China’s Lenovo warns of cost challenges as it sinks to Q1 loss

Despite a 11 percent drop in revenue, Lenovo’s CEO expects the group to turn profitable in two years. (Reuters)
Updated 19 August 2017
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China’s Lenovo warns of cost challenges as it sinks to Q1 loss

HONG KONG: Chinese personal computer maker Lenovo Group warned of higher costs and margin pressure due to shortages of components like memory chips, as it posted its first quarterly loss in almost two years on Friday.
Lenovo, which gave up its title as the world’s largest PC maker to HP in the quarter through June, lost $72 million compared with a profit of $173 million for the same period last year.
It was the company’s first quarterly loss since September 2015 and lagged analysts’ average forecast of a $5.29 million profit, sending the stock down as much as 5 percent to a year-low of HK$4.52 during Friday morning trade.
The outlook for the rest of the year was challenging as component shortages would dive costs higher, possibly forcing the company to raise its selling price to protect margins, executives said.
“Most of the component cost is stabilising except memory ... and the price is still going up,” Lenovo Chief Operating Officer Gianfranco Lanci said on an earnings call.
Memory prices rises would continue “at least until the end of the year,” albeit at a slower rate than the past two quarters, he said, a product of exploding global demand for semiconductors.
Auto industry demand was also pushing up the price of batteries, he said.
While personal computer makers around the world are struggling as consumers switch to mobile devices, Lenovo’s core PC business is declining more rapidly than many of its competitors’.
Lenovo posted a 6 percent decline in PC shipments in the quarter, compared with a 3 percent fall globally. Its PC revenue was flat at $7 billion.
“Overall, it will be very challenging for them to improve their PC performance in the short-term with the component price rise that’s here to stay,” said analyst Mo Jia, of industry consultancy Canalys.
Despite the challenging outlook, Chairman and Chief Executive Yang Yuanqing was upbeat about the prospects for margins and the struggling mobile business.
He pointed to a $110 million sequential improvement in operational pretax income, which he attributed to improvement in the mobile and data center businesses.
“Not only did this gave me more confidence we will turn around our mobile business in the second half of FY2018, I think the entire Lenovo is entering a new phase of growth,” he said.
Lenovo has struggled with mobile since acquiring Motorola in 2015, and as Chinese rivals such as Huawei and Xiaomi leapt to global prominence.
Losses from its mobile business narrowed and revenue rose 2 percent to $1.75 billion in the quarter. It was the only unit to post a rise in revenue, although it still accounted for just 17 percent of the total. Total revenue was flat at $10 billion.
To protect margins, Yang said Lenovo would focus more on fast-growing premium products such as PCs tailored for gaming and millennials.
It had dropped low-margin deals such as that with Google’s Chromebook, and would raise selling prices if component costs continued to climb.
Lenovo’s data center business group recorded an operational loss of $114 million, versus a loss of $31 million a year ago. Despite a 11 percent drop in revenue, Yang said he expected the group to turn profitable in two years.
— Reuters


Oil prices fall on expected output rise after OPEC deal

Updated 25 June 2018
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Oil prices fall on expected output rise after OPEC deal

SINGAPORE: Brent crude oil prices fell over 1.5 percent on Monday as traders factored in an expected output increase that was agreed at the headquarters of the Organization of the Petroleum Exporting Countries (OPEC) in Vienna on Friday.
Brent crude futures, the international benchmark for oil prices, were at $74.21 per barrel at 0343 GMT, down 1.8 percent from their last close.
US West Texas Intermediate (WTI) crude futures were at $68.40 a barrel, down 0.3 percent, supported more than Brent by a slight drop in US drilling activity.
Prices initially jumped after the deal was announced late last week as it was not seen boosting supply by as much as some had expected.
OPEC and non-OPEC partners including Russia have since 2017 cut output by 1.8 million barrels per day (bpd) to tighten the market and prop up prices.
Largely because of unplanned disruptions in places like Venezuela and Angola, the group’s output has been below the targeted cuts, which it now says will be reversed by supply rises especially from OPEC leader Saudi Arabia. Although analysts warn there is little space capacity for large-scale output increases.
“Several ministers suggested that (rises) would correspond to a 0.7 million bpd increase in production,” said US bank Goldman Sachs following the announcement of the agreement, although it added that were risks “that Iran production may be even lower than we assume” and that its output could fall further due to looming US sanctions.
Still, Britain’s Barclays bank said OPEC’s and Russia’s commitments would take “the market from a -0.2 million bpd deficit in H2 2018 to a 0.2 million bpd surplus.”
Energy consultancy Wood Mackenzie said the agreement “represents a compromise between responding to consumer pressure and the need for oil-producing countries to maintain oil prices and prevent harming their economies.”
In the United States, US energy companies last week cut one oil rig, the first reduction in 12 weeks, taking the total rig count to 862, Baker Hughes said on Friday.
That put the rig count on track for its smallest monthly gain since declining by two rigs in March with just three rigs added so far in June, although the overall level remains just one rig short of the March 2015 high from the previous week.