Incident: FY2024's revenue was US$56.864 billion, down 8.2% year on year, of which non-PC revenue rose 3% year on year, accounting for 42%; net profit to mother was US$1,011 million, down 37.1% year on year, mainly due to: 1) declining profitability of the smart device business (IDG); 2) increasing investment in AI. Net profit to mother exceeded Bloomberg's agreed estimate of US$935 million by about 8%. The analysis was due to FY4Q24 PC gross margin exceeding expectations.

IDG's business diversified and profitability remained high: FY2024 IDG business revenue was 44.599 billion US dollars, down 9.7% year on year; FY4Q24 IDG business revenue was 10.463 billion US dollars, up 6.8% year on year, and achieved diversified growth for 2 consecutive quarters, and showed diversified growth: 1) Lenovo PC shipments increased 7.8% year on year, the growth rate was higher than the market 6 pct; 2) Lenovo smartphone shipments increased 23% year on year, the growth rate was higher than 11 pct; 3) Lenovo pad shipments rose 13% year on year, and the growth rate was higher than Market 12.5pct. In terms of profitability, the FY2024 IDG business profit margin before tax was 7.1%, down 0.2 pct year on year; the profit margin before tax for the FY4Q24 IDG business remained high at 7.4%, up 0.6 pct year on year, and remained flat from month to month.

The recovery of the PC industry stabilizes, and a new AI PC era begins: According to IDC data, global PC shipments in 1Q24 were 59.8 million units, up 1.5% year on year, and achieved year-on-year growth for the first quarter of 9 consecutive months since 1Q22. 2H24 takes into account: 1) Windows updates; 2) the commercial switching cycle is expected to gradually begin; 3) With large-scale AI PC shipments, global PC shipment growth is expected to accelerate. We expect PC shipments to increase by 3%-5% year-on-year in 2024, and grow or accelerate further in 2025. A new AI PC era begins: On April 18, Lenovo released AI PC series products with embedded artificial intelligence “Lenovo Xiaotian”, which initially have AI agent capabilities: 1) AI PPT; 2) AI painter; 3) personal knowledge base; 4) applet store. We believe that the core barriers to Lenovo's personal intelligence development are: 1) secondary training and fine-tuning of large models for PC application scenarios; 2) the ability to coordinate and optimize local multi-model, multi-tasking, and computing resources. 2. On May 21, Lenovo launched Microsoft Copilot+PC, equipped with a Qualcomm Snapdragon X Elite processor based on ARM architecture. Through the Copilot+ knowledge base, users can also use large-scale language model functions in offline scenarios. Along with: 1) Intel and AMD have successively launched processors with stronger AI computing power; 2) Software and application ecosystem optimization, AI PCs are expected to continue to iterate and enrich the application experience.

Pre-tax losses from the Infrastructure Program (ISG) business are expected to gradually narrow: FY2024 ISG business revenue was US$8.922 billion, down 8.5% year on year, and pre-tax losses of US$248 million. The company has a $7 billion AI infrastructure (including servers, storage, and software) potential Intent Order (AI pipeline), which is accompanied by the second half of the year: 1) the release of Nvidia GPU supply; 2) a richer AI server product portfolio such as GB200 and Mi300; 3) Improved operating efficiency, ISG's business revenue growth is expected to accelerate, and pre-tax losses are expected to gradually narrow.

Solution Services (SSG) business revenue continued to grow year on year, improving overall profitability: FY2024 SSG business revenue was US$7.472 billion, up 12.1% year on year; profit before tax was US$1,545 billion, up 11.0% year on year. We expect the high-margin SSG business to continue to grow, leading to an increase in overall profitability.

Profit forecast, valuation and rating: In view of the rapid rise in PC business volume and price due to the acceleration of AI PC iteration, we raised our FY25/26 net profit forecast by 5%/6% to US$1,319.1,702 million, adding an additional FY27 net profit forecast of US$2.03 billion. The company's current stock price of HK$11.06 corresponds to FY25/26 13/10 times P/E. The company: 1) benefits from the boost in consumer switching demand driven by AI PCs; 2) focuses on AI PC software and hardware ecosystems, which is expected to reshape valuation and maintain Lenovo Group's (0992.HK) “buy” rating.

Risk warning: PC demand recovery falls short of expectations; AI PC implementation progress falls short of expectations; downstream demand for infrastructure solutions falls short of expectations.