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BMW’s 2012 Prospects Hinge On China’s Millionaires

Profit Forecasts Raised For 2012, 2013

BMW Reaping Big Gains From Modular Programmes

But China Sales Start To Level Out

While German luxury car manufacturer BMW took a bow following its scintillating third quarter financial performance, some investors were starting to worry about the company’s reliance on China and whether this might start to wobble in 2012, just as sales in Europe slide because of the economic crisis.

In a report on BMW’s third quarter headed “BMW: Still Fantastic – Now Let’s Talk About China in 2012”, Bernstein Research analyst Max Warburton said the company’s prospects in 2012 will depend on one main factor.

“Chinese millionaires. We wish we knew more about how they’re feeling right now,” Warburton said.

BMW third quarter earnings before interest and taxes (EBIT) rose 44 per cent to €1.72 billion compared with the same period of 2010, boosted by sales of the new BMW X3 SUV and 5 series saloon.

BMW’s operating profit in the third quarter slipped to 11.9 per cent from a record 14.4 per cent in the previous quarter. The company’s long term aim is to produce a profit margin of between eight and 10 per cent in 2012 and beyond, so it is way ahead of its forecasts. BMW is currently handling the changeover of its new 1 Series, and cranking up the crucial switch to an all-new 3 Series, its biggest selling vehicle. The new 3 series goes on sale in February.

Bank of America Merrill Lynch analyst Fraser Hill raised his EBIT forecasts for 2011 and 2012 by six and seven per cent respectively, and expects an auto profit margin of 12.0 per cent next year.

“We continue to view the company’s eight to ten per cent 2012 margin guidance as particularly conservative,” Hill said.

Hill was impressed by BMW’s savings from its modular production programme, reckoning that this would amount to €1 billion in 2011, and €1.5 billion in 2012 with the new 1 and 3 Series.

Deutsch Bank analyst Jochen Gehrke warned though that profits in the current quarter would be pressured by the costs of the model changeovers, while next year the worsening economic outlook and lack of sales growth momentum in China might be negatives

Bernstein’s Warburton said it is difficult to predict how Chinese buyers of premium cars will behave, saying he’s tried measuring macro economic factors like money supply, and micro evidence from gaming in Macau, watch exports and Hong Kong wine auction results, and is none the wiser.

High average revenue
Warburton said BMW makes about 50 per cent of its EBIT profits in China, and will account for 17 per cent of vehicle sales this year and probably 25 to 28 per cent of revenues. Average revenue per vehicle is between €55,000-€60,000 in China compared with about €38,435 across the company.

“If China slows down in 2012 – particularly unpredictable high-end consumption – BMW earnings will come down. If China slows down, we still expect BMW to make good money in the U.S., probably its second most profitable market and hopefully Germany with similar profitability to the U.S., but clearly consumers may react to whatever happens in Europe,” Warburton said.

Citigroup Global Markets analyst John Lawson said BMW’s latest numbers showed the 1 and 3 series changeover was going well, while BMW’s report showed there was no noticeable slowdown in overall economic conditions.

“We think it right to raise slightly our (profit) estimates for 2012 and 2013 by an average of four per cent. We continue to believe that BMW presents an attractive value case (for investors), with high franchise values, consistency and uniquely conservative accounting which should transcend the normal auto investing focus on earnings momentum,” Lawson said.

In a separate report on European manufacturers product renewal cycles, Lawson said BMW is now entering an extended period of comparative advantage, even compared with Audi, which also has a big renewal programme. This positive relative to its main competitors extends through 2013.

Renew the Mini
“The next major innovation is the renewal of the Mini in 2013 and adoption of this front wheel drive architecture for some versions of the 1 Series as BMW attempts to secure adequate internal scale for its small car platform, one of the biggest challenges for the upscale car sector,” Lawson said.

“Beyond that, BMW is also engaged in a further major step in re-engineering its business model as it prepares to launch the i3 (electric) and i8 (plug-in hybrid) adopting completely new materials like carbon fibre and construction along with the electric power-trains,” Lawson said.

Meanwhile, investors must be worrying about prospects in China, as a Deutsche Bank report said overall premium sales were beginning to stagnate, albeit it a high level. Deutsche Bank said China premium sales were hovering now at around 60,000 to 65,000 a month.

And for Bernstein’s Warburton, China is crucial for BMW.

“The key question is what happens next year – and whether BMW’s key profit driver China will see volumes, mix and pricing remain at current extraordinary levels. How many new millionaires can China create next year?” Warburton asked.

Neil Winton – November 15, 2011

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