Sat, Feb 03, 2007 - Page 11 News List

Lenovo stock jumps as Q3 profit beats forecasts

COMPUTERS Although Lenovo said its third-quarter net income had jumped 23 percent, analysts expressed concern over its heavy reliance on the Chinese market

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Shares of Lenovo Group Ltd (聯想), the world's third-biggest manufacturer of personal computers, climbed as much as 11 percent after the company reported a surge in third-quarter profit, beating analysts' estimates.

The stock rose 4.6 percent to HK$3.38 as of the close of trading in Hong Kong, its highest since Nov. 9, compared with a gain of 0.8 percent in the Hang Seng Index. Lenovo on Thursday said net income for the three months ended Dec. 31 jumped 23 percent to US$57.7 million.

"Lenovo appears to be trading off margins for market share in China, and with over 80 percent of the profitability coming from that region, it's a cause for concern," Credit Suisse analysts Venugopal Garre and Manish Nigam said in a report yesterday.

Lenovo's operating margin in its Greater China region, which includes Hong Kong as well as Taiwan, fell to 5.1 percent from 5.7 percent a year earlier, and from 6.5 percent in the previous quarter, the company said.

Third-quarter revenue from the region was US$1.6 billion, or 40 percent of total sales, up from US$1.5 billion a year earlier, it said. The company's total sales gained to US$4 billion from US$3.98 billion.

Lenovo's share of China's PC market rose 0.4 percentage points from a year earlier to 36.2 percent, it said.

Chief executive officer William Amelio, a former executive at Dell Inc and IBM Corp, has deterred competition in Asia by cutting prices.

In March, Amelio said Lenovo would cut jobs and move its headquarters to Raleigh, North Carolina, from Beijing at a cost of US$100 million. The company completed the US$1.25 billion purchase of IBM's PC business in 2005.

"The much-expected synergy didn't materialize," Credit Suisse said. "Inability to reduce the operating structure will continue to hurt profitability."

Credit Suisse downgraded the rating on Lenovo to "underperform" from "neutral" and reduced the 12-month target price to HK$2.72 from HK$2.93, citing falling margins and increased competition in China.

Lenovo forecast savings of about US$100 million from the reorganization in the fiscal year ending March 31, and as much as US$250 million in the year starting April.

"Management suggested that cost-cutting initiatives were substantially under way and should show clearer results in coming quarters," Tien Su Sieh, an analyst at Merrill Lynch, said in a report yesterday. "The potential remains, but may take longer to achieve."

He maintains a "buy" rating on the stock with a target price of HK$4.

Analysts at Merrill Lynch, JPMorgan and UBS Securities Asia Ltd are maintaining their ratings and target price on concern of rising competition.

"Dell could also bring more pricing pressure following recent restructuring," UBS analyst George Chu said in a report.

He keeps a "reduce 2" rating on the stock with a 12-month target price of HK$1.90.

"The first three months of the year is the slowest quarter for PC [sales] in most countries, and we expect Lenovo to post losses in the Americas and the Europe, Middle East and Africa, or EMEA, region, but maintain overall profitability," said Charles Guo, an analyst at JPMorgan Securities Ltd said.

He rates the stock "neutral" with a 12-month target price of HK$3.20.

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