TOKYO (Thomson Financial) - Toyota Motor Corp and other Japanese carmakers appear to be on track to achieve solid earnings growth in the year to March, even in the face of a stronger yen, a weaker outlook for US demand and the damage to a key supplier's facilities caused by an earthquake, analysts said Friday.
The yen has strengthened to levels below 115 yen to the US dollar from above 123 in June. The currency held below 115 during fiscal 2006, hurting earnings growth for all Japanese exporters but especially carmakers which rely on overseas demand.
The meltdown in the US subprime sector has cast a shadow over US economic forecasts, while a powerful earthquake paralyzed domestic car production for a few days in mid-July.
Even so, analysts are sticking with bullish projections for the sector, citing faster-than-expected sales and profit expansion in emerging markets including China, greater Asia, Russia and Brazil as well as the petrodollar-energized market of the Middle East.
'Demand in Asia was stronger than expected (in the first quarter), and there's been a pause in the rise in materials prices. The terms of trade for the car industry are improving,' Nomura Securities said in a recent report as it upgraded its outlook for the sector.
Toyota's strong run
Toyota posted a 33 percent rise in pretax profit before extraordinary items in the April-June quarter vs. the same period a year ago, with a 49 percent increase in revenue in Asia, excluding Japan. The company, which typically is conservative with its earnings targets, left guidance for the fiscal year unchanged, despite the strong performance.
Honda Motor Co racked up 14.1 percent growth in pretax profit before extraordinary items, with its Asian revenue up 37 percent in the same quarter. The second-largest Japanese carmaker lifted its earnings projections for the half year to September.
Nissan Motor Co's pretax profit before extraordinary items dipped 4 percent in April-June, however, with a 22 percent increase in revenue in its regional category centering on Asia, the Middle East and South America.
Nomura now expects Japanese carmakers to achieve a 12.4 percent rise in their combined pretax profit before extraordinary items in fiscal 2007, accelerating from a 5.8 percent rise in fiscal 2006. The brokerage had previously forecast a 10.1 percent profit expansion.
Nomura's forecasts are based on an assumption of an average yen level of 115 to the dollar and 155 to the euro.
When the yen strengthens by one unit to the dollar over the course of a year, it trims the current profits of Japan's carmakers by 1.3 percent, according to Nomura. Similarly, when the yen is stronger by one yen to the euro, it lowers profit by 0.3 percent, the brokerage said.
'At this stage, changes in the business environment have a larger impact on earnings than does the strong yen. Unless the yen's strength goes to extremes, the profit growth trend of Japanese companies will remain intact,' Nomura said.
US growth
Carmakers have also impressed analysts by managing to expand sales modestly in the US, easing fears they would suffer a direct impact from sluggish demand.
The US is the biggest overseas market for Japanese carmakers, and performance in that market continues to have a significant impact on earnings. The contribution from North America ranged from one-fifth to a majority of their profits in fiscal 2006.
In the quarter to June when the overall US car market shrunk by 2 percent, Toyota and Honda saw sales volume in North America rise 2 percent, while Nissan gained 3 percent.
More recently, data showed August US industry-wide sales were flat compared with the same period a year ago, while all the Japanese players except for Toyota and Fuji Heavy Industries Ltd extended their market share. Toyota's sales fell 3 percent but analysts said the decline was expected after a 12.6 percent jump in sales the year earlier.
'The US market is surrounded by various factors of concern' such as the widening fallout of subprime home loan problems, rising gasoline prices and signs of slowing growth in the overall economy, said Shotaro Noguchi, analyst at Mitsubishi UFJ Securities.
However, 'we want to bring attention to steady rises in the presence of Japanese carmakers in the US market, which has been underpinned by the competitiveness of their products with features such as high fuel efficiency... Given the likelihood of their product competitiveness helping boost their market shares further, I think they will remain highly resistant to risks associated with shrinking US demand,' he said.
Noguchi's view is reflected in comments late last month by Toyota President Katsuaki Watanabe. The executive said that Toyota continues to target sales of 2.7 million vehicles in the US in 2007, up 5 percent from 2006, despite the weaker market outlook.
The world's second-largest carmaker after General Motors Corp previously predicted that 2007 US car sales would exceed the 16.6 million units sold in 2006. At a press conference on Aug 30, however, executives revised the company's view to a modest drop from a year ago.
Quake impact
A strong quake registering 6.8 on the Richter scale hit Niigata Prefecture in central Japan on July 16, paralyzed the flagship plant of Riken Corp, the supplier of key engine components to all Japanese carmakers.
All of Japan's seven car companies halted their assembly operations either fully or partially for less than a week in late July because of the shortage of parts, bringing their total missed production to an estimated 122,400 units, equal to 13 percent of the industry's average monthly output in 2006.
Analysts, however, have downplayed the earnings impact from the production delay, as most of the carmakers have mapped out plans to recover the delayed production by the end of the calendar year or the March 31 fiscal year-end at the latest by cancelling summer and public holidays and through overtime.
The hardest-hit was Toyota which postponed the production of 62,000 cars and the sale of 16,000 units in Japan.
Toyota's Watanabe said the company's production will be back on schedule by the end of November. He did not specify how the company would cover the cracks in domestic sales but said the company hopes to achieve year-on-year growth in sales in the July-September quarter, as well as growth in the following quarter.
Honda's production was reduced by 14,400 units, and Nissan's by 12,000 units.
The day after Toyota slashed its projection for US industry-wide sales, it officially pinned its global sales target for 2009 at 10.4 million units, which is expected to be the largest number of vehicles sold in a year by any carmaker. GM sold a record 9.55 million vehicles in 1978.
Toyota ranked second in sales volume in 2006 but it replaced GM in the world's No 1 spot in the first half of 2007.
'Provided it achieves medium-term growth targets, Toyota has a good chance of becoming the world's No 1. We keep a 'buy' recommendation on the stock,' said Noriyuki Matsushima, analyst at Nikko Citigroup.
The Japanese auto giant aims to reach the medium-term goal, which is 18.2 percent higher than the volume sold in 2006, by capitalizing on growing demand in China and other emerging economies in particular.
The company aims to sell 1.90 million vehicles in Asia, 60 percent more than its record Asian sales in 2006, and 1.45 million units in Europe including Russia, up nearly 24 percent.
It further plans on increasing sales in North America by 8.8 percent to 3.1 million units. Toyota is targeting a 26 percent rise in sales in other overseas markets to 1.55 million vehicles. In Japan, it is forecasting 1.3 percent growth in sales to 2.4 million vehicles.
To attract demand in the hotly-contested markets of India and Brazil, Toyota said it will introduce a specially-designed low-price model, using technological innovation to achieve lower-cost production. In China, it plans to expand its production capacity and broaden its product portfolio, and in Russia where it has a first plant in the pipeline, it will expand its sales network.
'I believe chances are extremely high for Toyota to realize these targets by boosting its sales sharply, centering around the emerging markets, and by bolstering its presence steadily in the matured markets, taking advantage of its eco-friendly technology cars and fuel-efficient models,' said Noriyuki Matsushima, analyst at Nikko Citigroup.
'The company does not only excel on cost competitiveness in conventional products but also has an overwhelming lead in the mass production of new technology products, such as hybrid cars and the G-BOOK telematics system. Efforts to expand production globally have started to bear fruit and will likely contribute significantly to the company's earnings in several years,' he said.
Rosier outlook?
In the more immediate future, analysts expect Toyota to upgrade its earnings guidance for the full year to March, possibly when it reports half-year results, after the company generated 30 percent of its targeted full-year operating profit in the first quarter.
'We now expect Toyota's earnings to reach further above the company's existing guidance after we revised (upward) our estimates of sales volume and per-unit prices based on first-quarter results,' said Atsushi Kawai, analyst at Mizuho Investors Securities.
Kawai is forecasting operating profit of 2.56 trillion yen on revenue of 26.25 trillion yen in the year ending March 2008. In calculating the estimates, he assumed the yen will average 118 yen to the dollar and 160 yen to the euro during the fiscal year.
Toyota has pinned its targets for operating profit at 2.25 trillion yen and for revenue at 25.00 trillion yen, assuming the currency will average 115 yen to the dollar and 150 yen to the euro.
'The company has been diversifying earnings sources by reducing dependence on North America and beefing up the weight of Europe and Asia, and it has retained its relatively superior position in the US where there are now fears of a shift in economic conditions.
'There are many uncertain factors surrounding the auto industry. But, it would take several of extreme developments to prompt analysts to downgrade their bullish ratings on Toyota,' he said.
(1 US dollar = 115.07 yen)
yumiko.nishitani@thomson.com
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