Cost cutting seen pushing up Lenovo Q2 earnings
Fri Nov 12, 2004 04:38 AM ET
By Doug Young
HONG KONG, Nov 12 (Reuters) - Cost cutting at top Chinese PC seller Lenovo Group Ltd. (0992.HK: Quote, Profile, Research) and the company's campaign to win business in the hinterland probably drove quarterly profit higher, analysts said.
Shares of Lenovo, which reports interim results on Tuesday, have jumped 45 percent in the last three months, helped by market rumours of a joint venture with IBM (IBM.N: Quote, Profile, Research) and the potential for lower costs if China revalues its currency, the yuan.
The stock was a relative laggard before then, as analysts and investors fretted about growing competition in its home market and a lack of progress on the export front.
"We think they have regained some market share, especially in rural areas," said Daiwa Securities analyst Judy Chui.
"Also, they've reshuffled their sales team to make it more cost effective and give them more sales points in third- and fourth-tier cities."
Lenovo is expected to say its fiscal second-quarter earnings rose 9.2 percent to HK$285 million (US$36.5 million), according to three analysts surveyed by Reuters.
Analysts and investors have been impressed by Lenovo's recent cost-cutting efforts and its push into China's smaller cities, two initiatives that followed a corporate reorganisation early this year as growth faltered.
But they spent most of the year worried about the company's future prospects, with little chance of major growth at home and no major export initiatives.
REALITY CHECK
When it announced the reorganisation in February, Lenovo acknowledged it had been overly optimistic in forecasting its performance in what was a competitive home market, where it competes against Dell Inc. (DELL.O: Quote, Profile, Research) , Hewlett-Packard Co. (HPQ.N: Quote, Profile, Research) , IBM and local rival Founder Group.
Since then, Lenovo has signed a deal to buy chips from Advanced Micro Devices Inc. (AMD.N: Quote, Profile, Research) , the low-cost rival to Intel Corp. (INTC.O: Quote, Profile, Research) , as part of a broader drive to cut costs.
Lenovo now has a range of cheap PCs, including one costing as little as 3,000 yuan ($362).
Many investors are increasingly convinced China will soon revalue the yuan as it seeks to control inflation. That would lower costs for Lenovo, which imports parts from America, and help pump up its balance sheet as it reports its earnings in U.S.-dollar-pegged Hong Kong dollars.
But it would also make computers made by foreign rivals cheaper.
UOB Kay Hian analyst Eric Lau estimated a 1 percent appreciation in the yuan would translate to an 8.6 percent increase in Lenovo's profits.
"That would be quite substantial because a majority of their material costs are denominated in foreign currency and linked to international pricing," he said.
BNP Paribas Peregrine analyst Marvin Lo said rumours -- denied by Lenovo -- that a tie-up with IBM was in the works was probably driving the share price higher.
Lenovo said earlier this year it would consider obtaining the rights to a better-known foreign PC brand name as part of an effort to tap the international market. But the company has made no further announcements on that since then.
China is the world's No. 2 PC market, with about 13 million units sold last year, according to International Data Corp. That number is expected to grow 20 percent this year.
Lenovo is easily the market's dominant player, with a share of more than 25 percent.