Honda share price up, Q1 profit tops projections on US, China SUV demand

Honda Motor Co, Japans third-biggest carmaker by global sales, reported on Friday first-quarter profit that rose by nearly 20% as strong SUV demand in the US and China, coupled with a weaker yen, helped offset declining sales in Japan and Europe.

The Japanese carmaker said that net profit for the three months ended June surged 19.6% to ¥186.0 billion ($1.5 billion) from ¥155.6 billion in the first quarter of the 2015 fiscal year, well above projections of ¥138.6 billion. This was on the back of a 15.5% jump in revenue to ¥3.7 trillion from ¥3.2 trillion a year earlier, which was mainly due to increased revenue in automobile and financial services business operations, as well as favorable foreign currency swings.

Hondas operating margin for the quarter inched up by 0.1% to 6.5%, with operating profit jumping 16.4% to ¥239.2 billion, primarily due to an increase in sales and model mix, as well as continuing cost reduction efforts, the auto maker said, despite a jump in SG&A expenses.

Honda also left its guidance for the full financial year ending March 2016 unchanged from its previous forecast on April 28th, pegging net profit for the year at an annualized 3.1% jump to ¥525.0 billion on 8.8% higher revenue at ¥14.5 trillion.

The companys profit gains “progressed at a faster pace than we had expected in the first quarter due to currencies and other factors, but we are not revising the full-year outlook as there are uncertainties such as future foreign exchange moves and costs related to quality issues,” said Executive Vice President Tetsuo Iwamura.

Like a slew of other major auto manufacturers, Hondas results have been hit by hefty quality-related costs linked to recalls of vehicles equipped with faulty airbag components made by Japans Takata Corp. It pulled back another 4.5 million cars globally this month, bringing the total count of recalled vehicles to more than 24 million units.

The auto maker did not disclose details on quality-related costs for the first quarter but said that its SG&A expenses (Selling, General and Administrative Expenses), which include those associated with product warranty, rose by ¥47.6 billion for the period.

However, robust overall sales growth, primarily in the US and China, helped make up for the increased costs and sales declines in other key regions, with automobile sales volumes for the quarter jumping 4.9% to 1.147 million units.

Shipments to Asia surged 18.8% to 405 000 vehicles from 341 000 a year earlier, thanks partly to strong performance in China, boosted by the refreshed Vezel SUV and other models. Sales in North America rose by an annualized 10.7% to 497 000 vehicles, positively affected by the increased production of the popular HR-V compact sport utility vehicle at Hondas new plant in Mexico. Gains in the two regions more than offset a 27.2% sales decline in Japan for the quarter to 147 000 units and a 15.8% drop in Europe to 32 000.

However, with the Chinese economy adjusting to a stage of moderate growth and its car market, the worlds biggest, gradually saturating, analysts fear that major Japanese and European car makers will not be able to sustain their current growth rates for much longer.

Fumihiko Ike, chairman of the Japan Automobile Manufacturers Association and also Honda chairman, said earlier in July that Chinas vehicle market has begun to show signs of spiraling down, which would eventually hit Japanese manufacturers.

Honda Motor Co Ltd settled 1.53% higher at ¥3 979.5 on Friday in Tokyo, marking a year-on-year jump of 8.91% and valuing the car maker at ¥7.10 trillion. According to the Financial Times, the 22 analysts offering 12-month price targets for Honda Motor Co Ltd have a median target of ¥4 250, with a high estimate of ¥5 000 and a low estimate of ¥3 100. The median estimate represents an 8.43% increase from the previous close of ¥3 919.5.