Investing in Japan: Honda Motor posted declining results but may attract more investors

COVID-19 affected Honda’s financial results for FY 2019 

Honda Motor Co., Ltd. is one of the world leading manufacturers of motorcycles and automobiles. Honda boasts the world's top market share for motorcycles and has created a number of well-known automobiles such as "CIVIC" and "Accord" brands. 

Utilizing its advanced motor technology, Honda also provides general-purpose products including tillers, generators, snow throwers, outboard engines, and lawnmowers to customers worldwide. 

Honda has been recognized by Japanese investors as one of the most excellent investment destinations with its high technology, profitability and stable financial base. It is also well known to locals in the Chubu region because it started the first full-fledged international racing course in Japan in Suzuka, Mie prefecture. 

In the fiscal year ending March 2020, consolidated revenues were down 6.0% year on year to 14,931.0 billion yen, and operating income was down 12.8% to 633.6 billion yen. Sales continued to decline due to restrictions on going out to contain the new Corona virus causing its operating income to decrease about 130 billion yen. Honda's future performance is likely to depend on the situation in China and the US, main markets for its products. The United States accounted for 32% and China for 30% out of Honda’s sales of about 4.79 million units worldwide in FY 2019.

Honda was hit hard but may be on recovering track

Most Japanese automakers were greatly affected by COVID-19, but among them, Honda may have been impacted most with its main factory located in Wuhan, China from where the outbreak may have started. 

However, production activities seem to be recovering in China recently. Honda has restarted its Guangzhou plant by the end of March and Wuhan plant in mid-April recovering its capacity to the level before the outbreak. On the other hand, outlook for recovery is muddy in areas other than China. 

In the United States, the pace of the spread of infection is beginning to slow, but the sales continue to stagnate.  Sales in US in April decreased by 54% year on year to 57,000 units, worsening from the 48% decrease in March. Demand in the east coast of the United States, which is Honda’s major market, was especially weak because the infection was extremely serious there. In terms of profitability, North America is the most important region which brings about 50% of Honda's operating income. 

Japanese investors expect Honda's performance to be on a recovery track when coronavirus infections subside in the region. If so, Honda’s stock looks definitely attractive for value seeking investors after a recent price correction in the Japanese stock market. Its PBR is left at irrational low price never seen in a decade, although its financial base remains stable.