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Lenovo's Q2 seen slipping on global woes
2006-11-06
Lenovo Group Ltd. (0992.HK), the world's third-largest computer maker, should post a second straight quarterly profit -- albeit down on a year ago -- as it rides a robust home market and makes headway in turning around a loss-making business inherited from IBM (NYSE:IBM). But analysts said the Chinese PC giant's global business would stay weak for the foreseeable future because of a lack of brand awareness and an inability to reach non-Asian consumers. Lenovo -- one of a handful of Chinese firms trying to forge a global brand by investing abroad -- has been coping with expenses arising from its US$1.25 billion purchase of IBM's PC arm last year, plus stiffer competition from bigger rivals Dell Inc. (Nasdaq:DELL) and Hewlett-Packard Co. (NYSE:HPQ). China's largest maker of personal computers, which squeezed into the black in the first fiscal quarter with a net profit of US$5 million, is expected to post a profit of HK$324.78 million ($41.74 million) for the July-September period, according to six analysts surveyed by Reuters Estimates. That would follow a sharp fourth-quarter loss and would be down 8 percent from a HK$354 million ($45.4 million) net profit a year ago. Analysts say the results may include a partly IBM-related restructuring charge of up to US$10 million. "The summer season is typically good for PC sales in China and we believe Lenovo has gained market share in the third quarter," a JP Morgan analyst said. Lenovo is expected to post full-year net profit of HK$1.15 billion, more than six times last year's HK$173.24 million, according to Reuters Estimates. Shares of Lenovo -- the worst performer in Hong Kong's blue-chip Hang Seng Index (^HSI) until August -- have recovered since it posted better-than-expected first quarter results. The stock, valued at more than $3.81 billion, rose 19 percent in July-September, beating a 7.8 percent gain on the main index, but that meant it traded at a lofty 27 times prospective earnings -- pricier than Dell's 22.4 and HP's 17.6, according to Reuters data. BACK HOME Despite strength on its home turf -- Lenovo commands a third of the Chinese PC market, the world's largest after the United States -- the firm is struggling to expand beyond Asia. It continues to relinquish market share in major international markets due to a lack of brand recognition and consumer exposure, experts say. Chairman Yang Yuanqing told Reuters in September it would take at least three years to return to strong profitability as competition intensifies and corporate demand lags. "Our key concern is the loss-making America business. I do not expect it to turn around until the second half of next year, when the corporate PC replacement cycle starts," said an analyst at Cazenove. The firm's dominant share in Asia excluding Japan grew to 21 percent in the calendar third quarter from 19.9 percent in the previous quarter, according to IDC, with most growth coming from China, Hong Kong and Taiwan. HP ranked second with a 12.9 percent share of the Asian market, with Dell at No.3 with 9 percent. "We believe the market share loss is primarily due to lack of exposure in the fast-growing consumer market, while its core market segment of corporate market has remained stagnant," the JP Morgan analyst said. "Such a structural problem will continue to weigh on Lenovo's market share in the foreseeable future." ($1=7.779 Hong Kong dollar)
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