China's top PC maker, Lenovo Group Ltd, will continue focusing on its core business, selling PCs, and key businesses such as handsets, to boost profitability, a company executive said last week.

Lenovo's decision, earlier this year, to shift its focus back onto its core business, and the disposal of non-core businesses as part of its restructuring program, is paying off, said company President and Chief Executive Officer Yang Yuanqing.

Lenovo last week reported a better-than-expected, 21.1 percent growth, year-on-year, in net profits in its fiscal first quarter, which ended on June 30.

Its revenues rose 10 percent.

"The return of our focus to core business has enabled our management team to concentrate our energy, and capital, (on the profitable business)," Yang said.

Lenovo will continue gradually disposing of its non-core businesses, he said.

"I think we are almost done. Disposal of our non-core businesses will help Lenovo narrow losses," Yang said.

Lenovo's operating losses at its non-core IT services and motherboard contract manufacturing business were reduced to HK$19.9 million (US$2.55 million) during the firm's fiscal first quarter.

The firm's losses had previously reached HK$31.6 million (US$4.05 million).

Lenovo last year sold a large stake in its motherboard contract manufacturing business.

Last month, it transferred its IT (information technology) services to software firm AsiaInfo Holdings Inc.

Earlier this month, Lenovo formed a joint venture with Sun Media Investment Holdings Ltd, as part of its pull-out of its Internet portal FM365.

Lenovo's lacklustre performance last year was due largely to its losses in the handset and motherboard businesses, said company Senior Vice-President Wang Xiaoyan.

In its fiscal first quarter, Lenovo posted HK$900,000 (US$115,385)in profit from its nascent mobile phone business.

Handset shipments surged 145.9 percent, year-on-year, and sales grew 61.3 percent.

The spike in shipments compared with a 31 percent, year-on-year growth, between April and June, in China's mobile phone market.

Some 15.8 million units of handsets were sold in the quarter, Beijing-based research house Analysys International said in a report last week.

Compared with the previous quarter, the handset sales volume declined 23 percent, the first drop in history, due to intense competition.

Yang said Lenovo's independent research and development has boosted its handset business.

"Previously, we focused on OEM (original equipment manufacturing), which offers a profit margin as low as 2-3 percent," said Yang.

"As in-house-developed phones now account for about 80 percent of our total handsets, the gross margin for mobile phones has climbed to 25.06 percent."

Yang dismissed the notion that Lenovo's business growth is losing steam.

Lenovo has traditionally been one of the darlings in Hong Kong's stock market, but this year, it has been Hong Kong's worst-performing blue-chip stock. Investors have been concerned the firm's rivals will erode its share of China's PC market, and that its growth will be flat.

Yang suggested those investors are short-sighted.

"Lenovo remains a steady, healthy firm, though we missed the target we set three years ago," he said.

Lenovo, he added, faces a great challenge in boosting its market share.

"(As a market leader), Lenovo needs to make a much greater effort than ever if we want to increase our market share," he said.

A report released last week by research house Gartner noted Lenovo had decrowned Hewlett-Packard (HP), during the second quarter, to regain the No. 1 position in Asia-Pacific's PC market.

Lenovo held 10.5 percent of the market during the period, compared with 9.3 percent in the previous quarter.

HP held 10.3 percent in the second quarter, compared with 9.7 percent in the first quarter.

Lenovo has a 23 percent share, the largest, of China's PC market. Its nearest rival, Founder Technology, has a 9.3 percent share.

Lenovo, earlier this month, launched a much-cheaper consumer PC series, using CPUs (central processing units) made by AMD.

Analysts widely believe the low-price strategy, aimed at tapping the township and rural markets, will help Lenovo increase its market share.

Insiders said Lenovo had asked Intel, without success, to provide low-price CPUs for its new PC series.

Tapping China's township and rural markets is a natural choice, as the penetration of PCs in big cities has reached 60-70 percent, Yang said.

"If our partner cannot give us support, we will surely choose another," Yang said.

(Business Weekly August 18, 2004)