Peugeot posts record earnings despite sales dip

By Laurence Frost and Gilles Guillaume PARIS (Reuters) - French automaker PSA Group shrugged off a drop in Chinese sales and an ageing lineup to deliver record first-half profit, as Chief Executive Carlos Tavares made progress on his turnaround plan for the maker of Peugeot, Citroen and DS cars. PSA shares surged 8.5 percent after the company said net income more than doubled to 1.21 billion euros (1.01 billion pounds) despite a decline in revenue and deliveries, soundly beating market expectations. "This was a very strong result, and Tavares continues to make significant headway in transforming the company," said Evercore ISI analyst Arndt Ellinghorst, who has a "sell" rating on the stock. The closely watched core automotive division increased profit by one third to 1.3 billion euros, lifting its operating margin to an all-time high of 6.8 percent from 5 percent. Since emerging in 2014 from a brush with bankruptcy and a government-backed bailout, PSA has been pushing an international expansion to reduce its dependence on the European mass market. But the Paris-based carmaker fell behind archrival Renault in global deliveries for the first half, as sales of its ageing model lineup fell almost 20 percent in China and lost market share in a recovering European market. Pricing nonetheless improved for all three brands, PSA said, and sales are expected to gain momentum from a product offensive getting underway, with eight model launches this year. PSA is seeking to cut its China operating costs by 10 percent annually under a plan agreed with shareholder and joint venture partner Dongfeng <0489.HK>, Chief Financial Officer Jean-Baptiste de Chatillon said. The CFO also pledged 200 million euros in extra savings this year as PSA cuts wage costs towards a targeted 11 percent of revenue, from 12 percent last year. "These action plans are not over," he said. "We're continuing to right-size our fixed costs." PSA shares rose 8.5 percent to 13.56 euros in Paris at 0816 GMT. The results beat analysts' expectations of 796 million euros in net income and 1.01 billion in auto division profit, based on the median of 12 estimates in a Reuters poll. PSA, which has flagged openness to mergers and acquisitions, frustrated some analysts by issuing no 2016 guidance, nor changes to mid-term profitability goals it has already beaten. "Peugeot may stay unclear at this point on cash uses to keep its options open on M&A as long as possible," said Thomas Besson of Kepler Cheuvreux, reiterating his "buy" rating on the stock. (Reporting by Laurence Frost; Editing by Geert De Clercq and Mark Potter)