China's Lenovo Group Ltd beat market forecasts on Thursday with its third-quarter net profit thanks to its fast expanding market share.

Lenovo's shares rose sharply to their highest level in more than three and a half years after it reported its results. The shares rose as much as 4.8 percent to hit an intraday high of HK$6.55, the highest level since May 2008.

Lenovo's financial results over the past few quarters have been strong, mainly propelled by an increase in global market share following the acquisition of Germany's Medion and a joint venture deal with Japan's NEC Corp, and strong sales from emerging markets such as China.

The overall PC growth is not that exciting, but why we like Lenovo is really, purely based on its ability to gain market share, said Jonathan Ng, an analyst with CIMB Research in Singapore, who has an outperform rating for the company.

Lenovo's performance in China was also a strong point, analysts said.

Lenovo's performance in China is quite a major factor on why it beat the consensus in the third quarter. It continued to gain market share and its margins there are also the highest compared to the performance in other emerging markets, said Jenny Shih, an analyst with Daiwa CapitalMarkets in Taipei.

China constituted 42 percent of Lenovo's total sales. Its market share in China rose 3.1 percentage points year on year to 35 percent during the reporting quarter, the company said.

It is also doing pretty well in certain mature markets. The United States for example, has gained market share as some commercial PC users switched to Lenovo given concerns over HP's management and strategy, Shih said.

The Beijing-based, Hong Kong-listed company reported a net profit of $153.46 million for the three months ended December, up 54 percent from $99.65 million a year earlier and outpacing the $130.2 million in a poll by Thomson Reuters I/B/E/S. Third-quarter revenue rose 44 percent from a year earlier to $8.37 billion.

Analysts said Lenovo, which last year edged out Dell Inc to rank behind market leader Hewlett Packard Co in PC sales, needs to increase market share in the fast-growing tablet and smartphone sectors as traditional PCs and laptops have become commoditized.

The company has been diversifying into smartphones and tablets with its LePhone and LePad devices, although market share still lags that of major players such as Apple Inc, Samsung Electronics Co Ltd and Chinese companies Huawei Technologies and ZTE Corp.

In the last fiscal quarter, Lenovo shipped 400,000 tablets globally and 6.5 million handsets, including smartphones, executives said on Thursday. Lenovo is now the No.2 tablet provider in China, ranking behind Apple.

For tablets, there isn't a big contender out there to compete with Apple (globally), CIMB's Ng said. If you look at China, Lenovo's brand name is pretty strong.

Lenovo has also launched an online application store called LeGarden and showcased its first smart TV running Google Inc's Android operating system Ice Cream Sandwich in a bid to boost its brand in the sector.

The company said it would launch its smart TV in April, but said the TVs would be sold only in China at the beginning because the company needs to line up content providers and carriers before expanding sales globally.

Despite its moves into other sectors, PCs will remain the company's main business.

We will continue to focus on traditional PCs, CEO and chairman Yang Yuanqing told a teleconference on Thursday. We want to win in this market until we become the leader. I believe traditional PCs will continue to be our core business.

EUROPE, THAILAND IN FOCUS

Lenovo said its profit margin in the third quarter was 11.4 percent, up 0.2 percentage points from a year earlier, though it fell from a quarter earlier due to the shortage of hard drives, which increased costs, it said.

Although challenges to worldwide PC demand remain, such as the pace of global economic recovery and the ongoing debt crisis in Western Europe, and even a hard disk drive supply shortage and cost increases, Lenovo remains optimistic that its growth momentum will continue, the company said in a statement.

In November, a senior Lenovo executive said the company aims to maintain margins in coming quarters even though floods in Thailand have disrupted supply chains for hard drives.

Lenovo, formerly known as Legend, has become one of China's best known brands. It plans to restructure to improve its focus on key markets.

In January, Lenovo said its business will be divided into four regions starting April 2. The regions will be China, Asia-Pacific/Latin America, North America and EMEA (Europe, Middle East and Africa). It currently is organized as mature markets, emerging markets and China.

(Additional reporting by Twinnie Siu; Editing by Chris Lewis and Matt Driskill)

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