Lenovo's net income predicted to climb 12.9% to US$160m

But weak PC demand poses a threat.

According to CCB International, Lenovo will report 1Q FY14 results in mid-August. We look for sales revenue of US$8.2b and net income of US$160m, up 2.1% and 12.9% YoY respectively, and slightly below the Bloomberg consensus estimates.

Here's more:

We expect its 1Q FY14 OPM to increase 20bp from last year to 2.5% on improving smartphone profitability in China and better economies of scale in its PC division.

Weak PC demand still the biggest overhang. Lenovo’s PC division did well in the previous year and has grown to become the second largest PC vendor across the globe.

Despite the success, we view lackluster PC industry growth in 2013F/2014F will weigh on the company’s overall performance. As such, we remain cautious and expect a mere 2.4% PC shipment growth for FY14F.

Encouraging traction in smart-devices but not good enough. Lenovo has been investing heavily in the Mobile Internet and Digital Home Business Group (MIDH) that develops smart-devices.

The MIDH division smartphone and tablet shipments were up 3.7x and 74% YoY to 29.0m units and 2.2m units in FY13, respectively. We expect the MIDH division to break even in FY14F, with smartphone and tablet shipments to reach 43.0m and 8.0m units.