2QFY23 results: home net profit is 14% higher than Bloomberg's consensus forecast
Lenovo reported 2QFY23 results of $17.1 billion in revenue,-4.4% year-on-year, 1% higher than Bloomberg consensus expectations, and home net profit of $541 million, + 6% year-on-year, 14% higher than Bloomberg consensus expectations. On a sectional basis, IDG business revenue 2QFY23 fell 11% year-on-year due to weak demand for PC and smartphones, but SSG/ISG business grew by 26% and 33%. We believe that the weak demand for PC may continue in 2023. We will lower the forecast of annual homed net profit of FY2023/2024/2025 by 8%, 6% and 3% respectively to 2 billion / 2.1 billion / 2.2 billion, and lower the target price to HK $11.8 (previous value: HK $13.89), corresponding to 10 times FY23's annual PE. As PC demand is still weak, we will give comparable companies a 47% discount on the average PE level in 2022 to maintain "buy".
IDG business: weak PC demand, acceleration of non-PC business
IDG 2QFY23 revenue fell 11 per cent year-on-year to $13.7 billion, while operating profit fell 12 per cent to $1.02 billion. Lenovo shipped 16.9 million PC units in the single quarter (- 16.1% year-on-year), with a market share of 22.8%, according to IDC. In terms of non-PC products, the company shipped 11 million 3Q22 smartphones (year-on-year-14.7%), but the smart collaboration business continued to grow at double-digit growth rates year-on-year. Since then, Lenovo will continue to focus on the high end of the market, expanding its non-PC product portfolio through innovation and capitalizing on growth opportunities in enterprise collaboration and smart homes through scenario-based solutions.
ISG business: the CSP business is still robust, with storage / edge computing innovation records ISG 2QFY23 revenue of $2.61 billion (year-on-year + 33%) and operating profit of $36 million (year-on-year + 1.4%). Turnover in the edge computing and storage businesses both reached record highs, up 297% and 115% respectively over the same period last year. Lenovo will comprehensively enhance its infrastructure portfolio and apply the ODM+ model in all directions to meet the needs of the CSP area. At the same time, it will continue to invest in innovative technologies (especially in edge computing and services), with the strategic goal of becoming a full-stack infrastructure vendor covering everything from the edge to the cloud, from hardware to software to services.
SSG business: sustained and rapid growth, improved profitability
SSG's 2QFY23 revenue is $1.72 billion (year-on-year + 26%) and operating profit is $368 million (year-on-year + 29%). Among them, the turnover of non-hardware-driven solutions and services accounts for more than half of the overall business of SSG for the first time, and the synergy effect of the newly established Lenovo PCCW Enterprise Solutions Company is also preliminary. Lenovo will focus on key vertical areas and use Lenovo's IP to create repeatable omni-directional solutions.
Lower the target price to HK $11.8
The forecast of FY2023/2024/2025 's annual homing net profit is lowered by 8% to 2 billion / 2.1 billion / 2.2 billion respectively, and the target price is lowered to HK $11.8 (previous value: HK $13.89), corresponding to 10 times FY23 PE. As the demand for PC is still not strong, relative comparable companies are given a 47% discount on the average PE level in 2022, maintaining the "buy".
Risk Tip: uncertainty of PC inventory, global economic fluctuations.