Honda Motor Co Ltd <7267.T> is betting on a weaker yen and a rollout of new models in the United States to boost car sales after unexpectedly trimming its annual net profit forecast on poorer-than-expected demand in China and Europe.
Honda said the outlook for China remained murky after Japanese brands saw sales plunge in the world's second biggest economy late last year when anti-Japan sentiment flared. The euro zone's grinding debt crisis also crimped car purchases.
"We can't quite tell if it will go back 100 percent to the levels prior to the issues," Chief Financial Officer Fumihiko Ike told Reuters on Thursday, referring to China.
Analysts had expected the yen's steep depreciation since December to at least partially offset the slower sales in China and Europe.
Honda, Japan's third-biggest automaker by sales volume, made net profit of 77.4 billion yen ($849.9 million), up 63 percent from a year earlier, undershooting the average estimate of 111.4 billion yen among seven analysts polled by Thomson Reuters I/B/E/S.
For the financial year ending March, Honda cut its global car sales forecast to 4.06 million vehicles from 4.12 million, and its European car sales outlook to 185,000 vehicles from 205,000.
Honda's weaker-than-expected results highlight the risk that the shifting value of the yen may take more time than anticipated to feed into exporters' bottom lines.
"The market had expected the company to release a bright outlook on the back of a weakening yen," said Yoshihiro Okumura, an analyst at Chibagin Asset Management.
"It was negative that the company did not raise its full-year outlook. Now, investors will be watching how the carmaker will try to raise sales in the core U.S. market this year."
Honda, which relies on the United States for 40 percent of its global sales, maintained its North American sales forecast for the year to March. It launched the fully redesigned Accord sedan in the U.S. in September, and gave the Civic compact car a minor upgrade for its December relaunch.
For rivals Toyota Motor Corp <7203.T> and Nissan Motor Co Ltd <7201.T>, the U.S. accounts for about a quarter of global auto sales.
Honda is the first among major Japanese automakers to announce its third-quarter earnings. Toyota is set to announce on February 5, and Nissan on February 8.
Japanese carmakers have suffered lower sales in China, the world's biggest auto market, since September as a result of a territorial dispute between the countries, which brought many Chinese onto the streets to protest against Japan.
In China, which accounts for about 15 percent of Honda's global sales, the automaker shifted about 604,000 vehicles in 2012, down about 3 percent from a year ago in a market that grew 4.3 percent.
"The drop in car sales volume was a bigger negative factor than foreign exchange," Chief Financial Officer Ike told reporters, referring to how Honda can convert overseas profits back to the yen at a more favorable rate with the yen's recent drop.
"But when it comes to the next business year, we will start to see the full effects of the new models that have been introduced. Our full abilities are not reflected at the moment," he said.
While many Japanese exporters have expressed confidence that a weakening yen will improve profitability, Honda booked what it said was an unrealized loss on currency derivatives of 54.5 billion yen for the three months ended December as a result of the steep fall in the yen.
The yen lost about 10 percent against the dollar from the beginning of October to the end of December. It now trades around 91 to the dollar, down from 78 at the start of the October-December quarter.
In the current quarter and the next business year, Honda expects the currency moves to prove a boon, as it will be able to convert overseas profits back into yen at a more favorable rate, and export cars more cheaply.
Honda's operating profit will rise by about 16 billion yen for every one-yen hike in the value of the dollar, Ike said.
Honda changed its average dollar rate assumption to 81 yen from 80 yen for the financial year that ends in March. For the fourth quarter, its dollar rate assumption is 85 yen, executives said.
"Since the yen is trading at around 90 yen at the moment, it may be the case that 85 yen is conservative. But the currency moves at the end of 2012 were very sudden, and we do not know what will happen in February and March," Ike said.
Helped by the softening yen, Honda shares have risen about 50 percent since mid-November, while Nissan is up 37 percent and Toyota about 43 percent. Honda closed at 3,505 yen on Thursday prior to the earnings announcement.
The firm also said it will delist from the London Stock Exchange at the end of March because the volume of trade is small. ($1 = 91.0650 Japanese yen)
(Additional reporting by Dominic Lau, Ayai Tomisawa and Tomo Uetake; Editing by Daniel Magnowski)