The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Katrina Hamlin

HONG KONG, Aug 25 (Reuters Breakingviews) - Dongfeng Motor 0489.HK appears on first glance to have made the biggest move yet to answer President Xi Jinping's call for China's carmakers to deal with the mess more than two years of painful price wars have created. After markets closed on Friday, the struggling manufacturer said it would be taken private by its state-backed majority owner in a deal that values its equity at $7 billion, while also spinning off an electric vehicle unit. The financial engineering has some benefits, but it appears to leave Dongfeng's operational woes untouched.

The deal is a good one for the company's long-suffering minority shareholders. The buyout offer alone, at HK$6.68 a share, is more than double where the stock was trading in early February before news broke that Dongfeng was mulling a merger with fellow state-owned manufacturer Chongqing Changan Auto 000625.SZ, which later fell through. It also values the target's equity at around 0.4 times its estimated sales for the year.

It's roughly four times better than the multiple for its partner Nissan Motor 7201.T, which is struggling with problems of its own. Add to that the stated value of the stake they'll receive in new EV unit Voyah, and Dongfeng's unaffiliated investors are in line for a HK$10.9-a-share payout. The last time the stock was that high was a decade ago.

The company's engine started sputtering soon after. It has reported negative free cash flow every year but one since 2018. Car sales have fallen by around a third since 2019, dipping below 2 million vehicles last year, but with no reduction in capacity to trim costs. Dongfeng reported a first-half net loss of 101 million yuan ($14 million) on Friday.

It makes sense to carve out premium EV brand Voyah, which accounts for around a quarter of the battery-powered cars Dongfeng sells. That's where most of the growth in China's new-car market is. But the $5.5 billion market capitalisation outlined in the filing looks punchy. Assuming Voyah keeps up the pace of sales in the first half of the year and an average price of just over 200,000 yuan per vehicle, it values the outfit at 1.5 times sales, compared with the average of 1 times of larger rivals Xpeng 9868.HK, Li Auto 2015.HK, Nio 9866.HK, Seres and Leapmotor 9863.HK .

The deal's orchestrator, Wuhan-based Dongfeng Motor Corporation, which is wholly owned by China's State-owned Assets Supervision and Administration Commission, says the buyout and spinoff will allow it to focus more clearly on EVs. Yet it will still be saddled by an asset whose core product, internal combustion engines, has been slowing for years. Unless it can sell or shutter unneeded factories - and lay off any unneeded workers - Dongfeng will keep burning cash.

Follow Katrina Hamlin on Bluesky and LinkedIn.

CONTEXT NEWS

Hong Kong-listed Dongfeng Motor Group plans to carve out and list its electric-car business, Voyah, while state-owned parent Dongfeng Motor Corporation, which already owns 73.8% of the target, takes the remainder of the company private, according to a filing on August 22.

Investors holding Dongfeng’s Hong Kong shares will be paid HK$6.68 a share, which the company calls a cancellation fee, valuing the company's equity at $7 billion. They will also receive 0.3552608 Voyah shares for each H-share they hold. Voyah shares have been valued at HK$11.735 a piece, per the filing. Together, the fee and Voyah stake are theoretically worth HK$10.85 per H-share, an 82% premium to Dongfeng’s closing price on August 8, when trade in its stock was halted.

The deal requires approval from two-thirds of the company's minority investors at an extraordinary general meeting.

(Editing by Antony Currie; Production by Aditya Srivastav)

((For previous columns by the author, Reuters customers can click on HAMLIN/katrina.hamlin@thomsonreuters.com; Reuters Messaging: katrina.hamlin.thomsonreuters.com@reuters.net))