Summary of Key Points
Toyota's net profit for the first quarter of fiscal year 2027 (April–June 2026) increased by 76% year-on-year, but the quality of this growth is not impressive. The surge was mainly driven by the depreciation of the Japanese yen and its financial operations, while its core automobile sales business experienced a 21% decline in profit. Sales in the Chinese market have been declining for five consecutive months, becoming a major drag on overall performance. The company's annual net profit forecast is expected to decrease for the third year in a row, and it faces additional challenges such as disruptions in the Middle East supply chain and natural disasters like earthquakes. Even share repurchases have not managed to stop the decline in its stock price.
1. Net Profit Soars by 76%, but the Real Driver of Growth is Not Automobile Sales
Toyota's net profit for this quarter was 1.48 trillion yen (approximately 63.5 billion RMB). Although the increase seems significant, the reasons are as follows:
- Exchange Rates Played a Major Role: The depreciation of the yen resulted in higher profits when converting Toyota's export earnings from US dollars/euros into yen, generating an additional 345 billion yen in revenue due to exchange rate changes (compared to a loss of 212.3 billion yen in the same period last year).
- Financial Operations Were Profitable: Profits from financial services such as car loans and insurance increased by 24%, with other financial revenues rising from 153.7 billion yen to 850.5 billion yen.
- Automobile Sales Performance Dropped: The core automobile business's profit margin fell from 8.26% to 5.99%, meaning Toyota earned nearly 30% less per car sold compared to the previous year.
2. The Chinese Market Has Become a Drag: Five Consecutive Months of Declining Sales
Toyota's sales in China are very poor:
- Statistical Facts: Sales in June were 115,300 units, a year-on-year decrease of 26.9% (the fifth consecutive month of decline); the cumulative sales for the first half of the year amounted to 694,700 units, a reduction of 143,000 units, or a 17.1% decline.
- Toyota's Explanation vs. Real Reasons: Toyota attributes the decline to rising oil prices, but the real reason is the fierce competition from Chinese new energy vehicle manufacturers like BYD and Li Auto. These companies offer newer models with better cost-performance ratios, while Toyota continues to prioritize hybrid vehicles and delays the development of electric models, making its electric offerings less competitive and less appealing to consumers.
3. Conservative Annual Forecast, with Net Profit Expected to Decline for the Third Year in a Row
Although Toyota has raised its annual revenue forecast (from 51 trillion yen to 54 trillion yen) and operating profit forecast (from 3 trillion yen to 3.4 trillion yen), its net profit forecast of 3.25 trillion yen is still lower than last year's 3.848 trillion yen. The reasons for the conservative outlook are:
- The profitability of its core automobile business has not improved.
- The pressure from the Chinese market remains unresolved.
- There are too many external risks, and the company is cautious about its prospects.
4. Multiple External Risks, and Share Repurchases Fail to Boost Stock Price
Toyota also faces various challenges:
- Supply Chain Disruptions: The situation in the Middle East has caused disruptions in parts supply, expected to result in a loss of 510 billion yen in annual profits (previously estimated at 670 billion yen, although this figure has been slightly reduced).
- Market Disatisfaction: Despite announcing a share repurchase program worth 1 trillion yen (a benefit for shareholders), Toyota's stock price fell by 1.9% on the same day, indicating that investors believe these measures do not address the underlying issues (weak core business and declining market share in China).
Conclusion
Toyota's impressive financial results this quarter are largely superficial, as it has not resolved its fundamental problems: weak profitability from its main business, a shrinking presence in the Chinese market, and numerous external risks. If it does not accelerate its transition to new energy vehicles, its future may be even more challenging. When analyzing financial reports, it is important to consider not only the increase in net profit but also the source of that revenue—revenues generated from core operations are the true sign of strength, while gains from exchange rates and financial activities are often temporary.