Lenovo Group expects its profit margin to rise as component prices drop and sales of its smartphone, the LePhone (above), increase. The company will launch the LePad, a tablet PC similar to the iPad, in China within a few weeks. [Photo / Bloomberg]

CFO expects firm's operating profit margin to trend upwards

HONG KONG/BEIJING - Lenovo, the world's fourth-largest PC maker, expects its operating profit margin to trend upwards, helped by easing component shortages and an appreciating Chinese currency, its chief financial officer said on Monday at the Reuters China Investment Summit.

"With an appreciating RMB and falling component prices, obviously managing such a business will be easier than having to deal with a depreciating RMB and rising component prices," CFO Wong Wai-ming said in an interview at Reuters offices in Beijing. He declined to give a forecast.

Lenovo's operating profit margin, a key performance indicator in the PC sector, rose to 1.9 percent in the July-September quarter this year, up from 1.58 percent in the preceding quarter.

Separately, Wong said the company will launch its LePad tablet PC in China within the next few weeks and is planning to have a smartphone that will run on China Mobile's TD-SCDMA 3G network, as it moves beyond its traditional PC base.

The company already produces smartphones for use in 3G networks operated by China's two smaller operators, but has yet to make one for China Mobile, which controls more than two-thirds of the world's biggest mobile market.

"We obviously plan to have a product for each operator," he said.

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PC companies, such as Lenovo, Dell and HP, have been increasingly looking to mobile devices to diversify from the heavily commoditized personal computer, where net margins can fall into the low single digits for brands such as Acer.

A supply shortage in LCD panels crimped sales of Lenovo's first smartphone, the LePhone, in the few months following its launch in May. But the shortage has eased as Lenovo began sourcing from other LCD manufacturers, Wong said.

Overall component prices are also beginning to fall across the board as suppliers such as LCD and chipset makers begin ramping up production in response to the stronger demand seen earlier this year.

However, the company is seeing PC shipment growth slow from the numbers recorded earlier this year, when companies frequently recorded shipment growth of higher than 20 percent, according to figures from research firm International Data Corporation (IDC) said.

"We're seeing that demand for PCs is starting to slow," Wong said. "By that I mean the market is still growing, but not at such a high percentage year-over-year."

Lenovo saw the biggest improvement among the top PC brands in the third quarter of this year, with shipments up 33 percent, outperforming the overall market's 11 percent rise, according to IDC figures.

Its shares have risen about 14 percent in the past three weeks and closed at HK$5.37 (69 cents) on Friday, about 13 percent below the HK$6.06 average target price of 25 analysts polled by Thomson Reuters StarMine.

Lenovo is also staying off corporate data services for the time being until it has reached the critical mass needed in mature markets such as the United States and Europe, Wong said.

Rivals, such as HP and Dell, have been investing heavily to increase their presence in the area, most recently engaging in a $2.4 billion bidding battle for high-end storage maker 3PAR.

"Longer term, that is obviously an area we will look at," Wong said. "Looking at opportunities in China versus opportunities outside China, we still need to build up the critical mass before we can do it outside China."

Reuters