Lenovo Profit Increases 25%, Exceeding Analysts' Estimates; Shares Advance

Lenovo Group Ltd., China’s biggest maker of personal computers, said fiscal third-quarter profit rose 25 percent, exceeding analysts’ estimates, as customers replaced aging machines and component costs fell.

Net income increased to $99.7 million, or 0.98 cent a share, in the three months ended Dec. 31, from $79.5 million, or 0.79 cent, a year earlier, Lenovo said today in a statement. Profit was expected to be $86.1 million, according to the average of five analyst estimates compiled by Bloomberg. Revenue rose 22 percent to $5.81 billion.

Lenovo climbed to the highest price in a month in Hong Kong trading as the company benefited from businesses in China, U.S. and Europe replacing computers with machines running on Microsoft Corp.’s Windows 7. The maker of Thinkpad laptops is buying control of NEC Corp.’s PC division to expand in Japan and is gaining sales in emerging markets such as Russia and India.

“The corporate replacement demand should remain quite strong,” said Kirk Yang, who rates Lenovo shares “overweight” at Barclays Capital in Hong Kong. The company is expected to continue posting sales gains in emerging markets, he said.

The shares rose 3.4 percent to HK$4.92 at the 4 p.m. close in Hong Kong trading. The stock has declined 1.2 percent this year, giving the company a market value of HK$49.3 billion ($6.3 billion).

Replacement Cycle

Companies are a third of their way through the current computer replacement cycle, which is expected to continue for another two years, Chief Operating Officer Rory Read said on a conference call today.

Growth in China’s PC market moderated last quarter as demand was affected by falling stock markets, and the introduction of tablet computers by competitors, Chief Executive Officer Yang Yuanqing said on the call.

Apple Inc., the world’s biggest technology company, started sales of its iPad tablet computer in China in September. Lenovo will shortly begin sales in China of its LePad tablet, priced at a range of $400 to $1,000, before offering the product in overseas markets later, Read said.

Lenovo, based in Raleigh, North Carolina, said revenue from China rose 18 percent to $2.68 billion, or 46 percent of the company’s total. That’s slower than the 34 percent growth posted in the company’s emerging-market division, which includes sales in India, Brazil and Russia.

Revenue at Lenovo’s mature-markets division, which includes its operations in the U.S. and western Europe, rose 22 percent to $2 billion.

Profit Margin

Gross profit margin, or the percentage of sales left after deducting the cost of goods sold, widened to 11.2 percent last quarter from 10.3 percent three months earlier, Lenovo said.

The cost of components such as memory chips and liquid crystal displays declined, helping to boost profitability at Lenovo, according to Barclays’s Yang.

Lenovo, which moved its headquarters to the U.S. after buying the PC division of International Business Machines Corp. in 2005, accounted for 10.4 percent of global PC shipments last quarter, compared with 8.8 percent a year earlier, according to research company IDC.

Hewlett-Packard Co., the industry leader, saw its market share drop to 19.5 percent from 20.2 percent, while third-ranked Acer Inc. declined to 10.6 percent from 12.8 percent, according to the Framingham, Massachusetts-based researcher.

Lenovo, the world’s fourth-biggest PC maker by shipments, followed Dell Inc. in reporting results that topped analysts’ estimates because of demand from corporate customers.

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

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

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