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China's Lenovo sets sights overseas in smartphone push

By Lee Chyen Yee

HONG KONG (Reuters) - Lenovo Group Ltd is stepping up its overseas expansion in the smartphone business after enjoying solid growth at home in China, as the world's No.2 maker of personal computers seeks to offset slowing growth in the traditional PC sector.

Lenovo, also the second-biggest smartphone vendor in China, has begun selling smartphones in countries including Russia, Indonesia, the Philippines and Vietnam, although analysts said it faced stiff competition from major players like Samsung Electronics Co Ltd and Apple Inc.

In its October-to-December third quarter, Lenovo shipped 9.4 million phones, including 9 million smartphones, mainly in China, where its smartphone business turned profitable for the first time.

"For the rest of the emerging markets, we will continue to invest in the smartphone business to drive market share," Yang Yuanqing, Lenovo's chief executive, told a media briefing after announcing its best-ever quarterly profit. "When we have enough market share, we can shift to (focusing on) profitability."

The ThinkPad maker reported on Wednesday a quarterly profit of $204.9 million, up by a third from a year earlier. That beat the average estimate of $178.4 million in a Thomson Reuters I/B/E/S poll of 11 analysts, and exceeded its previous record of around $172 million in the three months that ended in December 2007.

In the third quarter, overall revenue grew 12 percent from a year earlier to $9.4 billion, but the bulk of that still came from its PC business.

Lenovo has rapidly gained market share in the PC sector on the back of acquisitions over the past few years. The company trails Hewlett Packard Co by a slim margin in PC shipments, according to technology research group IDC.

As PC demand growth slows, Lenovo has been diversifying into the mobile device sector to tap robust demand for smartphones and tablets, particularly at home in China, the world's biggest market for mobile phones and personal computers.

About a tenth of its third-quarter revenue came from its mobile internet and digital home (MIDH) business - mainly consisting of its smartphone sales in China, which jumped 77 percent to $998 million.

"In my opinion, Lenovo's strategy in mobile devices is that it will focus initially on the overseas markets that it's most familiar with and this includes emerging markets," Eve Jung, an analyst at Nomura Equity Research.

"However, it will face challenges in the sector as companies like Acer and Asustek roll out cheaper tablet PC models to aggressively target markets, such as China, which is Lenovo's traditional stronghold," she said.

In smartphones, Lenovo will have to compete head-on not only with major global players, but also with Chinese rivals like Huawei Technologies Co Ltd and ZTE Corp, which are already among the top five smartphone players globally.

"Its strategy in diversifying into smartphones has proved quite successful in China, but it'll be quite difficult for Lenovo to be as successful as say, Samsung, in overseas markets," said Audrey Chiu, a manager at the investment and research division of Truswell Securities Investment Trust, which invests in Lenovo's shares.

Shares of Lenovo rose 36 percent in 2012, outpacing a 23 percent rise in the Hang Seng Index and beating rivals Hewlett Packard, Dell Inc and Acer Inc, whose stocks fell last year.

On Wednesday, Lenovo shares closed down 2.7 percent prior to the results announcement, compared with the Hang Seng's 0.7 percent rise.

(Reporting by Lee Chyen Yee; Editing by Chris Gallagher)

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