The PC business is recovering smoothly, and AI servers are gradually being rolled out

Considering the steady recovery of PC and the expected narrowing of the ISG business operating loss rate, we maintained the FY2025-2026 net profit forecast of US$12.05/1,538 million and added the FY2027 net profit forecast of US$1,901 billion, with year-on-year growth rates of 19.3%/27.6%/23.6%, respectively, corresponding to the diluted EPS of 0.099/0.127/0.157, equivalent to HK$0.78/0.99/1.22. The latest stock price of HK$11.32 corresponds to 14.6/11.4/9.2 PE in the 2025-2027 fiscal year. The company's AI PC product software and hardware ecosystem continues to optimize and improve the user experience, and the AI server is expected to enter the deployment stage and maintain a “buy” rating.

FY2024Q4 operating profit was basically in line with expectations. As a result of non-operating projects, net profit exceeded expectations. FY2024Q4 achieved revenue of 13.833 billion US dollars, up 9.5% year on year, slightly exceeding our expectations, stemming from ISG's business revenue growth of 15.1% year on year; while IDG's business revenue growth of 6.8% year on year was basically in line with our expectations. According to IDC data, PC business shipments grew 7.8% year on year higher than the overall growth rate of the industry by 1.5%. At the same time, strong mobile phone business performance reached double-digit growth. In terms of profit margins by business, PC business OPM remained stable at 7.39% month-on-month, SSG business OPM slightly increased to 21.4% month-on-month, and ISG's business operating loss rate temporarily expanded to -3.8% (due to the impact of R&D expenditure). FY2024Q4 achieved net profit of US$225 million, a year-on-year increase of 97.8%, exceeding our expectations. The analysis was mainly due to the impact of non-operating projects (increase in investment income and reduction in depreciation and amortization).

AI PCs and overseas mobile phones drive the steady growth of IDG. The 2024H2 server volume is expected to exceed expectations along with the intensive release of the company's AI PCs and the continued expansion of the overseas mobile phone business, and the FY2025 IDG business is expected to achieve steady growth. As GPU supply pressure eases and product abundance continues to increase, we expect 2024H2 ISG business revenue to exceed expectations, and the company guides ISG's operating profit margin to turn a loss into a profit in FY2025Q4. Considering that the weak recovery in the PC business has basically been reflected in the market, and the server business is expected to exceed expectations (potential orders for AI servers are abundant, and ordinary servers are expected to recover in 24H2), it is expected that the market's confidence in its performance prospects will be further boosted at that time.

Risk warning: Global IT capital expenditure falls short of expectations, raw material costs are rising, and macroeconomic growth is slowing.