Yesterday, the world’s second-biggest computer maker by units announced that
revenues grew by 44 per cent in the third quarter compared with the previous
year, while net income was up by more than one-half. This sent its share
price up 4 per cent, adding to a 38 per cent gain over the past year. In the
same period, the Hang Seng fell 9 per cent.
Lenovo investors have much to be grateful to chief executive Yang Yuanqing
for. The company is defying expectations by expanding beyond its Chinese
borders. Acquisitions of German consumer electronics company Medion and a
joint venture to make PCs with Japan’s NEC helped push sales in mature
markets up by 80 per cent. These regions now make up more than two-fifths of
total sales. It also increased its share of China’s PC market to more than a
third, bounds ahead of Acer in second place.
But with PC demand taking a pounding from tablets, the next few years for
Lenovo are not so certain. Although it is trying to hedge itself by
expanding in emerging markets and developing smartphones, tablets and smart
TVs, these have yet to take off. Emerging market PC sales outside of China
picked up just over 10 per cent and gadgets only make up 6 per cent of total
revenues. Further, losses on these segments tripled in the third quarter
from a year earlier. As a result, overall margins are a quarter of those at
global PC leader Hewlett-Packard.
Lenovo trades at a forward price to earnings ratio of 15 times – more than
double that of HP, two-thirds higher than Dell, and one-third more than
Apple. While today’s performance deserves credit, investors should be
careful of how long Mr Yang is willing to tolerate losses in his quest to
expand.
Copyright The Financial Times Limited 2012
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