The Wall Street Journal-20080201-Lenovo Shares Regain Their Appeal- PC Maker Seems Positioned to Weather a U-S- Storm
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Hong Kong -- Lenovo Group's latest financial results suggest that the computer company could be better insulated than its rivals from the worst effects of a U.S. recession.
Personal-computer stocks have taken a beating in recent weeks amid fears that an economic downturn could slow technology spending in the world's largest computer market. Lenovo, the world's fourth-largest PC company by unit shipments, hasn't escaped the selloff. Its shares, traded in Hong Kong, plunged 32% from the end of 2007 through Wednesday.
But after the company said yesterday that net profit in the quarter ended Dec. 31 had tripled from a year earlier, the stock jumped 13% to 5.37 Hong Kong dollars (69 U.S. cents).
"If you're going to pick a winner within the PC market, it's Lenovo," says Jenny Lai, an analyst with CLSA Asia-Pacific Markets in Hong Kong. "The Asia-Pacific region is the bright spot for the entire computer industry right now, and companies with lots of exposure here are going to be doing better than their Western peers."
Lenovo, the Chinese company that acquired the PC division of International Business Machines Corp. in 2005, has the least exposure to the U.S. market of any of the world's top five PC companies. Nearly 40% of its revenue comes from China alone, and the company has shown strong growth in emerging markets such as India.
Limited exposure to the U.S. market, which accounts for 26% of global PC sales, had long been viewed as Lenovo's greatest weakness, and it has been actively trying to expand its American foothold. But with the threat of a slowdown in U.S. technology spending, many analysts view Lenovo's weak presence there as a potential advantage over companies such as Hewlett-Packard, Dell and Acer, which are more dependent on U.S. sales.
In 2007, 14% of Lenovo's PCs were shipped to the U.S., compared with 49% for Dell and 33% for H-P, according to research firm IDC. Acer, which recently leapfrogged Lenovo to become the world's third-largest PC company, also has a strong sales base in Asia, but the Taiwan company's acquisition of Gateway in California makes it more vulnerable to weakness in the U.S. market.
Credit Suisse upgraded Lenovo's shares to "outperform" from "neutral" and increased its 12-month target by 20 Hong Kong cents to HK$6.70.
Lenovo, with offices in Beijing and Raleigh, N.C., posted net profit of $171.7 million for the quarter, up from $57.7 million a year earlier. The profit was boosted by $50 million in one-time gains, including a disposal of a holding in Kingsoft, a software company.
Analysts who like Lenovo's prospects take the view that Asian economies are less vulnerable to an economic downturn in the U.S. than in the past. To these analysts, many investors recently have been dumping tech stocks partly out of habit.
"Investors have become extremely bearish on the tech sector; overly so in our view, given that the technology sector has become much-less dependent on the U.S. since the last downturn," says Bernard Liu, head of research for J.P. Morgan in Taiwan.
Many of the world's top PC companies are investing heavily in emerging markets, and Dell just opened retail stores in China. But analysts say Lenovo may have an edge in breaking into markets such as India, Vietnam and Indonesia because of its experience in China, where it controls roughly 30% of the PC market.
"Lenovo is used to operating in a low-price environment with difficult logistics and other challenges," says Kirk Yang, an analyst with Citi Investment Research in Hong Kong. He has a "buy" on the stock with a 12-month target price of HK$7.
Financials Feel Effect
Of More Write-Downs
European financial stocks slid amid rising fears that fresh write- downs on less-risky classes of securities will take a toll, overshadowing a day in which major indexes ended little changed.
Worries that bond insurers might lose their top credit ratings, which could push down the value of bonds they had backed, magnified after Fitch Ratings lowered the financial-strength rating on the world's top bond insurer, Financial Guaranty Insurance, to AA from AAA.
MBIA, a large bond insurer, swung to a fourth-quarter loss of $2.3 billion. It has maintained its AAA rating.
UBS shed 3.8% in Zurich as investors digested Wednesday's warning that the Swiss bank still needs to make write-downs on positions related to the residential-mortgage market.
The pan-European Dow Jones Stoxx 600 Index eased 0.03 point to 322.16, a muted end to a month in which the index plummeted 11.65%, its largest one-month decline since September 2002.
Most markets in Asia gained, although they, too, ended the month deep in the red. Hong Kong's Hang Seng Index shed 16% in January, posting its worst month since October 1997. For Japan's Nikkei Stock Average, January marked the worst month since April 2000, as the benchmark index gave up 11%.
In LONDON, the FTSE 100 index rose 0.7% to 5879.80, ending a month that saw it decline 8.9%. Carphone Warehouse climbed 8.1% on revived talk that U.S. electrical-goods retailer Best Buy could increase its shareholding beyond its 3%.
In TOKYO, the Nikkei ended 1.9% higher at 13592.47. Terumo surged 11% after it said its nine-month operating profit climbed 16%.
