HONG KONG — Lenovo Group Ltd beat market expectations as it tripled quarterly earnings thanks to strong Asian demand, sending its shares 15 per cent skyward, but the world's No.4 computer maker faces a tough 2008 for its sector as a U.S. slowdown threatens to curb spending.
Lenovo, which commands a third of the booming Chinese market and leads Asia in computer sales, is making inroads into a fiercely fought, unfamiliar American consumer arena even as worries mount of a sharp deceleration in IT spending there.
But analysts say the firm, which bought IBM's loss-making PC arm in 2005, should fare better in 2008 than larger rivals Hewlett-Packard Co, Dell and Acer because of its dominance in Asia, especially China.
Investors drove its shares to as much as HK$5.48 on Thursday, but they settled back to close 13 per cent higher.
“If emerging markets continue to be robust, hopefully that should offset any weakness,” said Bear Stearns analyst Jack Tse.
“China hasn't seen any slowdown yet.”
Lenovo, which derived 40 per cent of its revenue from greater China, posted October-December net profit of $171.75-million versus $57.7-million a year ago, trumping a mean forecast of $130-million from five analysts polled by Reuters Estimates.
Gross profit margins edged higher despite cut-throat global competition, to 15.2 per cent from 13.5 per cent a year ago, as a weakening U.S. dollar held down costs, executives said. Lenovo's revenue is mostly denominated in other currencies.
Facing a potentially difficult year, Lenovo has agreed to sell its loss-making cellphone arm — which saw shipments drop 31 per cent in the quarter — for $100-million (U.S.), allowing it to focus on its PC business and enhancing profitability.
The sale of a division that bled 133.7-million yuan ($18.6-million) in calendar 2007 and a stellar quarterly result triggered upgrades by Merrill Lynch and Credit Suisse.
“A challenging macro environment, consumer sluggishness and slower corporate tech spending should hurt the PC market,” Merrill's Daniel Kim wrote on Thursday.
But he added: “Lenovo's sales mix should constantly improve towards high-margin notebooks. Second, management has proven its ability in cost cuts.”
CONSUMER FORAYS
Lenovo plans to start selling higher-margin servers by the end of 2008, vying with long-established players such as HP, IBM and Sun Microsystems.
It hopes to book a gain of about $66-million from selling its cellphone business to an affiliate of its unlisted parent.
In 2008, analysts expect U.S. technology spending to weaken as the world's largest economy teeters on the brink of recession, and a consequent price war could hit PC makers. But demand should bounce back in 2009, they say.
Chief Executive William Amelio argued the company was insulated from much of that fallout because it has little consumer exposure in the United States, although the world's largest economy yields a quarter of its global revenue.
“If it's a prolonged recession that affects the rest of the world, then of course that will change things. But all indications are that that's not going to be the case,” he said.
“It's going to slow down in 2008, but the fact is that it's still double-digits in the PC space.”
Lenovo racked up 22 per cent growth in shipments globally in October-December as it rode the industry's peak buying season, but intense competition is expected to pressure margins.
Taiwan's Acer, which usurped Lenovo's global No.3 spot in the same period, managed 60.3 per cent growth.
“We are not satisfied with only 4-5 per cent market share outside China. We also see room for improvement in profitability in regions such as Asia Pacific,” Chairman Yang Yuanqing said.
Lenovo is placing longer-term hopes on its foray into the U.S. consumer arena. It introduced its first consumer computers for the United States this month, trying to cement its footprint in a market it entered with the $1.25-billion IBM deal.
But analysts said Lenovo may not see strong market share gains there until the second half of 2009.
Acer leap-frogged Lenovo after buying Gateway Inc for $710-million in October, according to researcher IDC. It held 9.6 per cent of the worldwide PC market in the last quarter, up from 6.9 per cent a year earlier and beating Lenovo's 7.5 per cent.
Shares in Lenovo rose 18 per cent in October-December, outpacing the market's 2.5 per cent gain. But they have slid 48 per cent since November, hit with the rest of the sector.
Lenovo trades at 16 times prospective earnings, versus Dell's 15 and HP's 13, according to Reuters Estimates. It's expected to post full-year net profit of HK$2.8-billion, more than twice last year's $161-million (U.S.), according to Reuters Estimates.
