UPDATE 1-Dongfeng Motor eyes Hafei and engine maker-sources

Fri Jan 25, 2008 5:27am EST

(Recasts adding quotes, details)

By Fang Yan

SHANGHAI Jan 25 (Reuters) - The parent of China's Dongfeng Motor (0489.HK) is seeking to buy control of minivan maker Harbin Hafei Automobile Industry Group and engine supplier Harbin Dongan Auto Engine Co (600178.SS) to boost its competitiveness in the world's fastest-growing major auto market.

Two sources with knowledge of the negotiations told Reuters on Friday that Dongfeng Motor, the China partner of PSA Peugeot Citroen (PEUP.PA), was in talks to buy the firms from their majority owner AviChina Industry & Technology Co (2357.HK).

AviChina is a subsidiary of state aircraft maker AVIC II, which wants to spin off its none-core assets to focus on plane manufacturing, they said.

If successful, the deal would mark the lastest consolidation in China's fragmented auto sector. In December, top Chinese car maker SAIC Motor Corp (600104.SS) announced it would merge with smaller rival Nanjing Automobile Group.

Dongan said this week AviChina was looking for partners for its auto operations. No details were given.

A Dongan executive, who asked not to be named, told Reuters that AviChina, which holds 59.51 percent of Dongan Auto Engine, was currently looking for buyers for Hafei and the engine maker. He declined to name any candidates.

"Dongfeng Motor is doing due diligence on Hafei and Dongan Auto Engine, but it could take 2-3 months to finalise any deal," said one of the sources.

A spokesman for Dongfeng Motor, which also has joint ventures with Japan's Nissan Motor (7201.T) and Honda Motor (7267.T), declined to comment. Executives at Hafei could not immediately be reached for comment.

Dongfeng Motor, whose strength is in making passenger car and medium-to-heavy duty trucks, faces tough competition from SAIC Motor and Changan Automobile (Group) in the booming minivan segment where rural demand is rising.

An acquisition of Hafei and Dongan, a major engine supplier to Hafei, would be a valuable addition to Dongfeng's product mix, industry analysts said.

Peugeot, which makes the Peugeot 307 and C-triomphe sedans in partnership with Dongfeng Motor, has expressed interest in joining hands with Hafei to make mini vehicles in China.

Peugeot CEO Christian Streiff said in October that a tie-up with Hafei would give the French company a new growth area.

A Peugeot spokesman in China said the French firm's stance on Hafei remains unchanged.

The No.2 European auto maker by volume is doubling the capacity of its car joint venture with Dongfeng in central China to 300,000 vehicles a year by 2008 and jointly building a second facility to add an annual capacity of 150,000 units.

Peugeot will make a decision this year on whether to build with Dongfeng a third plant in China, likely with an annual capacity of 150,000 vehicles, executives have said.

Dongan Auto Engine booked net profit of 76.34 million yuan ($10.59 million) in January-September last year, up from 68.01 million yuan a year earlier. Trading in the Shanghai-listed shares of Dongan has been suspended since Jan. 15.

Hafei sold 1.66 million vehicles in 2006, including 66,000 units overseas, it said on its Web site. No comparative figures were provided. ($1=7.208 Yuan) (Reporting by Fang Yan, editing by Charlie Zhu and Ian Geoghegan)