PC maker Lenovo set for dismal quarter

Lenovo Group is expected to post its second straight quarterly loss as the world's third-largest PC maker struggles to turn around the loss-making business it bought from IBM.

Some analysts continue to hold out hope for improvement over the year, partly because of a traditionally more vibrant second half for China's top PC maker, but also because Lenovo should get a firmer grip on an IBM PC business that vies with the likes of Sony and Toshiba in Asia.

The firm, which suffered a deeper-than-expected HK$903 million (US$116 million) fiscal fourth-quarter loss, is expected to post a loss of HK$38.5 million for the quarter ended June, according to a consensus mean of forecasts from five analysts polled by Reuters.

The forecasts ranged from a maximum of HK$126 million profit to a loss of HK$260 million.

That compares with a net profit of HK$357 million for the same period of 2005 for the Chinese giant, which vies worldwide with Dell and Hewlett-Packard.

Lenovo, one of a handful of Chinese firms trying to forge a global brand by investing abroad, has been coping with expenses arising from its US$1.25 billion purchase of IBM's PC arm in 2005. It is due to unveil quarterly earnings on Thursday.

First-quarter results could include restructuring costs of between HK$73 million and HK$200 million, analysts said.

The company said in March that it would cut about 1,000 jobs, or 5 percent of its work force, as part of a six- to 12-month restructuring plan to save US$250 million annually in costs following the IBM deal.

"There will be no more restructuring-related losses - this quarter should be the end of it," said an analyst with a major European investment bank.

"The second half of the year is a high season for PCs, and because of that, their operation leverage will be positive."

Lenovo is expected to post a full-year fiscal 2006/07 net profit of HK$1.18 billion, up nearly a fifth from the previous year, according to the consensus mean of forecasts from 18 analysts polled by Reuters Estimates.

Despite what's expected to be another less-than-stellar quarter, Lenovo has been having some success carving out a global footprint.

Its global market share in the year's second calendar quarter - equivalent to Lenovo's fiscal first - climbed to 7.7 percent from 6.4 percent in the first quarter and 7.5 percent a year ago, according to consultancy IDC.

Still, analysts reckoned that that market share gain could have come at the expense of profit margins. The firm - which has stated publicly that profits are not a prime concern for now - faces persistent pricing pressure.

Over the past year, it had tried to arrest a slide in market share to larger rivals Dell and HP.

In July, Dell warned that earnings in its fiscal second-quarter beginning in May would fall about 30 percent short of forecasts, blaming what it called "aggressive pricing" in a slowing market, though some analysts said the problems were largely company specific.

Lenovo Chairman Yang Yuanqing said that the firm would focus on expanding market share and was ready to cut prices to keep up.

"Lenovo is an interesting story and we are positively biased, but to see results will require patience," said Credit Suisse analyst Venugopal Garre, in a 31 July research report.

Lenovo's shares fell 13 percent from April to June, underperforming a three percent gain on the benchmark Hang Seng Index during the same period. The stock was up 0.8 percent at HK$2.52.

Lenovo hopes to transform itself into a notebook powerhouse by combining its expertise in lower-end PCs with the strength in laptops it bought along with Big Blue's PC assets.

Notebooks accounted for just under 50 percent of group sales last year but that ratio would increase this year, Yang said.

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