In 3Q 09, Toyota recorded a significant decline in net revenues, as the company’s largest markets, such as North America and Europe, are currently experiencing recessionary conditions. With the current prevailing weakness in the global economy, we remain skeptical over sales growth for Toyota. Moreover, the company reported weak sales figures for February and March 2009. We believe Toyota will be compelled to reduce its ARPV in order to maintain its market share in the current weak market conditions, going forward. Moreover for the first time in over a decade, Toyota’s debt rating has been downgraded by Standard & Poor’s Financial Services LLC (S&P) and Moody’s Corporation (Moody). Multiple government’s are currently pledging to spend billions of dollars to recover from the prevailing recessionary conditions, demonstrated by the recently concluded G-20 summit on 02 April 2009. In addition, Toyota has approached the government of Japan for securing funds in order to support its US operations and enable the company to sustain the current weak market conditions. We believe Toyota will be one of the prime beneficiaries once the US economy emerges out of recession. However, over the medium term, we remain skeptical about Toyota’s revenue growth, as high unemployment rates and low consumer spending levels in recessionary conditions will impact top-line performance. However, from FY 2011, we expect robust sales growth led by the anticipated improved economic conditions and new vehicle launches. Management’s cost reduction initiatives and lower commodity prices will also support the company to reduce cost of sales. Considering the current economic conditions, we expect Toyota to achieve a healthy bargain from its ongoing price negotiation for purchase of steel with Nippon Steel Corporation (Nippon Steel) in May 2009. Moreover, bankruptcy of any of the Detroit 3 (Ford Motor Company, General Motors Corporation, Chrysler LLC) companies could severely disrupt the automobiles supply chain and negatively impact Japanese counterparts, including Toyota. However, margins are expected to remain subdued in light of weak revenue expectations. In addition, we expect lower income from equity in earnings of affiliated companies (for instance; Hino Motors), which will further impact net earnings over the medium term. We expect Toyota’s Free Cash Flow (FCF) to be negative for FY 2009, despite the company’s efforts to reduce capital spending. Hence, our outlook for the company remains weak.

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