Guangzhou Automobile has reached an initial agreement with Hunan Changfeng Motor to take a major stake, possibly up to 30%, in the sport utility vehicle maker, a source with knowledge of the matter has said.

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The deal would make Guangzhou Auto, a Toyota and Honda auto assembly JV partner, the largest shareholder in Changfeng, which has a market capitalisation of RMB5.78bn (US$846.7m), and help it to secure a foothold in the country’s inland area, the source told Reuters.


Final terms of the agreement have yet to be agreed but Guangzhou Auto’s stake in Changfeng is unlikely to exceed 30%, the source was quoted as saying. Changfeng is currently 50.98% owned by its state-run parent.


Mitsubishi Motors, which owns 14.59% of Changfeng, would remain a major shareholder after an equity deal with Guangzhou Auto, the source added.


According to Reuters, Changfeng’s shares were suspended from trade on Tuesday pending an announcement of a major restructuring deal. They have nearly tripled since the beginning of this year, vastly outperforming a 47% gain of the benchmark index.

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Reuters noted that the Beijing government has been encouraging mergers and acquisitions among the auto industry’s more than 100 players, aiming to create a few national champions able to compete with global giants at home and overseas.


Industry analysts told Reuters Changfeng, which supplies its Leopard SUVs to China’s military, would fill a gap for Guangzhou Auto in SUVs, which are popular among young consumers in big cities.


It also would give Guangzhou Auto a production base in inland provinces where automobile demand has started to pick up as Beijing takes steps to encourage consumption through subsidies to rural households and other measures, they added.


Changfeng, with annual production capacity of 100,000 units, sold only 26,816 vehicles in 2008, up 4.01% from a year earlier, the report added.