Aug. 7 (Bloomberg) -- Lenovo Group Ltd., China's biggest personal-computer maker, said first-quarter profit rose 65 percent on higher sales in Europe. The company's profitability shrank as marketing costs increased and competition intensified.

Net income climbed to $110.5 million, or 1.15 cents a share, in the three months ended June 30, from $66.8 million, or 0.74 cent, a year earlier, the Raleigh, North Carolina-based company said in a statement today. Profit matched the $110 million median of six analyst estimates in a Bloomberg survey.

Lenovo gained sales in Europe through distributors including Ingram Micro Inc. and Tech Data Corp., helping to compensate for a revenue decline in the U.S. The Chinese company's operating costs jumped because of Olympic sponsorship costs and efforts to defend its market share in China.

``In China, operating profit margin declined because of market competition,'' in addition to costs of commercial sponsorship of the Beijing Olympic Games, Chief Financial Officer Wong Wai Ming said on a conference call today. Overall operating profit excluding a year-earlier charge of $45 million for job cuts fell 5 percent to $127 million, Wong said.

Lenovo's share of global PC shipments fell to 7.9 percent in the quarter from 8 percent a year earlier, after the Chinese company trailed bigger rivals Hewlett-Packard Co., Dell Inc. and Acer in sales gains, research company IDC said.

Dell's China Push

Dell, the world's second-biggest PC maker, will expand its sales network to 1,200 cities in China this year, from 45 at the end of last year, Amit Midha, the U.S. company's president in China, said in March.

Revenue in Europe, the Middle East and Africa increased 20 percent to $903.8 million, according to the statement. Lenovo's PC shipments in the EMEA region rose 26 percent in the three months ended June, beating the 24.5 percent growth in the overall market, as the company increased sales to business customers, research company IDC said.

``In the PC business, it is important for companies to have good sales channels, and Lenovo has focused on this and got good results in Europe,'' Wang Wangli, who rates the computer maker's shares ``overweight'' at HSBC Holdings Plc in Taipei, said before the announcement.

Sales from continuing operations rose to $4.21 billion from $3.81 billion, compared with the $4.13 billion median estimate.

Lenovo, which fell 2.6 percent to HK$5.24 in Hong Kong trading today before the announcement, has declined 25 percent this year, compared with a 21 percent loss in the city's benchmark Hang Seng Index.

Low-Cost Notebooks

Lenovo said this week it will offer low-cost notebooks in October, after Taipei-based Acer began selling the products in June. The Chinese company will also introduce computer servers next quarter, Chief Executive Officer William Amelio said on the conference call today.

Acer, which overtook Lenovo as the third-biggest PC maker after acquiring Gateway Inc. and Packard-Bell BV, last week reported its profit rose 47 percent to NT$2.92 billion ($94 million.)

Lenovo, which moved its headquarters to the U.S. after buying International Business Machines Corp.'s PC division in 2005, said sales in the Americas region fell 4.8 percent to $1.09 billion. The PC maker increased revenue 22 percent in China, Taiwan and Hong Kong to $1.72 billion in the quarter.

The Chinese company, which operated only in its domestic market before the IBM purchase, has used the U.S. company's sales networks and third-party distributors to expand international sales. Ingram Micro, based in Santa Ana, California, and Clearwater, Florida-based Tech Data are the world's two biggest distributors of computer products.

To contact the reporter on this story: Mark Lee in Hong Kong at wlee37@bloomberg.net

Last Updated: August 7, 2008 11:18 EDT