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Most Rated Asian Automakers Should Steer Through Demand Volatility, EV Strains

The competitiveness of Asian automakers is being tested. Decelerating demand growth and rising electrification are shifting the industry landscape in key markets.

In China, sales growth will likely remain muted next year, given fragile consumer confidence amid a slower-than-expected economic recovery. Price wars are ongoing.

In the U.S. and Europe, which are important markets for Japan and Korean automakers, pent-up demand and easing semiconductor shortages fueled a robust recovery in light vehicle sales this year. The momentum is set to weaken in 2024, with subpar economic growth and high interest rates dampening purchasing power.

Electrification is progressing well, bringing opportunities and challenges. Electric vehicle (EV) penetration is above 20% in Europe and approaching 30% in China this year. The Inflation Reduction Act (IRA) is also pushing forward electrification in U.S.

Japanese producers are behind the curve on EV offerings, risking potential market-share loss. Chinese carmakers face elevated competition in the EV market with new entrants and rapid product portfolio expansion or upgrades at existing players.

S&P Global Ratings believes most of the automakers we rate should still have healthy margins and low leverage in 2024, supporting their credit profiles. Nonetheless, downside risks are increasing.

A Downshift In Demand Growth

Chart 1

image

Volume growth could be more challenging for rated Japanese auto original equipment manufacturers (OEMs).  Their combined unit sales in China (including sales at joint ventures) continued to decline in 2023, extending the trend since 2021, amid rising electrification in the country. Having said that, we expect solid earnings in fiscal 2023 (ending March 31, 2024) due to increasing sales in the U.S. and Europe. A weak yen will also underpin the performance.

Over the next three to five years, the ability of Japanese brands to recoup volume in China, which accounts for 20%-35% of their total sales, will be important for their competitiveness.

Chinese auto OEMs could increasingly venture abroad, given muted growth at home.  This entails opportunities but also uncertainty. Resilient local supply chains and better product competitiveness have supported notable growth in China's auto exports since 2020, with Europe and Asia being the major destinations. The momentum is likely to see a speed bump from 2024, however, given a high base.

A recently announced anti-subsidy probe by the European Commission on EVs exported from China may lead to potential protective measures that could increase export thresholds or reduce the cost competitiveness of Chinese EVs. Trade tensions may accelerate some Chinese automakers' plans to establish plants in Europe as well as Southeast Asia to better capture rising EV demand in those markets.

Korean auto OEMs will likely remain better positioned in the global market over the next 24 months.  Hyundai-Kia's exposure to China's market has shrunk to a single-digit percentage in recent years, while its volume growth has been solid in the U.S., European, and India markets.

The group expanded its market shares in U.S. and Europe over 2021-2022 and we continue to see healthy volume trends year-to-date, thanks to a stronger product portfolio. However, a lack of EV models that are eligible for the tax credit under the IRA could constrain volume growth in the market before the commissioning of new local plants in 2025.

Chart 2

image

Most Rated Automakers Could See Improving Financial Metrics

Despite more challenging industry conditions, rating trends will be steady for the majority of the OEMs that we rate in Asia. By our estimates, financial metrics will generally strengthen over the next 12-24 months, owing to modestly higher volumes, better cost control and improving working capital turnover post the pandemic. We also assume automakers will remain disciplined in capital spending, despite substantial investment in relation to electrification. This will underpin free operating cash flow and low leverage for most of the pack.

Table 1

Margin is the key credit driver for Asia-Pacific auto OEMs
Company Ratings Headwinds Tailwinds Downgrade triggers Our 2023-2025 forecasts

Beijing Automotive Group Co. Ltd.

BBB/Stable/-- Loss-making proprietary brands, slow electrification Good sales momentum for premium brands FFO/debt  < 12% FFO/debt: 22.7%-27.3%

BAIC Motor Corp. Ltd.

BBB/Stable/-- Loss-making proprietary brands, slow electrification Good sales momentum for premium brands Beijing Auto's FFO/debt  < 12% Beijing Auto's FFO/debt: 22.7%-27.3%

Geely Automobile Holdings Ltd.

BBB-/Negative/-- EV-led margin dilution Improving volume and mix Zhejiang Geely's Debt/EBITDA > 2.0x, or EBITDA margin <6% Zhejiang Geely's Debt/EBITDA: 1.6x-2.3x, EBITDA margin: 5.5%-7.1%

Zhejiang Geely Holding Group Co. Ltd.

BBB-/Negative/-- EV-led margin dilution and leverage hike Improving volume and mix Debt/EBITDA>2.0x, or EBITDA margin <6% Debt/EBITDA: 1.6x-2.3x, EBITDA margin: 5.5%-7.1%

Hyundai Motor Co.

BBB+/Stable/-- EV models don't qualify for tax credits under IRA Improving mix HMC-Kia's combined EBITDA margin<8% HMC-Kia's combined EBITDA margin: 10%-13%

Kia Corp.

BBB+/Stable/-- EV models don't qualify for tax credits under IRA Improving mix HMC-Kia's combined EBITDA margin<8% HMC-Kia combined EBITDA margin: 10%-13%

Toyota Motor Corp.

A+/Stable/A-1+ Slow electrification, declining sales in China Healthy financials EBITDA margin<10%, or FOCF<0 EBITDA margin: 10%-11%, FOCF/sales: 3%-5%

Honda Motor Co. Ltd.

A-/Stable/A-2 Slow electrification, declining sales in China Healthy financials EBITDA margin<8%, or DCF<0 EBITDA margin: 9%-10%, DCF: ¥100 bil.-120 bil.

Nissan Motor Co. Ltd.

BB+/Stable/B Slow electrification, declining sales in China Healthy financials FOCF<0 FOCF: ¥100-200 bil.
Notes: Our forecasts for Japanese automaters are for fiscal years 2024-2026. Hyundai and Kia's figures are Hyundai-Kia combined, and exclude financial subsidiaries. FFO--Funds from operations. FOCF--Free operating cash flow. DCF--Discretionary cash flow. EV--Electrical vehicle. Source: S&P Global Ratings.
China's rated auto OEMs: Price war and electrification dragging on profitability

Heightening competition won't likely let up in China, the world's largest auto market. Wider product offerings and decelerating growth led to price cuts and more purchase incentives for EVs this year. Such tactics will likely endure for another 12 months, given lower battery costs and technology advancement are allowing EV producers to roll out more affordable models with better functionality.

The price pressure will also linger for longer on internal combustion engine (ICE) vehicles. Makers of ICE vehicles slashed prices on low-to-mid end models to stimulate sales in 2023, and also offered discounts for high-end ICE vehicles. As ICE sales volume continue declining, further price cuts are likely.

For rated issuers, subsiding pandemic disruptions, increasing EV offerings and rising exports nudged volume growth into mid-teens percentages, year to date. We expect volume growth for these market leaders to soften in 2024 but exceed the industry trend.

The road to margin improvement will be bumpy, however. Drags include price competition and increasing revenue contribution from the lower-margin EVs. Against this, lower raw material costs, improving operating efficiency, and stronger volumes will slightly expand margins for some rated players in 2023-2024 (see chart 3).

For producers with faster EV progress (i.e., Geely entities), improving economies of scale for EVs is essential for cost reduction and margin restoration. For those that are laggards, catching up with peers in rolling out EV products will be increasingly important to protect market position.

Chart 3

image

Zhejiang Geely:  Rising EV sales and prolonged price competition have heightened margin pressure and hence rating downgrade risk for Zhejiang Geely. The company's adjusted EBITDA margin deteriorated to 4.3% in the first half this year, from 5.7% in 2022. However, we think the company will be able to claw back some margin even as its EV penetration continues to expand.

A strong commitment on EV transition and continual rollout of upgraded EV models will likely support a further rise in the company's EV penetration to 30%-35% in 2023-2024, from 25%-27% last year. This should also support its total sales volume to grow 11%-13% annually in 2023-2024 and bring in better economies of scale on EV production. Together with lower battery costs, the company's EBITDA margin could improve to 5.5%-6.3% during the period.

The company's debt-to-EBITDA ratio could also lower to 1.9x-2.3x over 2023-2024, from 2.4x in the first half of 2023. That said, downside risks on margin could arise if price competition in China is more intense than we anticipated.

Geely Auto:  We expect Geely Auto to remain net cash on stable free operating cashflow generation in 2023-2024 despite of profitability pressure amid electrification. The rating on the company will move in tandem with that of its parent Zhejiang Geely, given its core subsidiary status within the group.

Beijing Auto:  The company should slightly widen the financial headroom over the next 12-24 months. We estimate subsiding supply disruptions will support 5%-7% volume growth in 2024, after our estimated 14%-16% growth in 2023. This, together with stringent cost control and ongoing restructuring of proprietary brands, should partly moderate the impact from price competition and keep the company's EBITDA margin largely stable. Improving earnings and cautious capital expenditure will result in positive free operating cash flow, helping the company to deleverage slightly over 2023-2024.

Having said that, Beijing Auto has been slow to transition, with EV making up just 6%-9% of total sales in the first eight months of 2023. While its premium ICE brands have been more resilient amid the electrification wave, a lack of competitive EV models could weigh on the company's competitiveness past the next three to five years.

BAIC Motor:  As the core subsidiary with the best performing assets of Beijing Auto, the rating on the company will move in tandem with that on its parent. We expect BAIC will maintain net cash in 2023-2024 with improving operating cash flows.

South Korea auto OEMs are not facing the same margin pain as regional peers

Rated Korean carmakers look best positioned relative to regional peers. An improving product mix and low inventory levels support margins, in our view.

Chart 4

image

Hyundai and Kia:  The group can manage a deceleration in demand growth in 2024 after performing well this year in its three key markets of Korea, U.S. and Europe. The combined sales volume at Hyundai and Kia rose 8.7% year on year in the first eight months of this year. Meanwhile, the automaker is progressing steadily in electrification, with an EV penetration rate of 7%-8% in the first half of this year.

With stronger contributions from premium models and sport utility vehicles, margin dilution from increasing EV sales will be manageable over the next one to two years. Lean inventory levels also should support the company's margins. Despite rising EV sales, operating margins have widened this year--hitting 11.2% in the second quarter, compared with 9.0% in the second quarter of last year.

We also expect the group to maintain net cash through to 2025, with operating cash flows sufficient to meet capital expenditure and dividend payment needs.

Japan auto OEMs: Slower electrification and volume loss in China are emerging risks

Japan's three biggest auto OEMs should see a modest recovery in volumes and margins and steady free operating cash flow generation over the next 12-24 months. This will be underpinned by competitive ICE and hybrid models, easing supply-chain bottlenecks, and cautious investment appetite.

Looking beyond 24 months, EV strategy will become increasingly important for their competitiveness and credit profiles. Prolonged volume loss or material market share declines could lead us to revisit the assessment of their business strength. Specifically, Japan's three big auto makers are losing market share in China to local producers. Nissan in particular has seen a protracted volume loss in China.

Toyota:  Toyota Motor will maintain its strong global market position and stable profitability in our view. This is thanks to the company's solid brand recognition, broad range of models, and cost reductions.

We expect Toyota's global auto sales volume to grow by another high single digit in the current fiscal year (ending March 31, 2024), after hitting a historical high in fiscal 2022. The company's sales volume has been more resilient than that of its domestic peers, due to more efficient management of the supply chain.

Solid car sales volume and profit contributions from a wide variety of products should support Toyota's profitability over next one to two years even if the EV mix rises as a percentage of global sales. We expect the EBITDA margin to remain stable above 11%. Meanwhile, the company has deep net cash (excluding captive finance operations) under its conservative financial policy. Toyota's strong financial standing should underpin its credit quality even as the company increases investments for developing EVs and expanding production facilities.

Honda:  Honda's annual new car sales will steadily recover toward the pre-pandemic level of 5 million units over the next year or two. The company's EBITDA margin will likely stabilize at 9%-10% over the next one to two years. Honda will benefit further from measures to improve production efficiency, including the closure of production sites in 2022 and the launch of new models in the automobile business.

The reputation of Honda's brand and quality in the U.S. market could translate into lower sales incentives compared with peers, supporting profitability. In addition, its motorcycle business--the world's largest--will likely maintain a strong EBITDA margin of 16%-18% for the next one to two years.

We believe Honda's conservative financial management and healthy balance sheet will remain strengths because it can afford to increase capital expenditure on battery EVs. We also expect a partial reduction of the investment burden for auto electrification thanks to a partnership with General Motors Co.

Nissan:  Nissan Motor's profitability will recover moderately because cost reductions and an improved product portfolio have enhanced its earnings base. Still, we expect the company's profitability to lag its major global peers over the next one to two years as sales volume likely remains below its production capacity.

We forecast an EBITDA margin of 4.5%-6% over the next one to two years. The EBITDA margin may come under pressure, given flagging demand growth and EV-transition strains in the global auto industry. The financial soundness and net cash position of Nissan's automotive segment (excluding captive finance operations) continues to underpin our rating on the company.

Nissan's financial burden will increase if it invests in a new EV company being set up by alliance partner Renault, or repurchases shares held by Renault. However, we expect the company to maintain a conservative financial policy.

Related Research

This report does not constitute a rating action.

Primary Credit Analysts:Claire Yuan, Hong Kong + 852 2533 3542;
Claire.Yuan@spglobal.com
Katsuyuki Nakai, Tokyo + 81 3 4550 8748;
katsuyuki.nakai@spglobal.com
JunHong Park, Hong Kong + 852 2533 3538;
junhong.park@spglobal.com
Stephen Chan, Hong Kong + 852 2532 8088;
stephen.chan@spglobal.com
Jeremy Kim, Hong Kong +852 2532 8096;
jeremy.kim@spglobal.com
Yuta Misumi, Tokyo +81 3 4550 8674;
yuta.misumi@spglobal.com
Secondary Contacts:Danny Huang, Hong Kong + 852 2532 8078;
danny.huang@spglobal.com
Hiroki Shibata, Tokyo + 81 3 4550 8437;
hiroki.shibata@spglobal.com
Research Assistant:Rhett Wang, Beijing

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