Lenovo, China's biggest personal computer maker, will on Wednesday release its first quarterly results since its purchase of IBM's PC unit. Investors hope it will be a progress report on the highest profile acquisition by a Chinese company of US assets.
Investors are eager to find out whether IBM's loss-making operation is hurting Lenovo's profitability, and about the other challenges facing the Chinese company, which has shed little light on the performance of the IBM business so far. “It will be time for us to find out whether IBM has been a drag or a positive addition,” said Jeannie Cheung at CSFB.
To fulfil its ambition of overseas expansion, Lenovo announced it would buy IBM's loss-making PC division for $1.75bn last December and completed the purchase in May.
The deal not only turned Lenovo into the world's third-largest computer maker, but is one of few completed transactions by a Chinese company looking to invest overseas. Chinese enterprises have suffered a string of setbacks this year, highlighted by the failure of CNOOC, the country's third-largest oil group, in its bid for Unocal of the US.
State-owned Minmetals failed in its bid for Noranda of Canada. Haier, a white goods manufacturer, in July pulled out of the race for Maytag, the US maker of Hoover vacuum cleaners.
While Lenovo managed to overcome its challenges and struck a deal, investors remain concerned about how rapidly the company is losing customers to rivals in China and globally, and whether the deal is making financial sense.
Analysts in Hong Kong said Lenovo's management had given little guidance on the profitability of the IBM unit. Only a few have made forecasts for the company's first-quarter results for April to June this year.
CSFB's Ms Cheung predicted Lenovo would report a 2.7 per cent rise in net profit from the same period last year to HK$346m (US$44.5m), while sales were expected to triple to HK$17.4m.
But Marvin Lo, analyst at BNP Paribas Peregrine, said Lenovo's results were likely to be affected by a number of swing factors, such as the size of amortisation charges the company would have to pay for IBM's patents and logo and the income tax rate in the US. “Everything is ambiguous,” Mr Lo added.
Liu Chuanzhi, founder of Legend Holdings, Lenovo's parent group, said in June it aimed to return the IBM business to profit in one year through cost-cutting, and said IBM's higher-margin business would lift Lenovo'sprofitability in the longer term.
Mr Liu said gross profit margin at IBM was 24 per cent compared with Lenovo's 14 per cent.
But Mr Lo said the IBM business had a lower net margin of below 1 per cent, compared with close to 5 per cent at Lenovo a situation likely to hurt Lenovo's bottom line.
Lenovo's shares, which have risen 10.3 per cent since May, fell 0.9 per cent to HK$2.675 on Tuesday.