Better product mix to support PC sales
? 3QFY3/22 net profit surged 62% yoy, supported by 7% growth in PC shipments and record 8.2% PC PTI margin and PTI profit in server business.
? FY23F PC sales should remain resilient on ASP growth and stable margin.
? Retain Add. We raise our TP to HK$13.78, based on 10.5x CY23F P/E.
3QFY22 net profit surged 62% yoy on record PC margin
Lenovo’s 3QFY22 net profit surged 62% yoy to US$640m (15% above our estimate), driven by robust PC margin and turnaround of Server business. Hence, 9M22 net profit was above at 95% of our full-year forecast. Revenue delivered double-digit growth in all segments: PC revenue +12% yoy, driven by strong PC demand in all regions and premium segment growth; smartphone revenue +46% yoy, supported by product mix and strong sales in the US; server revenue +19% yoy, driven by robust demand from cloud service provider (CSP) and continual ICT infrastructure upgrade; software and service (S&S) revenue rose 25% yoy, thanks to wider customer base.
PC sales to remain resilient in FY23F on ASP growth
PC 3Q22 shipments grew 7% qoq to c.22m units (outpace industry growth rate 5%) in 3Q22, with global market share 24.6%, thanks to sustained work/study/play-from-home trend. Led by strong sales in premium segment (gaming PC, Yoga-series and thin & light products), PC pretax income (PTI) margin reached a record high of 8.2% (+0.1% qoq and +0.4% pts yoy). We believe that PC sales should remain solid in 4QFY22F and expect volume to fall c.3% yoy in FY23F due to lower consumer demand but offset by commercial segment (Windows 11 refreshment cycle). Nevertheless, we do believe PC revenue should
remain resilient (flat revenue growth in FY23F, estimate volume to dip and ASP to rise), with sustained PTI margin improvement.
Software & services to lead continuous PTI margin expansion
S&S revenue grew 25% (PTI margin at 22.2%, +0.8% qoq) in 3Q22, driven by strong performance in support services (+21% yoy), managed services (+50% yoy) and project services & solutions (+23% yoy), due to wider service portfolio expansion and new customer gains and footprint expansion. We expect S&S to maintain 25-30% revenue growth in FY23F/24F with stable PTI margin of c.20% amid rising PC as-a-Services trend.
Server business likely turn profitable in FY23F
Infrastructure service group (ISG) turned profitable with PTI of US$17m in 3Q22, first time since acquiring the business, driven by infrastructure upgrade cycle. With a huge backlog on hand, we estimate server business to be profitable in FY23F driven by strong demand from 1) CSP and enterprises customers, 2) new Intel CPU platform, and 3) AI Edge server solution and storage service.
Retain Add with a higher TP of HK$13.78
Stay invested. We raise FY22-24F EPS by 10.6-16.4% on stronger PC margin and profitable server business. We lift TP to HK$13.78 due to EPS hike and roll over to CY23F EPS, based on 10.5x, still 30% premium to global peers, reflecting strong S&S business growth and PC market share gain. Re-rating catalysts include stable PC shipments and margin and strong growth in solution-base services. Risks: persistent CPU shortage.