20151109-广发证券_香港_-联想集团-00992.HK-Negatives_mostly_priced_in__initiate_at_Accumulate_11页_713kb

Lenovo (992 HK) Equity Research Summary

Core Content

This equity research report provides an analysis of Lenovo's financial performance and market position, with a focus on its core PC business, mobile business, and enterprise server business. The report initiates coverage with an Accumulate rating and sets a target price of HK$8.51, implying a 13% upside from the current share price.

Key Points

Valuation Overview

• Current Market Cap: HK$83.9 billion (US$10.8 billion)
• Target Price: HK$8.51
• Valuation Methodology: Sum-of-the-parts (SOTP) model with three scenarios: conservative, optimistic, and aggressive.
• Implied PE for Core PC Business: 7.9x (in base-case) and 9x (in target price calculation)
• Assumptions:
  • PC Business: OPM of 5%, projected net profit of US$1,306 million for FYE Mar 31, 2017
  • Mobile Business: Valuation assumed at 0% (due to poor performance)
  • Enterprise Server Business: Valuation at US$1.2 billion (vs. acquisition cost of US$2.1 billion), with OPM of 2% and P/E multiple of 15x

Market Share and Growth Potential

• PC Business:
  • Current Market Share: 21% in 3Q15
  • Target Market Share: 30% by 2020
  • Projected Volume Growth: ~43%
  • CAGR Assumption: 7.4% over the next five years
• Global PC Shipments:
  • Expected to stabilize at 2015 levels by 2019
  • Decline rate is expected to moderate from 9% in 2015 to 1% in 2016

Mobile Business

• Current Status:
  • Lenovo/Motorola ranked 5th in global smartphone market with 4.7% market share in 2Q15
  • Shipment fell 14% YoY in 2Q15
• Cost-Saving Efforts:
  • Restructuring charges in August 2015 are expected to help achieve breakeven by late 2015 or early 2016
• Market Challenges:
  • Highly competitive and homogeneous Android-based market
  • Poor product offerings have contributed to weak sales

Enterprise Server Business

• Acquisition:
  • Acquired IBM x86 server business in 2014 for US$2.1 billion
  • Now ranks as the global no. 3 server manufacturer by shipment volume
• Market Growth:
  • Server shipments are smaller than PC shipments, with low single-digit growth expected
  • Market share in 2Q15 was ~8%

Upcoming Earnings

• Q2 FY16 Earnings:
  • Expected to report a record quarterly loss of US$811 million
  • Includes one-off restructuring charges of US$600 million and smartphone inventory write-offs of US$300 million
• Impact on Share Price:
  • The market has already priced in these losses, so the results release is expected to have a neutral impact

Risks

• Downside Risks:
  • Sell-down of shares by Google (4.7%) and IBM (1.6%), both with lock-up periods expired in October
  • Foreign currency depreciation (RMB, Euro, JPY) against the US dollar

Financial Performance (2014–2016E)

SOTP Valuation Summary

Key Figures and Forecasts

• PC Shipments: 282 million units in 2019, similar to 2015 levels
• Smartphone Shipments: Expected to grow at a ~7% CAGR through 2019
• Server Shipments: Expected to remain at 10 million units globally in 2014, with low single-digit growth
• Gross Margin: Expected to fall in the Sep quarter due to inventory write-offs, from 15.4% to 12.8%
• Operating Profit: Expected to be negative in Q2 FY16 (US$-810 million), but return to positive in Q3 FY16 and Q1 FY17
• Net Profit: Expected to be US$829 million in FY15, US$-261 million in FY16E, and US$951 million in FY17E

Conclusion

The report suggests that while the mobile business is struggling, the core PC business has significant growth potential through increased market share. The enterprise server business is performing well and has been a key driver of recent growth. The report initiates coverage with an Accumulate rating and sets a target price of HK$8.51, which represents a 13% upside from the current price. The market has already priced in the expected losses, and the report anticipates a neutral impact on the share price from the upcoming results release. The key risks include the potential sell-down of shares by major shareholders and foreign currency depreciation.