Lenovo Attacking Smartphones After Winning the Laptop War

Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Operating in clear opposition to the trend in the global PC industry, China based PC manufacturer Lenovo Group, which has significant representation in Global X NASDAQ China Technology ETF (NYSEMKT: QQQC) , reported a 13% rise in profits for the quarter ending September year-on-year to $162.1 million.  This was $7.5 million higher than analysts’ expectations. Revenues also increased by 11% in the corresponding period to $8.67 billion.

More importantly though, Lenovo, with a 15.6% global PC market share -- consumer and commercial-- is now just 0.2 percentage points behind Hewlett-Packard (NYSE: HPQ) in laying claim to being the world’s leading PC manufacturer. It is already ahead of HP in the worldwide consumer market share but with 18.3% of global commercial market share, Lenovo is behind HP, which has 18.8% share. IDC has identified that global PC shipments have fallen in the third quarter of CY2012 by 8.6% as compared to year-ago quarter while both Dell (NASDAQ: DELL) and HP reported earlier a 16% and 14% decline in sales but Lenovo recorded a 10% increase in shipments in the corresponding period. Lenovo is the leading PC vendor in some of the important PC markets such as China, Japan and India. With 16% market share in worldwide laptop market, Lenovo now supplies more laptops than any other company of the world.

The business is known to follow a militaristic approach of targeting a specific market, conquering it and then moving on to another objective. Its earnings presentation highlighted two strategic approaches as “key to success,” “Attack” to gain PC and mobile market share in China and emerging economies while “Protecting” its dominance in China. Its new objectives are further expansion in emerging markets, a greater share for its infant smartphone and tablet business unit -- called Mobile Internet Digital Home (MIDH) -- and to move deeper into cloud computing and “killer apps.” MIDH’s quarterly revenues increased by 155% to $718 million as it jumped from the fifth position in the Chinese smartphone market 12 months ago to the second spot with a 14.2% share, behind Samsung and ahead of all of its local and international competitors.  That gain in market share came substantially from Apple, whose share in China was halved to less than 10% in the most recent surveys.

Meanwhile, it has acquired Brazilian consumer electronics conglomerate CCE for $150 million to expand in that emerging market. In cloud computing arena, it has recently acquired the U.S. based software firm, Stoneware for an undisclosed amount,  Stoneware specializes in cloud computing products and Lenovo plans to offer remote access to its consumers. Stoneware would be Lenovo’s first software business acquisition as the company aims to compete with Apple and Samsung in the tablet, smartphones and smart TV market.

Unlike other Chinese technology firms, Lenovo is not just about gaining market share on price. On the contrary, it still protects the ThinkPad brand it bought from IBM in 2005 as a premium brand and it has been able to successfully penetrate up the value chain, especially in China, commanding incrementally higher margins while at the same time attacking the low end of the market with cheap smartphones where it has no brand image but is set on acquiring users.

<table> <tbody> <tr> <td> <p><strong> </strong></p> </td> <td> <p><strong>Lenovo (HKG)</strong></p> </td> <td> <p><strong>HP</strong></p> </td> <td> <p><strong>Dell</strong></p> </td> <td> <p><strong>QQQC</strong></p> </td> </tr> <tr> <td> <p><strong>Stock YTD</strong></p> </td> <td> <p><strong>12.50%</strong></p> </td> <td> <p><strong>-46.31%</strong></p> </td> <td> <p><strong>-37.29%</strong></p> </td> <td> <p><strong>3.02%</strong></p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>137.08</p> </td> <td> <p>N/A</p> </td> <td> <p>5.54</p> </td> <td> <p>17</p> </td> </tr> <tr> <td> <p><strong>EPS</strong></p> </td> <td> <p>0.05</p> </td> <td> <p>-2.81</p> </td> <td> <p>1.68</p> </td> <td> <p>N/A</p> </td> </tr> <tr> <td> <p><strong>Yield</strong></p> </td> <td> <p>N/A</p> </td> <td> <p>3.70%</p> </td> <td> <p>3.40%</p> </td> <td> <p>1.25%</p> </td> </tr> <tr> <td> <p><strong>ROA</strong></p> </td> <td> <p>3.03%</p> </td> <td> <p>4.72%</p> </td> <td> <p>5.61%</p> </td> <td> <p>N/A</p> </td> </tr> <tr> <td> <p><strong>ROE</strong></p> </td> <td> <p><strong>23.08%</strong></p> </td> <td> <p><strong>-</strong><strong>15.60%</strong><strong></strong></p> </td> <td> <p><strong>33.45%</strong></p> </td> <td> <p>N/A</p> </td> </tr> </tbody> </table>

Despite putting up strong numbers, the global PC market is diminishing which is hitting Lenovo as well as the company’s growth is slowing. It did achieve 13% growth in this quarter and its stock easily outperformed both HP and Dell, but 13% is significantly lower as compared to previous quarter’s 30% profit growth. Even in its home territory China, where it enjoys a strong brand loyalty, its shipments grew by just 8% as opposed to 59% in the previous quarter. Lenovo’s decision to tap into the smartphones and mobile devices market, which has witnessed the strongest growth, is smart.  The margins may be lower but the markets are growing and with the results that Foxconn reported even low margin mass production can work magic on the bottom line.

Moreover, it is now going to take its phone operations outside of China to India, Indonesia, the Philippines and Vietnam. Following the release of Windows 8, the demand for PC is set to pick up and coupled with the holiday season, the shipment numbers will show a sequential improvement. In the long-run however, PC demand will remain challenging due to slow global economic growth and the steady shift towards mobile devices, but Lenovo believes that it has tablets and other innovative mobile hybrid devices in its pipeline that will ensure long term growth.

PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple and Dell. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus