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Honda lifts annual profit forecast by 8.3 percent on lower costs, sees sales up

Honda signage
Ashlee Espinal | CNBC
Honda signage

Honda Motor lifted its full-year net profit forecast by 6 percent, betting that Chinese customers will keep buying its XR-V and Vezel SUVs and the popular Civic sedan after robust demand there boosted Asian sales sharply in the latest quarter.

Japan's third-largest automaker by sales said on Monday it expects full-year net profit to hit 415 billion yen ($3.95 billion), compared to its previous forecast of 390 billion yen. Honda upgraded its global sales forecast to reflect strong demand in China, the world's biggest auto market and the company's second largest.

It also expects cost cuts and lower quality-related costs to offset the impact of a stronger currency and lift its bottomline this year, after taking a hit last year due to hefty provisions for costs to recall Takata air bag inflators.

Strong demand in growing cities has pushed Honda's Chinese sales up 26 percent higher year-on-year to 872,000 in the first nine months of 2016, boosted by a near doubling in sales for the Civic, which underwent a model change this year.

This prompted it to lift the forecast for group vehicle sales in Asia by 11 percent on the year to 1.915 million for the year ending in March 2017, after overall Asian sales rose 22 percent on the year in the second quarter.

As a result, it sees global sales rising by 5 percent from last year to 4.98 million cars.

"We're seeing a positive impact from our new models. The Civic is doing very well in North America, China, and South America," Honda Executive Vice President Seiji Kuraishi told reporters at a briefing, adding that strong demand for the XR-V compact SUV crossover was also lifting Chinese sales.

To keep up with rapidly growing demand for its sedans and SUVs in China, Honda is planning to build a new factory in the country with partner Dongfeng Motor, two people familiar with the matter told Reuters earlier this month.

Honda sells roughly 40 percent of its global production in North America, but as growing demand in China drives Asian sales higher, the automaker expects sales in the two regions to be roughly the same this year.

Despite the rosier profit outlook, Honda's new profit forecast remains lower than the average 482 billion yen profit expected by 21 analysts polled by Thomson Reuters, and Honda said that its conservative outlook was largely due to global uncertainties.

"At the moment we see uncertainties related to the U.S. elections, Brexit and a weaker sterling, and in Asia, the outlook for Thailand after the death of the country's monarch," Kuraishi said.

"We haven't seen the impact of these factors yet, but we're taking a cautious approach to our forecasts."

Honda operates a plant in Britain, producing around 140,000 vehicles per year, including the CR-V crossover SUV and Civic sedan at its plant in Swindon. Half of its production is exported to the EU.

Kuraishi said that the automaker had no plans at the moment to shift its production away from Britain, adding that it would consider factors including the value of sterling and the likely introduction of tariffs when deciding its future in the country.

Honda is assuming an average rate of 103 yen to a dollar for the current year, against its earlier forecast of 105 yen.