FRANKFURT (Reuters) - BMW (BMWG.DE) tore through market expectations for second-quarter profits as more wealthy Chinese drove away with its revamped 5 Series saloon car.
The company reported an 83 percent jump in quarterly operating profit at its luxury car business, underpinned by surging sales of the 5 series and a 4.8 percentage point widening in its operating margin to 14.4 percent.
Although BMW is enjoying a golden year for profits, like Mercedes (DAIGn.DE) and Audi (VOWG_p.DE), the carmaker tempered expectations by predicting a return in the longer term to margins of 8-10 percent.
Bernstein analyst Max Warburton called the results “quite simply awesome” as BMW came in third only to luxury sports car makers Porsche (PSHG_p.DE) and Ferrari FIA.MI in terms of sheer earnings power in the global auto industry.
“For an analyst that’s covered BMW for 11 years it’s amazing to see this level of earnings,” he said in a note to clients. “At no point in the past would it have been imaginable that this company could make margins of this level.”
Chinese demand for models like the top-of-the-line 7 Series, allowed BMW to charge higher prices and offer fewer margin-eroding incentives than ever before.
“What the market completely underestimates is the impact Chinese demand has on overall global pricing. Were it not for China, BMW would have to sweeten its leasing conditions to sell those additional 20,000 units of its 7 Series,” UniCredit analyst Georg Stuerzer said.
The margin, the most closely followed metric for German luxury carmakers, exceeded the 12.8 percent forecast in a Reuters poll, even though analysts had already penciled in higher estimates after BMW raised its outlook last month.
Although BMW echoed Daimler in forecasting that sky-high growth rates would return to earth in emerging markets, this will not threaten their outlook as margins are supported largely by maintaining factory output near their current absolute limit.
Sales volumes jumped 60 percent in China in the first half and were up nearly 70 percent in Brazil. They doubled in India and almost tripled in Turkey.
Chief Executive Norbert Reithofer admitted on Tuesday that BMW could not keep pace with this demand, losing out on potential sales as manufacturing plants were already running flat out.
To better profit from developing economies, he expects his board will approve this autumn plans to build a car assembly site in Brazil, its first ever in Latin America.
Reithofer told reporters that the environment in western economies will remain extremely volatile.
“Global risks continue to increase rather than decrease. There are concerns about the sizeable national debt of many countries,” he said a day after U.S. politicians struck a last-gasp deal to raise the country’s borrowing limit, warding off the risk of a debt default.
Against this background, China stood out particularly as a source of record profits for German luxury carmakers.
“The outlook there is extremely, extremely bright. Very steep wage rises in China are creating a rapidly growing urban middle class, so the Chinese luxury auto market is set to grow by just under 50 percent annually for the next two to three years,” said John Leech, automotive partner at KPMG.
Double-digit margins are “definitely achievable” for German luxury carmakers as a result, since fairly small changes in volumes have dramatic effects on earnings when capacity utilization improves at their plants.
“There is a huge potential for China’s car market to expand five-fold in size over a 50 year time horizon and reach a penetration rate in line with other developed markets,” he said.
Reporting by Christiaan Hetzner; Editing by Sophie Walker and Chris Wickham