At present, AI has become the definitive direction for the development of technology enterprises, and fully grasping the huge growth opportunities in the AI era will also bring more long-term development space for enterprises. As a leading technology company, Lenovo Group is anchoring AI and taking AI PC as the traction to lock in future growth opportunities and enter a new development cycle.
This can be seen in Lenovo Group's recent financial report: "continue to invest in diversified growth engines and release new growth opportunities in the field of AI", which also means that Lenovo Group is driving AI-centered intelligent transformation, and from the perspective of performance, its strategic transformation and transformation are gradually entering the cash period.
According to Lenovo Group's financial report, as of the end of last year, in the third quarter of fiscal year 2023, Lenovo Group's revenue was 113.6 billion yuan, an increase of 3% year-on-year and 9% quarter-on-quarter, and its net profit was 2.6 billion yuan, a year-on-year decline, but a quarter-on-quarter increase of 35%, and profitability has increased for two consecutive quarters.
In Lenovo Group's core business IDG smart device business, the PC business is returning to the growth track, with a solid position in the industry with the world's largest market share, and the mobile phone and tablet business other than PC has achieved double-digit growth. In the second half of last year, Lenovo Group announced that it would promote the development of AI PCs, lead the development of the PC industry, accelerate the arrival of a new round of replacement cycles, and promote the development of greater growth space.
Lenovo Group's non-PC business accounted for 42% of the group's overall revenue, and the strategic transformation has achieved remarkable results. This was mainly due to the fact that Lenovo Group's SSG solution service business continued to maintain double-digit growth, with operating income reaching a record high of 14.6 billion yuan and an operating profit margin of more than 20%. ISG's infrastructure solutions business grew sequentially on the back of the recovery of cloud and enterprise customer demand, with a total revenue of 7.4 billion yuan from core products such as storage, software and services, up 36% year-on-year, and edge computing up 12% year-on-year, propelling Lenovo Group to become the world's third-largest storage equipment and AI infrastructure provider.
Lenovo Group's steady performance background and the long-term growth momentum brought by AI have won the unanimous optimism of major investment banks and brokerages at home and abroad.
Citi: Better-than-expected results in the new fiscal quarter, AI infrastructure Edge AI will be a long-term growth opportunity
Lenovo's 3QFY24 results were 9% and 10% higher than the consensus estimates of Citi and Bloomberg, respectively, mainly due to better expense control and higher non-operating benefits. Management is optimistic about Lenovo Group's FY24E-25E PC industry recovery replacement cycle and AI infrastructure edge AI development, which will drive better sales growth and higher margins.
In particular, AI infrastructure and edge AI products will drive Lenovo's long-term growth, driven by the recovery of the industry and growth opportunities for AI infrastructure and AI PCs. Lenovo expects AI PC to contribute to ASP margin expansion in FY2025-26 with the enrichment of configurations; For servers, Lenovo expects more balanced growth in AI and general-purpose servers, while portfolio launches that include GPU solutions such as L40S, MI300 and H200 will help achieve better growth momentum this year.
The PC and server industry is likely to return to growth this year after last year's trough, and Citi believes Lenovo can benefit from the recovery with its products** and cost control capabilities. Citi says it will see any as an increased opportunity. Based on a 10x P/E EPS ratio, Lenovo Group has a price target of 10HK$5, maintaining ** rating.
Goldman Sachs: The performance was in line with expectations and maintained**
After the release of the earnings report, Goldman Sachs is still optimistic about Lenovo Group, the main reasons include: the PC business is recovering, Lenovo Group's PC shipments increased by 4% year-on-year in the fourth quarter of last year, and it is expected that the business is expected to grow year-on-year in 2024 25 under the new product cycle and lower base such as Windows 11 and AI PC, of which desktops will increase by 11% and notebooks will increase by 8%, further consolidating the industry position. Goldman Sachs said that Lenovo's business model has high exposure and is in a leading position in the world, which can better support its PC market share growth under industry consolidation.
ISG's business narrowed its decline, but grew 24% sequentially, reflecting the stabilization of its server business and the strong expansion of AI servers and storage. SSG revenue continues to grow by double digits and is expected to grow by 15%-20% in FY2024, driven by related support services.
In terms of valuation, it is based on a 9.5% of Lenovo Group's 2025 earnings per share5x P/E target, which is derived from the low average range of the same industry, is in line with the other two leading PC manufacturers (HP, Dell) and in line with the 2-year average of Lenovo Group, with a TP of 11HK$54, maintaining ** rating.
JPMorgan Chase: ISG's earnings slightly beat expectations
Lenovo Group's revenue for the quarter rose 9% sequentially and 3% year-on-year, about 3% higher than expected, mainly due to growth in the IDG and ISG businesses. IDG's revenue showed resilience, driven by sales growth in multiple regions and high-end products, with both quarter-on-quarter and year-on-year growthISG business grew 24% sequentially, driven by key server customer orders and seasonality. Due to the increase in operating leverage, Lenovo Group's operating profit was 39%, better than expected.
At present, JPMorgan Chase & Co. believes that investors will pay more attention to the magnitude of Lenovo Group's demand recovery and the potential of AI products. Based on the recovery of the PC and server market and the growth of AI PCs, Lenovo Group has set a price target of 10HK$3.
CLSA: AI PC is worth looking forward to
Lenovo Group delivered solid net profit in FY3Q24, beating expectations by 105%。Among them, the PC and mobile phone business showed a solid trend, with an increase in market share and a better product portfolio. It is expected that from 2025 onwards, AI PC will bring greater contributions to Lenovo Group.
Lenovo Group management expects AI PC to increase ASP by 5%-10% while improving margins. CLSA said that there will be some delays in PC demand in the short term as consumers may wait for AI PCs to be launched in the second half of 2024. However, Lenovo Group's PC recovery is still on track, as the largest player in the PC market, with the increase in market share, the PC shipment cycle is recovering, and the PC outlook is solid, in addition, AI PC will help Lenovo Group improve PC shipments, average selling price and profit margins, helping it accelerate the recovery of PC shipments in the new cycle.
Based on the PC upcycle and Lenovo Group's **AI PC, extend its valuation period to average EPS from the end of fiscal year 2025 to the beginning of fiscal year 2026 with a target of **9HK$60, and the price-to-earnings ratio remains unchanged at 11 times.
In addition, Morgan Stanley believes that Lenovo Group is the main beneficiary of the overall PC replacement cycle and AI PCs, while the worst moment for Lenovo Group's PCs and servers is behind us, and it is expected to return to growth in the next few quarters, which lays the foundation for medium- to long-term growth.