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Lenovo's away game counters China weakness

People walk past a Lenovo shop in Hefei, Anhui province, in this October 18, 2013 file photo. REUTERS/Stringer/Files

By Paul Carsten

BEIJING (Reuters) - China's Lenovo Group Ltd, the world's biggest personal computer maker, showed why it is expanding overseas and into smartphones as it reported its slowest annual profit growth in five years.

Lenovo is especially pushing smartphones, to offset a decline in its once-mainstay personal computers (PC) as consumers switch to mobile devices.

Lenovo, which competes with Apple in the U.S., agreed to acquire IBM Corp's low-end server business and Google Inc's Motorola Mobility smartphone unit in two separate deals worth a total of $5.2 billion in January.

Chief Executive Yang Yuanqing said he hoped those deals, which require U.S. approval, would not be impacted by tensions between Beijing and Washington over the U.S. indictment of five Chinese military officers for cyber-theft against American companies.

"I don't think (the cyber-theft case) will impact Lenovo's business," said Yang. "For a long time we've operated not just in China but also in the U.S. and other global markets. We have always been a transparent company, a trusted company, we've never had any issue with the government."

"Regarding the approval of the (IBM and Motorola Mobility) deals, we definitely hope it will not have an impact," Yang said in a telephone interview.

The company, which became a global brand in 2005 after buying the PC unit of IBM, wants to buy the low-end server unit to combat slow PC sales.

The majority of Lenovo's revenue growth in the twelve months to end March, came from overseas markets: revenues in Europe, the Middle East and Africa (EMEA) and the Americas each climbed roughly 30 percent, to account for 83 percent of total revenue growth.

Net income for the year ending March rose 28.7 percent to $817.2 million, a record high and in line with analyst estimates of $819.7 million. Growth in China, which accounts for almost two-fifths of its $38.7 billion total revenues, was 1.3 percent.

Lenovo's success in emerging markets spurred confidence in the company's shares, which were up 3.4 percent by close of trading on Wednesday versus a 0.01 percent rise in the Hang Seng Index.

The company said PC profit margins had improved in China even as the market slowed. In the EMEA region it reported 24 percent growth in PC shipments and the Americas saw 27 percent growth.

Lenovo still faces challenges with smartphones, despite shipments growing 72 percent year-on-year to more than 50 million units globally. Margins are very low, and China, where the company shipped 89 percent of its handsets in the fiscal year, is one of the world's most competitive markets.

"The China smartphone industry is very difficult to make money from, if you look at most Chinese players they're not making money at the moment," said Jean-Louis Lafayeedney, a Hong Kong-based technology analyst at JI Asia, an affiliate of Societe Generale.

"The fact that Lenovo is going overseas with Motorola is probably not a bad thing and may come at a good time actually," he said.

Lenovo aims to sell 100 million smartphones and tablets in the coming year, Chief Executive Yang Yuanqing said, with smartphones accounting for 80 million units should the Motorola deal be finalised.

"Overseas there are not as many competitors, that's why we want to do the Motorola deal," said Chief Executive Yang Yuanqing. "In mature markets there's not as much competition."

The company has stressed the Motorola and IBM acquisitions will weigh on finances in the near term, and the loss-making businesses could take three to five quarters to make them profitable.

Yang said Lenovo would focus for the time being on the U.S. acquisitions and would not be looking for other sizeable purchases.

"I don't think we have the energy to buy big companies or big businesses, but small business acquisitions are still possible," Yang said.

(Additional reporting by Donny Kwok in HONG KONG; Editing by Christopher Cushing and Elaine Hardcastle)