Mercedes’ China motor hits one of two roadblocks

Making amends. Mercedes-Benz’s all-important China motor is sputtering. $64 billion luxury carmaker warned of collapsing earnings and free cash flow this year, as a real estate bust in People’s Republic means less demand for upmarket rides. A deteriorating political backdrop suggests worst may not yet be over.

Mercedes’ profit warning on Thursday night managed to be both unsurprising and shocking at same time. Maybach maker derives over a third of its car sales from Middle Kingdom, while Bernstein analysts reckon country’s share of total operating profit stood at 37% last year. Yet Chinese sales are hurting from a property-market slowdown and a vicious price war in electric vehicles. Rival BMW h alrey warned on profit earlier this month.

Still, magnitude of cut that Mercedes CEO Ola Källenius announced was unexpected. Having promised a 2024 operating margin of 10% to 11% in its automotive unit as recently as July, Källenius now expects a margin of 7.5% to 8.5%, with ratio in second half of year as low as 6%. Back in 2022, equivalent figure was 15%.

Like many carmakers, who are grappling with competition and shift to electric vehicles, Mercedes has been keeping investors happy by returning capital, with buybacks and dividends of around 12 billion euros planned this year. Yet 2024 free cash flow may be just 8.5 billion euros now, analysts reckon, potentially affording less room for buybacks next year. Alternatively, Källenius could keep capital-return party going by selling some of his 35% stake in 26-billion-euro Daimler Truck, which parent group spun off in 2021.

good news for investors is that Mercedes’ stock could be cheap if China bounces back. Assuming that bottom line recovers next year to where carmaker h previously expected it to be, at 11.5 billion euros, group would be tring on less than 5 times forward earnings after Friday’s roughly 7% fall. That compares with a long-term average of around 7, using LSEG data.

Yet re’s little hope of a real estate revival in China. And competition in electric vehicles and combustion-engine cars in Middle Kingdom may even increase as growth slows and country’s ageing demographics kick in. Citigroup analysts estimate that Mercedes is selling electric vehicles in China at a 37% discount to recommended retail price, up from 18% last September. Moreover, if European Union goes ahe with plans to slap import levies on Chinese EVs, n higher-end cars that Mercedes ships to China, like Maybach, could suffer from counter-tariffs. ro ahe looks treacherous.