From the FT's Lex blog
Lenovo looks to be well beyond the dark days that followed its eye-popping purchase of IBM several years ago. On Thursday, the world's second biggest computer maker by units announced that revenues grew by 44 per cent in the third quarter compared with the prior year, while net income was up by over one-half.
This sent its share price up 4 per cent, adding to a 38 per cent gain over the past year. Over the same period, the Hang Seng fell 9 per cent.
Lenovo investors have much to be grateful to chief executive Yang Yuanqing for. The company is defying expectations by expanding beyond its Chinese borders. Acquisitions of German consumer electronics company Medion and a joint venture to make PCs with Japan's NEC helped push sales in mature markets up by 80 per cent. These regions now make up more than two-fifths of total sales. It also grew its share of China's PC market to over one-third, bounds ahead of Acer in second place.
But with PC demand taking a pounding from tablets both at home and abroad, the next several years for Lenovo may not be so certain. Although it is trying to hedge itself by expanding in emerging markets and developing smartphones, tablets, and smart TVs, these have yet to take off. Emerging market PC sales outside of China picked up just over 10 per cent and gadgets only make up 6 per cent of total revenues. Further, losses on these segments tripled in the third quarter from a year earlier. As a result, overall margins are a quarter of those at the global PC leader Hewlett-Packard.
Lenovo trades at a forward price to earnings ratio of 15 times - more than double that of HP, two-thirds higher than Dell, and one-third more than Apple. While the quarterly performance deserves credit, investors should be careful of how long Mr. Yang is willing to tolerate losses in his quest to expand.