Lenovo: the next Samsung?

January 25, 2014 Leave a comment

January 24, 2014 12:47 pm

Lenovo: the next Samsung?

Chinese computer maker would need to add competitive edge to its market momentum

One slips on so-so earnings – only $7bn in quarterly profits. The other jumps 3 per cent on a deal that will hurt its bottom line. It isn’t hard to see that the latter,Lenovo, has more market momentum than Samsung Electronics. Both make consumer electronics and tech hardware, from Lenovo’s new server business to Samsung’s chips. Might Lenovo become the next Samsung?

On a size basis, the comparison is still a bit ridiculous. Samsung’s market capitalisation is $160bn; Lenovo’s, $14bn. Samsung’s profits last quarter were 10 times Lenovo’s for the past year. Still, Lenovo’s deal this week to buy IBM’s X86 server business demonstrates that it still has the ambition it showed when it bought Big Blue’s PC business in 2004.

The relatively low price paid – half of sales – reflects theIBM unit’s swing into loss last year. The business will knock about 5 per cent off Lenovo’s full-year earnings per share, including the slight dilution from the shares issued to IBM. The shares’ rise suggests that investors think it can use its lower cost structure to lift profits.

Investors like bold tech stories. Samsung’s success was not born of timidity either. It has never bought in growth as Lenovo has, but has taken risks to move up the value chain. One of the reasons for its unexpectedly poor earnings in the latest quarter was a Won800bn ($738m) bonus paid to employees to mark the 20th anniversary of a strategy. Back then its chairman made a bonfire of 150,000 mobile phones – worth $50m – to make the point he wanted better. Now Samsung is trying to push into software – a challenge for a company staffed by hardware engineers.

Samsung’s shares have risen 20 per cent a year, compounded, for the past two decades. Should Lenovo follow suit, it will take it a little over a decade to reach Samsung’s present size.

Lenovo has momentum on its side. But can it sustain profit growth on a foundation of low-cost manufacture of commodity hardware? Samsung invested aggressively to acquire an enduring competitive advantage – scale – in chips, and from there built a hugely profitable premium phone business. Lenovo needs to find a similar edge.

 

Filed under Macro Trends, TMT Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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