Company Reports

After fine-tuning Lenovo’s earnings forecasts, we keep our HKD 12 fair value estimate and believe shares are undervalued. While the timing of our forecasts for the infrastructure solutions group, or ISG, segment’s return to profitability has been delayed by a year to fiscal March 2026—due to sluggish recovery in server shipments and deteriorating product mix—we raise our operating margin assumption for the intelligent device group, or IDG, segment as we believe the PC product mix will improve more than we had previously expected over the next two years. As a result, we lower our forecast for Lenovo’s fiscal March 2025 operating income by 8%, but the revision to fiscal March 2026 is limited. We believe the market underestimates the pickup in replacement demand and product mix improvement starting in late 2024. Lenovo’s share price is down more than 20% from its recent peak earlier this year, mainly on concerns about rising geopolitical risks. As North America accounts for about 20%-25% of Lenovo’s PC shipments, we believe the current share price implies Lenovo will substantially lose market share in the United States, which we think is overly pessimistic.

Lenovo’s acquisition of IBM’s ThinkPad PC business in 2005 has helped propel the company to be a leader in the PC market with 24% global market share. The successful integration of the ThinkPad business has also enabled Lenovo to increase its commercial-related sales, which currently make up 60% of its PC sales, as well as stabilize its PC margins in recent years. We expect PC sales to continue to make up around 70% of overall sales, while the segment’s profit margins should remain stable, given less intense competition at the higher end of the PC market.

We raise Lenovo’s fair value estimate to HKD 12 from HKD 10.50, based on better visibility of a recovery in PC demand beyond second-half 2024. While Lenovo’s September-quarter revenue of USD 14.4 billion and operating income of USD 5.1 billion were in line with our expectations of USD 14.2 billion and USD 5.0 billion, the operating margin of the intelligent device group, in which PCs account for 60% of revenue, improved to 7.4% from 6.3% in the previous quarter due to lower promotional expenses as inventory adjustments were completed. This operating margin is close to the historical high of 7.7%, indicating the product mix is better than in the past due to high-end PC demand and we expect the product mix to improve further as replacement demand picks up in second-half 2024. While we slightly lower our earnings forecasts for fiscal 2024 (ending March 2024) and 2025 due to the prolonged inventory correction and higher research and development expenses for servers, we raise our PC average selling price and operating margin assumptions from fiscal 2026, which is the reason for the increase in our fair value estimate. We believe Lenovo’s shares are undervalued as the market is less confident about the PC market recovery in the medium term.

Lenovo’s acquisition of IBM’s ThinkPad PC business in 2005 has helped propel the company to be a leader in the PC market with 24% global market share. The successful integration of the ThinkPad business has also enabled Lenovo to increase its commercial-related sales, which currently make up 60% of its PC sales, as well as stabilize its PC margins in recent years. We expect PC sales to continue to make up around 70% of overall sales, while the segment’s profit margins should remain stable, given less intense competition at the higher end of the PC market.

Although the weaker-than-expected loss at the server business disappointed the market, we believe Lenovo’s fundamentals are not as bad as the numbers look, and the PC business is in the recovery phase from the inventory adjustment, as we had expected. While we lower our operating income forecasts for fiscal 2023 (ending March 2024) and fiscal 2024 due to sluggish server demand, slightly lower margin for PCs, and higher financing costs due to higher interest rates, we raise our PC shipment assumptions from late 2024 onward as we are more confident that replacement demand will pick up. As a result, we maintain no-moat Lenovo’s fair value estimate of HKD 10.50 and believe its shares are undervalued.

Lenovo’s acquisition of IBM’s ThinkPad PC business in 2005 has helped propel the company to be a leader in the PC market with 24% global market share. The successful integration of the ThinkPad business has also enabled Lenovo to increase its commercial-related sales, which currently make up 60% of its PC sales, as well as stabilize its PC margins in recent years. We expect PC sales to continue to make up around 70% of overall sales, while the segment’s profit margins should remain stable, given less intense competition at the higher end of the PC market.

Despite Lenovo’s lower-than-expected profitability in the March quarter, we maintain our fair value estimate at HKD 10.50. We are somewhat disappointed that the operating margin of the IDG segment, which is mainly PCs, fell to 6.7% from 7.3% in the previous quarter, and the company expects an even lower profitability in the June quarter. However, we note that Lenovo has reduced its inventory by 15% from three months ago, suggesting that the lower profitability is due to the incentives paid by the company to prioritize inventory reduction in the off-season. As management expects the inventory digestion in the channel to be completed by the end of this quarter, we expect Lenovo’s profitability to improve from the September quarter.

Lenovo’s acquisition of IBM’s ThinkPad PC business in 2005 has helped propel the company to be a leader in the PC market with 24% global market share. The successful integration of the ThinkPad business has also enabled Lenovo to increase its commercial-related sales, which currently make up 60% of its PC sales, as well as stabilize its PC margins in recent years. We expect PC sales to continue to make up around 70% of overall sales, while the segment’s profit margins should remain stable, given less intense competition at the higher end of the PC market.

While Lenovo’s December quarter revenue was down 24% year over year due to weak PC shipments, we are encouraged that the company maintained solid profitability. The operating margin of 4.9% in the December quarter was only slightly lower than 5.0% in the September quarter and up from 4.6% in the year-ago quarter, due to the solid margin expansion in the server business and the company’s cost-saving initiatives, which are impressive in a challenging environment. We expect the March quarter to be the bottom of Lenovo’s fundamentals due to the low seasonality and expected restructuring, but we believe that most risk factors are already priced in. We maintain our fair value estimate of HKD 10.50, which corresponds to 11 times P/E and 3.2 times price/book on a fiscal 2022 basis.

Lenovo’s acquisition of IBM’s ThinkPad PC business in 2005 has helped propel the company to be a leader in the PC market with 24% global market share. The successful integration of the ThinkPad business has also enabled Lenovo to increase its commercial-related sales, which currently make up 60% of its PC sales, as well as stabilize its PC margins in recent years. We expect PC sales to continue to make up around 70% of overall sales, while the segment’s profit margins should remain stable, given less intense competition at the higher end of the PC market.

Despite the headwinds, Lenovo reported another impressive quarter. Although September quarter revenue was 4.4% down from the previous year, its operating income was up 4.2%, exceeding our expectations. While we cut Lenovo’s fair value estimate to HKD 10.50 from HKD 12.60 due to the stronger U.S. dollar and lower PC shipment outlook, we believe the market is underestimating the resilience of Lenovo’s business portfolio. We acknowledge Lenovo’s shares lack a catalyst for the meantime as the recovery of PC demand will likely be slower than for other IT products. However, we view most risk factors are priced in as Lenovo’s price/earnings and price/book ratios are at the bottom of its historical range.

Lenovo’s acquisition of IBM’s ThinkPad PC business in 2005 has helped propel the company to be a leader in the PC market with 24% global market share. The successful integration of the ThinkPad business has also enabled Lenovo to increase its commercial-related sales, which currently make up 60% of its PC sales, as well as stabilize its PC margins in recent years. We expect PC sales to continue to make up around 70% of overall sales, while the segment’s profit margins should remain stable, given less intense competition at the higher end of the PC market.

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.

Lenovo’s acquisition of IBM’s ThinkPad PC business in 2005 has helped propel the company to be a leader in the PC market with 24% global market share. The successful integration of the ThinkPad business has also enabled Lenovo to increase its commercial-related sales, which currently make up 60% of its PC sales, as well as stabilize its PC margins in recent years. We expect PC sales to continue to make up around 70% of overall sales, while the segment’s profit margins should remain stable, given less intense competition at the higher end of the PC market.

Based on Lenovo’s solid profitability in the March quarter, we retain our view that the company’s profitability would not deteriorate as much as the market is factoring in. In the short term, we expect weaker PC shipments to be partially mitigated by the better product mix, underpinned by the recovery of commercial PC demand and solid demand for high-end consumer PCs such as gaming PCs. In the longer term, we believe better-than-expected sales of servers and smartphones would support Lenovo’s margin recovery. While we incorporate the near-term headwinds into our numbers, overall, we broadly maintain our earnings forecasts for the next five years, as well as our fair value estimate of HKD 12.60. Although lacking near-term catalysts, we believe Lenovo’s shares are undervalued as they currently trade at 2.2 times price/book and 6 times 2023 price/earnings, which are both at the bottom of the historical range.

Lenovo’s acquisition of IBM’s ThinkPad PC business in 2005 has helped propel the company to be a leader in the PC market with 24% global market share. The successful integration of the ThinkPad business has also enabled Lenovo to increase its commercial-related sales, which currently make up 60% of its PC sales, as well as stabilize its PC margins in recent years. We expect PC sales to continue to make up around 70% of overall sales, while the segment’s profit margins should remain stable, given less intense competition at the higher end of the PC market.

We raise Lenovo’s fair value estimate to HKD 12.60 from HKD 11.60, based on the robust December quarter results, mainly a result of the better product mix. We think the replacement demand for commercial PCs, which has been weak over the past two years due to the pandemic, is starting to pick up along with the reopening economy, more than offsetting the slowdown for consumer PCs because of its higher average selling price, or ASP. While our view is that Lenovo’s PC shipments will decline 2% year on year in fiscal 2022, we forecast PC revenue will increase 1% year on year, which is 11% above our previous number, as we believe that the trend will continue.

Lenovo’s acquisition of IBM’s ThinkPad PC business in 2005 has helped propel the company to be a leader in the PC market with 24% share. The successful integration of the ThinkPad business has also enabled Lenovo to increase its commercial-related sales, which currently make up 60% of its PC sales, as well as stabilize its PC margins in recent years. We expect PC sales to continue to make up around 80% of overall sales, while the segment’s profit margins should remain stable, given less intense competition at the higher end of the PC market.

We fine-tuned Lenovo’s earnings forecasts and maintained our fair value estimate of HKD 11.60 per share. We believe Lenovo’s shares are undervalued, based on the view that the company would be able to maintain solid profitability in fiscal 2022 (financial year ending March 2023) due to the improving product mix on PCs. While we expect consumer demand to slow down going forward, we expect the replacement demand from the commercial side to pick up as people begin to return to the office post-pandemic, and the launch of Windows 11 may also be a tailwind. In addition, on the consumer side, demand for high-end PCs such as gaming PCs seems to remain strong. In fact, we estimate that Lenovo’s average pricing per PC in the September quarter has increased 8% from the previous quarter and 18% from the previous year. As such, we expect Lenovo’s product mix to continue to improve, partially offsetting the slowdown of PC shipments. While we understand Lenovo’s shares lack near-term catalysts, Lenovo is currently trading below 8 times fiscal 2022 price to earnings, which is at the bottom of its historical range.

We fine-tuned Lenovo’s earnings forecast following the solid June quarter results and maintain our fair value estimate of HKD 11.60 per share. We lift our forecasts for fiscal 2021 (financial year ending March 2022) as PC demand seems to last longer than anticipated. In addition to solid consumer demand, we expect enterprise demand to pick up from the second half of this year as economies reopen. Moreover, the new launch of Windows 11 may also drive the replacement demand of enterprise PCs. Although education demand seems like it may cool down shortly, it does not make a material impact on Lenovo’s 2021 numbers as we estimate Chromebooks are less than 5% of its revenue. Overall, we believe 2021 earnings numbers will be stronger than we had anticipated. Meanwhile, as we forecast the entire PC demand to slow down in 2022 and stabilize in 2023, our forecasts for fiscal 2023 and beyond are broadly intact, which is the main reason for making no change to our fair value estimate.