Forecast about profitability dim in short term

Chang'an Automobile Co, a Shenzhen-listed company under the Chang'an Automobile Group, will become the new partner of Chang'an PSA in the fourth quarter this year, Jiang Aiqun, a spokesman for the company, told reporters recently.

Previously, the Sino-French joint venture Chang'an PSA was a 50-50 venture between Chang'an Automobile Group and PSA Peugeot Citroen. According to a statement released by Chang'an Automobile Co on Dec 27 last year, the company will purchase the 50 percent stake in the joint venture currently held by the parent group at a price of more than 2 billion yuan.

For Chang'an Automobile Co, which only had a profit of 1.4 billion yuan in 2012, such an expensive purchase is a huge risk, analysts say.

The company predicts that the joint venture will start to be profitable by 2015.

According to the parent group, this is easier said than done.

The group predicts that Chang'an PSA's deficit will reach 125 million yuan this year, and the deficit is likely to hit 175 million yuan in 2014.

Chang'an PSA was established in November 2011 with a registered capital of 4 billion yuan.

At first, the joint venture just sold imported DS models - Citroen's high-end portfolio - and conducted research and development for local production.

The first locally made DS5 model will begin production in this September.

Although the DS series has a high profile in its home country France and was the foremost sedan choice of several French leaders, including Charles de Gaulle and Francois Hollande, its prospects in China are still dubious, analysts say.

Currently, the DS has 19 dealers and nine show rooms in China. However, the brand has only sold 20 of the imported DS models monthly on average since it entered the country in the middle of 2012, according to the China Business newspaper.

Industry insiders say the main reason for the sluggish sales of DS series in China is mainly that French companies still lack enough understanding of Chinese culture and the driving habits of local customers.

Furthermore, insiders also voiced concerns that the merger will threaten Chang'an Automobile Co's prospects in the next few years, especially by competing with sedans released under its wholly owned nameplate.

In the past, the Chang'an brand mostly built minivans and only entered the sedan segment in 2006.

According to the company's strategy, the Chang'an brand will develop a complete sedan lineup that includes 15 products in the next few years.

To reach that goal, the company has invested a lot in the research and development of its self-developed products. In 2011, the investment was more than 1.61 billion yuan and in 2012, 1.69 billon yuan.

"If the wholly owned brand wants to speed up development, they need a lot of capital," said Jia Xinguang, an independent auto analyst in Beijing.

"Obviously, the merger will harm Chang'an Automobile's profitability at the moment, and it will cast a cloud on the prospects of its self-developed nameplate."