Honda to Build Hybrid Plant

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Honda to Build Hybrid Plant

By: Zacks Equity Research
July 15, 2010 | Comments: 0

Honda Motor Co. (HMC - Analyst Report) plans to resume construction of its hybrid plant in Yorii, Saitama of Japan in order to focus on its green vehicles business. At the same time, Japan’s second largest automaker has scrapped its plan to build a 660cc mini-vehicle factory at its subsidiary Yachiyo Industry Co.

Honda delayed constructing both the plants due to the global financial crisis in 2008. Both were scheduled to start production in 2010.

The automaker has initially planned to manufacture clean-diesel and other fuel-saving vehicles at the Yorii factory. However, with the tightening of environmental regulations around the world and a rebound in demand in Japan and North America, Honda has decided to roll out more hybrid cars in the markets.

The Nikkei business daily has reported that Honda move away from producing mini-vehicles, which has a market limited to its home country. As a result, the automaker has abandoned its ¥50 billion ($565 million) plan to build the mini-vehicle factory. The news agency has also revealed that the Yorii plant will begin production from 2013.

In the fourth quarter of its fiscal year ended March 31, 2010, Honda has posted a profit of ¥72.1 billion ($776 million), a stupendous 140% increase from the same period in 2009. This was equivalent to earnings per share of ¥39.78 (43 cents), an increase of ¥138.95 ($1.50) from a loss of ¥99.17 ($1.07) in the corresponding period last year.

Consolidated net sales and other operating revenues in the quarter rose 27.8% to ¥2.3 trillion ($24.5 billion). This was attributable to favorable currency translation effects and increased sales in the automobile business. At constant exchange rates, Honda’s revenues would have increased 25.4%.

Consolidated operating income increased ¥368.2 billion ($3.96 billion) to ¥96 billion ($1.03 billion). This was attributable to increased profits on the back of increased revenue, reduction in vehicle costs and a decline in selling, general and administrative (SG&A) expenditures.

However, Honda’s results are expected to be adversely affected by unfavorable currency exchange rates, flat-to-lower sales in its key markets and increased competition. These have led us to recommend the shares as Strong Sell (Zacks #5 Rank) in the short term.