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Lenovo Profit Beats Forecasts, Shares Jump 4 Percent

Lenovo Group reported a forecast-beating 25 percent jump in third-quarter net profit, its best result in more than two years, but a slowdown in key home China market threatens to darken
its 2011 outlook.

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Economic uncertainty in mature markets such as the United States and Europe also could offset the positive impact it gets from a strengthening Chinese currency and lower component costs.

"China's growth in the PC market is showing signs of slowing right now," said Jenny Lai, head of Taiwan research at HSBC. "Lenovo has a lot of exposure in China, and that means it is likely to be affected by any slowdown in the country and so it will likely have to focus on other markets."

Lenovo, one of China's best-known brands, reported October-December net profit of $99.6 million, up from $79.5 million a year ago, and beating expectations for a $86.2 million net profit from seven analysts polled by Thomson Reuters I/B/E/S.

The results come a day after bigger rival Dell reported forecast-beating earnings and margins on lower component costs and demand from companies replacing older technology.

Lenovo shares extended gains after the results and were up 4.1 percent by 0640 GMT in a steady market.

Operating profit margin, a key performance indicator in assessing profitability, rose to 2.2 percent from 1.9 percent in the previous quarter, boosting Lenovo's earnings.

Such razor-thin margins have forced PC brands to look to acquisitions and alliances with rivals. Last month, Lenovo signed a $175 million agreement with NEC Corp to jointly sell and develop PCs in Japan.

Part of the improvement in Lenovo's operating margin is likely to have come from an appreciating yuan, which rose about 1.5 percent against the greenback in October-December. A supply glut in LCD panels and other parts such as DRAM chips have also driven down costs for Lenovo and other PC brands.

"I expect that most of the margin improvements came from favourable component prices, as anticipated, similar to what we saw at Dell's results and Asustek's results last week," said Kirk Yang, head of Asia hardware research at Barclays Capital.

LCD makers such as LG Display and Chi Mei Innolux have been warning of lower shipments and weaker screen prices, all of which is beneficial to PC brands because it drives down their component costs.

Better-Than-Expected Q3

China still accounted for the largest portion of Lenovo's sales, making up 46.2 percent of revenue in the third quarter, down from 47 percent in July-September.

"The company's earnings were better than expected, but just by a little," said Macquarie's Stephen Chow. "The improvement is likely to have come from emerging markets outside of China, but the European and U.S. market has been very ordinary."

Its mature-markets business, much of which it inherited from International Business Machines , retained its profitable record for a second straight quarter, making up about 34.6 percent of total sales with an operating profit margin of 1.1 percent.

Lenovo saw the biggest jump in shipments among the top PC brands, up 21 percent during the three months, according to research firm IDC. This was better than rivals Hewlett-Packard , Acer and Dell , and about eight times the overall market's 2.7 percent growth.