Lenovo Group Ltd (0992.HK) has been the world’s largest PC vendor until 2016. Now surpassed by HP, Lenovo has still a global market share of over 20 percent. The company has one of the world’s most comprehensive portfolio of connected products, including smartphones (Motorola), tablets, PCs (former IBM’s ThinkPad, Yoga, Lenovo Legion) and workstations.[mepr-active membership=”1734″ ifallowed=”show” unauth=”message” unauth_message=”Please login or purchase a membership to view full text.”] Furthermore, AR/VR devices as well as smart home and office solutions. Lenovo has been recognized with several best product and design awards. The company, which is among the Fortune Global 500 and the Forbes Asia’s Fab 50 list, has the vision to become the global leader in intelligent transformation through smart devices and infrastructure.
Lenovo’s PC and smart device business, which consists of the core PC business as well as slate tablets, detachables, gaming and other smart devices, grew by 8 percent last year and contributed to more than 70 percent to the total revenues. The mobile business contributed 16 percent to the revenues but shrank by 6 percent last year. Both segments have now been consolidated to optimize shared platforms and to accelerate the convergence of computing and communications technologies. Lenovo’s data center business, which includes servers, storage, software, and services, grew by 8 percent last year and contributed another 10 percent to the total revenues. After three years of shrinking revenues and profits, Lenovo’s decisive restructuring efforts are bearing first fruits. The company is capitalizing on global growth trends in both software and services.
Lenovo operates in more than 60 countries and sells its products in around 160 countries. Revenues in Europe, the Middle East, and Africa grew at 12 percent last year, followed by the Americas with 9 percent. Both regions accounted for almost 60 percent of the company’s total revenues.
Lenovo was founded in 1984 and is headquartered in Hong Kong. The shares are listed on Hong Kong’s stock exchange since 1994 and can also be traded in Germany, the US and in Switzerland. Major shareholder is the founder, Mr. Liu Chuanzhi, with an ownership of around 29 percent, followed by the CEO, Mr. Yang Yuanqing, with an ownership of roughly 6 percent. 65 percent of the shares are in public hand.
With a workforce of 54,000 employees, Lenovo reported revenues of 11.9bn USD and profits before tax of 113m USD over its first quarter 2018/19. This is an increase of 19 percent in revenues and a jump of 184m USD in profits compared to the same period a year ago. For the full year 2017/18, revenues increased by 5 percent while profits dropped 69 percent. The operating margin of 1.3 percent is well below industry average. Lenovo’s cash reserves increased by 39 percent over its first quarter to 2.7bn USD at the end of June 2018.
The company shows still a weak balance sheet with poor profitability and financial strength. The equity ratio is at 16 percent and the gearing, defined here as total liabilities to total equity, at more than 500 percent. Next earning results will be announced in early November.
Lenovo’s shares are in a downtrend since May 2015 and lost more than 70 percent in value until May this year. The long decline caused the company also to be removed from the Hang Seng Index. But the share price bottomed in May and increased almost 40 percent since. The company is priced at 1.6 times book value and at ten times cash flow. The latest dividend yielded more than five percent. Only 10 out of 26 analysts have “buy” or “outperformer” recommendations on the company currently. The majority of analysts are still bearish for the stock.
Our Conclusion: The company shows still a weak balance sheet with poor profitability and financial strength. However, there are promising signs that the restructuring process is bearing first fruits. The management is focusing on the right trends with its strategy and with new products. Revenues and profits grew again over the last consecutive quarters. The share price bottomed and crossed its upturning 200 moving average line, which is a strong bullish signal. Lenovo seems to gain momentum again. The global PC market shows also signs of stabilization after years of stagnation.
Assuming a stable global economy, we expect the share price to increase 20 to 25 percent over the next six months.
AIS Rating: ★★★★☆
| 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | |
|---|---|---|---|---|---|---|
| EPS (USDcent) | 6.1 | 7.8 | 7.7 | -1.2 | 4.9 | -1.7 |
| Change | 33% | 28% | -1% | -115% | 519% | -134% |
| P/E | P/E SECTOR |
P/B | P/CF | Equity Ratio* |
ROE | LIAB./ Equity** |
Div YLD |
|---|---|---|---|---|---|---|---|
| 13 | 1.6 | 10 | 16% | -4.5% | 527% | 5.3% |
* Equity / Total Assets, ** Total Liabilities / Equity
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