Lenovo Booted from Hong Kong Stock Index

Lenovo Group hasn’t had an easy time since its takeover of IBM’s PC division, and its removal from the main index of the Hong Kong stock exchange is just the most recent sign of trouble for the company.

The world’s third-largest PC vendor will formally be removed from the Hang Seng Index on Sept. 11, according to HSI Services, replaced by Taiwanese mobile phone maker Foxconn International Holdings.

Losing its place on the index won’t affect Lenovo’s operations, but it could send its stock lower. And it’s a small humiliation for the company, which was expected to be a major technology component of the Hang Seng.

Many investors adjust their portfolio of stocks based on major indexes, such as the Dow Jones Industrial Average and the Hang Seng. The removal of a share from a major index normally prompts at least some people to sell, and then buy shares in the replacement company. In this case, traders would sell Lenovo and buy Foxconn.

It also highlights a perceived decline in the company’s business ever since it took over IBM’s PC division last May.

In March, Lenovo announced a HK$543 million (US$69.8 million) restructuring scheme, including plans to lay off 1,000 employees and move its corporate headquarters from Purchase, N.Y., to Raleigh, N.C., due to market pressures in its desktop business.

Shortly thereafter, the company turned in weak fiscal fourth-quarter results, turning to a loss of HK$903 million despite sales of HK$24.4 billion.

It has also watched its lead over fourth-place rival Acer erode. Lenovo’s share of global PC market revenue rose to 7.7 percent in the second quarter of 2006, up from 7.5 percent in the same time last year. But Acer’s share leaped to 5.4 percent, up from 4.3 percent a year ago, a 1.1 percentage point gain, according to market researcher IDC.

Despite its woes, Lenovo’s removal from the Hang Seng Index might have been premature. Some analysts reckon the company is on the mend.

In its fiscal first quarter, which ended June 30, Lenovo reported a slim net profit of US$5 million, despite the ongoing restructuring costs.

It also stabilized margins in the face of heavy competition in the PC market against Acer, as well as giants Dell and Hewlett-Packard. In addition, the company’s cost-cutting moves have already paid off, with reduced operating losses in overseas markets.

The improved performance prompted Deutsche Bank analyst William Bao Bean to reiterate his “buy” recommendation on Lenovo’s shares in a report titled “Lenovo Group: Gradually turning the corner.”

Still, Lenovo faces numerous obstacles, including increased competition from Dell in China, its mainstay market, as well as pressure to further cut prices elsewhere as it seeks to increase market share.

So although its removal from the Hang Seng Index may sting company pride and hurt its stock in the near term, it’s by no means a sign the company is spiraling downward. In fact, Deutsche Bank reckons that although the next 12 months may be bumpy for Lenovo, the PC maker will ultimately succeed.

-Dan Nystedt, IDG News Service (Taipei Bureau)

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