SMARTPHONES: Lenovo Eyes Friendlier China as Foreign Investors Flee

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Bottom line: Lenovo’s smartphone business could ultimately get spun off and separately listed in China, as its continued weak performance could force out CEO Yang Yuanqing later this year.

Lenovo posts first annual loss in 6 years

There’s really not much positive to say about the latest earnings report from struggling PC and smartphone maker Lenovo (HKEx: 992), which has just posted its first annual loss in 6 years. Perhaps we could find an upbeat note in word that the company is on track to achieve $1.35 billion in annual cost savings, though even that’s related to widespread layoffs and other cuts related to its faltering businesses. One might also find rays of hope in Lenovo’s admission that its earlier purchase of Motorola has largely failed, or that it might consider a re-listing in China.

But the bottom line is best displayed in the company’s stock, which has lost nearly two-third of its value since a peak last May and now trades at its lowest level in 5 years. The company has bounced back from similar setbacks in the past, most notably a after it had difficulty integrating its landmark purchase of IBM’s (NYSE: IBM) PC business in 2005.

But one could argue there are several key differences between that comeback and the current situation. Most notably, IBM was still a world leader in PCs when IBM purchased the business back in 2005, and turning the unit around was mostly a matter of cost reduction and business integration. By comparison, Motorola was a has-been with little or no proprietary technology when Lenovo purchased the brand for $2.8 billion in 2014.

Lenovo CEO Yang Yuanqing had hoped to resurrect the Motorola brand to become Lenovo’s flagship in smartphones, following the disappointing performance of its own low-end Lenovo brand models. Now Yang is saying Lenovo had problems integrating Motorola into its own business, though he is still saying he doesn’t regret the decision to buy the faded brand. (English article)

Lenovo’s overall smartphone sales dropped by about 35 percent in the first quarter, led by an 85 percent plunge in its home China market, according to various sources. That plunge continues trends from last year’s fourth quarter; but more worrisome is a concurrent drop in Lenovo’s core PC business that is still its main breadwinner and an area where it’s still considered a global leader. Lenovo’s PC shipments fell 7 percent in the first quarter, slightly outperforming a 9.6 percent drop for the broader global sector, according to Gartner.

Swing to Loss

All that negative news, which included numerous charges related to the company’s ongoing overhaul, led Lenovo to report a $128 million loss for its latest fiscal year that ended in March, reversing an $829 million profit a year earlier. (company announcement; English article; Chinese article) Revenue was also weak, dropping 3 percent to $44.9 billion, though some of that was due to currency fluctuations.

Yang was quite direct about his shortcomings, saying that he let down investors. That’s probably an understatement, and I’ve previously called for Yang to step down to make way for younger new leadership with fresh ideas that can move the company forward into the new world of mobile computing devices. (previous post) I actually have quite a bit of admiration for Yang, as he built Lenovo into China’s first global high-tech brand. But he’s too firmly rooted in a past era, which is evident in the company’s failed mobile strategy.

In a final intriguing footnote to the Lenovo story, CFO Wang Wai Ming said Lenovo is looking at ways to raise shareholder value and would consider a listing in another market as one possible option. Some media interpreted that as a potential de-listing plan from Hong Kong, though such a move seems a bit radical.

Instead, I would expect that Lenovo might split off one or more of its units for a separate listing in China, similar to what companies like real estate services firm SouFun (NYSE: SFUN) and telecoms equipment maker ZTE (HKEx: 763; Shenzhen: 000063) have been doing. The smartphone unit would be the most likely candidate for such a separate listing, since Chinese investors are far less concerned about a company’s financial health than their global peers, and seem more interested in things like “famous brands”.

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