20180614-交银国际证券-联想集团-00992.HK-Earnings_to_rebound__upgrade_to_non-consensus_Buy_10页_1mb

Lenovo Group (992 HK) - Company Update

Core Content

• Target Price: HK$5.80
• Upside: +37%
• Stock Rating: Buy
• Date: 14 June 2018

Main Points

DCG (Data Center Group) Performance

• Server Market Share: Lenovo's server market share grew to 6.5% in 1Q18, the first increase in six quarters, according to Gartner.
• Order Momentum: Strong near-term order momentum is expected, supported by improved product mix and market demand.
• ASP Increase: Server ASP rose to ~US$6,900 per unit in 1Q18, up from US$4,000-5,000, driven by shift towards SDI and HPC.
• Margin Improvement: Improved margins from better product mix, though still below industry average.
• Revenue Forecast: DCG revenue is forecast to rise 51% YoY in 1QFY19 and 53% YoY in 2QFY19, based on strong order momentum and mix shift.
• Profitability: Pre-tax margin for DCG is expected to improve to -3.3% in 1QFY19 and -2.0% in 2QFY19, compared to -14.9% and -13.4% in 1Q/2QFY18.

PC Business

• Cash Cow: The PC business is still a major contributor to cash flow, with PTI margin expected to remain stable at ~4.5-5.0%.
• Profit Forecast: Expected to deliver US$1.65bn in FY19E pre-tax profit.
• Memory Prices: Stabilizing memory prices should help maintain PC margins.
• Downside Risk: USD appreciation could negatively impact PC margins.

Smartphone Business

• Restructuring: Management indicates that restructuring efforts in the smartphone segment are largely complete.
• Impact: Expected to have a lesser impact on earnings as the company exits some markets.
• Goodwill Write-Down: Less likely due to improved financial position.

Earnings Outlook

• Street Pessimism: The market is overly pessimistic about Lenovo's earnings, with most brokers rating it as Sell or Neutral.
• Earnings Forecast: FY19E pre-tax profit is expected to reach US$641m, above the Bloomberg consensus of US$549m.
• Profit Improvement: Expected to see improving profit over the next 2-3 quarters, leading to potential share price rally.
• EPS Forecast: FY19E EPS is raised by 3% to 0.04, and FY20E EPS is raised by 16% to 0.06.

Trading Opportunity

• Price Target: Raised to HK$5.80 based on 13x FY20E P/E, up from HK$4.10 on 13x FY19E P/E.
• Timeframe: Trading opportunity is expected over the next six months.

Key Financial Highlights

Stock Data

Analysts

• Chris Yim:
  Email: christopher.yim@bocomgroup.com
  Phone: (852) 37661803

• Xinhe Deng:
  Email: xinhe.deng@bocomgroup.com
  Phone: (852) 37661856

Key Figures

Server ASP and Shipment

• Server ASP: Rose to ~US$6,900 per unit in 1Q18, narrowing the gap with HPE (~US$8,300 per unit).
• Server Shipment: Improved in 1Q18, indicating better market position.

DCG Revenue vs. Smartphones

• DCG Revenue Share: Expected to reach 11.5% in FY19E and 13% in FY20E, surpassing smartphone revenue contribution which is forecast to drop to 13.2% and 12.5% respectively.

Earnings and EPS

• Earnings Rebound: Expected to see a rebound in earnings, with FY19E PTI margin improving to 91m (vs. -69m in 1QFY18).
• EPS Increase: EPS is forecast to rise to 0.04 in 1QFY19 and 0.06 in 2QFY19.

Figures and Charts

• Figure 1: Lenovo server shipment improving.
• Figure 2: Lenovo server ASP significantly rising.
• Figure 3: Global server shipment rebounding since 2017.
• Figure 4: Global server revenue has grown faster than shipment.
• Figure 5: Expect DCG revenue growth momentum to continue.
• Figure 6: Expect DCG PTI margin to gradually improve.
• Figure 7: Lenovo DCG margins have room for improvement vs. HPE.
• Figure 8: Expect DCG revenue to surpass smartphones.
• Figure 9: DRAM price stabilizing.
• Figure 10: NAND price declining.
• Figure 11: Street is overly pessimistic on earnings.
• Figure 12: Lenovo share price history.
• Figure 13: Short interest ratio declined recently.
• Figure 14: Lenovo quarterly forecasts and key assumptions.

Analyst Certification

• Disclosure: The authors of the report do not have insider information or financial interests in the covered stocks, except for one analyst holding shares of Shimaio Property Holdings Limited.
• Conflict of Interest: No part of the analysts' compensation is related to the specific recommendations or views expressed in the report.

Conclusion

BOCOM Int'l Research upgrades Lenovo to a Buy rating, citing strong DCG performance, improved margins, and a potential earnings rebound. The report highlights the company's strategic shift towards higher-margin server products and the stabilization of PC margins, suggesting a positive outlook for the next six months. The target price is raised to HK$5.80, reflecting increased confidence in the company's future earnings potential.