Date of Release: 2008-03-12

Honda Motor Co., Ltd. & Honda Canada Finance Inc.

Confirms at A (high), Trend Now Positive

DBRS has today confirmed Honda Motor Co., Ltd. and Honda Canada Finance Inc.’s (collectively, Honda or the Company) Senior Unsecured Debentures and Issuer Rating at A (high) and its Commercial Paper at R-1 (middle), while changing the trend on the long-term ratings to Positive from Stable. The trend change reflects the Company’s strengthening business profile given continued growth, not only in North America but also in emerging automotive markets in Asia. Additionally, Honda’s core automotive models are very well positioned to benefit from the structural shift in consumer preference toward more fuel-efficient vehicles, spurred by ever increasing fuel prices. The ratings continue to incorporate the Company’s very strong financial profile and balance sheet, as demonstrated by its consistent profitability and solid cash generation, with the industrial operations having a significant net cash position.

In fiscal 2007 (ending March 31, 2007), Honda recorded growing revenues and increasing automotive unit sales for the seventh consecutive year. In North America, the Company’s key automotive region, Honda was able to increase sales significantly in a declining market. Strong gains were also recorded in Asia (excluding Japan), with further increases being posted in these markets through the first nine months of F2008. These gains have more than offset decreases in Honda’s native Japanese market, which has been declining for several years due to, among other factors, unfavourable demographic conditions. Additionally, Honda has recently been gaining significant ground in Europe (traditionally a challenging market for the Japanese original equipment manufacturers (OEMs)). The sales momentum is based on four key global models: the Accord; Civic; CR-V; and Fit (these nameplates represent close to 70% of total unit sales).

To help meet growing demand, a new manufacturing facility in Greensburg, Indiana, is scheduled to come online in October 2008, with a capacity of approximately 200,000 vehicles (initially, Honda Civics). Including this facility, the Company’s total North American production capacity will be approximately 1.6 million vehicles; this would represent more than 80% of regional automotive sales. Although the increased capacity will help mitigate Honda’s foreign exchange exposure, associated earnings volatility may persist given uncertainties in the United States economy and the underlying movement of the U.S. dollar.

Honda is also expanding its manufacturing presence in emerging automotive markets with a new plant (120,000 units) in Thailand and significantly increased capacity in South America and Asia. The Company is therefore very well positioned to forge ahead with the growth of its key automotive business, given the increasing capacity and demonstrated global acceptance of its core models. Profitability has been consistently high, with the automotive operating margin over the past five years averaging 7.3%, well above the industry norm. Honda’s product excellence has been continuously fostered by its leading engine technology, which the Company has been able to preserve through sustained elevated R&D expenditures enabled by its very strong financial profile.

While the automotive business generates the significant majority of total revenues and operating income, the motorcycle, financial services and power products divisions also have favorable margins and smooth overall earnings. The ratings, however, continue to be constrained by the Company’s lack of scale relative to industry leaders. Additionally, despite improving geographic diversification, Honda remains dependent on the U.S. market, where demand levels are highly uncertain over the medium term, given well-documented economic difficulties. Should the Company’s global growth not be significantly impeded by the pending challenges in the vital U.S. market, DBRS would consider upgrading the ratings.

Note:
All figures are in Yen unless otherwise noted.

The full report providing additional analytical detail is available by clicking on the link below or by contacting us at info@dbrs.com.

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