Japan Automobiles/Auto Parts: ESS re-rating limited for Japanese OEMs; focus on select domestic battery capacity

Research evidence excerpt

Japan Automobiles/Auto Parts: ESS re-rating limited for Japanese OEMs; focus on select domestic battery capacity

Simplified estimate of Honda’s US ESS

business value

Exhibit 1 estimates the potential financial performance of the ESS (Energy Storage

Systems) business for Ford and Honda by applying the assumed unit prices and an

operating margin of 5% to their respective battery production capacities. For Ford,

which has seen a sharp increase in its stock price, we make the highly simplified

assumption that the portion of outperformance during the period reflects the value

attributed by the equity market to its ESS business. Based on this assumption, we

assess the extent to which the future potential of the ESS business has been priced in

by dividing the analysis into three scenarios: (1) a case reflecting only currently

announced production capacity, (2) a case incorporating additional capacity expansion

expected going forward, and (3) a case reflecting long-term capacity expansion potential.

Using a similar valuation framework, we also estimate the implied market capitalization

of Honda’s US ESS business.

In conclusion, if the recent sharp rise in Ford’s stock price is assumed to reflect not only

the currently announced 20GWh production capacity but also a certain degree of future

expansion potential—corresponding to Cases (2) and (3) above—then Honda may

similarly see its valuation incorporate expectations for capacity expansion. Under this

assumption, our estimates suggest a potential contribution of 18–36x P/E and

¥289.8bn–¥579.6bn in market capitalization. However, considering that (1) applying the

average forward P/E of ESS-related companies (26.4x) to the above earnings

assumptions would imply a market capitalization of only around ¥425bn, and (2) unlike