Lenovo <0992.HK>, the world's No. 4 PC brand, relied on Chinese government-backed demand boost to cut quarterly losses and was wary on its outlook, underlying the fragility of its recovery.

Lenovo's results underscored how the company and rival Dell are suffering from weak enterprise demand, compared to consumer-driven Taiwan's Acer <2353.TW> and the much more diversified Hewlett-Packard .

Lenovo, which is cutting jobs and consolidating its divisions to return to profitability by December, has seen its stock jump 50 percent in recent weeks as it has been one of the main beneficiaries of China's move to encourage consumer spending.

The market's moved a little ahead of itself, said UBS analyst Edward Yen. There's still little evidence of a pick-up in corporate spending, and that's the biggest worry there.

By 2:55 a.m. EDT, Lenovo's shares reversed early losses of almost 7 percent to climb 2 percent in volatile trade, while the broader market <.HSI> rose 1.1 percent.

Lenovo's reliance on corporate demand stems from its purchase of IBM's laptop PC arm in 2005, and it has since shifted its headquarters to the U.S. from Beijing.

The company, also China's biggest PC maker, said the macro environment remains challenging and demand had not yet picked up, especially among corporate customers.

We're still seeing negative growth in many developed countries, so expectations shouldn't be too high right now, Lenovo's Chairman Liu Chuanzhi told reporters on Thursday.

The global PC sector has shown early signs of a recovery in recent months, with shipments in the second quarter of this year falling less than expected, and chipmaker Intel declaring the worst was over for the industry.


Lenovo reported a smaller-than-expected net loss of $16 million in April-June, thanks in part to China's massive stimulus package, stabilizing consumer demand and a slew of cost-cutting measures.

This is its third straight quarterly loss, but is better than market expectations of a $54 million loss and smaller than the previous quarter's $264 million loss.

China still drove much of Lenovo's growth, accounting for about 48 percent of its revenue and led with a 14 percent growth in sales, as the company turned its focus back to its traditional emerging markets stronghold.

Nearly half of all computers sold under a rural subsidy program in China in the first six months of this year carried its brand name, compared to global peers such as HP and Acer, which took less than 1 percent each.

Dell and Asustek <2357.TW> did not sell a single PC under the scheme, according to Chinese government data.

Lenovo's overall revenue fell 17 percent in the first quarter from a year ago as companies froze technology spending, and further hit by rapidly declining prices due to the growing popularity of low-cost netbook PCs.


Some analysts said Lenovo will likely recover faster during the rest of the year due to its pole position in China.

I'm turning more optimistic on Lenovo now and think most analysts will now need to re-look their assessment on the company, said Ellen Tseng, an analyst at Nomura Securities.

I now think Lenovo could return to profitability ahead of its own expectations, and think that if it can carry on with its current momentum, they should be profitable by September.

Lenovo had previously said it expects to return to profit in the third quarter, which ends December 2009. Analysts are more optimistic, with a consensus estimate for a $6 million profit in the current three months and a full-year net profit of $44 million.

Lenovo grew its share of the global PC market in April-June by 0.5 percentage points to 8.7 percent, research firm IDC said, reversing consecutive quarters of falling market share.

(Editing by Anshuman Daga)