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Lenovo annual profit up 1 percent, missing forecasts, amid China smartphone competition

A woman tries a Lenovo tablet on display during a news conference announcing the company's annual results in Hong Kong May 21, 2014. REUTERS/Bobby Yip

BEIJING/HONG KONG (Reuters) - Lenovo Group Ltd <0992.HK>, the world's biggest PC maker by sales, said on Thursday its annual net profit rose 1 percent to $829 million, slightly below analyst expectations, as intense competition in the Chinese smartphone market eroded margins.

Analysts had forecast a net profit of $857 million.

Revenue during the 2014/15 financial year rose 20 percent to $46.3 billion as Lenovo expanded its share of the shrinking PC market to one-fifth. In the fourth-quarter alone, revenue rose 21 percent to $11.3 billion.

Lenovo said PC sales, by far the group's largest business, rose across all geographic regions but targeted Europe in particular as an area of potential growth. PC sales to businesses rose 3 percent year-on-year despite a 3 percent drop in the broader market, it added.

Speaking to reporters in Hong Kong on Thursday, Yang acknowledged Lenovo's smartphone business was flagging on its home turf, a slowing market characterized by intense competition and razor-thin margins.

Industry analyst group IDC said last week smartphone shipments in the world's most populous country shrank for the first time in six years as the market became saturated.

Yang said the company needed to improve profitability in China after the smartphone division's performance crimped Lenovo's overall operating margin in China.

"We have encountered bigger challenges in China during the past few years," Yang said. "Our advantage was at the carriers sales channels in the past, but now we need to rebuild our retail and online sales channels."

Lenovo, whose phones are selling well in markets outside China, recently launched a sub-brand called ShenQi that is sold only online in a bid to attract young, price- and fashion-conscious buyers and ward off Internet-based rivals like Xiaomi Inc (XTC.UL).

Lenovo has been expanding into enterprise computing and smartphones to offset the decline in PC sales globally. The Beijing-based firm closed in October its $2.1 billion acquisition of IBM's low-end server unit and also its $2.9 billion purchase of Motorola.

The company said both the IBM unit and Motorola were "on track to deliver their targets", with Motorola, which re-entered the Chinese market in January, set to turn profitable within 4 to 6 months. The American handset maker accounted for 7.8 million out of Lenovo's total 18.7 million mobile units sold during the quarter.

Yang also downplayed reports that the U.S. Navy would replace its IBM low-end servers out of cybersecurity concerns following the unit's transfer to a Chinese owner. He said the matter could be resolved and would not affect Lenovo's business.

"Lenovo is trusted and respected worldwide and our PC business has also expanded globally including in the U.S. government and army. We haven't heard such complaints...We are willing to communicate with the U.S. government to solve problems."

After beating earnings expectations in consecutive quarters, Lenovo shares have risen nearly 50 percent to HK $13.6 in the past 12 months, outpacing the 23 percent gain in the broader market.

(Reporting by Gerry Shih in Biejing and Yimou Lee in Hong Kong; Editing by Miral Fahmy/Mark Heinrich)