Smartphones and tablets -- PC giant Lenovo's next frontier

HONG KONG Thu Nov 8, 2012 7:48pm IST

Lenovo's laptop PCs are displayed at an electronic shop in Tokyo September 5, 2012. REUTERS/Kim Kyung-Hoon

Lenovo's laptop PCs are displayed at an electronic shop in Tokyo September 5, 2012.

Credit: Reuters/Kim Kyung-Hoon

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HONG KONG (Reuters) - Lenovo (0992.HK) is on track to become the world's No.1 PC maker, but with traditional PCs going out of vogue with consumers, the Chinese company is pinning future growth hopes on smartphones and tablets, a segment dominated by Apple and Samsung Electronics.

The Thinkpad maker has successfully grabbed market share from rivals such as Dell Inc DELL.O and Acer Inc (2353.TW). Technology research firm Gartner says it has already overtaken market leader Hewlett Packard Co (HPQ.N) in PC shipments and rival research firm IDC ranks it a close second.

However, with the traditional PC sector's long-term future uncertain, Lenovo has forayed recently into the mobile computing business and is ploughing resources there.

Reflecting that push, the company reported on Thursday a 12.6 percent rise in quarterly net profit to $162 million, its slowest profit growth in more than two years, though it beat the

$156.3 million consensus forecast of analysts.

"Obviously their cash cow is still going to be PCs, so they will use their PC business to expand into tablets and smartphones," said Jonathan Ng, an analyst with CIMB in Singapore.

In the six months to September, Lenovo's PC revenues accounted for nearly 90 percent of total revenues of $16.7 billion and grew 14 percent.

Revenues at its mobile Internet and digital home division more than doubled to $1.3 billion in the same period, mainly due to consumers snapping up its smartphones in China, the world's largest mobile phone market.

Lenovo has been adept at capturing market share in the PC sector, claiming the No.1 spot in markets such as China, India, Germany, Japan and Russia.

A raft of acquisitions in the United States, Japan, Germany and Brazil over the past few years has also helped strengthen its foothold.

TRACTION IN CHINA

But with the traditional PC sector viewed by many analysts and investors as a sunset industry, Lenovo is attempting to pack more punch into its mobile computing products in a segment where consumers are often fickle on brands and features.

Last month, it launched the Yoga, a laptop running Microsoft Corp's (MSFT.O) Windows 8, which can be converted to a tablet PC by flipping the screen all the way backwards.

Lenovo's smartphones, such as LePhones, have gained traction in China with the PC maker ranking second in terms of market share in the second quarter, behind Samsung Electronics (005930.KS), IDC data showed.

In the second quarter, Lenovo sold 8.6 million phones, including 7 million smartphones, mainly in China, CEO Yang Yuanqing told a media teleconference on Thursday.

"We've had success in China. For the next step, we want to expand in the emerging markets first, then mature markets," he said. The company derives nearly half of its total revenues from China.

Its China smartphone business is currently loss-making, but the company expects to turn a profit in the next few quarters, executives said.

Whether its Windows tablets and smartphones achieve wider success remains to be seen, in a market where Google Inc's (GOOG.O) Android and Apple's iOS rule.

"So far in China, they have the advantage and they have been doing well over there. But outside China, that remains to be seen because competition is more intense," CIMB analyst Ng said.

Microsoft has also launched its own Surface tablet, though market observers say the impact on PC suppliers in Asia is limited.

"The shipment target for Surface is still relatively low and PC makers here still have an edge in terms of hardware design and performance," said Audrey Chiu, manager for investment and research at Truswell Securities Investment Trust Co Ltd, which owns Lenovo shares.

Shares of Lenovo ended down 2.6 on Thursday, in line with the broader market's .HSI fall. Lenovo shares are up 27 percent since the start of this year. (Editing by Muralikumar Anantharaman)

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