From China, the Next Great Tablet
Lenovo, the world's fourth-largest maker of personal computers, is deploying a brutal "Protect and Attack" strategy. Why its sortie into iPad territory might just hit the mark.
Like any good magician, Yang Yuanqing knows how to build suspense. First, he shows a visitor how his new creation functions as a basic laptop, which is exactly what it looks like. Surely there is more―and Yang does not disappoint. He suddenly pops the screen clear off the base and -- presto! -- he's holding a sleek, stand-alone tablet computer, complete with its own operating system. "Two systems," the CEO of China-based Lenovo announces with pleasure. "Windows in the base, Android in the screen." His audience of one is duly impressed.
Meet the LePad, as the company is calling it ("Le" stands for Lenovo and, in Chinese, stands for happiness). Yang has huge ambitions for LePad. He figures the device, recently launched in China, will soon grab 10% of the country's tablet sales. Within two years, he says, the share will grow to 20%. The device could be a hit in other markets too; a U.S. debut is slated for this summer.
Lenovo (ticker: 992.Hong Kong) faces plenty of competition. Some 100-plus tablets have been launched by 60 rivals in the past few months, each hoping to chip away at the dominance of the Apple's iPad. But if anyone can muscle into the market in a big way, it may well be Lenovo, the world's fourth-largest manufacturer of personal computers.
CEO Yang Yuanqing figures the LePad will grab 20% of China's tablet market.
Even as growth in the personal-computer market slows, Lenovo has been scarfing up market share -- both in China, where it dominates with a third of the market, and elsewhere around the globe. In each of the past six quarters, it was fastest-growing PC maker of the world's top five, its 16.3% growth rate eclipsing the market's 3.2% decline.
Lenovo's strategy -- which it calls "Protect and Attack" -- is to boost profits in mature markets and China and ruthlessly amass market share in the emerging world. The plan was developed by Yang in 2008, after the company lost huge chunks of market share during the global downturn.
The LePad could play a prominent role in Lenovo's attacking. The hybrid device is not only versatile but attractively priced; at about $1,000 it's in the midrange for laptops, with the tablet coming as a bonus. That should play well in China, developed nations and corporate users in emerging markets. Emerging markets are another story: While tablet sales have hurt laptops in many parts of the world, laptops are still selling better than ever in emerging economies.
Lenovo doesn't have the laptop/tablet market completely to itself. Dell (DELL) has launched its own model, but it's inferior to LePad on some key points. It's chunky when in tablet mode -- the screen folds face-up onto the base rather than detaching -- and it doesn't have Android, which was developed by Google (GOOG), is great for touch-screen devices and has a wide array of available apps.
With many consumers struggling to choose between laptops and tablets. the LePad has "a very good chance" of securing a top spot in world-wide tablet sales after Apple (AAPL), says Richard Doherty of the Envisioneering Group, a digital-media research firm.
As with its other products, Lenovo may have the greatest success with corporate users. The firm is No. 1 in notebooks among large companies and public-sector institutions, thanks in part to the ThinkPad line of laptops, a former IBM brand that has long been a favorite of corporations. Big companies are still in the so-called PC refresh cycle after the launch of Windows 7 in mid-2009; Yang figures there's another year or two left. Lenovo is also going after smaller businesses. This month it began selling PCs at Best Buy (BBY), a good move since the chain accounts for a third of all PCs sold in the U.S., says David Daoud of research firm IDC.
At the moment, Lenovo's operating margins are thinner than those of most rivals -- 2.2% overall, versus 7.3% for Dell. That's a sore point with some investors. But Lenovo is growing much faster than its rivals, and as Yang tells it, profitability is improving nicely. Margins in China are already a relatively fat 5%-plus.
"We're starting to recover in Western Europe and North America. We're getting decent profit margins there -- very similar to China," he says. Now Lenovo has to improve the picture in emerging markets, where the push for market share has produced losses.
The Bottom Line
Lenovo's shares could climb 43% as the company grabs more market share in developing countries and begins to improve profit margins.
Lenovo's stock may look expensive, trading at 22 times estimated earnings for the year ahead. But if you exclude a huge $3.2 billion of net cash, the P/E drops to just 6.7. And Lenovo's earnings are firmly on the rise; they're expected to come in at 2.7 cents per share for the fiscal year that ended in March and 3.8 centsthis year.
Bulls think Lenovo's shares could jump 43% to 6.50 Hong Kong dollars (84 U.S. cents). American depositary receipts are also available, under the ticker LNVGY.
Says James Weir, who manages Guinness Atkinson China & Hong Kong Fund: "If Lenovo can keep its market share in China, and the corporate refresh cycle comes through, there is good value in the stock." For investors, Lenovo could be a LeWinner.
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