Lenovo announced management team changes and restructuring plans to cut costs and focus on low-price products. However, we are concerned about its high-cost structure and expect negative operating margin in the next three quarters. We expect Lenovo to lose US$187 mn in 4Q FY09 due to US$120 mn restructuring costs.
Lenovo still has US$1.8 bn in cash. However, its cash position will suffer due to continuous negative profit and additional cash needed for operations. Intangible assets worth US$1.86 bn is another concern, although Lenovo claimed there was no need to revise numbers currently.
We maintain our negative view on Lenovo. The concern on decreasing cash position and huge intangible assets will mean further pressure on its share price. It has indicated for the first time that it will increase outsourcing on consumer/low-price models to bring down costs, which may benefit Taiwan‘s manufacturers.
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