Legend Holdings Ltd, China's biggest personal computer maker, may have to wait until early next year for a pickup in sales that will help boost its stock price from 52-week lows.
Legend stock, which lost two-thirds of its value in the past year, trades at 24 times next year's earnings. That's well above the average of 14 times for Hang Seng Index stocks, making it expensive for a company that may miss its sales target of 3.7 million computers this year. China's US$10 billion PC market is the third largest.
Further declines are "unavoidable," said Vincent Fong, who counts Legend among the US$1.8 billion he helps manage at Hintful Capital Ltd. "People have been paying a lot of premium for the stock."
Legend, which overtook International Business Machines Corp and Compaq Computer Corp in 1997 to become China's largest seller of personal computers, needs to sell more expensive machines to offset a sales shortfall. That may help profit rise by a third even as the company misses its sales goal by about 11 percent, said Tim Ariowitsch, an analyst at Goldman Sachs Group Inc.
While the company hopes to use its brand name to expand into new products and services beyond the PC market, none of its new offerings can provide revenue comparable to what Legend earns from the computer business. Sales probably won't get a boost until the Christmas and Chinese New Year holiday seasons, analysts said.
Legend formed a partnership with AOL Time Warner Inc, the largest media and Internet company, to provide Web access in China. It also teamed up with Siemens AG, the third-largest mobile phone maker, to offer handheld wireless products in China next year. Those ventures won't contribute much to Legend's earnings for at least two years, some investors said.
* Legend's stock has lost two-thirds of its value in the past year.
* The company is predicted to miss its sales goal by about 11 percent this year.
* The computer maker currently holds a 30 percent share of the China market.
"Legend's current valuation can't justify future earnings growth," said Anna Ho, who helps manage US$1.2 billion at Skandia Asset Management Asia Ltd. and doesn't own Legend shares.
"I don't see anything they can do."
Granted, the company said it doesn't plan to revise its sales forecast. The company said after its first-quarter earnings announcement last month it won't revise its sales forecast until October. "We're on track to meet our sales target," said Jenny Lee, a company spokeswoman.
In addition, Legend sales may increase in the second half of this fiscal year as Intel Corp's introduction of a new version of the Pentium4 chip allows it to slide prices by about a tenth, said Kirk Yang, an analyst at Credit Suisse First Boston. Holiday sales could also lift demand.
"We've been looking for about 3.4 million shipments for Legend," said Yang. "The next pickup for the company will be in the period from Christmas to the Chinese New Year," in mid-February.
Even so, if the company maintains its current 30 percent share of the China market, Legend would sell about 2.7 million PCs in the current fiscal year, about a quarter less than its estimate.
China's PC market is expanding, albeit at a slower pace, as global sales drop for the first time since 1985. Demand in China this year will grow to 9 million computers, up 26 percent, compared with a 46 percent jump in 2000, according to International Data Corp.
Local companies such as Legend and Founder Holdings Ltd, the second-largest seller on the mainland with about 10 percent market share, dominate China's computer market. Both companies increased their market shares slightly in the second quarter, while third-ranked IBM lost ground, IDC said.
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