HONG KONG (Reuters) - Lenovo Group Ltd <0992.HK> is set to post a doubling in quarterly earnings on strong demand from Asia, and the outlook benefits from the world's No.4 PC maker being least vulnerable among its rivals to a U.S. slowdown.
By Judy Hua
HONG KONG (Reuters) - Lenovo Group Ltd <0992.HK> is set to post a doubling in quarterly earnings on strong demand from Asia, and the outlook benefits from the world's No.4 PC maker being least vulnerable among its rivals to a U.S. slowdown.
Despite worries of a sharp deceleration in technology spending, analysts say Lenovo, which bought IBM's loss-making PC arm in 2005, should fare better than Hewlett-Packard Co <HPQ.N>, Dell Inc <DELL.O> and Acer <2353.TW> because of its commanding presence in China and Asia.
"The biggest concern is the slowdown in the PC market this year, but Lenovo is best-positioned within the sector since it has the least exposure to the U.S. market," said CLSA analyst Jenny Lai. "Strong growth in China could offset the weakness in the U.S. and Europe."
!ADVERTISEMENT!Lai expects weakness in U.S. IT spending, as the United States teeters on the brink of its first recession in years, and a price war expected to hit PC makers in 2008. But demand should recover in 2009, she added.
China's largest PC maker is expected to post a profit of HK$1.01 billion (US$130 million) for the October-December period, according to five analysts surveyed by Reuters Estimates, more than double a US$57.7 million profit a year ago.
But that's slower than a tripling in net profit in the previous quarter, reflecting a winding down of IT spending across its main markets.
Lenovo racked up 22 percent growth in shipments globally in the October-December period as it rode the industry's peak buying season, but cut-throat competition ate away at margins. Rival Acer, which usurped Lenovo's global No. 3 spot in the same period, managed 60.3 percent growth.
Lenovo derived more than 40 percent of its revenue from China -- it commands a third of the world's top PC arena after the United States -- and 27 percent from the Americas in the fiscal second quarter ended September.
UPS AND DOWNS
Daiwa Institute analyst Joseph Ho, while agreeing that a U.S. slowdown would have a greater affect on its rivals, expects Lenovo's PC shipments in the fiscal fourth quarter ending March -- typically a slow period -- to fall 22 percent from Q3.
Lenovo is expected to post a full-year net profit of HK$2.8 billion, again more than twice last year's US$161 million, according to Reuters Estimates.
Shares in Lenovo rose 18 percent from October to December, outpacing a 2.5 percent gain on the main index. But they have fallen 48 percent since early November, walloped along with the rest of the sector.
Lenovo shares trade at 15.8 times prospective earnings -- slightly pricier than Dell's 14.6 and HP's 13, according to Reuters data.
"The recent ups and downs in Lenovo's shares reflect investors' uncertainty of how serious the U.S. slowdown could be." Lai said. "It may take another one or two months before demand visibility gets better."
Lenovo itself is placing plenty of hopes on its foray into the U.S. consumer arena. It introduced its first consumer computers in the United States this month, trying to cement its footprint in a market it entered with the US$1.25 billion IBM <IBM.N> deal.
But analysts said Lenovo may not see strong market share gains there until the second half of 2009.
"PC makers tend to cut price to protect their market share in a slowdown, making it relatively more difficult for Lenovo to enter the U.S. market," Lai said.
Taiwan's Acer has leap-frogged Lenovo to become the world's No. 3 PC maker -- behind Hewlett Packard and Dell -- after it bought Gateway Inc for $710 million last October, according to market researcher IDC.
Acer, whose PC shipments surged 60 percent after the Gateway purchase, held 9.6 percent of worldwide PC market in the last quarter of 2007, up from 6.9 percent a year earlier. That trumped Lenovo's 7.5 percent.
It is the third biggest vendor in the United States, while Lenovo isn't among the five biggest, according to IDC.
But Lenovo maintained its leading position in Asia excluding Japan, with nearly a fifth of the region's PC market and unit growth of 25.9 percent in the fourth quarter of 2007, IDC said.
(Editing by Edwin Chan, Editing by Ken Wills and Louise Heavens)
