Lenovo Group Ltd's smartphone business on the Chinese mainland is about to turn its first profit, enabling the company to expand margins even while funding a handset push in emerging markets, Chief Executive Officer Yang Yuanqing said.

"Very soon you will see we'll start to make money in the China smartphone area," Yang said in an interview at company headquarters in Beijing last week. "We will improve our profit not just in absolute dollars, but the pretax income ratio as well."

Yang is under pressure to maintain profit growth after the costs of that expansion snapped Lenovo's streak of 12 straight quarters with net income growth of at least 25 percent.

The company's net income is forecast to gain 24 percent in the year ending March 31, and 22 percent next fiscal year, according to the average of 18 analysts' estimates compiled by Bloomberg. Those estimates compare with a 73 percent gain last year.

The projection for slowing profit growth is largely because of the company's expansion of smartphones out of China into markets where it lacks home-field advantage, said Alberto Moel, an analyst at Sanford C Bernstein & Co.

Lenovo, which introduced its first touch-screen handset on the mainland in 2010, in the past six months expanded sales to Russia, India, Indonesia, Vietnam and the Philippines.

"They are moving into markets where the costs of starting up are higher," Moel said. "As they grow unit shipments, the fixed costs are growing. They are going to run out of ability to maintain their margins."

Yang said Lenovo can boost its pretax margins by one percentage point in the next three years, to more than 3 percent, from 2.4 percent recorded in the September quarter.

"You have to invest in new areas but meanwhile you must manage the profit growth as well," Yang said. "Even though we will further invest in new areas, we are still committed to our shareholders."

Growth of 13 percent in the three months ended Sept 30 was the slowest pace since the first quarter of 2010.

"The profit expectations in the stock that are being baked in are for 20-plus percent growth numbers this year and next, and I'm skeptical of that," Moel said.

He estimates growth in net income will slow from a 23 percent gain this year to a 14 percent increase next year, hitting $692 million.

Yang maintained profit growth in a stagnant PC industry by expanding market share. The company, which acquired International Business Machines Corp's PC unit in 2005, accounted for 15.7 percent of global shipments in the third quarter, overtaking Hewlett-Packard Co's 15.5 percent, market-research firm Gartner Inc said in October.

Yang has said he intends to use that dominant position in PCs to expand in mobile devices, including smartphones and tablet computers. Lenovo vaulted to second place in China's smartphone market in the second quarter from seventh place the previous quarter, market researcher IDC said in August.

"If we cannot improve our existing business like smartphones in China, we will not have the money to invest in new areas like smartphones in other emerging markets," he said.

Lenovo still has room to boost profitability, according to BOCI Research Ltd analyst Geng Yang, who forecast a 25 percent gain in net income for the fiscal year ending March 2014 to $800 million.

"I believe in Lenovo's ability in smartphones and PCs," BOCI's Yang said. "They are still in a fast growth period."

(HK Edition 01/08/2013 page2)