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TOKYO: Honda Motor posted a smaller-than-expected rise in quarterly profit as fierce competition in China weighed on sales, and it left its operating profit forecast unchanged despite a big lift from a weaker yen.

The world’s second-most valuable carmaker, with a market worth of $72 billion, had been riding demand for its small and fuel-efficient cars amid $3-a-gallon gasoline, but said it was feeling headwinds now with pump prices down at $2.2 to $2.3.

The Tokyo-based automaker also said it had set its expectations too high for the booming Chinese market, and lowered its sales target there by about 20,000 units to around 3,60,000 vehicles for the business year to the end of March.
“The Asian market didn’t recover for us as much as we had thought,” executive vice-president Satoshi Aoki told a news conference. “Our sales target for China ended up being too ambitious.”

Sales of Honda’s flagship Accord sedan have been badgered in China by the launch of Toyota’s popular Camry. Toyota, meanwhile, this month raised its sales growth outlook for China in 2007 to 40% from 33%. Honda’s October-December net profit rose 8.8% to 144.83 billion yen ($1.19 billion), short of an average estimate for 153.6 billion yen in a survey of five brokers.

Operating profit rose 5.2% to 205.11 billion yen, below market estimates for 215 billion yen. Foreign exchange gains added 10.6 billion yen, but cost cuts could not keep up with a rise in raw materials prices, Honda said. Revenue grew 12% to 2.77 trillion yen on brisk car sales in North America, Europe and Asia.

“The profit numbers do not look appealing considering that their auto business is supposed to be doing well,” said Masayuki Furukawa, analyst at Fukoku Capital Management. Honda nudged up its net profit forecast for the full year to the end of March to 560 billion yen from the previous 555 billion yen, attributing much of it to non-operating, derivates-related gains.

At the operating level, it stuck to its forecast for an 820 billion yen profit despite additional currency windfalls of 51 billion yen on top of its reading three months ago. Honda altered its assumption for the dollar’s average rate to 117 yen for the year from 115, and the euro to 149 yen from 145 yen.

Weaker-than-expected sales volumes in each business segment — motorcycles, cars and power products — as well as a big rise in recall-related costs and incentives spending would offset forex gains of 107 billion yen for the year, it said.
Honda estimated it would spend about $100 million more on sales incentives this business year in North America than it reckoned in October.
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