20180202-兴业金融证券-联想集团-00992.HK-Profitability_Continuing_An_Upward_Trajectory_11页_427kb

Lenovo Group Summary

Core Content

Lenovo Group is currently on a path of continuous profitability improvement. The report highlights the company's performance across its key segments and provides forecasts for future earnings and valuations. The overall outlook is positive, with a "Buy" recommendation and a target price of HKD6.10, reflecting a 39% upside from the current price. The analysis is based on DCF valuation and considers key drivers such as market share gain in the PC segment and profitability improvement in the mobile segment.

Main Points

Segmental Performance

• PC Segment:

  • Revenue growth of 7.6% YoY in 3QFY18, slightly below the forecast.
  • PTI margin improved by 0.1ppt QoQ to 4.5%.
  • The global PC market is expected to remain stable, and Lenovo's acquisition of Fujitsu's PC division is anticipated to contribute significantly to FY19F growth.
  • Expected revenue growth of 11% in FY19F with a 0.3ppt improvement in PTI margin to 4.6%.

• Enterprise Segment:

  • Revenue growth of 16.7% YoY in 3QFY18, above forecast.
  • PTI margin improved by 4.3ppts YoY and 5.6ppts QoY to -4.6%.
  • Restructuring efforts in channel-building and R&D are showing early results, contributing to better performance.
  • Expected revenue growth of 11% and PTI margin improvement of 3ppts to -4.4% in FY19F.

• Mobile Segment:

  • Revenue declined by 5% YoY, below forecast, but showed strong performance in North America, Latin America, and West Europe (up 85%, 24%, and >20% respectively).
  • PTI margin improved by 0.7ppt YoY and 2ppt QoY to -4.4%.
  • The segment is expected to see a 6% revenue growth and 1.5ppt improvement in PTI margin to 4% in FY19F.

Financial Forecast and Valuation

Key Drivers

• Market share gain in PC.
• Profitability improvement in mobile.

Key Risks

• Worse-than-expected PC demand.
• Mobile phone business facing fierce competition in overseas markets.

Share Performance

• Market Cap: USD6,745m
• Price: HKD4.39
• Target Price: HKD6.10
• Estimated Return: 39%
• Average Daily Turnover: 224m/28.1m
• 52-wk Price Range (HKD): 4.15 - 5.40
• Free Float (%): 57
• Shares Outstanding (m): 11,097

Shareholders

• Legend Holdings Corp: 31.5%
• Senior Management: 11.2%

Share Performance (YTD and Rolling Periods)

Analyst

• Name: Ken Chui CFA
• Contact: +852 2103 9415
• Email: ken.chui@rhbgroup.com

Summary of 3QFY18 Results

• Total revenue grew by 6.3% YoY to USD12.9bn, 3% below forecast but 3% above consensus.
• Recurring net profit increased by 14.7% YoY to USD198m, 7% and 15% above forecasts and consensus, respectively.
• The PC segment showed 7.6% YoY growth, with revenue slightly below forecast.
• The enterprise segment exceeded expectations with 16.7% YoY growth and PTI margin improvement.
• The mobile segment faced a 5% YoY decline in revenue, but PTI margin improved due to better opex control and product mix.

Financial Highlights

• Gross margin remained stable at 13.6% in 3QFY18.
• Operating EBITDA margin improved to 2.9%.
• Net profit margin was 1.0% for FY18F.
• Recurring EPS growth is expected to be 18.0% in FY18F and 40.6% in FY19F.

Conclusion

Lenovo Group is showing signs of a profitable recovery, with the PC and enterprise segments leading the way. The mobile segment, while facing short-term challenges, is expected to rebound. The company's financial performance is underpinned by effective restructuring, cost control, and strategic acquisitions, supporting the "Buy" recommendation and the target price of HKD6.10.