PC demand to soften, but strong services
- 1Q23 net profit rose 11% yoy despite weakened consumer PC demand, Covid wave in China and surge in components and logistics costs.
- We have a weak outlook on PCs in the next few quarters but expect stable growth in SSG and ISG.
- We retain our Add call as Lenovo trades at an attractive 6x FY23F P/E. We cut our FY23-25F EPS to reflect the short-term macroeconomic headwinds.
Resilient 1QFY3/23 results despite Covid-19 wave and weak PC
Lenovo posted solid 1Q23 results despite weakened consumer PC demand, Covid-19 wave in China and surge in components and logistics costs. 1Q23 net profit rose 11% yoy to US$516m amid continual profitability improvement in smartphone and servers business due to their market share gains and better product mix but offset by decrease in consumer PC demand. 1QFY3/23 net profit was in line at 25% of our FY23F forecast.1Q23 revenue stayed flat, driven by Software & Services Group (SSG, +23% yoy) and Infrastructure Services Group (ISG, servers for Could Services Providers and Enterprise & Small and Medium Business, +14% yoy) but offset by Intelligent Device Services Group (IDG, PC + smartphone, -2.7% yoy).
PC shipments to decline in the next few quarters with stable margin
Lenovo PC shipments fell c.13% yoy in 1QFY3/23, according to IDC, mainly dragged down by consumer segment, while smartphone shipments stayed flat, thanks to 4G/5G migration in the US and LATAM. Supported by strong performance in PC premium segment (gaming and workstation) and 5G phones sales, IDG profit before tax (PBT) margin stood at 7.5% in 1Q23. We expect PC shipments to decline c.5-10% yoy in 2QFY3/23F to 4QFY3/23F due to Covid-19 pandemic subsiding and macroeconomic headwinds approaching. We estimate IDG FY23F revenue to decline c.5% yoy and a stable PBT margin at 7.5% due to the fast-growing in premium segment and commercial segment.
SSG to achieve 20% revenue growth in FY23-24F with stable margin
SSG revenue’s strong performance in 1Q23 was driven by robust As-a-services demand (+73% yoy). Meanwhile, relatively weak growth in project & solutions services (+10% yoy) and support services (+18% yoy) was due to Covid-19 wave in China which affected orders delivery. We expect SSG to maintain c.20% revenue growth in FY23-24F due to ongoing As-a-services and solutions demand among enterprises, thanks to strong customer base globally. In ISG segment, Lenovo won orders from Oracle in 2021 and started to deliver servers in 2HFY22. We believe that strong order flow from Oracle and Microsoft should be sustained due to steadily-growing cloud computing demand. We expect PBT margin to be stable at 22% in FY23-24F due to its solution-based services.
Retain Add with a lower target price of HK$10.05
Stay invested. Lenovo trades at 6x CY23F P/E, which is cheap, as we think market is underestimating the Services and Solutions-driven PC business which will continue to enhance Lenovo’s leading market position (24.4% global market share in 2Q22) and profitability (c.7% PC PBT margin). We trim our FY23-25F EPS by 1.7-3.8% to reflect poor global macroeconomy in the next twelve months. Our TP decreases to HK$10.05 due to EPS revisions and is now based on 8x CY23F EPS (previous 9x), reflecting slower growth
rate in PC and servers businesses. Share price re-rating catalysts include strong growth in SSG and stable PC margin. Downside risks: sustained supply chain issue and weaker-than-expected PC demand.