Legend reports strong yearly gains, clouds ahead

Legend Holdings, China's largest PC maker and the biggest seller of PCs in Asia, saw its revenue soar 56 percent for its 2001 fiscal year, which ended March 31, boosting net income 78 percent, the company announced Wednesday.

Demand for PCs grew strongly in China during the period, bucking the global downward trend in the PC business, Legend said in a statement, attributing the growth to "Internet fever" in China. The company said turnover of Legend computers and non-PC Internet access devices grew 82 percent in China during the year. However, Legend executives and analysts expect to see slower revenue growth in the year ahead, and the slowing world economy is hurting Legend's motherboard and printed circuit board business.

The upward trend in sales took revenue to HK$27.2 billion (US$3.5 billion) from just under HK$17.45 billion in fiscal 2000. Net income grew to HK$860 million in fiscal 2001 from just under HK$481 million in the previous year. Earnings per share were HK$0.114, up from HK$0.067 in fiscal 2000.

Some Hong Kong-based financial analysts said the results were near their forecasts but prospects for the coming year are less sunny. Johnny Chan, a Hong Kong-based analyst at investment bank J.P. Morgan Chase, said 2001 net income was just below his own expectation of HK$0.12.

For the current fiscal year, Legend is predicting PC and Internet access device sales -- which made up 60 percent of Legend revenue in the fiscal year -- will rise to 4 million units, a 53 percent gain from 2.6 million units in the year just ended, analysts said.

Even that prediction may be overly optimistic, said Kelvin Chang, an analyst at Daiwa Securities in Hong Kong. Daiwa is predicting those sale to reach just 3.6 million units in the coming year. Working from such a high sales base, it is difficult to keep achieving high growth. Plus, competition in China from both domestic and foreign PC brands is growing more fierce, he said.

At the same time, the non-PC Internet access devices that Legend has pushed in recent years are not catching on strongly and are unlikely to do so in the next year.

"At the moment, Chinese consumers still prefer to buy a PC rather than just an Internet access device," Chang said.

Meanwhile, the worldwide slowdown in PC sales is hitting Legend's motherboard and printed circuit board business, which supplies these components to Legend's PC operation as well as other PC makers. The company reported revenue in the motherboard segment grew only 21 percent year-over-year.

"In terms of the motherboard business, you're competing against the Taiwanese motherboard makers in the global market as well as the China market, and they are pricing very aggressively," J.P. Morgan Chase's Chan said.

Gross margins in this part of Legend's business dropped from 32 percent to 22 percent just from the third to the fourth quarter of fiscal 2001, according to Chang.

The company's Internet access business, which still represents less than 1 percent of its revenue, lost more than HK$96 million last year. Legend operates a Chinese Internet portal, FM365.com, and sells PCs with built-in access to an Internet service it offers in cooperation with China Telecommunications (Group) Corp.

Despite reaching a deal earlier this month with America Online Inc. aimed at bolstering its service offerings, the Internet business is likely to remain in the red for some time, though its prospects are fuzzy at this point, Chang said. No detailed business plan for the AOL venture has been provided, he said. "We definitely need to have more information about the AOL cooperation and joint venture," Chang said.

In midday trading Thursday on the Stock Exchange of Hong Kong, shares of Legend (code: 992) had dropped HK$0.350 or 7 percent to HK$4.625.

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