2QFY23 performance exceeded market expectations
Lenovo Group Limited announced 2QFY23 results: operating income was $17.09 billion, down 4.4% from a year earlier, up 0.8% from a month earlier; operating profit was $851 million, up 4.2% from a year earlier, corresponding to an operating profit margin of 5.0%; pre-tax profit fell 4.3% to $710 million Homed net profit rose 5.7 per cent year-on-year to $541 million, corresponding to a quarterly net interest rate of 3.2 per cent, a year-on-year rise of 0.3pptPerry 2QFY23 performance above market expectations.
We believe that the performance is higher than market expectations, mainly due to: 1) the development momentum of non-PC business is good, accounting for 37.4% of the group's total revenue, of which ISG and SSG revenue have achieved year-on-year double-digit growth; 2) cost control has been effective, and the expense rate during the 2QFY23 period has decreased by 0.4ppt to 11.9% compared with the same period last year.
Trend of development
ISG business has achieved high growth, and the growth rate of high value-added categories is bright. The overall revenue of 2QFY23's ISG business increased 33% compared with the same period last year, of which the cloud IT infrastructure business benefited from the strong demand for overseas cloud computing, with a growth rate of 57.5%, exceeding market expectations, and the enterprise IT infrastructure business grew 9.3% over the same period last year. 2QFY23 high profits, strong growth in revenue from high-tech products, server, smart edge computing, storage business revenue reached record highs in a single quarter, up 28%, 297% and 115% respectively compared with the same period last year, driving the single-quarter operating profit margin of ISG business to increase by 1.7ppt to 1.4% year-on-year.
The PC side keeps the market taking the lead and continues to expand non-PC business. 1) PC: according to IDC,3Q22, global personal PC shipments fell 15% year-on-year. Affected by slowing demand and promotional activities, Lenovo PC 3Q22 shipments dropped 16% year on year, but continued to maintain the first place in the industry (market share 22.7%). The company's PC business product structure continues to be optimized, game books and other high-end categories of revenue to achieve year-on-year growth, solid operating profit margin. 2) non-PC: the mobile phone business has been profitable for 10 consecutive quarters, maintaining its second and third position in Latin America and North America, and continuing to expand new markets.
Steadily promote the plan to double R & D investment and incubate new business of SSG with new technology. 2QFY23's SSG business revenue grew 26% year-on-year, accounting for more than 10% of total revenue, of which non-hardware-driven operation and maintenance services and solutions accounted for more than 50% of total revenue. The company continues to promote technological innovation, 2QFY23 R & D costs increased by 15% year-on-year, the number of R & D personnel increased by 25% year-on-year, committed to incubating edge computing, hybrid cloud, industrial meta-universe and other new businesses. According to the company announcement, Lenovo's self-developed industry intelligent transformation solution has been applied to Ningde era, Sany heavy Industry, Southern Power Grid, Comac and other enterprises.
Profit forecast and valuation
Looking ahead, the company will still be challenged by the epidemic and exchange rate fluctuations, and the PC business will continue to be weak, and considering that overseas cloud capital expenditure is under pressure from macroeconomic disturbances, the net profit of 2023 Universe in fiscal year 2024 will be revised from 5.6% to 11.6% to $2.149 billion / $2.458 billion. The current share price corresponds to a price-to-earnings ratio of 4.3 times earnings for 2023 Universe in fiscal year 2024. Maintain an outperform industry rating and a target price of HK $8.80, corresponding to 6.4 times the price-to-earnings ratio for the 2023 fiscal year and 5.6 times the price-to-earnings ratio for the 2024 fiscal year, which has 47.7% upside from the current share price.
Risk
The impact of the chip shortage exceeded expectations; the capital expenditure of cloud manufacturers slowed down; and the epidemic affected product delivery.