Lenovo Earnings: PC Replacement Demand to Pick Up in Late 2024; Fair Value Raised by 14% to HKD 12

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.