Lenovo wants to establish international leadership is not difficult

China days ago for Xinhua Far East Rating Rating review of Lenovo's acquisition of IBM's personal computer business of Lenovo Group, confirmed the main credit rating of A, but the rating outlook to negative.

Xinhua Far East believes that during the review, Lenovo continued strong performance in the Chinese market, a smooth transition and better than expected performance in the international market to alleviate some of the concerns of the company's position. However, considering the risk of the company's financial position and uncertainty, and the challenge for the establishment of international leading position in the fierce competition in the personal computer market, Xinhua Far East the rating outlook to negative.

Xinhua Far East pointed out that Lenovo has a leading position in the personal computer market China, while the strong performance of the market is very important for its global strategy, because the expansion of this will produce a continuous cash flow to support its overseas business. 2005, Lenovo's market share ranks first in China, ranking third in the international market. In the 2004/05 fiscal year, Lenovo reported a turnover of HK $22 billion 600 million, net profit of HK $1 billion 100 million. In the three quarter ended December 2005, Lenovo benefited from strong domestic sales, continued growth in sales, and produced a stable net cash inflow from operations.

Xinhua Far East also affirmed the positioning of Lenovo's clear international strategy, as well as by mergers and acquisitions IBM PC business generated synergies. By strengthening product mix and customer base, expanding the global sales network, improve the management level, as well as technology transfer, Lenovo has begun to gradually achieve synergies from the acquisition. I believe that if Lenovo can effectively implement its international expansion strategy, the company will benefit from its domestic market position will also be consolidated.

However, Lenovo's acquisition of most of the bank loans and the issuance of new shares to raise funds, which makes it bear a lot of debt, the balance sheet has deteriorated. In December 2005, even if only bank loans, Lenovo's total debt / capital ratio has been 2004 years of extremely low financial leverage rose to $29.1%.

Xinhua Far East financial structure of the company that is uncertain, there is the possibility of rising debt ratio in this difficult period, mainly with Lenovo to strategic investors to issue a large number of convertible preferred stock, the preferred shares can be redeemed, and quarterly cash dividend payable. Considering this, the Lenovo adjusted total debt / total capital ratio rose to 40.1% in December 2005, its long-term support depends on the operating performance, the financial structure is uncertain, especially in the case of adverse market conditions. At the same time, the company's cash generating ability is strong, in a net cash position, which gives it a certain degree of financial flexibility, and can provide a buffer in difficult times.

Xinhua said the association is facing severe challenges in the highly competitive international PC market. In addition to China, the company is very weak in other markets, so that in the three quarter ended December 2005, the EBIT yield fell from a year earlier in the year of 4.1% to $2.1%. It will take time and energy for the company to improve its international market competitiveness. However, Lenovo has paid a lot of effort to promote its products in overseas markets, and began to implement the strategy to enrich the product mix, for the rapid growth of emerging markets and small and medium enterprises market.

Xinhua Far East said, will continue to assess the progress of Lenovo to realize the potential synergies and improve its global market position, influence and track Lenovo business integration of its future business and financial performance.