Honda Motor Company, Limited: Confirms at "A"

Kam Hon, Walter Schroeder, CFA / 416-593-5577 ext.2243 / e-mail: khon@dbrs.com

The corporate rating of Honda Motor Co., Ltd. ("Honda" or "the Company") of Japan, is confirmed at "A" with a Stable trend. The confirmation reflects the Company’s consistent profitability and strong balance sheet.

Honda has consistently been profitable with a return on equity, which has been over 10% since 1997 although the appreciation of the yen prevented earnings growth in the last two years. The Company is an efficient and cost competitive automobile producer. Diversification between motorcycles, auto and power products, with exposure in North America, Europe and Asia, also provides income stability. Honda has a very strong balance sheet, with virtually no debt in the operating company. All the debt is attributable to the finance function performed by Honda, with receivables relatively liquid. Honda’s balance sheet should continue to improve in the future, even if earnings fall to the ¥150-200 billion range. At this level it can still support capex with internal cash flow. Challenges facing the Company includes: (1) With auto sales near ¥2.5 billion, the Company is relatively small, in an industry where sales count. (2) The Company continues to be extremely sensitive to the relative strength of the yen despite its diversification efforts. (3) The Company is relatively weak in Europe, where it had losses in 2000-01.