Investment advice
We raised our rating to outperform the industry rating, and raised our target price by 14.3% to HK$16.0 (based on the division plus general method). There is room for an increase of 27.6% from the current stock price. The reasons are as follows:
The company's 1H21 performance exceeded our expectations. 1H21's revenue increased 24% year on year to 228.565 billion yuan, and net profit increased 636% year on year to 4.691 billion yuan. It exceeded expectations. Thanks to the collaborative development of strategic investment and financial investment, both achieved good results.
The company's strategic investment revenue and profit both increased. Revenue from the information service sector of Lenovo Holdings increased steadily 25% year over year to 210.776 billion yuan, and net profit increased 172% year on year to 1,539 billion yuan. The three major segments of Lenovo Group's smart equipment, infrastructure solutions, and solution services business have achieved steady growth. Financial services business revenue fell 25% year on year to 3.141 billion yuan, and net profit fell 56% year on year to 318 million yuan, mainly affected by Hankou Bank's introduction of equity dilution for strategic investors and Koala Technology's depreciation. Revenue from the advanced manufacturing and professional services business increased 46% year on year to 3,894 billion yuan, and net profit increased 108% year on year to 794 million yuan. Among them, China Eastern Logistics was listed in June this year, and performance continued to grow year on year. Revenue from the agriculture and food sector increased 9% year on year to 9.778 billion yuan, and net profit reached 240 million yuan, turning losses into profits. Business revenue in the innovative consumption and services sector increased 103% year-on-year to 533 million yuan, turning losses into profit and net profit of 67 million yuan. We believe that the company is expected to improve the operating efficiency of invested enterprises, focus on core business, have a more stable investment portfolio, and continue to grow in strategic investment business in the second half of the year.
The financial investment business performed well. The financial investment sector contributed 2,558 million yuan in net profit, an increase of 81% over the previous year. Lenovo Star has carried out follow-up financing for nearly 50 projects and has withdrawn from 15 projects. In the first half of this year, Junlian Capital raised 6.335 billion yuan, withdrew from 33 projects, and achieved cash revenue of 1.2 billion yuan. Cash flow contributed to improving the Group's liquidity. Considering that the domestic economy continues to recover and the capital market is booming, we expect the financial investment sector to maintain steady growth in the future.
Our biggest difference from the market? We believe that in the future, the company will promote the industrialization of more scientific and technological achievements and achieve a good return on investment by focusing on laying out technology and medical tracks, continuing to build payment assets, continuously optimizing asset layout, and continuously improving existing business technology attributes and operational efficiency.
Potential catalysts: Fundamentals continue to improve, and the transformation of scientific and technological achievements is accelerating.
Profit forecasting and valuation
Considering the gradual weakening of the impact of the pandemic, the company's focus on core business, and the good return on financial investment, we increased net profit by 52% and 52% in 2021 and 2022 to 7.527 billion yuan and 7.707 billion yuan respectively. The company's current stock price corresponds to 3.4 times the predicted price-earnings ratio for 2021. The rating was raised to outperform the industry rating; due to high market fluctuations or the impact on strategic investment returns, we raised our target price by 14.3% to HK$16.0 (based on division plus general law), which has 27.6% room for increase from the current stock price.
risks
IT and innovative consumer business uncertainty; capital market fluctuations.