20150729-Maybank_KERPL-Lenovo_Group_Coming_down_to_earth_12页_541kb

Lenovo Group (992 HK) Summary

Core Content Overview

• Stock Information:

  • Current Share Price: HKD8.61
  • Target Price: HKD7.20 (-16%)
  • Market Capitalization (USD): 12.3B
  • Average Daily Trading Volume (USD): 64M
  • Sector: Technology
  • Recommendation: SELL

• Earnings and Financial Performance:

  • Earnings are expected to decline by 7% in FY16/17 due to rising risks, including Mobile division losses, restructuring charges, and balance sheet concerns.
  • The Mobile division is a major drag, with potential losses exceeding USD500M in FY16.
  • The company’s net profit and core EPS have shown significant volatility, with a decline of 23.9% in 1QFY16 and a projected 27.6% growth in FY17.
  • The net dividend yield is expected to increase from 2.9% in FY15 to 4.6% in FY17.
  • The company's core P/E ratio is expected to drop from 14.3 in FY14 to 14.4 in FY17, while the P/BV ratio is projected to fall from 3.6 to 1.9.

• Financial Metrics:

  • FY16E revenue is projected at USD49,242.1M, with a slight decline in the first quarter.
  • EBITDA is expected to rise from USD1,283.8M in FY14 to USD1,569.9M in FY17.
  • Net profit is projected to increase from USD635.1M in FY15 to USD854.3M in FY17.

Main Risks

• Mobile Division Underperformance:

  • Lenovo’s Mobile division has underperformed, with a 40% QoQ decline in 2QCY15 and a 33% YoY decline.
  • The division is expected to face significant losses in FY16, with a projected USD500M loss.
  • The division's unit shipment is expected to decline by 22% YoY in FY16 and remain flat in FY17.
  • The average selling price (ASP) is expected to fall by 5–10% YoY due to pricing pressure and product mix.

• Restructuring Charges and Impairment Risk:

  • Restructuring charges are expected to further reduce profitability.
  • Goodwill impairment is a significant risk, with USD1.66B in goodwill (40% of equity) potentially at risk if losses continue.
  • A 50% impairment could wipe out FY16 group profit and reduce shareholder equity by 15–20%.

• Balance Sheet Concerns:

  • Intangible assets have increased to USD8.93B in FY15, more than twice the size of shareholder equity (USD4.11B).
  • Book value per share (BVPS) has turned negative to HKD3.34, making traditional valuation methods ineffective.
  • The company's net tangible assets per share (NTAPS) are positive but significantly lower than BVPS.

Strategic and Market Considerations

• Market Share Decline:

  • Lenovo’s market share in the smartphone sector has dropped to 4.8% in 2QCY15, the lowest since 3Q13.
  • The company is losing ground to competitors like Xiaomi, Huawei, and Apple.
  • The reintroduction of Moto to the Chinese market failed to meet expectations.

• Strategic Changes:

  • Lenovo has replaced its Mobile head and is focusing on cost reduction and online sales strategies.
  • However, the company is considered late to the online model, which has been adopted by competitors like Coolpad and TCL.
  • The company is also accelerating the consolidation and restructuring of its Mobile division.

• Goodwill and Intangible Assets:

  • Goodwill and intangible assets have ballooned due to acquisitions (Moto and IBM X-system).
  • The total goodwill and intangible assets amounted to USD5.82B in FY15, up 1.7x YoY.
  • The company's intangible assets are amortized over 6–8 years, increasing operating costs.

Valuation Challenges

• Book Value and Fair Value:

  • The company's book value is negative due to high intangible assets.
  • Traditional valuation methods are not applicable, leading to a target price of HKD7.20 based on 12x FY17 P/E.
  • The company’s ROE is expected to halve compared to FY12–14.

• Market Performance:

  • The share price has declined by 21.3% in 1Mth and 35.6% in 3Mth.
  • It is underperforming relative to the market, with a 14.4% decline against the index.

Summary of Key Data

• Shareholder Equity:

  • FY15: USD4.11B
  • FY14: USD3.02B

• Intangible Assets:

  • FY15: USD8.93B
  • FY14: USD3.34B

• Major Shareholders:

  • Legend Holding Ltd.: 30.6%
  • Yang Yuanqing: 6.0%
  • Google, Inc.: 4.7%

• Market Capitalization:

  • HKD95.6B

• Share Price Range (52 Weeks):

  • High: HKD13.86
  • Low: HKD8.61

• Financial Ratios:

  • P/E (reported): 18.3 (FY13A) to 14.4 (FY17E)
  • P/BV: 4.3 (FY13A) to 1.9 (FY17E)
  • Net dividend yield: 1.7% (FY13A) to 4.6% (FY17E)
  • EV/EBITDA: 7.6 (FY13A) to 7.9 (FY17E)

Conclusion

• Investor Sentiment:

  • Earnings uncertainty may lead to increased scrutiny of the balance sheet.
  • The company’s negative BVPS and high intangible assets complicate valuation.

• Recommendation:

  • The company is recommended to SELL due to the significant risks to its earnings and balance sheet.
  • Disposing of the entire Mobile business is suggested to safeguard shareholder interests.

• Future Outlook:

  • The global smartphone market is expected to grow only in single digits for CY16/17.
  • Lenovo’s market share is expected to continue declining.
  • The company’s financial performance is heavily influenced by the Mobile division.