Dongfeng and FAW shares suspended amid reports of possible merger

Shares in the listed arms of two of China’s “big four” automotive manufacturers were suspended on Tuesday amid reports of a possible merger that would create a new top 10 global car manufacturer.

Dongfeng and FAW halted trading in their listed subsidiaries after media reports said a changing of the chairmen of the two state-owned enterprises might preface a combination of the companies.

China’s ruling Communist party is keen to shake-up its network of state-owned enterprises and make them more competitive on the global stage, partly through a wave of mergers and spin-offs.

According to Chinese media reports, Xu Ping, chairman of Dongfeng, is expected to take up the same role at FAW. In March, the ruling Chinese Communist party’s anti-graft bureau said it had detained Xu Jianyi, FAW chairman, for “serious violations of discipline” — official shorthand for suspected corruption.

Meanwhile, Zhu Yanfeng, deputy party secretary of Jilin province and a former FAW head, is reportedly set to become chairman of Dongfeng.

Mr Zhu is regarded as the dealmaker of China’s auto industry, according to analysts at UBS. As FAW chairman, he oversaw the acquisitions of Haima Auto in 1998 and Tianjin Auto in 2002.

Dongfeng Motor Group, a Hong Kong-listed subsidiary, said in a stock exchange filing that it had taken the merger rumours “seriously” but neither it nor the parent group had received any information, written or verbal, from any government authorities.

FAW, also known as First Automotive Works, could not be reached for comment.

Dongfeng’s Hong Kong-listed shares resumed trading later on Tuesday, ending the day down 2.8 per cent at HK$12.70. Shares in its Shanghai-listed subsidiary, along with stock in FAW’s Shenzhen-traded units, remained suspended.

FAW and Dongfeng, formerly known as Second Automobile Works, form part of a sprawling web of joint ventures with international carmakers operating in the world’s biggest auto market.

Dongfeng, for instance, has tie-ups with Renault-Nissan, Honda and PSA Peugeot Citroën, in which it also holds a 14 per cent stake following a €3bn rescue of the French carmaker last year.

FAW, meanwhile, has car and commercial vehicle partnerships with the world’s three biggest carmakers by sales — Toyota, Volkswagen and General Motors.
Any combination of the two companies — which sold almost 7m vehicles in 2014 as the second and third-largest Chinese carmakers — would supplant Shanghai’s SAIC Motor as the biggest domestic marque and put the merged entity sixth in global auto sales.

But several analysts cautioned that the merger would have a limited impact.

Yankun Hou, an analyst at UBS in Hong Kong, said most Chinese carmakers’ profits came from joint ventures with foreign peers. Since these were operated independently from each other, cost savings would be hard to come by, he added.