Solutions-based business to support FY23F
? 4Q22 net profit rose 58% yoy on stable PC margin and profitable ISG despite
Omicron challenges. FY22 net profit was 3% above our full-year forecast.
? We expect FY23F revenue to stay flat due to weaker PC shipments but
supported by fast-growing SSG and improving profitability in ISG.
? Reiterate Add. Our target price is lowered to HK$11.50 on c.2% EPS cuts in
FY23F-24F to reflect lower PC shipment assumptions.
Remarkable FY22 and 4Q22 results for all business segments
Lenovo Group (Lenovo) reported remarkable 4Q22 and FY22 results. 4Q22 net profit rose
58% yoy to US$412m, thanks to the momentum in all main business groups while
Infrastructure Services Group (ISG) was profitable for two consecutive quarters. 4Q22
revenue was up 7% yoy and GPM stabilised at 17.2%, reflecting stable PC pretax income
(PTI) margin and appropriate cost control despite Omicron disruptions. Net profit increased
72% yoy to US$2.07bn in FY3/22, thanks to strong PC sales and margin and profitable
smartphone and ISG businesses. FY22 revenue rose 18% yoy to US$71.6bn, contributed
by PC/smartphone (IDG, +18% yoy), ISG (+13% yoy), and solutions & services (SSG,
+30% yoy). FY22 GPM expanded 0.7% pt yoy to 16.8%, thanks to better-than-industry
average PC margin.
1Q23F net profit likely to see decelerated growth, led by SSG
We believe that Shanghai’s lockdown will affect all business segments in 1Q23F (Apr-Jun
2022), due to 1) supply chain and logistics disruptions, 2) low efficiency in PC and server
production, and 3) weaker PC sales in China. We expect PC sales to decline over 10%
yoy in 1Q23F, mainly dragged down by China market, while ISG revenue growth could be
capped by shortage of components. We expect 1Q23F net profit to grow slowly at 5-10%
yoy, supported by the fast-growing SSG, thanks to new order wins in the US market.
FY23F outlook remains solid despite weakened PC shipments
We expect PC sales to remain resilient with flat revenue growth in FY23F (shipment
decrease but ASP increase), thanks to robust growth in the premium segment (gaming PC,
workstation, light & thin products). We believe that ISG should achieve its second profitable
year in FY23F due to strong order flow from major US cloud services providers (CSP) and
attributed by the fast-growing high-value segment (storage, software & services and highperformance computer). We expect SSG to maintain over 20% revenue growth in FY23F
on stable PC penetration for solutions-based services (support services/managed
services/project & solutions services) and this business segment should lead FY23F
earnings growth. We cut our FY23-24F EPS forecasts by c.2%, mainly due to lower PC
shipment assumptions but partially offset by better profitability in ISG.
Reiterate Add with a lower target price of HK$11.50
We reiterate our Add call on Lenovo as we believe its profitability will continue to improve
on the fast-growing high-margin SSG business (20%+ revenue CAGR and 20%+ PTI
margin). Our TP is lowered to HK$11.50, now based on 9x FY23F P/E (previously 10.5x),
on par with global peers, reflecting the slowdown of the global PC market. Re-rating
catalysts: stable PC ASP growth and strong growth in solutions-based services. Downside
risks: prolonged Omicron outbreak in China and supply chain constraints.