Top China PC Maker Lenovo's Q2 Plunges 78%

By Joseph Chaney

HONG KONG (Reuters) - China's Lenovo Group Ltd (0992.HK), the world' No. 4 PC maker, posted a 78 percent plunge in quarterly earnings on slower shipments and lower margins, as the global financial crisis crimps appetite for technology products.

But analysts say China's top computer maker, which competes with Hewlett-Packard (HPQ), Dell Inc. (DELL) and Asian rival Acer (2353.TW), is expected to thrive in the long run due to its commanding share of China's market -- the world's top PC arena after the United States -- and other emerging markets.

Last month, market researcher IDC said personal computer shipments in Asia excluding Japan grew 12 percent to 20.2 million units in the third quarter -- a figure that fell 2 percent short of its forecast for the region.

Corporate-focused Lenovo earned a net profit of $23.44 million in its fiscal quarter ended in September, compared with $105.26 million a year earlier.

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The result severely lagged an average forecast for $91.80 million, according to five analysts polled by Reuters Estimates.

Lenovo derived $1.9 billion -- of $4.3 billion in sales -- from greater China during the quarter, and $1.1 billion from the Americas.

Shares in Lenovo plunged 36 percent between July and September, underperforming the 18.5 percent loss on Hong Kong's benchmark Hang Seng Index .HSI over that period, as investor's fled equities in the wake of the financial turmoil.

The stock had lost nearly 2.8 percent ahead of the earnings announcement on Friday.

Last month, Acer, the world's No. 3 PC vendor, said its third-quarter net profit rose 4 percent to T$3.04 billion, lagging analyst estimates for T$3.16 billion.

US WEAKNESS

The United States has been Lenovo's second-largest revenue contributor since it bought IBM's PC unit for $1.25 billion in 2005.

But its performance in the Americas, where it was barely profitable in the first quarter, was hit by sluggish consumer appetite.

"Slowing commercial demand and aggressive pricing impacted the group's profitability in the geography," Lenovo said in a statement.

Armed with a solid balance sheet, Lenovo has said it is considering acquisitions after Acer beat it in a race to buy Europe's Packard Bell last year.

In the past two months, sources at Japan's Fujitsu Ltd (6702.T) said it was in talks with Lenovo aimed at selling to the latter Fujitsu-Siemens's personal computer division but keeping the server business.

Two sources have said that talks are still going on with Lenovo, with key issues centred on personnel cuts and negotiations with Fujitsu Siemens Computers' labour union.

But some analysts say a deal could hurt Lenovo if there is an additional downturn in global tech appetite.

"As we have been cautious on Lenovo's outsized exposure to the corporate PC market, we believe a new major M&A would increase the downside risk for Lenovo," Goldman Sachs said in an earnings preview note.

(Editing by Anne Marie Roantree)

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