Lenovo Holdings announced its 2018 financial report. Due to the decline in the company's 2018 earnings, we adjusted the 2019/20/21 EPS forecast to 2.3/2.6/2.4 yuan respectively (the original forecast for 2019/20 was 2.6/2.7 yuan), corresponding to the stock price on April 11, 2019, 8 times/7 times PE, respectively. We believe that the company's strategic investment is steady, related assets are expected to be listed in the near future. At the same time, the profit from financial investment is improving, and we are optimistic about the company's long-term investment value. We lowered the company's target price to 25.3 yuan (corresponding to the 2019 profit forecast to 9 times PE) to maintain the “increase in holdings” rating.
Lenovo Holdings announced its 2018 financial report, with consolidated revenue of 358.9 billion (RMB, same below) (13%) and net profit of 4.36 billion yuan (-14%). The company's strategic investment made a profit of 5.22 billion dollars (+186%), of which the IT sector reversed losses for the first time in three years. Return to the mother's net profit went from a loss of 250 million in 2017 to a profit of 1.09 billion, and innovative consumption also reversed a loss of 190 million yuan in 2017 to a profit of 1.01 billion. Financial investments were affected by market fluctuations, and profits fell sharply to 540 million (-87%). Our comments on this are as follows:
Revenue and profit from strategic investments reached record highs. The IT sector, which accounts for the largest share of strategic investment, saw revenue increase 10% year-on-year due to the recovery of Lenovo Group's performance. The net profit of the mother turned from a loss of 250 million dollars in 2017 to a profit of 1.09 billion, making it the sector that grew the most. In addition, Baibo Dental introduced Taikang Life Insurance as a strategic investor, driving the first profit of the innovative consumer sector, totaling 1.10 billion dollars. The financial services sector saw a sharp 91% year-on-year increase in revenue due to the merger of the Bank of Luxembourg, and net profit of the mother increased 56%. Meanwhile, continuing operations in the agri-food and advanced manufacturing sectors have all achieved steady growth, and all five major sectors have achieved profits.
The sector is developing in a balanced manner, and asset plans are being listed one after another. After acquiring the Bank of Luxembourg, Lenovo Holdings opened up development space for overseas financial services and M&A platforms. The share of assets in the financial sector increased to 45%, and the share of assets in the IT sector fell from 55% to 36%, mitigating the impact of seasonal fluctuations in the IT industry. As for future asset listing plans, in addition to the successful La Cala IPO, Zhengqi Financial will soon be listed on the Hong Kong stock market. At the same time, companies such as Lianhong New Materials and China Eastern Logistics are expected to submit IPO applications. The above capital operations will help increase asset value and equity liquidity.
Financial investment is affected by market fluctuations, and the stabilization of the stock market and the Science and Technology Innovation Board will help restore value. The income from financial investment mainly comes from investment project management income and unsold shareholding of follow-up projects. Relevant income is calculated based on listed stock prices. Sector profits in 2018 were affected by market conditions and fell 87% year on year; stock market conditions began to pick up in 2019, which is expected to increase shareholding income. At the same time, the Science and Technology Innovation Board is expected to speed up the listing process of investment projects. For example, Junlian Capital's HKUST National Shield and UniCredit have been included in the acceptance list for listing on the Science and Technology Innovation Board.
Risk factors: The profitability of IT business and innovative consumption and services has not continued to improve, asset listing plans are not as good as expected, and market system risks affect financial investment returns.
Investment advice: Due to the decline in the company's profit in 2018, we lowered the company's 2019/20 EPS forecast to 2.3/2.6 (the original forecast was 2.6/2.7 yuan) and predicted that its 2021 EPS would be 240 million yuan, corresponding to PE8 times/7 times/8 times based on the stock price on April 11, 2019. We believe that the company's strategic investment is steady, related assets are expected to be listed in the near future. At the same time, the profit from financial investment is improving, and we are optimistic about the company's long-term investment value. We lowered the company's target price to HK$25.3 (corresponding to the 2019 profit forecast to 9 times PE) to maintain the “increase in holdings” rating.