Matters: Lenovo Group Limited, the world's largest PC equipment manufacturer, recently released its Q2 financial report for fiscal year 2022. Revenue growth continued to be strong and profit margins improved faster than expected. Our comments are as follows:

Performance: both income and profitability set a record. In fiscal year 2022, Lenovo Group Limited achieved revenue of $17.87 billion (+ 23% compared with the same period last year), net profit of $510 million (+ 65% compared with the same period last year), and cash flow of operating activities doubled year-on-year to $1.6 billion. Q2 in fiscal 2022, the company's gross profit margin was 16.8% (+ 1.3pcts), mainly due to the continued increase in the share of revenue from more profitable solution services and the improvement in gross profit margin brought about by hardware portfolio optimization. In terms of expense rate, the company's quarterly sales expense rate is 5.2% (+ 0.2pcts), management expense rate is 3.9% (- 0.2pcts), and R & D expense rate is 2.7% (+ 0.6pcts). After the improvement of the epidemic, the increase in travel and other expenses has increased the sales expense rate, and the company also said that it will continue to increase R & D investment and strive to double R & D expenditure within 3 years.

Smart device business: strong demand, structural optimization, on-hand orders are still positive. Q2 revenue in the company's smart device business rose 21% year-on-year to $15.3 billion in fiscal 2022, of which revenue from non-PC businesses rose to 19% (+ 0.3pcts), operating profit rose 34% year-on-year to $1.17 billion, and operating profit margin rose 0.8pcts to 7.6% year-on-year, an all-time high. According to IDC, 2021Q3 shipped 86.7 million PC units worldwide (+ 3.9% year-on-year), while Lenovo shipped 19.18 million units of PC worldwide (+ 3.1% year-on-year) in the same period, with a global market share of 23%. At the same time, the recovery of commercial demand after the improvement of the epidemic and the acceleration of high-end evolution driven by telecommuting & learning have led to a substantial increase in commercial PC and high-end products (yoga series, game books, etc.) compared with the same period last year, in which the turnover of high-end Yoga and workstations doubled, the turnover of commercial computers increased by 29%, and the business turnover of small and medium-sized enterprises increased by 48%. As a result, the 2021Q3PC portfolio has achieved high ASP and profitability, and the ASP of PC products has increased by 17% compared with the same period last year. In terms of non-PC business, 2021Q3 grew 23% year-on-year, while revenue from smartphone business, tablet business and accessories business increased by 27%, 20% and 31%, respectively, and smartphone operating profits hit an all-time high. We judge that the market will continue to maintain a high momentum in the natural year, mainly due to the strong recovery of the enterprise market, the continued penetration of high-end products and the replacement demand driven by Windows11. But at the same time, it is expected that this year's high base will put pressure on growth in the same period the following year.

Infrastructure business: strong growth in cloud services and improved profitability. Q2 revenue in the company's infrastructure business in fiscal 2022 rose 34 per cent year-on-year to $2 billion, the highest since the acquisition of x86 servers, operating losses narrowed by $24 million to $6 million, and operating losses narrowed from-2.1 per cent to-0.3 per cent. In terms of cloud services, the company's sales increased by 52% year-on-year during the reporting period. ODM+ business model has expanded from server to storage, water cooling, more advanced system design and multiple platforms, and its profitability is also increasing. On the enterprise side, the company has further increased its market share in a number of high-growth products, such as servers, storage, software and services, and continues to maintain its position as the second largest supplier in the global mainstream storage market. at the same time, it continues to expand its business scope in hybrid cloud solutions. We judge that the recovery of global cloud vendor CAPEX and the recovery of traditional enterprise market demand will support the short-term performance of this part of the company's business; in the medium to long term, the enhancement of program and design capabilities and the continuous strengthening of cooperation with cloud vendors are expected to enable the company's relative share in this field to increase rapidly and achieve sustained and rapid growth.

Solution services business: Q2 revenue of the company's solution services business increased 30 per cent to $1.36 billion in fiscal 2022, including 23 per cent year-on-year growth in IT support services, 88 per cent year-on-year growth in intelligent operation and maintenance services, 22 per cent year-on-year growth in smart solutions, 51 per cent year-on-year increase in operating profit to $260 million, and an increase in operating profit margin to 22 per cent year-on-year. At the same time, the company's booking revenue and deferred revenue increased by 34% and 31% respectively compared with the same period last year, and the stability and predictability of revenue were significantly enhanced. Looking to the future, we believe that: 1) IT support services will continue to benefit from the continuous growth of market stock hardware equipment and the gradual increase of service density and added value; 2) Intelligent operation and maintenance business to provide enterprise users with IT equipment batch rental and maintenance services, strong equipment side capabilities, perfect service mechanism and so on constitute the company's core competitiveness. 3) due to the broad space of industrial digitization, the company's end-to-end service capabilities and industry experience, the company is expected to continue to share this blue ocean market.

Risk factors: global macroeconomic growth is less than expected risk; upstream raw material price fluctuation risk; the company's core technology, market personnel loss risk; market competition continues to aggravate the risk; the company's new business development is not as expected risk.

Investment suggestion: with the help of outstanding capabilities in technology research and development, supply chain management and channel & service, the company is comprehensively promoting the transformation from equipment delivery to intelligent solutions. In terms of smart devices, the epidemic accelerates the further improvement of global PC penetration, while the company's global relative share and leading edge are expected to continue to expand; in terms of IT infrastructure, the company's business is expected to maintain rapid growth, mainly due to the enhancement of solutions and design capabilities, as well as the continuous strengthening of partnerships with cloud vendors. In terms of programme services, the company's share of service revenue is expected to continue to increase, and drive the company's overall profit margin to improve significantly in the medium to long term. Taking into account the expectation of the continuation of PC's high demeanor, the recovery of cloud manufacturer Capex and the improvement of the company's profit margin, we maintain the company's operating income forecast of US $81.6 billion for fiscal year 2022-2024, corresponding to a growth rate of 16%, 6%, 9% and a corresponding growth rate of US $16.7 billion, 20.0 billion and 42%, respectively. With reference to the valuation of the global comparable hardware company and the company's own medium-term growth, we give the company 19xPE (FY2021) with a target price of HK $14 per share and a "buy" rating.