VW Boosts Profit, But Cuts Sales Forecast Citing China.
VW Brand Improves Profit Margin.
China Margin Of Close To 15 Per Cents Looks Unsustainable.
Volkswagen impressed investors with its latest financial report but worries about China were inescapable.
Shareholder confidence won’t be helped either by the fact that VW remains leaderless after the demise of supervisory board chairman Ferdinand Piech, and it also awaits a big reorganization.
In the second quarter, VW’s operating profit rose 7.5 per cent to €3.49 billion from €3.33 billion in the same period of 2014. Sales in the half-year fell 0.5 per cent to 5.04 million vehicles. Despite this decline, mainly down to China, VW was quick to brag that it was now the world’s largest carmaker because number two Toyota’s sales had fallen a bit more.
VW cut its sales forecast for the year to flat after an earlier expectation it would beat 2014’s 10.1 million vehicles moderately.
Bernstein Research analyst Max Warburton said present trends for VW were worrying with what he described as a “substantial” fall in profit per unit in China.
He agonised about the lack of leadership too.
“It’s also not clear who is in charge of ideology – and how readily VW can respond to tougher conditions – now Piech has gone. But in contrast, the future may still look bright. VW brand margin ticked up but has massive room for improvement, the brand and technology strengths of the company remain powerful and Herbert Diess has arrived to sort out costs. This company has great promise – but it is too dependent on China,” Warburton said.
In the second quarter VW’s troubled namesake brand’s profit margin rose to 3.3 per cent – much higher than expectations of 2.5 per cent. That remains well below the target of more than six per cent by 2018.
Diess recently took over the VW brand, after being lured away from BMW.
Investment researcher Evercore ISI said VW’s second quarter numbers reflected not only the improved performance of the VW brand, but also a better European performance. It described the performance as solid, but added that shareholders needed clarity on what to expect from China.
“Unless China volumes stabilize, which will unlikely be the case in July, we suspect most investors will choose to stay away rather than lose sleep over never-ending negative China headlines,” Evercore ISI analyst Arndt Ellinghorst said.
Bernstein Research’s Warburton said investors will be watching Diess’s performance to see if he can come up with a viable cost reduction plan at VW brand.
“But will this be enough to offset the decline in China? The truth is, nobody knows. But we believe that VW at least has an interesting non-China story, with immense cost opportunities in Europe and across the organization to be explored in the future,” he said.
Commerzbank analyst Sascha Gommel pointed out that VW’s profit margin in China is about five times higher than the close to three per cent in the rest of the world.
“For the time being the question will remain how much downside could come from China – a market where the Volkswagen EBIT (earnings before interest and tax) margin level is still around 15 per cent,” Gommel said.
Who replaces Piech?
Meanwhile speculation continues to simmer around the Piech succession issue.
Most seem to think that VW Group CEO Martin Winterkorn has the inside track. Others see support for Wolfgang Reitzle, former chairman of Ford’s Premier Automotive Group.