MZDAF - Mazda: Weak Yen Benefits Top Line And Bottom

2023-09-13 09:42:50 ET

Summary

• Mazda's stock has appreciated 20% in a month due to increased exports of cars, reflecting also in Japanese GDP data.
• Q1 data is lifted by weak comps, but sequential trends are positive too thanks to a weaker Yen.
• China remains a difficult market due to competition, debt, and credit issues. Hopes are pinned on EVs to take back share.
• Overall, car demand is optimistic, but investors may consider taking profits with the Yen potentially getting stronger and after the run-up.

We were on the money with our Mazda ( OTCPK:MZDAY ) call which appreciated 20% in a little over a month. Drivers were reflected in Japanese GDP data: exports of cars went up considerably. While comps were weak in the recent Q1 data, the sequential trends look great. We think that a slightly stronger Yen may be coming which is incrementally bad, but the jury is still out on timelines due to modest Japanese spending habits and the perennial demographics story. Still, after recent run-ups and generally weakening economies, this seems like a take-profit moment for Mazda. General pent-up demand in automotive could also come to an end a little unexpectedly.

Q1 2024 Breakdown

Let's begin with the IS highlights:

Volumes are driving growth. Comps are about as weak as they get since last year there were lockdowns in Shanghai that made production almost impossible for a while, as they source parts from Shanghai. The remaining sales driver was mix effects, with larger and higher ticket cars becoming more representative in the mix.

Some of the volume performance was also a consequence of excellent general exports in cars due to the weaker Yen. This also drove quite a bit of the blockbuster GDP data from Japan .

The FX effects are also seen in the operating income. A weak Yen is good for Mazda two-fold. It promotes growth, but it also promotes wedge effects because a lot of the production costs for Mazda are in weaker Asian currencies, mainly the Yen. The US is a big market so the weak Yen to USD has been a boon. FX effects mitigated inflation effects entirely. Cost improvement plans also helped add to the bottom line.

China has been a difficult market both for idiosyncratic and regional reasons. Competitively Mazda is struggling with local producers and a large amount of EV demand. Mazda has some EV vehicles and plans to continue to press on in the market that way. But China has a debt and credit problem that will be enduring and reduce the ability of people to pay for cars there. High youth unemployment figures and general signs of distress don't help either.

Bottom Line

Besides China, things look good. A weak Yen is contributing to promising forecasts on volumes, 20% growth expected by FY 2024. However, profits are going to start to peter out. Some non-operating gains on FX have had an extraordinary effect on NI in FY 2023. The lack of this in FY 2024 will limit profit growth despite having no debt issue and benefiting from operating leverage on sales growth.

We are quite optimistic about car demand in general, and we think the conditions are quite different from other downcycles in consumer durables as there is still a volume shortfall in automotive markets. However, with the PE up past 6x now, and automotive still being an ordinarily cyclical market, with the recent run-up in price, investors may consider taking profits and moving elsewhere to less cyclical exposures. The Yen could also get stronger this year as BoJ Governor Ueda is signaling that rate hikes could come sooner than expected, which would be a contributing factor to limited profit growth and would affect buyers in foreign markets, of which there are many.

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