Volkswagen:Position Changes

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27 February 2023 - consideration 25% sell

I am considering selling 25% of Volkswagen to take a more defensive positon.

VW remains to be sizable position in the portfolio given it's cheap valuation and virtual equity stories.

I am certainly interested to increase the position again, once our visibility increases or we get an even more attractive entry.

Reasons:

• Automotive Data is showing some first signs of deterioration as expected. See: Automotive Industry:United States. Especially the Cox Automotive Insight Presentation mentioned in our article is insightful.
• It is likely that the situation will further deteriorate with lower demand due to high interest rates and a possible recession while supply bottlenecks ease, which will lead to more competition and eventual price pressures.
• Volkswagen Brand is apparently forced to increase prices due to increasing costs? Raises prices by 4.4% More about Volkswagen brand margins here: Volkswagen:Brand_overview#Operating Margins
• Our visibility into China is still limited. There are consistent geopolitical risks and a hickup in the automotive market due to the end of state subsidies. The reopening after Covid should be positive though. Note: Article Automotive Industry:China needs to be written.
• In the longterm the risk from autonomous vehicles is very unpredictable. I believe that there will be a self driving future which could reduce car demand drastically.
• There are many open unanswered questions like the profit margins of EVs see Automotive Industry:Questions or the situation at Volkswagen Financial Services see Volkswagen:Questions that need to be answered.
• Volkswagen is in a transition towards renewable energy which costs a lot of money. I am unsure when Free Cash Flows will improve again.
• Revenue and operating margins in 2022 have missed targets. The likely cause was a (temporarily) weaker China.
• There has been a special dividend of 19,06 EUR per share. Taking it into account the stock is up approx. 15% from our average buy level.
• Tesla is posing a thread to the automotive industry overall given it's strong value proposition at low car prices.
  

Note: I already sold and repurchased 25% of the Volkswagen position on February 7.

Additional Arguments:

Pro selling arguments:

• Competition in China's BEVs market continues to grow. For instance, NEV cars sold by domestic brands accounted for 79.9 percent of China's overall NEV market in 2022.
• Volkswagen said that it won't participate in BEV price wars initiated by Tesla in China. This means that its market share will likely diminish.
• Audi, one of its main operating margin contributor(14.1%) in 9M 2022 and which contributed around 20% of total deliveries in 2022 is facing aging lineup.

Magaly: For a macro perspective I don't feel comfortable that one of a biggest portfolio position is in one of the most interest rate sensitive industries. Since it will be hit by both possibilities higher interest rates for longer or a recession.

I know valuation is cheap compare to previous years, but is also a very different period this one compare to the last few decades: - Higher inflation (I have started to think inflation could be more structural, and we will need to fight it constantly) - High interest rates - QT - Extreme high debt All of these factors in my opinion makes all stock market valuations lower than what we were used to in past years, since I don't think we can continue to experience in coming years the growth and expansion we had, especially in financial assets, with these conditions. I also think that it will be a few years that passively investing will not generate the same returns that we were used to. On top of this the industry in facing a big structural change that will make the competition more challenging in coming years. You probably need to be 100% sure VW will be one of the winners in this transition for their innovation.

Just a last point, from what I understand VW is dependent from their margins in luxury cars, if there is a recession later on, I think the luxury market could have the biggest hit, since luxury is a more discretionary market than the regular one