Hong Kong: Lenovo Group Ltd beat estimates with a 25% jump in third-quarter net profit, its strongest result in more than two years, but a slowdown in its key home China market could affect its 2011 outlook.
Economic uncertainty in mature markets such as the United States and Europe might also offset the positive impact it gets from a strengthening Chinese currency and lower component costs.
“China’s growth in the PC market is showing signs of slowing right now,” said Jenny Lai, head of Taiwan research at HSBC. “Lenovo has a lot of exposure in China, and that means it is likely to be affected by any slowdown in the country and so it will likely have to focus on other markets.”
The successful launch of Apple’s iPad has helped spawn a new market in tablet computers with dozens of touchscreen tablets expected to launch this year, further eating into demand for traditional PCs. Many PC brands have jumped in and Lenovo said it expects to begin selling its LePad tablet PC in China this quarter, and globally by June.
Shipments of tablet PCs such as Apple’s iPad are expected to surge by about 200% this year to 55 million, compared to about 16% growth to just over 400 million units for the overall PC market, according to research firm Gartner.
Lenovo, one of China’s best-known brands, reported October-December net profit of $99.6 million, up from $79.5 million a year ago, and beating expectations for a $86.2 million net profit from seven analysts polled by Thomson Reuters I/B/E/S.
Lenovo shares ended up 3.4% in a Hong Kong market up 0.6%.
Operating profit margin, a key performance indicator in assessing profitability, rose to 2.2% from 1.9% in the previous quarter, boosting Lenovo’s earnings.
Such razor-thin margins have forced PC brands to look to acquisitions and alliances with rivals. Last month, Lenovo signed a $175 million agreement with NEC Corp to jointly sell and develop PCs in Japan.
Lenovo’s results come a day after bigger rival Dell Inc reported forecast-beating earnings and margins on lower component costs and demand from companies replacing older technology.
Part of the improvement in Lenovo’s operating margin is likely to have come from an appreciating yuan, which rose about 1.5% against the dollar in October-December. A supply glut in LCD panels and other parts such as DRAM chips have also driven down costs for Lenovo and other PC brands.
“I expect that most of the margin improvements came from favourable component prices, as anticipated, similar to what we saw at Dell’s results and Asustek’s results last week,” said Kirk Yang, head of Asia hardware research at Barclays Capital.
LCD makers such as LG Display and Chi Mei Innolux have been warning of lower shipments and weaker screen prices, all of which is beneficial to PC brands because it drives down their component costs.
Increased spending to boost Lenovo’s position in the mobile devices category will lead to higher expenses in the current quarter, Lenovo’s chief financial officer Wong Wai Ming said in a conference call after the results.
Much of this spending would be focused on increasing the company’s presence in the fast-growing tablet PC and smartphone space, which typically offer margins fatter than the heavily commoditised desktop and laptop PC.
Taiwanese smartphone maker HTC typically reports gross margins of about 30%, almost three times that of Lenovo’s 11.2% in its third quarter.
Lenovo has already set up a new business unit to look at its mobile strategy, and sells its LePhone-branded smartphones in China through China Unicom .
China still accounted for the largest portion of Lenovo’s sales, making up 46.2% of revenue in the third quarter, down from 47% in July-September.
“The company’s earnings were better than expected, but just by a little,” said Macquarie’s Stephen Chow. “The improvement is likely to have come from emerging markets outside of China, but the European and US market has been very ordinary.”
Its mature-markets business, much of which it inherited from International Business Machines Corp , retained its profitable record for a second straight quarter, making up about 34.6% of total sales with an operating profit margin of 1.1%.
Lenovo saw the biggest jump in shipments among the top PC brands, up 21% during the three months, according to research firm IDC. This was better than rivals Hewlett-Packard Co , Acer Inc and Dell, and about eight times the overall market’s 2.7% growth.