Morningstar DBRS Confirms Nissan Motor Co., Ltd. at BBB (low); Trend Remains Stable

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and Senior Unsecured Debt rating of Nissan Motor Co., Ltd. (Nissan or the Company) as well as the Senior Unsecured Debt rating of its subsidiary, Nissan Canada Inc., at BBB (low). The trends on the credit ratings remain Stable.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations reflect Nissan's moderately improved (albeit from weak levels) operating performance, which, amid the Company's conservative financial policy and favourable balance sheet, results in Nissan's credit metrics and overall financial risk assessment (FRA) being well commensurate with the existing credit ratings. Moreover, the ratings remain underpinned by Nissan's sound business risk assessment as a major Japanese automotive original equipment manufacturer (OEM), whose global competitiveness is bolstered by the Renault-Nissan-Mitsubishi Alliance (the Alliance).

CREDIT RATING DRIVERS
Consistent with the Stable trends, Morningstar DBRS expects the credit ratings to remain constant over the near to medium term, although material operating losses and any associated cash burn by Nissan in forthcoming periods could result in negative rating actions. Conversely, markedly stronger operating performance over a similar time horizon could have positive rating implications. Morningstar DBRS notes, however, such improvement is likely to be hindered by significant cost headwinds (in the form of ongoing investments associated with the increasing electrification of the automotive fleet) facing the industry.

EARNINGS OUTLOOK
For F2024, Morningstar DBRS estimates Nissan's (industrial) earnings to soften year over year (YOY). Q1 F2024 profitability was markedly lower compared with the similar prior year period amid essentially flat retail sales globally. At the same time, the Company's sales volumes in the key U.S. market decreased by 3.1% (vis-à-vis Q1 F2023), reflecting the delayed model changeover of the Roque and Sentra nameplates and a relatively aged product portfolio in certain higher-margin segments. Accordingly, the decline in earnings performance is more than explained by negative volume/product mix effects in addition to higher selling expenses that combined represented negative contributors to operating earnings of more than JPY 110 billion (approximately $688 million) relative to Q1 F2023. Despite Nissan's weak Q1 F2024 results, the Company is likely to benefit from numerous planned product introductions over the ensuing months that should progressively improve its earnings performance over the remainder of the fiscal year (although on an aggregate annual basis, F2024 earnings are estimated to remain below F2023 levels). Over the medium term, Morningstar DBRS expects Nissan's profitability to range from essentially flat to slightly softer (vis-à-vis F2023 levels), given an anticipated slowing of volume growth, moderation in pricing, and ongoing cost headwinds, partly offset by projected efficiency gains. Morningstar DBRS also notes that Nissan's earnings will likely be influenced by the sales progression of electric vehicles (EVs), which continue to generate lower margins than legacy internal combustion engine vehicles.

FINANCIAL OUTLOOK
Morningstar DBRS anticipates Nissan's (industrial) cash flow from operations in F2024 to remain sound, albeit likely moderating YOY given the slightly softer projected earnings. Capital expenditures (capex) are forecast at substantial levels, with Nissan projecting F2024 capex at JPY 620 billion, in line with ongoing investments associated with Nissan's electrification efforts and expansion into new mobility businesses. Dividend payments in F2024 are slated to increase YOY, reflecting Nissan's YE2023 declared dividend of JPY 15 per share with total cash dividend payments (including payments to noncontrolling interest) estimated by Morningstar DBRS to readily exceed JPY 120 billion. In line with the above, Morningstar DBRS anticipates Nissan's industrial gross free cash flow (i.e., before working capital items) to result in moderately negative levels. While working capital represented a significant use of cash in Q1 F2024, Morningstar DBRS estimates this to be significantly reversed (in line with an anticipated reduction in inventories) over the remainder of the fiscal year, although still potentially representing a slight use of cash on an annual basis. As a function of the above, Morningstar DBRS estimates Nissan's F2024 net free cash flow (i.e., post working capital effects) to result in moderately negative levels. Share repurchases in F2024 are estimated at approximately JPY 60 billion, reflecting Nissan's purchase of 2.5% of its own shares offered by Renault SA.

Cash flow from operations is projected to remain sound albeit with the potential to decline somewhat over the medium term amid some anticipated pressure in earnings. Capex will likely persist at substantial levels for the foreseeable future. Shareholder repurchases will also likely continue over the medium term as additional Nissan shares are made available by Renault. Taking dividend payments into account, the Company is outlining a total shareholder return target of more than 30%. In line with the above, Morningstar DBRS estimates that Nissan's net (industrial) cash flow could persist at moderately negative levels over the medium term, although Morningstar DBRS nonetheless anticipates such to be satisfactorily absorbed by the Company's strong balance sheet and liquidity position.

CREDIT RATING RATIONALE
Nissan's credit ratings reflect its status as a major global automotive OEM whose market position is strengthened by the Alliance, now restructured with the voting rights of Nissan and Renault SA (Renault; rated BB (high) with a Stable trend) capped at equivalent levels of 15%. On a combined basis, the Alliance represents the world's fourth largest OEM in terms of sales volume, with associated benefits that include shared vehicle platforms and scale efficiencies in research and development spending. The Company's ratings also incorporate its solid FRA, with Nissan's industrial operations having a sizable net cash position and abundant liquidity position. The credit ratings are constrained, however, by the Company's ongoing lacklustre operating performance (notwithstanding some recent improvement), with Nissan's declining results in China representing additional challenges.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Environmental (E) Factors 
Morningstar DBRS considered that the E factor, specifically costs related to carbon and greenhouse gas (GHG) emissions, represents a relevant negative factor as the rapid spread of EVs and stricter regulations on GHG emissions around the world require an initiative aiming for carbon neutrality across the whole lifecycle of cars. Delays in Nissan's responses to these environmental requirements could affect its financial position and business performance. In 2023, Nissan announced the fifth generation of its National Green Program (NGP), NGP2030. Nissan is targeting to achieve carbon neutrality across the Company's operations and the lifecycle of its products by 2050. As part of this effort, Nissan is increasing investments toward accelerating the electrification of its product portfolio. By F2030 (ending March 31, 2031), Nissan is aiming to introduce a total of 34 EV models covering all vehicle segments while increasing its model mix of EVs to more than 60% globally. Nissan's electrification efforts entail substantial investments. Over the near term, the Company is planning to invest JPY 2 trillion (USD 12.4 billion) in electrification by 2026. (For further details, please refer to the commentary "The Future is Electric: Climate Change and the Global Automotive Sector" published on May 3, 2023.

There were no Social or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of Nissan, the relative weighting of the BRA factors was approximately equal.

(B) Weighting of FRA Factors
In the analysis of Nissan, the relative weighting of the FRA factors was approximately equal.

(C) Weighting of the BRA and the FRA
In the analysis of Nissan, the BRA carries greater weight than the FRA.

Notes:
All figures are in Japanese Yen unless otherwise noted.

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Automotive Manufacturing and Supplier Industries (June 28, 2024), https://dbrs.morningstar.com/research/435216.

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024, https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:

Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (August 13, 2024)
https://dbrs.morningstar.com/research/437781

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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