Mercedes gets shares boost on stable second quarter despite China woes

By Rachel More

BERLIN, July 28 (Reuters) - Shares in Mercedes-Benz got a boost on Tuesday after cost cuts helped stabilise profit in the second quarter, with further measures planned at its German plants, but intense Chinese competition cast a shadow over its core business.

The results were a rare respite for investors in the German automotive sector, which has been battered by mounting tariff costs and intensifying competition from Chinese rivals, prompting Volkswagen, Mercedes and BMW to accelerate cuts.

Mercedes' shares rose by as much as 5.9% following the announcement, before easing to 2.9% by late morning trade.

"In an environment where some automakers are ringing alarm bells on their competitive positioning, Mercedes delivered a clear and confident message," Morningstar analyst Rella Suskin said.

Mercedes confirmed profit guidance for its core car business and posted an above-forecast 4.0% adjusted return on sales in the second quarter, comfortably within the 3% to 5% range.

Rival BMW slashed its outlook in June as a downturn in the Chinese car market intensified pressure on sales.

CHINESE COMPETITORS NOW TARGETING EUROPE

Mercedes' second-quarter operating profit rose 22% to €1.5 billion ($1.7 billion) despite a 3% revenue decline, helped by cuts to administrative and research & development spending, as well as strong earnings at its financial services and vans units.

It also benefitted from a €131 million gain linked to the planned sale of its leasing subsidiary Athlon.

But the Stuttgart-based carmaker is far from safe. Having suffered heavy losses at the hands of local manufacturers in the once-lucrative China market, those same Chinese competitors are now increasingly looking to export to Europe.

The full-year margin for the company's car business is currently seen at the lower end of the forecast range, CFO Harald Wilhelm said, with higher sales in Europe for costlier to produce EVs expected to weigh on profit.

Second-quarter car sales slumped 30% in China, the world's largest auto market, prompting Mercedes to scrap forecasts of stable car sales and group revenue. It now expects a slight decline on both fronts compared to the previous year.

German factories are in the firing line of an intensified push for leaner production, the company said, declining to give further details as it talks with labour representatives.

At the same time, Mercedes is boosting its production presence in cheaper Eastern European countries such as Hungary, with the expansion of its Kecskemet plant, and Poland.

"We must continue to work flat out to reduce costs so that we can remain competitive on the prices of our products," CEO Ola Kaellenius said.

As for Chinese entrants to Europe, he said their main target was currently volume markets rather than Mercedes' premium segment.

"But that is not a reason to sit back and be relaxed."

($1 = 0.8795 euros)

(Reporting by Rachel More; Editing by Linda Pasquini and Varun H K; Editing by Joe Bavier)