The 2022 results fell short of our expectations
The company announced results for the full year of 2022: revenue of 483.7 billion yuan, slightly lower than our previous expectations, mainly because Lenovo Group's PC business revenue fell short of expectations due to the impact of the pandemic; the net profit of the mother was 1.2 billion yuan, down 79.7% from the previous year, lower than our previous expectations. The main reason was the decline in the fair value of some investment projects under the influence of capital market fluctuations in 2022, and the narrowing of the contribution of the industrial operations sector to profits due to macroeconomic disturbances.
Development trends
The industrial operation sector is based on ups and downs and steady operation. The revenue of the industrial operating sector in 2022 was 479.6 billion yuan, down 2.4% year on year. By entity, 1) Lenovo Group: Revenue fell 2% year over year to 444.4 billion yuan. The PC business fluctuated due to falling demand in the fourth quarter. The non-PC business grew rapidly, accounting for more than 40% of revenue; 2) Jiawo Group: Revenue increased 20% year over year, but large-scale goodwill impairment was carried out due to rising purchase prices of bulk raw materials and feed, interest rate hikes, and inflation, which dragged down Guimo's net profit. 3) International Bank of Luxembourg: Compared with the performance of similar banks in Europe, which achieved contrarian growth, revenue increased 2% year on year (10% increase in Euros), and net profit of the mother increased 6% year on year, mainly due to internal risk management optimization and business diversification. We anticipate that the company's industrial operating sector revenue will achieve steady growth in low units in 2023.
The industrial incubation and investment sector took the initiative to break the game and optimize its allocation. Revenue from the industry incubation and investment sector increased 6% year-on-year to 4.1 billion yuan in 2022. Affected by capital market fluctuations in 2022, the sector's contribution to net profit of the mother declined from 1.5 billion yuan in 21 to -2.3 billion yuan. In the past 3 years, the company successfully promoted the listing of 60 invested companies. Currently, 50%-60% of investment business holdings are still listed targets that have not yet been withdrawn. In 2022, the company actively optimized capital allocation and returned about 8 billion yuan in cash by increasing the dividends of invested companies and withdrawing from non-core assets. At the same time, the company took the initiative to reduce leverage. After excluding highly leveraged businesses (Lenovo Group, International Bank of Luxembourg), the balance ratio in 2022 fell below 60%, down 1.4ppt from the previous year. Facing the future, various entities such as Lenovo Holdings, Junlian Capital, and Lenovo Star participated in nearly 40 AI companies, including Fuhanwei and Cambrian, laying out breakthroughs in underlying technology.
Profit forecasting and valuation
Considering that the PC business still needs to be repaired, we cut our 2023 revenue by 13% to 498.5 billion yuan; considering the uncertainty of the industry incubation and investment sector, we lowered net profit of 2023 by 20% to 5.7 billion yuan; and introduced 2024 revenue and net profit of Fumo of 533.3 billion yuan and 6.7 billion yuan for the first time. Maintaining an outperforming industry rating and target price of HK$12 (based on the segmentation plus aggregation method, taking into account the recovery in market sentiment; the target price corresponds to the predicted price-earnings ratio of 4.2/3.5 times 2023/2024), with room for a 36% increase from the current stock price. The company's current stock price corresponds to the 2023/2024 forecast price-earnings ratio of 3.1/2.6 times.
risks
IT and innovative consumer business uncertainty; capital market fluctuations.