Lenovo Analysts Slash Outlook on Company’s ‘Mobile Crisis’

  • Stock has been worst performer in Hang Seng in past year
  • Analysts expect sales out Thursday to show 7.6% decline

Lenovo Group Ltd., the personal computer maker that moved into smartphones and servers, has had a rough year. Its stock has dropped more than 60 percent in the last 12 months, the worst performer in the benchmark Hang Seng index.

Things may get worse before they get better. At least three analysts have cut their rating on Lenovo shares in the last month, as the company prepares to report fourth-quarter results Thursday. Jenny Lai, an analyst at HSBC Securities reduced her rating to hold and predicted Lenovo may miss consensus profit estimates by 15 percent. The Beijing-based company is suffering a “mobile crisis,” she wrote.

Chief Executive Officer Yang Yuanqing acquired Motorola Mobility in 2014 to cement Lenovo’s place among the smartphone elite and provide a new source of growth to offset a declining PC industry. Instead, Lenovo has lost market share even as industry growth has stalled. Apple Inc. has captured premium customers with larger iPhones, and Chinese competitors such as Huawei Technologies Co. and Oppo have lifted their games.

“You can hardly find any bright spots,” says Alan Wang from Principal Global Investors, who manages $1.9 billion in five funds that once held shares in Lenovo. "The smartphone market was the last thing that we had some hope on and it failed.

Lenovo is forecast to report that fourth-quarter sales declined 7.6 percent to $10.47 billion, according to analyst estimates compiled by Bloomberg. Net income is expected to be $184.9 million, down 38 percent from the December quarter.

Lenovo said it’s continuing to improve its cost structure and has effectively lowered inventories in China.

“We have a clear strategy for Motorola, the brand will comprehensively integrate with Lenovo in product and development,” the company said in an e-mailed statement.

Analysts are cutting their outlook despite the sharp stock price decline. Grace Chen, an analyst at Morgan Stanley who cut her rating to underweight this month, set a price target of 4.20 Hong Kong dollars, or 14 percent below Tuesday’s close. That closing price was the lowest in more than four years. Share price forecasts for the stock have dropped more than 20 percent since the start of the year, according to data compiled by Bloomberg.

Lenovo completed its deal to buy Motorola from Google in October 2014, eventually paying $2.8 billion for a brand that had failed to keep up with Apple and Samsung Electronics Co. after leading the invention of wireless communications. Lenovo’s share of the smartphone market has fallen to 3.3 percent from 6.5 percent in the fourth quarter of 2014.

“In smartphones, they haven’t been able to gain any traction,” said Anand Srinivasan, an analyst at Bloomberg Intelligence. “On the handset side, there’s a lot of work to be done.”

Chairman Yang Yuanqing promised he’d make the business profitable within 18 months and turn Lenovo into the world’s third biggest supplier of smartphones and mobile devices. Instead it slipped out of the top five.

Nicole Peng, research director for Canalys China, said Lenovo’s smartphone shipments plummeted in the March quarter and it now languishes in eighth place globally.

The deal for Motorola, and a separate $2.1 billion acquisition of International Business Machine Corp.’s low-end server business, has left Motorola with more than $3.2 billion of debt and almost $5 billion of goodwill on its balance sheet.

While the server business has grown thanks to China’s booming demand for data storage, the business generates less than half the sales of mobile phones.

The need to repay debt has analysts questioning if Lenovo has enough money and fresh ideas to turn the business around. Lenovo has about $3 billion of debt due to be repaid by the end of 2020, according to data compiled by Bloomberg.

“If the financial stress continues due to the tough market conditions, we expect Lenovo will find it difficult to get cheap fixed income financing, which will increase its interest expenses and, in return, enhance its financial stress,” analysts at China International Capital Corp. led by Kai Qian wrote in a May 16 report.

CK Lu, an analyst at Gartner Inc, in Taipei, says the company must unify its business with little synergy so far between the brands and product lines.

In India, set to become the world’s second-largest market, Motorola and Lenovo brands are competing with each other in the mid- to lower-end areas of the market.

“We need to see more consistency. Lenovo is out of the top five. We have a very clear top three now, which is Apple, Huawei and Samsung,” said Lu. “It’s not the end of the world for Lenovo but they have to have a clear strategy on coming back and we still don’t have that yet.

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