China’s Lenovo inches closer to overtaking HP in PC sales

Reuters: Lenovo Group Ltd. is on track to overtake Hewlett-Packard Co as the world’s biggest PC maker by sales as soon as this year, making it the first Chinese company to grab the top spot globally in a technology sector.

The ThinkPad maker’s rise highlights the advance of China’s technology firms on the world stage in recent years thanks to a combination of aggressive pricing,

overseas acquisitions and their taking advantage of a fast-growing home market.

Analysts, however, also warn that Lenovo’s rapid gains in market share have come at the expense of profit margins, while the company faces slowing growth in the market for personal computers and tough rivals in the tablet PC space.

“It’s just a matter of time before Lenovo becomes No. 1 and it won’t be surprising at all if it happens later this year,” said Frederick Wong, Executive Director at Avant Capital Management (Hong Kong) Ltd, which owns shares in Lenovo.

He added, however, that competition in the tablet sector and a weak PC market outlook could put pressure on Lenovo.

Lenovo, which became the world’s No. 2 PC vendor in the third quarter of 2011, had a 14.9% global market share in the April-June quarter this year, a mere 0.6%age point away from HP’s 15.5%, according to research firm IDC’s latest data. Figures from industry tracker Gartner show an even narrower gap, with Lenovo just 0.2%age point from HP.

In another technology sector, China’s Huawei Technologies Co Ltd., the world’s No.2 maker of telecom equipment, had been expected to surpass Sweden’s Ericsson in 2011 sales. But slow telecom spending, stiff competition in the handset market and difficulties in tapping the massive US market held it back.

Lenovo’s rise has been helped by its purchase of Germany’s Medion and a joint venture with Japan’s NEC Corp last year, as well as its acquisition of IBM Corp’s PC business in 2005.

Investors have rewarded Lenovo for its market share gains, sending its stock up by around 16% this year and outpacing rivals HP, third-ranked Dell Inc and No. 4 Acer Inc, whose stocks have dropped over the same period.

Lenovo currently trades at a multiple of 12.5 times forward earnings, the second-highest among the top-five PC makers and well above the 4.6 times multiple for HP, Thomson Reuters Starmine data showed.

But profit margins have suffered. Lenovo had a 1.4% operating margin in the latest quarter, lower than HP’s 7.4% and Dell’s 6.2%, the data showed.

“HP, Dell and Acer have switched lanes in the PC race and passed the baton to L enovo in terms of focusing on sales rather than margins,” said Dickie Chang, an analyst at IDC in Hong Kong.

Another risk is slowing growth in the PC market as the global economy, including Lenovo’s home turf and stronghold China, eases.

China accounts for about 42% of Lenovo’s total revenue, with the bulk of that coming from PC sales.

Global PC shipment growth was largely flat in the second quarter, marking the seventh straight quarter of low 0 to 5% growth for the industry.

“We remain positive on Lenovo’s market share expansion, but the absolute growth is nevertheless being negatively impacted by a slower market,” Jefferies said in a report. Jefferies has an “underperform” rating on Lenovo with a price target of HK$5.70.

Overall PC demand could pick up this year with the launch of Windows 8, though the catch is that competition in the sector for tablet PCs – not Lenovo’s strongest area – will heat up because the operating system is designed to run on laptops and tablets.