Dongfeng wants to sell Peugeot Citroen shares： cash flow is tight, Shenlong has no hope of turning losses

　　(Sina Automobile, August 8) According to Bloomberg, Dongfeng Motor’s plan to sell a stake in PSA is feasible. On Wednesday, sources said Dongfeng Motor has been evaluating and negotiating with potential buyers in recent weeks to sell some or all of the PSA stake, including a direct sale of the stock or the issuance of PSA-backed exchangeable bonds.

　　In a statement to Reuters, PSA said it had "no comment on rumours", while a source close to PSA Peugeot Citroe ? n said the board had not received any notice of Dongfeng’s planned stake reduction. A Dongfeng representative said they had no information on the plan at this time.

　　According to people familiar with the matter, Dongfeng’s negotiations on the sale of the stake are still at an early stage and it is uncertain whether an agreement will be reached. However, the reduction of the stake will be negotiated with PSA Peugeot Citroe ? n to maintain a good cooperative relationship between the two sides.

　　However, from a purely financial point of view, Dongfeng Motor’s sale of Peugeot Citroe ? n’s stake is completely feasible. In 2014, under the mediation of the French government, Dongfeng bought a part of Peugeot Citroe ? n to help Peugeot Citroe ? n bail out. According to the agreement, the two sides will deepen strategic cooperation, realize the coordinated development of Shenlong Automobile and Dongfeng passenger car independent brand business, and establish a research and development center across the value chain in China to provide research and development services for Dongfeng, PSA and Shenlong Automobile.

　　After injecting 800 million euros, Dongfeng, the French government and the holding company of the Peugeot family became the joint largest shareholder of PSA. Dongfeng Motor’s investment has done quite well. According to Bloomberg’s valuation data of global automakers over the past five years, Peugeot Citroe ? n’s share price has performed third, after Geely Automobile and Fiat Chrysler. The 800 million euros ($897 million) that Dongfeng invested at the time are now worth about 2.20 billion euros, nearly tripling.

　　Most importantly, with the help of Dongfeng, Peugeot and Citroen were the first foreign brands to enter the Chinese market, and they also had a glorious history in China. At the beginning of the new century, the Chinese auto market developed rapidly, and the sales of Shenlong cars also grew. Sales reached 704,000 units in 2014, achieving a year-on-year increase of 28%. Sales peaked in 2015, achieving 704,800 vehicles.

　　However, due to the failure to adapt to market changes in time, the Shenlong model was outdated and lacked SVU models, which led to a stall in sales thereafter. From 2016 to 2018, the sales of Shenlong cars fell sharply for three consecutive years, falling to 253,400 vehicles, about 36% at the peak, and the market share was even larger. It lagged behind the German and Japanese joint ventures.

　　Sales of the Peugeot and Citroe ? n brands in China halved in the first half of this year compared with the same period last year, and are now less than a quarter of what they were in 2015. In the key SUV market, models such as the Citroe ? n C5 Aircross and the Peugeot 4008 are simply not competing in the market.

　　Unless there is a significant improvement in the second half of the year, Shenlong’s factory utilization rate of 600,000 vehicles a year will be just over 25%. At this level, PSA Peugeot Citroe ? n should struggle to achieve profitability. The industry generally believes that factories typically need to be utilised at more than 80% capacity to remain stable, highlighting the serious overcapacity problem facing Shenlong.

　　In 2018, Dongfeng’s joint venture with PSA Peugeot Citroe ? n saw a loss of $251 million. It’s not surprising that things have gotten worse this year.

　　Shenlong’s management also apparently sees no sign of an imminent pick-up in sales. The Peugeot and Citroe ? n dealership networks in China shrank by nearly 80 per cent from 2015 to 2018, to just 666, compared with 1,186 for the Renault-Nissan brand in Dongfeng’s other two joint ventures.

　　There is a more immediate reason for Dongfeng’s sell-off of PSA Peugeot Citroe ? n. The company’s cash has looked a little tight recently, mainly due to a sharp increase in working capital, two consecutive years of negative earnings before interest and tax, and net debt of 2.15 billion euros.

　　In fiscal 2018, Dongfeng Motor’s operating cash flow actually turned negative at around 1.25 billion euros, a relatively rare event for an automaker that has not suffered a financial crisis or corporate scandal.

　　Dongfeng Motor still has ample liquidity. As of the end of December last year, its ratio of short-term assets to short-term liabilities was 1.36, higher than the industry average. But the situation in China’s auto market is severe, and sales have been below the level of the same period last year for 12 consecutive months. Dongfeng Motor expects profits to plunge by 30% in the second half of the year, the largest drop in history, highlighting the sluggish state of the Chinese auto market. At the same time, Dongfeng is also under pressure to invest heavily in electrification.

　　Faced with these headwinds, Dongfeng Motor’s cash flow will be improved by the proceeds from the sale of its PSA stake.

　　On the other hand, Demian Flowers, an analyst at Commerz bank, said that given the challenges PSA faces in complying with tougher emissions regulations in Europe, "Dongfeng may also see risks in its investment." (Crystal Ulrich)