<Earnings First Take> 3QFY3/24 net profit ahead of expectations
- 3QFY3/24 revenue increased 3.0% y-o-y to US$15.7bn, primarily driven by recovering end-market demand for consumer electronics
- Net profit decreased by 23% y-o-y to US$337m, better than market consensus, helped by faster-than-expected hardware business margin recovery
- Expect PC shipments growth to be sluggish in 2024 and the server shipments to take a few more quarters to resume growth due to the macroeconomy uncertainty; Currently rated HOLD
3QFY3/24 earnings ahead of consensus. Lenovo Group (992 HK) announced its 3QFY3/24 results after the morning trading session. Revenue increased 3% y-o-y to US$15.7bn. Segment-wise, hardware business revenue increased 6.7% y-o-y to US$12.4bn, driven by PC, smartphone and tablet end-market demand recovering. Server business revenue decreased 13.4% to US$2.5bn due to enterprise customers’ cautious view on IT capital expenditures during an uncertain economic climate. Service business revenue increased 10.0% to US$2.0bn, continuously driven by a higher service-attached rate of its hardware user base – especially in support service. Gross margin decreased 0.6%ppts y-o-y to 16.5%. Operating margin decreased 1.0ppts y-o-y to 3.9% (+0.3ppts q-o-q) due to operating losses in the server business. Net profit, accordingly, decreased by 22.9% y-o-y to US$337m, ahead of the market expectations by c.7%, driven by faster-than-expected hardware business margin recovery.
PC shipment growth to be sluggish in 2024. The y-o-y decline of global PC industry shipments in 4Q23 further narrowed to 2.7% (from 7.6% in 3Q23). Industrial research suggests a low single-digit growth in global PC shipment in 2024. We anticipated sluggish growth in Lenovo’s PC shipments in 2024, and for server shipments to take a few more quarters to resume growth due to the macroeconomic uncertainty. We expect the increasing AI computing demand to take a longer time to pass to the AI servers. We currently have a HOLD rating on the counter with TP of HK$9.0.