Volkswagen Quarterly Earnings To Rise On Sales In China

German automaker Volkswagen AG (VOW.XE) on Thursday is expected to report second-quarter net profit jumped to EUR733 million from EUR283 million a year ago, fueled by its large footprint in the dynamic Chinese market.

According to a Dow Jones Newswires survey of 13 analysts, Volkswagen's pretax profit is expected to rise 47% year-on-year to EUR1.11 billion from EUR751 million, while operating profit is expected to show a 27% rise to EUR1.18 billion from EUR928 million. Revenue is expected to increase 8.1% year-on-year to EUR29.4 billion from EUR27.2 billion.

"Due to very strong market environment for premium cars, we expect Audi's performance to stand out in the quarter," Deutsche Bank analyst Jochen Gehrke said in a recent note to clients. Gehrke has a hold rating on VW stock.

At the core VW brand, Gehrke expects healthy profit in Brazil to help shrug off anemic demand on the company's home turf in Germany, where car sales deteriorated following the end of the country's scrapping incentives that encouraged motorists to trade in aging cars and buy new.

Investors will focus on the outlook for the second half of the year as well, a possible update on the planned merger with Porsche Automobil Holding SE (PAH3.XE) and any indication about progress in forging a heavy-truck alliance between Scania AB (SCV-A.SK) and MAN SE (MAN.XE).

Volkswagen holds a majority stake in Sweden-based Scania and is the largest shareholder at German engineering company MAN with a 29.9% stake.

Volkswagen's second-quarter earnings are expected to underscore a broad recovery in the automotive industry after a woeful 2009, when demand for cars and trucks contracted sharply amid tight credit markets and a jittery economic environment.

Volkswagen emerged relatively unscathed from the industry gloom compared to most its rivals, thanks partly to its strong presence in China and a small exposure to the U.S. market.

But some analysts have cautioned that the enormous growth seen in China in recent months might start to slow and that the recent recovery in the U.S. appears fragile.

On Friday, Europe's largest automaker by sales reported a 16% rise year-on-year in vehicle sales in the January-to-June period to 3.58 million cars and trucks. "We are ... optimistic as regards the full year," Volkswagen sales chief Christian Klingler said at the time, but he noted that the first-half results couldn't be extrapolated for the full year as the economic situation remains uncertain.

Volkswagen Chief Executive Martin Winterkorn told reporters last month that the Wolfsburg-based company expects vehicle sales growth in 2010 to outpace an increase of about 5% in the global auto market.

On June 16, Volkswagen lifted its full-year outlook and said vehicle sales in 2010 are expected to rise significantly from 6.3 million in 2009 and operating profit is expected to climb from EUR1.9 billion last year.

Favorable exchange rates are expected to bolster earnings, particularly the relative weakness of the euro against the dollar. Volkswagen exports many cars from Europe to the U.S., which lowered earnings in recent years when the euro was stronger.

Volkswagen currently is building a new plant in Chattanooga, Tenn., and is considering building a new engine plant in Mexico as part of a wider effort to turn around its North American operations and increase local production to reduce the exposure to currency fluctuations.

Returning its North American business to profitability is a cornerstone of the company's ambitious global expansion plan in coming years, which include dethroning Toyota Motor Corp. (7203.TO) as the world's largest automaker.

-By Christoph Rauwald, Dow Jones Newswires; [phone]; [e-mail]