Lenovo booted from Hang Seng Index

Lenovo booted from Hang Seng Index

Lenovo has been removed from the main index of the Hong Kong stock exchange, the most recent sign of trouble for the company.

Lenovo Group hasn't had an easy time since its takeover of IBM's PC division, and its removal from the main index of the Hong Kong stock exchange is just the most recent sign of trouble for the company.

The world's third largest PC vendor will formally be removed from the Hang Seng Index on September 11, according to HSI Services, and replaced by Taiwanese mobile phone maker, Foxconn International Holdings.

Losing its place on the index won't affect Lenovo's operations, but it could send its stock lower. And it's a small humiliation for the company, which was expected to be a major technology component of the Hang Seng.

Many investors adjust their portfolio of stocks based on major indexes, such as the Dow Jones Industrial Average and the Hang Seng. The removal of a share from a major index normally prompts at least some people to sell, and buy shares in the replacement company.

It also highlights a perceived decline in the company's business ever since it took over IBM's PC division last May.

In March, Lenovo announced a $HK543 million ($US69.8 million) restructuring scheme, including plans to lay off 1000 employees and move its corporate headquarters from Purchase, New York, to Raleigh, North Carolina due to market pressures in its desktop business.

Shortly thereafter, the company turned in weak fiscal fourth quarter results, turning to a loss of $HK903 million despite sales of $HK24.4 billion.

It has also watched its lead over fourth place rival, Acer, erode. Lenovo's share of global PC market revenue rose to 7.7 per cent in the second quarter of 2006, up from 7.5 per cent in the same time last year. But Acer's share leaped to 5.4 per cent, up from 4.3 percent a year ago, according to market researchers at IDC.

Despite its woes, Lenovo's removal from the Hang Seng Index might have been premature. Some analysts reckon the company is on the mend.

In its fiscal first quarter, ended June 30, Lenovo reported a slim net profit of $US5 million, despite the ongoing restructuring costs.

It also stabilised margins in the face of heavy competition in the PC market against Acer, as well as giants Dell and HP. In addition, the company's cost-cutting moves have already paid off, with reduced operating losses in overseas markets.

The improved performance prompted Deutsche Bank analyst, William Bao Bean, to reiterate his buy recommendation on Lenovo's shares in a report titled: Lenovo Group Ltd: Gradually turning the corner.

Still, Lenovo faces numerous obstacles including increased competition from Dell in China, its mainstay market, as well as pressure to further cut prices elsewhere as it seeks to increase market share.

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