Mitsubishi Motors Corp. Upgraded To #BB# On Improved Internal Outlook Positive

Stocks and Financial Services Press Releases Monday December 18, 2017 18:06
TOKYO--18 Dec--S&P Global Ratings

TOKYO (S&P Global Ratings) Dec. 18, 2017--S&P Global Ratings today said it has raised its long-term corporate credit rating on Japan-based automaker Mitsubishi Motors Corp. one notch to 'BB' from 'BB-'. The outlook is positive.

We base the upgrade on our view that Mitsubishi Motors has progressed improvement in its internal controls over the past year as part of ongoing restructuring of its organization and business operations since Nissan Motor Co. Ltd. became its largest shareholder in October 2016. From May 2016, our rating on the company incorporated a two-notch downward adjustment to reflect our view that its internal controls had serious flaws in light of its April 2016 admission that it falsified fuel-economy data.

Mitsubishi Motors has improved its organizational structure and business operations since October 2016 when Nissan Motor took a 34% stake and became its largest shareholder. It is refining internal processes and management of its profitability by reviewing its development processes; clarifying the scope of authority of each business division; reviewing its appraisal system; and establishing a system of monthly checks on the progress of the company's earnings plan. Exchanges of personnel with Nissan Motor have also encouraged a revamp of Mitsubishi Motors' business operations, in our view. We believe its internal controls have improved somewhat over the past year given that its operating profit has recovered steadily--to JPY / CNY36.7 billion in the second half of fiscal 2016 (ended March 31, 2017) and JPY / CNY44.2 billion in the first half of fiscal 2017--following a JPY / CNY31.6 billion operating loss in the first half of fiscal 2016.

We believe Mitsubishi Motors' internal controls will continue to function in a stable manner, making it likely its strategic initiatives--including the development and rollout of new models and full-model changes--and production costs will remain generally on track. Management's strong commitment to enhance business operations, combined with the continuing exchange of personnel and sharing of technological knowhow with Nissan Motor, will continue to help strengthen its internal controls, in our view. In addition, Mitsubishi Motors has the wherewithal to take necessary steps, having over JPY / CNY520 billion on hand as of Sept. 30, 2017.

The auto industry faces high risk of cyclicality and intense competition, in our view. We also believe Mitsubishi Motors has limited marketing presence and competitiveness in key global vehicle markets, and we expect full benefits from its alliance with Nissan Motor to take time to materialize. But it also has relatively strong positions in Southeast Asian markets with good growth prospects. Accordingly, we assess its business risk profile as weak. We assess its financial risk profile as modest because of its small debt burden, our expectation that key cash flow indicators for Mitsubishi Motors will remain at favorable levels relative to our rating on the company, and our view the company will maintain its conservative financial management.

We assess Mitsubishi Motors' liquidity as strong. We estimate that its sources of liquidity are likely to exceed 1.5x uses over the next year and to exceed 1.0x uses in the following year, based on its ample cash and deposits, small debt burden, and our expectation that it will continue to manage its investments appropriately. We expect its very close relationships with its key domestic creditor banks to continue to underpin the company's financing capabilities.

The positive outlook on the long-term rating reflects our view of at least a one-in-three chance that continued effectiveness of the company's business operations will eliminate negative effects that weaknesses in the company's internal controls have on the rating in the coming year or so. We also expect the company to secure stable earnings even under harsh business conditions as it refines its internal processes and management of profitability and further reduces costs.

We will consider upgrading Mitsubishi Motors if, in the coming year or so, it makes steady progress in its strategic initiatives, including new model rollouts, as well as management of production costs and we determine that its internal controls are functioning effectively under the management regime in place since Nissan Motor became its top shareholder. Important factors to realize this scenario are a steady increase in unit sales based on stronger product competitiveness and continued improvement in profitability, in our view.

Conversely, we would revise downward the outlook to stable if we determine that Mitsubishi Motors needs more time to improve its internal controls. This might be the case if further improper misconduct becomes known, it faces major delays rolling out new models, or it slashes its earnings plan. We might revise the outlook downward also if its operating performance substantially worsens again because of a material decline in overseas unit sales, particularly in key Southeast Asian markets, or a steep climb in the yen against major currencies.


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