Broker's View

Profitability some way off for Lenovo’s mobile and data centre businesses

Chinese technology titan struggles to convince analysts it’s moving in the right direction

PUBLISHED : Tuesday, 08 November, 2016, 3:16pm
UPDATED : Tuesday, 08 November, 2016, 10:31pm

Analysts say Lenovo still has some way to go until its struggling mobile and data centre group (DCG) businesses turn a profit, despite the Chinese technology titan recording improved group figures for its second fiscal quarter, ended September.

The world’s largest personal computer manufacturer by shipments last week said net profit for the quarter came in at US$157 million, excluding one-off items, rebounding from a US$714 million loss in the same period last year.

During the period, it booked a gain of $205 million from the disposal of a property in Beijing, but also incurred US$136 million in restructuring charges related mostly to the restructuring of its Motorola mobile business.

However, losses at the company’s DCG, which includes servers, storage, software and services and is considered by the market as arguably its most promising future growth driver, more than doubled to US$141 million in the second fiscal quarter, up from US$64 million the previous quarter, amid what it called intense competition in China and overseas markets.

The company’s management insisted it will continue investing in the DCG, and expects it to remain in the red for the next two quarters.

Lenovo said that the data centre business is in the middle of integration and transformation and it will enlarge its investment in sales channels and products.

Losses on its data centre business widened as the company invested in sales staff, distribution channels and new technologies
Tony Zhang and Shelly Zeng, BOC International analysts

But Joseph Ho, an analyst with GF Securities (Hong Kong) Brokerage, described the DCG as “another new area of weakness” for the company, while BOC International analysts Tony Zhang and Shelly Zeng added, “losses on its data centre business widened as the company invested in sales staff, distribution channels and new technologies”.

The costs have been rising as Lenovo has been ramping up its investment in sales training, reorganising its sales capabilities, and improving channel incentives in regions outside China.

The company is also devoting more resources into software-defined networking technologies to ride on the industry trend, Zhang added.

“We expect both Lenovo’s mobile business and data centre business to remain loss-making in the fiscal year 2017,” Zhang wrote in his report.

He also still considers its move into mobile, “a challenging target”.

Lenovo is stepping up investment in the segment in a bid to reach break even at the operational level in the fiscal year of 2018.

Its mobile business is still in the red with sales falling 12 per cent year on year during the quarter, to record a pre-tax loss of $156 million.

But data from Bank of China International show that Lenovo’s mobile business recorded 24 per cent quarter on quarter shipment growth to 14 million units, among which Moto smartphone shipments jumped 39 per cent quarter by quarter.

Lenovo’s chairman and chief executive Yang Yuanqing said its new Moto Z smartphone and Moto Mods snap-on accessories were showing “positive signals” on market demand.

“Looking forward, market conditions may remain tough in the short term, but the group has seen the results of strong execution,” Yang said.

Ho from GF Securities, on the other hand, considers the poor market response to Motorola’s new smartphone launch as major downside.

“It is the one of the worst performing Hang Seng Index stocks this year, and faces potential removal from the Hang Seng Index, ” said Ho.

“One-off gains from property disposals are unlikely to alleviate market concerns about the challenging outlook for Lenovo’s mobile business and shrinking global demand for PCs.

“The company’s upsides are a stronger-than-expected recovery in global PC demand, and its parent company Legend Holding buying back Lenovo shares.”

Ho expects a further 8 per cent shrinkage in sales during the coming quarter to $11.9 billion, and net profit of $140 million, down 53 per cent year on year, while maintaining a “Hold” rating for the tech giant.

BOC International also maintains a “Hold”, but predicts “lower-than-expected margins for its mobile business and data centre business, which add downside risk”.