UBS says sell Volkswagen and Renault shares — China will crush them

By Barbara Kollmeyer

Shares of Europe's biggest copper producer Aurubis says major scam will hit its results

China is coming for Europe's automobile makers.

That was the message from UBS analysts who downgraded shares of Renault SA and Volkswagen AG (VOW3.XE) to sell from neutral, citing threats posed by China competition. Shares of Renault tumbled 5.2% to EUR35, while Volkswagen dropped 3.8%, leaving shares at EUR108.14.

Renault's share-price target was cut to EUR31 from EUR42, as a team of analysts led by David Lesne said the French group's financial performance may be starting to peak just as the China competition threat is ramping up.

"Although we expect financial performance to remain strong over the coming quarters, with even some scope for further positive surprises, most indicators are no longer improving," said Lesne and his colleagues.

They added that legacy mass manufacturers in the car business are at the most risk from structural market losses due to rising competition from Chinese original equipment manufacturers and Tesla (TSLA).

With around 70% of its unit sales exposed to Europe and a 10% share of that market, "Renault is one of the most exposed names here," said the analysts, who added that the planned initial public offering of Renault's EV and software unit Ampere is "unlikely to unlock significant value."

Also hitting the automobile sector on Friday was news that Tesla had cut prices of its Model S and Model X in China for the second time in two weeks, as that U.S.-based EV giant is also facing increased competition. Shares of Tesla, which fell 3.4% in August, lost 1.8% in New York on Friday.

As for Volkswagen, UBS analysts said the German car giant is the OEM that's "globally most negatively exposed to the rise of Chinese carmakers." A former No. 1 OEM in China, the company is "potentially on the path to marginalization and as [No. 1] in Europe, it is likely to be most impacted longer-term by highly competitive Chinese EVs."

UBS had an initial positive view on Volkswagen, but the group gave up its first-mover advantage in EVs as it executed in key areas below expectations. Its batteries, software and Scout EV unit will generate EUR15 billion in losses and suck up EUR30 billion in cash between 2023 and 2027. Meanwhile, the automobile maker's partnership with Chinese EV maker Xpeng "has high execution risk," said a team of analysts led by Patrick Hummel.

China EV maker BYD is likely to have a 25% structural cost advantage over Volkswagen, even with local assembly. And the European market is also fast moving into oversupply, said UBS. The price target for Volkswagen shares was cut to EUR100 from EUR135.

In addition to its eponymous marque, Volkswagen Group brands include Audi, Bentley, Lamborghini, Porsche, SEAT and koda.

IPO Report (September 2022):Volkswagen's Porsche IPO prices at top of its range

Porsche Automobil Holding and BMW were, respectively, down 2.5% and 2.9%. The German DAX reflected some of the pressure, dipping 0.1%, while the rest of the continent saw modest gains, with the Stoxx Europe 600 index up 0.2%.

Also taking a hit in Europe on Friday was the region's top copper producer, Aurubis , whose shares fell 10% after it said in a statement on Friday that it had been the victim of criminal activity. The company said it had identified "considerable discrepancies in target inventory as well as in individual samples from specific shipments of input materials for the recycling area."

Aurubis said it was too soon to assess the extent of damages, but losses could be in the low, three-digit-million-euro range, impacting the 2022/23 fiscal year result. Therefore its forecast range of EUR450 to EUR550 million for an operating profit in the current 2022/23 fiscal year "will not be achieved," said the company.

The FTSE 100 index UK:UKX was up 0.4%, with mining shares getting a lift as China's August Caixin manufacturing PMI beat forecasts with a rise to 51, which indicates improving conditions, as the country also lowered down-payment requirements on homes. China-sensitive miners such as Rio Tinto PLC (RIO.LN) and Anglo American rose over 2% each.

Elsewhere, data showed the U.K. Nationwide House Price index falling 5.8% on an annual basis, marking the most rapid decline since the Global Financial Crisis.

"Many first-time buyers haven't been able to make the numbers work, and there is also a sense that existing homeowners are delaying their ascension up the property ladder as not to give up the super low-rate mortgage they secured before rates skyrocketed," said Myron Jobson, senior personal finance analyst at Interactive Investor, in a note to clients.

-Barbara Kollmeyer

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

09-01-23 1003ET

Copyright (c) 2023 Dow Jones & Company, Inc.