Lenovo tumbles on growth and costs concerns

PUBLISHED : Thursday, 10 January, 2008, 12:00am
UPDATED : Thursday, 10 January, 2008, 12:00am


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Mainland computer giant Lenovo Group's share price took a beating yesterday on fears of weaker information technology spending overseas and growing domestic labour costs, casting a pall on the company's first week of expansion into the international market.

But more bad news could hammer Lenovo. Taiwanese rival Acer is expected to supplant it as the world's third-largest personal computer supplier, based on research data to be released next week.

Apparently troubled by brokerage house CLSA's downgrade of the stock to 'sell' from 'outperform', investors yesterday dumped Lenovo shares, depressing the price by as much as 14.02 per cent.

CLSA said potentially slower revenue growth and higher expenses would put pressure on earnings in the 12 months to March next year.

Lenovo's share price lost 68 HK cents or 10.37 per cent to close at HK$5.88, near CLSA's new target price of HK$5.30 and touching its lowest level since September 28.

Venugopal Garre, an analyst at Credit Suisse in Hong Kong, said he remained 'neutral' on Lenovo for various reasons.

First, the firm would not be as affected as Hewlett-Packard, Dell and Acer if corporate information-technology spending slowed down in the United States, he said. As it was, 65 to 70 per cent of Lenovo's annual earnings 'are still driven by its mainland and Asia-Pacific markets', he said.

Second, since by his estimate Lenovo's labour cost makes up only about 1.5 per cent of annual sales, Mr Garre said the mainland's new labour law also would not have that much of an impact.

Third, Lenovo has been amortising on a quarterly basis since June 2005 its Olympics-related marketing costs of about US$60 million.

Joseph Ho, an analyst at Daiwa Institute of Research in Hong Kong, agreed. He was also maintaining his 'neutral' rating on Lenovo. But he said: 'Lenovo is likely to slip to No4 among the world's largest personal computer suppliers, based on market share data to be released by global market research firms IDC and Gartner next week.'

Late last year, Acer acquired US-based personal computer supplier Gateway for US$710 million, thus trumping Lenovo in its attempt to buy Packard Bell of Europe.

Mr Ho, however, expected Lenovo to brush aside the lower vendor ranking and share price movement, and focus on getting 'incremental market share gains in the near term' by tapping the international consumer market.

Mr Garre forecast Lenovo would sell about one million consumer-oriented personal computers by its next financial year.

By Thomson Financial's forecast, Lenovo's net profit will rise 123.49 per cent to HK$2.81 billion in the year to March from HK$1.26 billion.