Performance review
Net profit in 2018 was lower than expected
Lenovo Holdings announced its 2018 results: revenue reached 358.9 billion yuan (up 13.5% from the same period last year), exceeding market consensus expectations by 2.9%; net profit reached 4.4 billion yuan (down 13.6% from the same period last year), 8.1% lower than market consensus expectations. Mainly due to the weak performance of the capital market led to a sharp decline in profits in the financial investment sector (down 87% from the same period last year).
Trend of development
Continuous optimization of strategic portfolio: 1) the performance of the IT sector has improved significantly, mainly due to Lenovo Group Limited's effective implementation of the transformation strategy to improve the profitability of the sector (the business sector recorded a net profit of 1.085 billion yuan in 2018, compared with a net loss of 246 million yuan in 2017) 2) the financial services sector has become the company's new pillar business after the acquisition of Luxembourg International Bank (contributed about 40 per cent of the company's net profit in the second half of 2018), and the CSRC has approved Lakala's listing application. We expect that the International Bank of Luxembourg is expected to optimize Lenovo Holdings' overseas investment portfolio, at the same time, it is expected to bring stable profits and cash flow to the company and promote cooperation between Luxembourg international banks and domestic enterprises; 3) the agricultural and food sector will mainly focus on fruit and animal protein business in the future, continuously strengthening competitive advantage in the context of consumption upgrading (revenue in this business segment increased by 161% year-on-year in 2018). We expect Lenovo Holdings to continue to optimize the company's strategic portfolio and promote strategic portfolio diversification in the future, so as to achieve sustainable financial growth.
Financial investment is under temporary pressure, mainly due to the large fair value losses caused by the downturn in the capital market, but the company's three funds are still operating stably and continue to issue new funds (with a scale of about 7 billion yuan). The project exited smoothly (more than 42 projects have been successfully withdrawn). With the gradual recovery of the market and the launch of Science and Technology Innovation Board, we expect the performance of the company's financial investment sector to improve.
Profit forecast
Taking into account the consolidated statement of the International Bank of Luxembourg, we have raised our revenue forecast for 2019 by 6.4% to 377.7 billion yuan. However, we keep the company's net profit forecast for 2019 unchanged to reflect the uncertainty of the company's earnings forecast. We introduce the 2020 profit forecast for the first time, and the company's revenue and net profit are expected to reach 393.7 billion yuan and 5.6 billion yuan respectively.
Valuation and suggestion
At present, the company's share price corresponds to 8.0 times 2019 price-to-earnings ratio. We maintain the company's "neutral" rating and target price of HK $24 (based on the total valuation of the NAV division in 2019), which is 16% upside from the company's current share price.
Risk.
The performance of the capital market is weak; the choice of investment object is wrong.