Lenovo Minimizes Headwinds With Better Product Mix, Operational Capabilities; Retain HKD 12.60 FVE

Despite the worsening economic outlook, no-moat Lenovo again reported a solid quarter. While we estimate Lenovo’s PC shipment for the quarter ended June dropped more than 10%, the intelligence device group’s revenue was only 2.7% down from the previous year and the operating margin of 7.5% was unchanged. We believe Lenovo was able to maintain PC profitability by expanding sales in the premium segment, and similarly, mobile sales were 21% up from the previous year, driven by the average selling price, or ASP, increase due to the 5G rollout, mitigating the decline in PC revenue. In addition, the infrastructure solutions group achieved solid revenue growth and recorded a profit for three consecutive quarters. Overall, we believe Lenovo’s June quarter numbers show the company is able to minimize the impact of a challenging environment with its resilient business portfolio and operational capabilities. We fine-tuned Lenovo’s earnings forecasts and kept its HKD 12.60 fair value estimate. While we believe Lenovo’s shares are undervalued, we think the bottoming-out of PC demand is necessary for its shares to rebound.