Analyst - Japan Autos, Hirakata Office

Noriaki Hirakata, CFA

Analyst - Japan Autos

Hirakata Office

Thematic (Sector/Industry)

Japan Automobiles and components / Thematic (Sector/Industry)

<p>Japanese automotive industry saw only a marginal, but still better than expected operating profit growth in 1QFY18.<br><br>Industrywide operating profit grew only by 5.5% YoY as among other negative factors, FX, rising raw material prices and severe competition in US markets took its toll.</p><div class="content-highlight"><p>Remarkably, there is a strong disparity in profit growth when looking at each companies respective market focus. A focus on Asian markets or what we call “Asia focused school” seemed to have paid off with significantly higher profit growth than a focus on major markets or what we call “Mega market school”. Asia focused names like Suzuki or MMC reported a 30% higher profit growth on the back of a strong volume rise and product mix improvements in Asia.</p></div><p>It was a moderately negative surprise to us that Asian focused Yamaha motor`s results overall disappointed as their operations in mega markets performed worse than expected.    <br><br>What major markets focused names are concerned, SUBARU, Nissan, and Mazda all disappointed the street with operating profit falling off the cliff, down 51.8%, 28.8% and 17.2% respectively. </p><div class="content-highlight">
<p>We have all reason to believe that the migration from passenger car segment to the crossover one will continue unabated for the foreseeable future and with the competition in crossover segment intensifying, we expect the trend of diverting operating profit growth to continue for the rest of FY18. </p>
<p>There is a risk that the top line growth of Asian businesses could slow down, but this would be rather a result of capacity constraints than lower underlying demand.</p>
</div><h2>1QFY18: Japanese automotive industry Operating Profit YoY Change</h2><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/062/252/original/1QFY18%20Growth.PNG?1535678645" class="editor-image img-responsive" data-smartkarma-image-id="62252"></figure><div class="content-caption">Source: Company data</div>

Japanese automotive industry saw only a marginal, but still better than expected operating profit growth in 1QFY18.  Industrywide operating profit grew only by 5.5% YoY as among other negative factors, FX, rising raw material prices and severe competition in US markets took its toll.Remarkably, there is a strong disparity in profit growth when looking at each companies respective market focus. A focus on Asian markets or what we call “Asia focused school” seemed to have paid off with significantly higher profit growth than a focus on major markets or what we call “Mega market school”. Asia focused names like Suzuki or MMC reported a 30% higher profit growth on the back of a strong volume rise and product mix improvements in Asia.It was a moderately negative surprise to us that Asian focused Yamaha motor`s results overall disappointed as their operations in mega markets performed worse than expected.      What major markets focused names are concerned, SUBARU, Nissan, and Mazda all disappointed the street with operating profit falling off the cliff, down 51.8%, 28.8% and 17.2% respectively. 
We have all reason to believe that the migration from passenger car segment to the crossover one will continue unabated for the foreseeable future and with the competition in crossover segment intensifying, we expect the trend of diverting operating profit growth to continue for the rest of FY18. 
There is a risk that the top line growth of Asian businesses could slow down, but this would be rather a result of capacity constraints than lower underlying demand.
1QFY18: Japanese automotive industry Operating Profit YoY ChangeSource: Company data

What Did We Learn from 1QFY18 Reporting Season of the Japanese Automotive Sector?