Top Chinese computer maker Legend Group disappointed investors yesterday with a weak 1.9 per cent rise in net profit in the key back-to-school quarter as competition squeezed margins.

The company vowed to step up spending on product development to defend its dominant China position from foreign and domestic rivals including US giant Dell Computer, renowned for its low-cost direct sales model. But it warned the spending would dampen profits.

Reflecting the intensifying competition, Legend said gross margins for its first half ended September 30 dropped to 14.88 per cent from 15.02 per cent a year earlier, while net margins dropped to 4.65 per cent from 5.06 per cent.

"The results are on the disappointing side," said Deutsche Bank analyst Fung Ee Lim. "The corporate side was a bit weak, but the main problem is the new businesses that are loss-making."

Lim said investors may be especially concerned about Legend's consulting services and cellphone arms, which the company has billed as future growth engines but which continue to lose money.

Legend said net profit totalled HK$261.16 million (US$33.5 million) in its second quarter, compared with HK$256.27 million (US$32.9 million) a year earlier. Revenues grew 12.2 per cent. The results lagged the average forecast of four analysts surveyed by Reuters for a profit of HK$288 million (US$36.9 million).

To bolster its position, Legend plans to step up research and development (R&D) spending to about 3 per cent of revenue from less than 2 per cent at present, said Chairman Liu Chuanzhi.

"If we don't want to be a mediocre company, this is the time to invest," he told a news briefing. He said increased R&D spending was likely to dampen profits in the short term.

Legend also said it was raising its interim dividend to 2 HK cents per share from 1.8 HK cents last year.

China's PC market is expected to grow by about 15 per cent this year, surpassing Japan for the first time to become the world's largest behind the United States, according to research firm International Data Corp (IDC).

Legend said its desktop PC shipment sales growth of 16 per cent for the six months through September was ahead of overall industry growth, but IDC said it was in line with the market.

Within Legend's PC unit, second-quarter profits from consumer sales rose a strong 73 per cent from a relatively low base last year, Deutsche Bank's Lim said. But profits for PCs sold to businesses, which typically carry better margins, rose a much weaker 2 per cent.

"Fiscal first-quarter results were affected by SARS, but we would have expected a stronger number" in the latest quarter, Lim said. "But it didn't come through, so that was a bit of a worry."

An estimated 12.9 million PCs will be shipped in China this year, compared with 12.7 million in Japan and 51 million in the United States, said IDC analyst Kitty Fok.

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