Lenovo's Q1 set to leap 6-fold but price war looms

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Lenovo has been showing signs of turning around a weak business abroad after seeking out its first profit in the United States, though analysts warn it may be drawn into a further price war with Dell on its home turf, the world's second-largest PC market.

But on Monday, shares in the PC giant leapt as much as 14 percent after Citi published a report lauding its improved performance. The stock soared 61 percent in the April-June quarter, versus 10 percent for Hong Kong's Hang Seng Index.

"The surge in corporate demand has come at a good time for Lenovo, which is strong in serving corporate clients," said Charles Guo, an analyst with JP Morgan. "But bear in mind that it still faces challenges in the consumer sector: basically, the lack of a 'wow' design to lure customers in the street."

China's top maker of personal computers is likely to report around noon on Thursday a first-quarter net profit of US$32 million for its fiscal first quarter, versus US$5 million a year earlier, according to four analysts polled by Reuters.

Lenovo bought IBM's ailing PC arm for US$1.25 billion in 2005, and has been saddled with expenses arising from lay-offs and corporate streamlining as it seeks to better compete with fast-growing rivals such as Taiwan's Acer Inc. and bigger ones such as Hewlett-Packard Co. (HPQ.N: Quote, Profile, Research).

The Chinese firm has said it will book $50-$60 million in additional costs in the first quarter of 2007/08 for firing 1,400 workers and shifting jobs to lower-cost countries to try and save $100 million this year, much of which would be re-invested.

Acer trades at around 13 times estimated earnings, versus 17 for HP and the low 20's for Lenovo, according to Reuters data.

Lenovo -- one of a handful of Chinese firms trying to forge a global brand by investing abroad -- dropped to global fourth place in the first three months of 2007 but has now reclaimed the No. 3 slot from Acer in a closely fought battle, according to data from researchers Gartner and IDC.

Investors will want to see whether Lenovo can sustain a profit in the United States -- achieved for the first time in the fourth quarter -- and if improves in Japan, where it has struggled.

"The next global corporate PC upgrade cycle should start in the second half of 2007 for 1-2 years, with Lenovo as one of the biggest beneficiaries," Citi's Kirk Yang wrote in his report.

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