China's Lenovo Q1 Profit Up 6%

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In its first earnings report since buying IBM Corp.'s (IBM) personal computer business, Chinese computer maker Lenovo Group Ltd. (search) said Wednesday its first-quarter net profit rose 6 percent.

Overall net profit, including the company's mobile phone and other businesses, grew to 357 million Hong Kong dollars ($45.8 million) in the April-June quarter from 337 million Hong Kong dollars in the same period a year ago.

Chief Executive Steve Ward said the International Business Machines unit the company bought for $1.75 billion in late April — which made Lenovo the world's third-largest PC maker — was now profitable. Before Lenovo purchased it, IBM's PC business had lost money from 2001 through at least the first half of 2004.

Lenovo's entire personal PC business also remained profitable, with global PC sales of 18.3 billion Hong Kong dollars ($2.35 billion). Profit figures for its personal computer business were not immediately available.

"Our results validate the expectations we have when we acquired the business and reinforced our convictions that we have a model for ongoing profitability," Lenovo Chairman Yang Yuanqing said.

Revenue more than tripled in the fiscal first quarter to 19.6 billion Hong Kong dollars ($2.5 billion) from 5.88 billion Hong Kong dollars, falling just short of Lenovo's earlier prediction that sales would quadruple.

Lenovo outlined an aggressive growth strategy that entails expanding its product line from 60 percent of the electronic products available on the market to 90 percent by the end of the year.

Yang said he expects mobile phone sales and new business in emerging markets to drive growth. Lenovo's handset sales, primarily made in China, surged 27 percent to 820 million Hong Kong dollars ($105.1 million).

Wednesday's earnings were closely watched because they offer the first clue to how China's largest foreign corporate acquisition was faring.

The apparently smooth incorporation of IBM's PC operation into Lenovo may have been helped by the way the deal was structured. IBM was given a 13 percent stake in Lenovo and Ward, formerly an IBM executive, stayed on.

Other recent forays overseas by Chinese companies haven't been quite as successful.

Chinese oil company CNOOC Ltd. (CEO) last week withdrew its $18.4 billion bid to buy California-based Unocal Corp. (UCL) amid political opposition from many U.S. politicians, who claimed the deal would threaten U.S. national and energy security.

"After the failure of CNOOC, investors see Lenovo as a success story of a mainland company acquiring overseas assets," said Y.K. Chan at Philip Asset Management.

Lenovo shares rose 5.61 percent to 2.83 Hong Kong dollars, ahead of the first quarter results.

The earnings report exceeded the forecast of Credit Suisse First Boston analyst Jeannie Cheung, who had predicted net profit would come in at 346 million Hong Kong dollars ($44.4 million) and revenue would be 17.4 billion Hong Kong dollars ($2.23 billion).

Few analysts had offered predictions because of limited information.