Bigger margins, China raise hopes worst over for Lenovo

Bigger margins, China raise hopes worst over for Lenovo

Hong Kong: China’s Lenovo, the world’s No. 4 PC brand, posted its strongest results in six quarters due to growing demand at home and other emerging markets, helping its shares trim losses.

A rising profit margin also marked a fledgling turnaround for one of China’s best-known brands, which this time last year posted its first loss in three years and saw the resignation of its chief executive as well as the return of Yang Yuanqing as CEO.

Lenovo shares sharply cut their morning losses when trading resumed in the afternoon session on Thursday. It stood at HK$5.61, down 1.2% at 0632 GMT, against a 6% loss at the mid-session close.

“The company just returned to profit and it will still take some time to recover in the next few months," said Yuanta Securities analyst Vincent Chen.

“We still want to know if its cellphone business will be doing well this year," he said, referring to Lenovo’s decision to repurchase the cellphone business it previously sold off. “If China’s 3G takes off this year, the outlook should be good."

Lenovo’s earnings follow a string of better-than-expected results from technology peers such as Microsoft, Apple and Asustek, reaffirming a return in consumer and corporate demand.

Lenovo has tried to return to its roots as an emerging markets specialist, after it struggled to integrate Western-focused assets it acquired with the purchase of IBM’s PC business in 2005.

That move met with disappointing results, which led to Lenovo recording a loss of $96.7 million this time last year, hit by a massive pullback in corporate spending due to the global financial crisis.

Lenovo cautioned profits may fall in the current quarter due to normal seasonality and a climb in component costs.

The final quarter of every calendar year is typically the busiest period for PC brands as students return to school, and ahead of the peak Christmas shopping season.

China continued to fuel much of Lenovo’s growth, with shipments in the world’s third-largest economy up 41%, to make up 47% of its total revenue in the October-December quarter.

“The strong momentum in the China PC market bodes well for the group," Lenovo said in a statement.

“Lenovo is dedicated to strengthening its leadership and profitability in China through expanding its distribution network and product portfolio to better serve the high growth segments."

One-Off Gains

One-off gains of over $43.4 million helped boost net profit in the fiscal third quarter to $79.5 million for the maker of Thinkpad laptop PCs, blowing past analysts’ expectations of a $43.38 million profit.

“The worldwide PC market outlook has continued to show improvement under increased signs of economic recovery, and consumer demand has remained resilient," Lenovo said in a filing to the Hong Kong stock exchange.

Operating profit margin climbed to 2.1% from the previous quarter’s 1.1%, which it attributed to a higher price product mix and tight cost controls.

“We expect their margin should continue to improve and the revenue decline should be a modest 5-6% in the fourth quarter which is usually a weak season for the company," said Lim Dae-yun, an analyst at Mirae Asset Securities.

Lenovo also outperformed bigger rivals such as HP, Dell and Acer in the final quarter of last year, research firm IDC said in January, with shipments climbing almost 42% compared to the year before.

“For the first time since the acquisition of IBM PCD, Lenovo was the fastest growing PC company in the world," Yang Yuanqing, Lenovo’s CEO, said in the statement.