China's Lenovo buys and diversifies to outshine PC rivals

HONG KONG Wed May 22, 2013 5:29pm EDT

HONG KONG May 23 (Reuters) - Lenovo Group Ltd's bold acquisitions in its flagship PC business, a foray into mobile gadgets, and a relatively light debt load are setting it apart from PC rivals as industry shipments take their steepest fall in decades.

Lenovo, a sliver away from unseating Hewlett-Packard Co as the world's top PC maker by shipments, is expected on Thursday to post a two-thirds rise in quarterly profit, its fastest in 1-1/2 years, according to analysts' estimates.

"They have been aggressive in acquiring several distributors in different regions such as Brazil, Europe and Japan over the past few years, so that basically gave them better distribution, as well as gains in market share," said Warren Lau, an analyst at Maybank Kim Eng Securities in Hong Kong.

The Chinese PC maker's net profit is expected to hit $110.0 million in the quarter ended March, up from $66.8 million a year earlier, based on Reuters calculations using unaudited nine-month financial data.

Lenovo's full-year net profit was estimated at $618.2 million in a poll of 31 analysts by Thomson Reuters I/B/E/S/, up from $472.99 million a year ago.

Research firm IDC said global PC shipments fell 13.9 percent year-on-year in the first quarter of 2013, the biggest decline since it began tracking the market on a quarterly basis in 1994, as consumers switched to mobile computing and Windows 8 sales fell short of expectations.

With shipments unchanged in the first quarter, Lenovo is outstripping other vendors. PC shipments from HP, Dell Inc , Acer Inc and Asustek Computer Inc fell by 11-33 percent during the same period, IDC said.

The latest IDC data showed that Lenovo's market share was 15.3 percent, just 0.4 percentage points lower than HP.

Lenovo shares far outperformed those of its rivals last year. This year Lenovo, up 3 percent, is still beating Acer.

Dell and HP have staged strong recoveries, but Lenovo's quarterly net profit has risen consistently over the past few years. By contrast, HP's net profit was down 16 percent and Dell's was down 79.5 percent year-on-year, according to the companies' latest quarterly financial results.

STRATEGIC BUYS

Lenovo has spent heavily over the past few years to strengthen its PC business, with purchases such as Brazilian electronics maker CCE last year, Germany's Medion in 2011 and IBM's PC business in 2005.

Its slew of acquisitions has also sparked market talk that it might be interested in IBM Corp's server business, as well as handset makers Research In Motion Ltd and Nokia Oyj.

Lenovo has declined to comment on the rumours.

Lenovo has cash totalling $4.5 billion, vastly outweighing debt of $423 million, and giving it the muscle for more buyouts.

HP and Dell have total debt of $28.2 billion and $7.2 billion respectively, compared with their cash balances of $12.6 billion and $10.9 billion.

"We expect Lenovo to remain acquisitive as it is hungry for growth and so despite high cash balances they will not hike the dividend," said Jefferies technology analyst Ken Hui.

The Beijing-based company has shed its staid image as the maker of all-business ThinkPads, and now churns out multi-coloured IdeaPad Yoga convertible ultrabooks which have helped build its brand in China and beyond.

Though newer to smartphones than to its core PC business, Lenovo is the No.2 smartphone vendor in China, a success it hopes to duplicate in other emerging markets including Russia and India, where competition from Samsung Electronics Co Ltd , Apple Inc and others is fierce.

"They are in the right niche markets and hitting the right segments at the right price points. But this is not sustainable in the long run unless the mobility business steps up," said a Hong Kong-based technology banker.