We've discussed previously getting in on tech companies in China. The potential is simply too great to pass up. Asia-Pacific investors are getting more bullish on China, boosting their OW in China to the second highest level on record since 2005. Not only that, a slowing China economy is about to get a $1 trillion stimulus. Stabilizing the Chinese economy would lift most emerging-market equities, most notably in key partner nations like Hong Kong, Brazil, and Indonesia.
But the path for the future is technology. A large population with increasing demand for technology and innovation is the ideal spot for companies to capitalize on growth. One such company poised to reap benefits from the whirlwind is Lenovo (LNVGY.PK).
Who Is Lenovo?
Lenovo is China's largest PC maker, and for a population of over 1 billion that's quite a market share. It is estimated that by the end of 2012, this company will have surpassed Hewlett-Packard (HPQ) as the world's largest personal-computer producer, serving customers in over 160 countries. The company currently sells one in three PCs in China, and its share of global PC sales jumped to 14% in 2011 from 10% the previous year.
The company has been focusing on PCs and about 93% of its $30 billion annual revenue comes from computers. That doesn't seem to be enough for the company, as it is now branching out to include other products such as tablets and mobile devices. Back in 2005, it bought out IBM's (IBM) ThinkPad business and will have very little trouble quickly producing a creditable contender for Apple's (AAPL) iPad.
Is HP Out?
HP is still clawing its way back from what is affectionately referred to as the "Leo Apotheker debacle." Credited with the company's loss of over $30 billion in market capitalization, the decision to make this man the chief executive officer was the beginning of a rapid decline for the technology titan.
To be fair, Apotheker attempted to model HP after then-successful competitor IBM, which emphasized innovation in order to differentiate its products. With such a diversified global reach, Apotheker seemed almost scared into the decision to jump ship from making PCs, cutting off the majority of its service contracts with businesses, and instead focus on several hardware and software projects at the same time.
It didn't take investors long to react. Almost immediately, the company's stock plummeted and kept on falling, losing about 40% of its value. Apotheker was subsequently removed. Today, however, under the steady hand of newly appointed CEO Meg Whitman, the stock has regained some of its past luster, selling around $17.25 a share.
Whitman has also shifted focus to the higher-margin cloud computing arena. This will be beneficial to HP in its competition with Lenovo, which is attempting to re-brand itself in order to bolster its appeal to Chinese consumers.
What Will Happen
Lenovo is gearing up for a sizable campaign push using the English slogan "Lenovo: For those who do." Although its business model is based on the manufacture and distribution of IT products, its products include laptops, desktops, tablets, and smartphones. Therefore, it makes sense that the company wants to boost its image with consumers -- these are consumer-driven products.
According to MSN Money:
The company's American depositary receipts trade at 12 times fiscal 2013 profit, vs. peers' 9 to 10 times. While over past three months Chinese PC demand has slowed from double digits to 5%, count on a 2013 recovery, as Chinese broadband service becomes more widespread and affordable.
Previously mentioned was Whitman's research investment in cloud computing technology. Last week, Lenovo announced the acquisition of Stoneware, to enhance and expand its cloud computing solutions.
Consider now the power of these two companies combined. With the global reach of the second (soon to be the first) largest PC seller in the world, with a line of products that extends to mobile devices and tablets, a solid support system of cloud computing would all but crush any competitive movement. Moreover, if the company continues to maintain a stranglehold on a population as expansive as China's, as well as capitalize on its already growing relationship with other emerging markets, it would require a hefty push by any company to present itself as a viable competitor.
To quote the article:
With today's typical technology user carrying multiple devices, the PC Plus era is here, and Lenovo is aggressively expanding its product offerings and capabilities to help people and businesses connect across any device to the content and communities that matter most to them. Customers simply want a better way to connect their PC with their tablet with their smartphone, and with Stoneware, Lenovo aims to help them get there.
While Lenovo is well-known in Asia, its brand isn't seen as a status symbol. There are some analysts who believe that it will be more difficult for Lenovo to completely revamp its image in China, since its reputation and image are already firmly engrained in the minds of consumers. To them I simply point to the plethora of examples of companies who have salvaged themselves by a strategic ad campaign (for example: T-Mobile's woman in pink, or the supremely effective single question from Verizon: "Can you hear me now?").
HP is far from "out." With the strength of Whitman's leadership, I see some positive movement on the horizon. However, one cannot neglect the growing trend of emerging market investments, particularly China. Companies are increasingly putting focus on the booming mobile market in smartphones, tablets, and e-readers. Those that can provide a compatibility across devices, and do so with a growing appeal in the eyes of consumers will truly prosper.