What Will Drive Volkswagen’s Value In The Near Term?

by Trefis Team
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Upside
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Trefis
VWAGY
Volkswagen AG
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Volkswagen ADR (OTCMKTS: VWAGY) has had a good 2018 so far, posting remarkable sales figure and the best ever first half in its history. Year-to-date, the company has about 6.5 million in auto sales out of the global auto sales figure of 55 million. Since the world’s largest automaker has witnessed superior sales over the last few quarters, we believe that the negative impact of the emission scandal is slowly fading away. Further, we believe that the company’s expansion plans in China will drive its revenue growth and valuation in the coming years.

We currently have a price estimate of $16 per share for the company, which is in line with the market price. View our interactive dashboard – Volkswagen’s Price Estimation – and modify the key drivers to visualize the impact on its valuation.

Expansion In China Will Drive Top-Line Growth

Volkswagen is still tussling with the aftermath of its emission scandal. However, despite paying billions of dollars in fixes, fines, and settlements, the automaker continues to invest heavily to expand its business in China. Since China is a key market for the company, it plans to invest over $18 billion in this market by 2022.

Volkswagen has already launched a new plant in Tianjin with annual capacity of 300,000 units. The new production facility will produce SUV models for Volkswagen and the Audi brand in the coming years. In addition, the company has also launched a component plant in China in June of this year. Further, Volkswagen aims to expand its SUV-lineup in China to 10 models by the end of decade. The company’s impressive lineup of new products in China includes Audi’s Q8, Q5L (first long-wheelbase in China), Bentley’s Bentagya (powerful twin-turbo V8), Porsche – 911 GTR RS, Mission E Cross Turismo, Porsche’s first all-electric model Taycan, Skoda’s Kamiq CitySUV, Scania’s L-series, and MAN’s T-series (TGE, TGL, TGM and TGS).

Furthermore, the passenger car segment in China has been the most profitable segment for Volkswagen so far in 2018. We expect the passenger vehicle sales in China to rise to 26.5 million in 2018, a rise of 6% over the last year. However, launch of modified vehicles, and increased sales of SUV’s, sedans, and commercial vehicles, coupled with intense pricing competition in the Chinese automobile market, could weigh on the company’s operating margins. In addition, the anticipated rise in tax breaks and purchase tax by the Chinese government in the coming quarters could further drag down the company’s profitability in China.

Yet, based on our estimates, the company’s Chinese operations constitute about 56% of its valuation. Accordingly, we believe that China is a critical market for Volkswagen and the company’s strong focus to grow its presence in this market is likely to boost its top-line in the near term.

 

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