Net profit in 2019 was lower than consensus forecast
Lenovo Holdings announced 2019 results: revenue rose 8.4% year-on-year to 389.2 billion yuan, basically in line with expectations; net profit fell 17.3% year-on-year to 3.6 billion yuan, lower than the consensus forecast of 27.7%, mainly due to a significant decline in capital gains in the second half of 2019. The company raised its dividend per share by 10% to 0.33 yuan per share.
Trend of development
Strategic investment will further optimize the structure. The company's investment portfolio is further diversified to create a platform business. The net profit of the financial services sector accounts for about 58%, which is the main growth engine, and the sector's revenue increased by 27.3% compared with the same period last year. The company has optimized its customer base in the financial services sector to strengthen the management of small and micro loans. Net profit in the information services sector increased by 48% compared with the same period last year, mainly due to Lenovo's effective implementation of the new strategy to reduce the size of mobile business. The operating profit margin of the modern services sector has improved, mainly due to a reduction in losses after the introduction of new investors in Baibo mouth. The agri-food business continues to expand strategically, strengthening its advantage in the high-end fruit and animal protein market; sector revenue increased by 21.3% year-on-year. Advanced materials and professional services are concentrated in Lianhong Group and China Eastern Logistics, while the company adjusts its supply chain business to improve profitability.
Thanks to the performance of the capital market, the company's financial investment improved significantly in 2019. The net profit of financial investment in 2019 increased by 67.8% compared with the same period last year, mainly due to the increase in the value of the portfolio of Junlian Capital and Lenovo Star, although the fair value of WeWork fell by about 100 million yuan. Lenovo Star invested in about 60 projects and pulled out of about 20 projects, while Junlian Capital invested in about 29 projects and pulled out of about 40 projects. The return on capital on financial investment is about 5 billion yuan, helping to improve the liquidity of the company. We expect the company to further increase liquidity and financial investment.
Profit forecast and valuation
We have lowered our 2020 revenue forecast by 3.1% to 381.6 billion yuan and net profit forecast by 12.2% to 4.5 billion yuan, mainly considering the increased risks in the information technology and modern service sectors in the context of market fluctuations. We introduce the 2021 profit forecast and expect revenue and net profit to grow by 3.3% and 8.6%, respectively, compared with the same period last year. Currently, Lenovo Holdings trades at 4.5 times 2020 earnings. Maintain the neutral rating, but lower the target price by 30 per cent to HK $14, based on a 40 per cent discount on NAV in 2020, mainly due to macro market fluctuations, resulting in a decline in average valuations, and our target price has 39 per cent upside compared to the current share price.
Risk.
Uncertainty of IT and innovative consumer business; volatility of capital market increases financial business risk.