Lenovo drops to two-year low as sales show China weakness

A woman talks on a mobile phone in front of an advertisement for Lenovo Group Ltd. in Beijing

Lenovo Group Ltd. fell to a two-year low in Hong Kong trading after posting first-quarter sales that trailed analyst estimates, highlighting China’s slowing economic growth.
The shares dropped 9.1 percent to close at HKD7.70, the lowest since September 2013. The stock is down 25 percent this year, the third-worst performance on the benchmark Hang Seng Index. Revenue for the quarter ended June was USD10.7 billion, compared with the $11.5 billion average of analyst estimates.
Lenovo said it would cut 5 percent of its workforce and reduce its reliance on China as the world’s second-biggest economy is growing at the weakest pace since 1990. The company is trying to turn around its mobile phones and server businesses after $5 billion of acquisitions last year, while battling a shrinking market for the personal computers that generate 68 percent of its sales.
“We expect near-term share price weakness on the back of soft earnings,” Kirk Yang and Ric Cheng, analysts at Barclays Plc, said in a report after the earnings. “The bottom line is that we continue to expect this quarter and next quarter to be transition quarters, as Lenovo is in the process of turning around its mobile and server businesses.”
Chairman and Chief Executive Officer Yang Yuanqing is cutting costs after last year’s purchase of a server unit from IBM Corp. and smartphone brand Motorola.
Net income for the quarter ended June dropped 51 percent to $105 million, Lenovo said in a statement, compared with the $71.7 million average of analyst estimates compiled by Bloomberg.
“This was the toughest quarter since 2008” for the PC market, Yang said in a phone interview yesterday. “We still think we should react to the market changes to reduced fixed costs.”
About 3,200 non-manufacturing jobs will be cut from a total workforce of 60,000, Lenovo said in a statement. The cuts will save $1.35 billion annually.
The majority of its cost cuts will come from a move to integrate the Motorola unit with Lenovo’s legacy phone business, Yang said. The cuts will save $850 million annually at the unit.
“The restructuring is indicative that they are lowering their overall expectations” in the smartphone business, said Alberto Moel, an analyst at Sanford C. Bernstein. “They’re obviously serious about keeping their financial and operating targets, and are willing to take very aggressive actions to get there.”
Lenovo will shift its smartphone focus away from China, where some new vendors are “playing irrationally,” he said. “Our first strategy is that we shift focus to the rest of the world.”
The slump in China’s currency to a four-year low this week may erode profit margins, wrote analysts at Jefferies Group LLC, led by Ken Hui. Lenovo sources some computer components in dollars, so a 1 percent drop in the yuan’s value can cause gross margin to fall by 10 basis points to 20 basis points, they wrote.
“We operate on a global basis, and so we are very focused on currency changes. We have a strong hedging program in place which is focused on protecting our margin,” Lenovo said in an emailed response to questions. Tim Culpan, Bloomberg