China profit analysis Volkswagen (VOWG.F) Germany: Automobiles " " Weaker Chinese margins a risk for ?4 earnings. China is likely to contribute 70%-80% of VW抯 EPS this year, but 3Q November 6, 2003 results show worrying signs of falling earnings in this market. If Stock rating: In-Line Chinese profits decline in 2004, the impact could offset some of the Coverage view: Neutral gains expected from the new Golf/other models in Europe. IL/N. Large-Cap Growth Price: EUR44.45 Chinese profits are the main driver of 2003 earnings This report is based on our morning note of November 4, VW"s strong exposure to the Chinese auto market is often cited as a positive for the stock. 2003. China will likely be the key driver of earnings in 2003, contributing c.70%-80% of reported EPS thanks to equity income from the JVs and operating profits from selling parts. One quarter does not make a trend, but 3Q results show worrying signs We see worrying signs in VW"s 3Q results that Chinese profits may already be slipping. Pro- forma EBIT from the Chinese JVs fell 35% yoy, despite much higher volumes, suggesting much lower margins. Profits from selling parts to the Chinese JVs also appeared to fall. We Kei

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