Related Event: Lenovo-IBM Deal
China's Lenovo Group Ltd., the world's third-largest PC maker, reported a 12 percent drop in quarterly profit on Wednesday, below expectations, and said it would look to its newly-acquired IBM PC unit to jumpstart growth.
Lenovo, which closed its purchase of IBM's PC-making assets last month, reported a profit of HK$166 million (US$21 million) for its fourth quarter ended March 31, compared with HK$188 million a year earlier.
Analysts had expected the company to report a profit of HK$194 million for the quarter, according to the average of 21 analysts polled by Reuters.
The report was the first for Lenovo since its US$1.25 billion purchase of IBM's PC assets, a move aimed at expanding abroad amid slowing growth and stiff competition in its home market.
China is the world's second-largest PC market after the United States, with 15.8 million units sold last year and 11 percent growth forecast for 2005, according to International Data Corp.
Lenovo already dominates the fiercely competitive market with a 26 percent share last year. But it faces growing competition at home from the world's top two PC sellers, Dell and Hewlett-Packard, which controlled 7.5 percent and 5.1 percent of the China market, respectively, in the first quarter.
Analysts have varied between enthusiasm about the potential for new growth from the IBM purchase and skepticism about Lenovo's ability to turn around the struggling IBM PC business.
Lenovo shares are down nearly 10 percent since the deal was announced in December, compared with a 1 percent drop for the broader Hang Seng Index.
The company's shares were down 1.02 percent in Wednesday morning trading before the results were announced.
Investors are looking for signs that Lenovo, which has retained much of the IBM unit's top management, can also retain IBM computer customers following the sale.
As part of the deal, Lenovo agreed to give up access to IBM's list of U.S. government clients -- an important segment of the business.
Last week, Chinese media reported a Dell employee had tried to win over former IBM customers by saying they would effectively be supporting China by continued buying of IBM PCs. Dell later issued a statement calling the employee's views "regrettable."
Lenovo last week also announced a deal to supply IBM ThinkPad brand computers to U.S. broadcaster NBC, a unit of General Electric, for the network's coverage of the 2006 Winter Olympics.
Following the IBM deal, Lenovo now has about 7.1 percent of the worldwide PC market, compared with Dell's 18.9 percent and HP's 15.4 percent, according to IDC.
Lenovo has said it aims to double its profit within three years, and eventually pass its competitors.
The company's stock trades at 16 times estimated earnings for its current fiscal year, compared with 21 times for Dell in 2006 and 14 times for HP.