Lenovo Group Ltd, China's biggest maker of personal computers, saw its interim earnings up 16 per cent, with the company cementing its leading market position and booking a one-time gain from selling non-core assets.

The company posted a first-half net profit of HK$627 million (US$80 million) for the period ending September 30, including a one-time gain of HK$164 million (US$21.2 million). However, excluding that exception, its interim earnings were about 14 per cent lower from the same period a year earlier.

Revenues also fell 0.5 per cent to HK$11.5 billion (US$1.49 billion), while its market share in China grew slightly to 27 per cent and the gross profit margin dipped partially to 14.77 per cent.

It should also be noted that the operating profit for its core corporate IT segment plummeted 15.3 per cent. That was due to intensified irrational competition in the country's computer market, which led to an average 15 per cent year-on-year reduction in retail prices of personal computers during the period, said Yang Yuanqing, Lenova president and CEO.

"There were crises everywhere in China's highly competitive PC market during the first half of the year as domestic rivals jostled with low-margin products and foreign competitors speeded up their investments in China," Yang said at a news conference in Hong Kong yesterday.

"The results reflect the transition period of our restructuring campaign, targeting smaller cities in China," said Liu Chuanzhi, chairman of Lenovo. "In fact, the restructuring started to bear fruit in September. I hope that we can achieve positive improvement either in market share or in profitability in the third and fourth quarters," he added.

Late in June, Lenovo embarked on a campaign focusing on the township market in China in response to fierce competition, rapidly changing customer buying habits, as well as the almost saturated urban market.

The "Yuanmeng" PC series which was designed for low-income smaller cities and sold as little as 3,000 yuan (US$361) accounted for 20 per cent of the company's total unit shipments, according to Liu.

Meanwhile, Lenovo's handset sales increased by 105 per cent by volume in the first half of the fiscal year, with gross profit margin growing from 13.2 per cent to nearly 24 per cent.

"It is an encouraging performance especially at a time when domestic rivals gained narrowed margin," said Liu, who attributed the growth to the company's self-developed handsets.

Looking ahead, Liu said he expects the low-price competition among domestic rivals who compete with 5-6 per cent gross margins to come to an end in the second half of the year since "the margins cannot be cut anymore."

He continued that Lenovo would stick to maintaining its 14 per cent profit margin and strive to shift its customer focus from governments and educational institutions to corporations, especially small and-medium enterprises. That would help offset the negative impacts resulting from the increasingly stronger bargaining power of the government and education sectors.

During the first half of the year, government and educational institutions accounted for 40.8 per cent of the company's PC customer base, compared with 42.2 per cent a year earlier.

Following the results announcement, shares of Lenovo, tumbled 11.2 per cent to HK$2.775 and became the top blue-chip loser in Hong Kong yesterday as the results were slightly below market expectations, with investors cautious about the outlook in the remainder of the financial year.

The steep drop in the share price could be partially due to profit-taking following a 11 per cent rally last week over media reports that Lenovo looked set to set up joint venture with US-based rival IBM.

(China Daily November 17, 2004)