Lenovo profit beats estimates but China slowdown a risk

HONG KONG (Reuters) - Lenovo Group Ltd, the world's No.2 PC maker by sales, reported a better-than-expected quarterly profit, pushing its shares to a seven-week high, but analysts warned a slower Chinese economy could cut into its performance.

The ThinkPad maker, close to overtaking Hewlett Packard Co for the top spot, has risen quickly on the global PC stage due to aggressive pricing, overseas acquisitions and a fast-growing home market. These rapid gains in market share, however, have come at the expense of margins, with profits growing at their slowest pace in more than a year.

Lenovo, with a market value of $8.2 billion, also faces slowing growth in the market for personal computers and tough competition from the likes of Apple Inc and Samsung Electronics Co Ltd in the fast-growing tablet PC and smartphone space.

"In China for sure they are also affected because as a whole, the Chinese market has softened," said Jonathan Ng, an analyst at CIMB in Singapore.

The booming Chinese market has been Lenovo's main sales driver, contributing around 42 percent of its total revenue, but the outlook is overshadowed by slowing growth that has sapped demand and led to a series of profit warnings by Chinese firms.

Lenovo's unit shipments in China grew 9 percent in the first quarter compared with a year earlier, outpacing a decline of 3 percent in the overall China PC market. The company expressed confidence it would grow faster than the worldwide PC market and was on track to become the leader in the PC industry.

"China's macro economy has shown some uncertainty because of real estate bubble controls and weak exports ... but from a long-term point of view, I'm still very optimistic," said Chairman and CEO Yang Yuanqing.

Lenovo on Thursday posted a net profit of $141.4 million for its April-June first quarter, up 30 percent from $108.8 million a year earlier.

The net profit growth was the slowest since the third quarter of fiscal 2010/2011, when the pace was about 25 percent, based on previously announced data, mainly due to lackluster demand in some emerging markets and North America.

Still, the result was better than an average forecast of $131.2 million in a poll of 10 analysts by Thomson Reuters I/B/E/S, sending its shares up as much as 6.8 percent to a seven-week high.

PROFIT MARGIN

Lenovo's profit margin has been lagging those of rivals such as Dell.

Its gross profit margin was down 0.5 percentage point in the first quarter from 12.5 percent a year earlier due to price competition in emerging markets and China, though it was up from 11.7 percent in the previous quarter.

While there is ample room for growth in China's second- and third-tier cities, lower disposable income levels would likely continue to pressure profit margins, analysts said.

In July, Lenovo and the United States' EMC Corp signed a partnership to develop servers and storage products, with the alliance allowing EMC to expand its reach in China. Analysts said the move was aimed at boosting Lenovo's margins in the long term.

In the first quarter, operating profit in North America was $46 million, against an operating profit of $52 million a year earlier.

In its money-losing smartphone business, Lenovo, which makes LePhone handsets, said it expects to see a profit in coming quarters.

In another move to try and boost margins, Lenovo executives told a media briefing the company aimed to sell more of its LePhones in the open market rather than relying on Chinese carriers because margins are three times higher.

Lenovo, which became the world's No.2 PC vendor in the third quarter of 2011, is just a sliver from overtaking Hewlett Packard as the top PC maker globally.

In the April-June quarter, Lenovo had a 14.9 percent global market share, just 0.6 percentage point away from HP's 15.5 percent, research firm IDC said.

Figures from industry tracker Gartner show an even narrower gap, with Lenovo just 0.2 percentage point from HP.

A series of deals, including acquiring Germany's Medion and forming a joint venture with Japan's NEC Corp last year, as well as its acquisition of IBM Corp's PC business in 2005, also helped Lenovo gain market share.

Its acquisition record has sparked rumors that it may try to acquire troubled handset makers such as Nokia Oyj and BlackBerry maker RIM, though Lenovo has so far denied such plans.

The earnings came before the stock market opened on Thursday. The stock was up 5.5 percent at HK$6.55 at the midday break, outpacing a 0.3 percent gain in the benchmark Hang Seng Index.

Lenovo shares have climbed about 20 percent so far this year, outpacing rivals such as HP, Dell Inc and Acer Inc.

(Editing by Chris Gallagher and Anne Marie Roantree)

Source: http://news.yahoo.com/lenovo-first-quarter-profit-beats-estimates-growth-slows-001929135.html

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