Main points of investment
Steady growth: the company's overall revenue in the first half of the year is 156.7 billion (+ 8%) (RMB, the same below), and the net profit is 2.83 billion (+ 5%). Its business is divided into strategic investment and financial investment, the former covers IT, finance, innovative consumption and services, agriculture and food, new materials and other areas, while the latter includes angel investment, venture capital, private equity and other investment platforms. In the first half of 2018, strategic investment income was 156.4 billion (+ 10%) and return net profit was 3 billion (+ 185%). Financial investment was affected by short-term fluctuations in the capital market, resulting in a decline in valuation, affecting equity and distribution income, with revenue of 470 million (- 83%) and return net profit of 470 million (- 78%).
IT plate: Lenovo Group Limited business warms up, driving IT plate to reverse losses. In the first half of 2018, the IT sector, which controls strategic investments, earned 143.9 billion (+ 7%) and returned to its mother net profit of 230 million (+ 1344%). Lenovo Group Limited is the only investment in the IT sector, and Lenovo Holdings holds 29.1% of its shares, which accounts for the largest proportion of revenue. As Lenovo Group Limited's computer business recovers with the overall market, losses on mobile products and data centers have been greatly reduced, profitability has been improved, and profits have been made for two quarters in a row. With the main business back on track, holding's strategic investment has grown steadily.
New consumption: strategic investment layout, gradually become a pillar of profit. The financial sector had revenue of 2 billion (+ 17%) in the first half of 2018, with a net profit of 1.1 billion (+ 78%). Innovative consumption and services, focusing on health care and pre-school education, with revenue of 890 million (+ 17%) and return net profit of 1.14 billion (+ 919%) including equity sale. The agriculture and food sector, which focuses on the whole industry chain of fruits and aquatic products, rose to 6.4 billion (+ 218%) in the same period, with a net profit of 380 million (+ 203%) due to the listing of companies such as Jiaxin Rongmao and Jiawo shares. Advanced manufacturing and professional services sector, into the gain supply chain and China Eastern Logistics two companies equity, revenue 3.1 billion (+ 2%), return to the mother net profit of 150 million (- 66%).
Financial investment: affected by fluctuations in the capital market, revenue and profit declined significantly. According to the investment attribute, it can be divided into the Lenovo star of angel investment, the Jun Lian capital of venture capital and the Hony investment of private equity investment. Due to the large number of IPO projects and the holding of more public offerings in recent years, market fluctuations have affected the valuation and distribution of related assets, with revenue plummeting to 470 million (- 83 per cent) and return net profit of 470 million (- 78 per cent) in the same period.
Risk factors: the profitability of IT business has not been continuously improved, the investment in innovation consumption and services is higher than expected, and systematic risks appear in the capital market, which affect the return on financial investment.
Profit forecast, valuation and investment rating. According to the Lenovo Holdings report, we maintain the profit forecast for the company, that is, the annual forecast net profit for 2018-19-20 is 5.4 billion / 6.1 billion / 6.3 billion RMB respectively, corresponding to EPS2.3/2.6/2.7 RMB, corresponding to August 29 share price is 8-7-6 times PE. We believe that the full circulation of H shares is expected to improve market liquidity and management incentive mechanism, coupled with Lenovo Group Limited's turnaround in the same period, optimistic about the long-term investment value of the holding, maintaining the target price of HK $29 (corresponding to 10 times PE in 18 years) and "overweight" rating.