Lenovo profit tops forecasts, but shares skid

SHANGHAI/HONG KONG (Reuters) - China's Lenovo Group Ltd. reported a better-than-expected 22 percent jump in quarterly earnings on Tuesday, but investors dumped its shares on profit taking and concerns about falling margins.

"The new Lenovo is already showing signs of achieving its potential, although we have much yet to do," Chief Financial Officer Mary Ma said in a statement.

"Most importantly, the response of our customers has been very positive as they begin to see evidence of the complementary strengths of the two organisations."

After initially reacting with scepticism, investors have gradually warmed to Lenovo's US$1.25 billion purchase of IBM's PC assets in April, making it the world's third largest personal computer maker.

Lenovo outlined a broad restructuring in late September, as it attempts to integrate its own China-focused business with the vast global business of its new IBM assets.

But Lenovo shares closed down 7.24 percent at HK$3.525 in Tuesday trading in Hong Kong as a sell-off reversed more than a week of steady gains for the stock, and was in contrast to a 1.29 percent rise on the day for the broader Hang Seng Index.

"A strong result was pretty much factored into the share price. The stock has risen a lot -- people are selling on good news," said Linus Yip, strategist at First Shanghai Securities.

Lenovo earned a profit of HK$354 million (US$45.4 million) for the three months through September, compared with HK$290 million in the same period a year earlier, based on Reuters calculations.

That beat the average forecast of HK$344 million for the three-month period, according to the average of five analysts polled by Reuters.



FALLS SHORT OF EXPECTATIONS

UOB Kay Hian analyst Mark Po also noted that margins were below his expectations, based on preliminary calculations.

The company confirmed after the market closed that gross profit margin for its fiscal second quarter through September stood up 14.0 percent, up 2 percentage points from a year earlier but down sequentially from the fiscal first quarter.

"The share price may have some retreat or consolidation after these results because people were expecting more," Po said after the initial midday results announcement.

Shares of the Chinese company are still up about 50 percent this year, making the ticker the best performer of the broader 33-component Hang Seng Index in Hong Kong.

Its second-quarter revenue rose 404 percent to HK$28.5 billion, as the firm counted the IBM assets for the first time.

Analysts expect the company's profit for its current fiscal year to grow 43 percent to HK$1.64 billion for the 12 months through March 31, 2006.

China is now the world's second-biggest PC market, with 15.8 million units shipped last year and the market is expected to grow more than 14 percent this year and next, according to International Data Corp.

Lenovo now controls about a third of the market, but has come under attack there from international giants Dell and Hewlett-Packard in the last few years, as well as Taiwan's Acer Inc. more recently.

It made some market gains in the third quarter, as Dell's long-serving China chief retired and Acer completed a retrenching of its operations. But those gains are not seen as long term.

With the growing competition and limited potential for further gains at home, the company is looking to the IBM purchase to give it a firm foothold for growth on the international stage.

Analyst said they would be watching closely to see how the integration of the two different units goes, and whether the company can bring together two very different corporate cultures while saving costs and keeping its big customers happy.

(US$=HK$7.8)

(Additional reporting by Vinicy Chan)

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