Toyota Automotive: A Turbulent Time With Key Decisions Looming

As of 2024, Toyota Motor Corporation produces vehicles under four brands: Daihatsu, Hino, Lexus, and Toyota. The company also holds a 20% stake in Subaru Corporation, 5.1% in Mazda, 4.9% in Suzuki, 4.6% in Isuzu, 3.8% in Yamaha Motor Company, and 2.8% in Panasonic, as well as stakes in automotive manufacturing joint ventures in China (FAW Toyota and GAC Toyota), the Czech Republic (TPCA), India (Toyota Kirloskar), and the United States (MTMUS).

Toyota is renowned for its comprehensive product lineup, which caters to the various needs of different markets and consumers worldwide. This includes a wide range of segments such as sedans, SUVs, MPVs, sports cars, pickup trucks, and commercial vehicles. Additionally, Toyota is continually expanding in the field of new energy vehicles, offering various eco-friendly options including hybrid electric vehicles (HEV), plug-in hybrid electric vehicles (PHEV), battery electric vehicles (EV), and fuel cell electric vehicles (FCEV).

Toyota Motor Corporation's stock is a component of the Nikkei 225 Index and the TOPIX Core30 Index. Over the past year, the company's stock price has increased by 37.43%, yielding an excess return of 138% relative to the Nikkei Index. However, due to negative factors such as production halts of certain models due to certification violations and a decline in shareholder support for the company's chairman, the stock price has been on a continuous decline over the past three months. As of June 25, the stock price stood at 3,149 yen.

Automobile manufacturing and sales contribute approximately 91% of Toyota's operating revenue, making it the core business. Other sources of operating revenue come from financial services and other businesses.

By market segment, the North American market contributes the most operating revenue (approximately 36%), with the Japanese domestic market and the Asian market each contributing about half of that amount. The remaining operating revenue is sourced from Europe and other markets.

For the fiscal year 2024 (ending March 2024), Toyota Motor Corporation's revenue was ¥45,095.3 billion, up 21.4% year-on-year; net profit attributable to the company was ¥4,944.9 billion, up 101.7% year-on-year. In this period, the core automobile business revenue reached ¥41,266.2 billion, up 22.0% YoY; operating income reached ¥4,621.4 billion, up 111.9% YoY.

The increase in revenue was mainly driven by sales growth in North America; in the fiscal year 2024, Toyota's combined automobile sales in Japan and overseas increased by 621,000 units compared to the fiscal year 2023, reaching 9.443 million units, a growth rate of 7.0%. Among them, automobile sales in Japan decreased by 76,000 units to 1.993 million units, a decline of 3.7%. In the fiscal year 2024, overseas vehicle sales increased by 697,000 units to 7.45 million units, an increase of 10.3%.

As a core market, North America's sales revenue for the fiscal year 2024 was ¥17,943.0 billion, up 9.6% YoY; operating income was ¥506.3 billion. This performance was mainly attributed to improved marketing effectiveness and cost reduction efforts.

The proportion of Toyota's HEV production in North America increased from 22% in calendar year 2022 to 27% at the beginning of 2023. The company launched a new HEV model, Tacoma, in 2024, and offers only hybrid versions for the Camry model.

According to UBS projections, the production ratio of Toyota's hybrid vehicles is expected to continue rising, from 28% in March 2023 to 45-50% by March 2026. Sales are expected to reach 5 million units in the fiscal year 2026.

Since hybrid vehicles in the North American market have a higher gross profit margin than internal combustion engine (ICE) vehicles, the enhancement of hybrid vehicle production and sales can drive profit growth. Additionally, the profit margins of hybrid vehicles have stronger resistance to fuel price inflation. During inflationary periods that lead to increased fuel costs, HEVs are more competitive than traditional ICE vehicles due to their lower fuel costs.

Considering that the United States announced in May to increase tariffs on Chinese-made electric vehicles nearly fourfold, and that Canada and the European Union have also indicated plans to raise tariffs on Chinese electric vehicles recently, this will lead to higher prices and reduced competitiveness for Chinese brand vehicles. This may benefit Toyota in the coming years, attracting more consumers, especially in the electric vehicle sector, by leveraging relative price advantages and a stable supply chain. For new energy vehicles, J.P.Morgan expects Toyota to achieve its goal of producing 2 million zero-emission vehicles by 2030, and UBS also believes that Toyota's hybrid vehicle sales have the opportunity to increase year by year.

Recently, Toyota Motor Corporation has been involved in multiple scandals. On June 3, Japan's Ministry of Land, Infrastructure, Transport and Tourism stated that Toyota submitted incorrect data in safety tests for three existing models, leading to the temporary suspension of these models. In addition, a subsidiary of the group discovered issues with exhaust emission test data, further exacerbating the trust crisis. These incidents have not only damaged Toyota's brand image but also raised public doubts about the standards of the entire Japanese automotive industry.

Despite the controversies, Akio Toyoda was re-elected as chairman at the annual shareholders' meeting in June, albeit with a noticeable decline in support. There is widespread dissatisfaction with the company's poor governance and frequent falsification of test data, and even though Toyota achieved significant growth in operating profit under his leadership, these negative events could not be entirely mitigated. The questions raised by shareholders and proxy advisors at the meeting reflect deep concerns about the current corporate governance structure.

Given this information, Toyota's future challenge lies in how to restore public trust damaged by scandals and implement effective reform measures to strengthen internal management and transparency, in order to recover its previously good reputation and market confidence.

Due to the safety testing scandal in December 2023, some production lines of Toyota's Daihatsu brand were shut down, and the automobile production in FY24 is expected to decrease by about 250,000 units compared to the normal operation of the production lines. Additionally, the high incentives paid to North American dealers, support costs, and investments in growth areas led to a significant increase in costs for FY24.

However, due to the simultaneous increase in sales, Toyota's basic business conditions remained stable in FY24. Recent negative news and rising costs have contributed to a slight downward revision of FY25 expectations: FY24 basic EPS was ¥365.94 per share. According to Bloomberg consensus estimates, FY25 EPS is expected to be ¥336.93 per share.

Shareholder Returns: The stock's dividend yield (TTM) is currently 2.44%. On May 8, Toyota announced a stock buyback of up to ¥1 trillion, representing 3.04% of the total issued shares. This decision was partly to appease shareholders' negative sentiment due to recent adverse news and their desire to sell Toyota stock. Toyota stated that the buyback amount could increase depending on the extent of shareholders' stock sales. According to insiders cited by Bloomberg, Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group will gradually sell ¥1.32 trillion (approximately $8.5 billion) worth of shares in the world's largest automaker over the coming years. On June 20, Denso and Aisin, the largest suppliers within the Toyota Group, sold their stakes in several Toyota subsidiaries, marking the latest reduction in cross-shareholdings within this vast automotive group.

Valuation:The company's forward P/E ratio for the next 12 months is expected to be 9.00x, which is relatively high among major automakers.

Risks: Intensified competition in the U.S. car market; High incentive costs in the North American passenger car market; JPY/USD exchange rate exceeding 120 yen per dollar.