Incidents:
Lenovo Group announced on May 23, 2024: FY2023/24 Q4 (corresponding to the natural year 2024Q1), the company achieved operating income of US$13.833 billion (YoY +9%, QoQ -12%), gross profit of US$2,428 billion (YoY +13%, QoQ -7%), and net profit of US$248 million (YoY +118%, QoQ -26%). FY2023/24 (corresponding to the natural year 2023Q2~2024Q1), the company achieved operating income of $56.864 billion (YoY -8.2%), gross profit of US$9.803 billion (YoY -6.6%), and net profit of US$1.01 billion (YoY -37.1%).
Investment highlights:
Overall performance was FY2023/24Q4. The company's revenue, gross profit, and net profit to mother all achieved year-on-year growth. Among them, net profit to mother increased 118% year over year. We believe that the significant improvement in performance confirms to a certain extent that the company's business is in the process of gradual recovery. In terms of profit margins, since bottoming out in the same period last year, despite seasonal fluctuations, both gross margin and net margin were in an upward trend throughout FY2023/24. In terms of cost ratio, FY2023/24Q4 compared to the previous quarter, R&D/sales and marketing/management cost ratios increased to varying degrees. In the first half of the fiscal year, the company's performance was poor due to the weakening of the overall market. The acceleration in demand in the second half of the fiscal year, especially in Q4, had a certain impact on the annual results. Despite this, the company's revenue and net profit to mother in FY2023/24 fell 8% and 37% year on year. We believe that as the iteration of AI PCs drives switching requirements and the execution of AI server orders, the improvement in the company's performance will be sustainable in the new fiscal year.
IDG (Smart Device Business Group) FY2023/24Q4, IDG achieved revenue of US$10.463 billion (YoY +7%, QoQ -15%), accounting for 71% of total revenue and 7.4% operating margin. In terms of PC business, according to IDC and 2024Q1, global PC shipments increased 1.5% year on year, and Lenovo PC shipments increased 7.8% year on year. The growth rate was significantly higher than the market average, and the sustainability of the recovery was verified. On the other hand, the company's non-PC business accounted for 44.7% of revenue, a record high, and the contribution of the non-PC business to the company's revenue is constantly increasing. At the beginning of FY2023/24, the PC market continued to bottom out due to excessive channel inventory, which seriously affected IDG's overall performance throughout the year. On FY2023/24, IDG's revenue and operating profit fell 10% and 12% year over year. Looking ahead to the new fiscal year, Lenovo's AI On stage AI PCs with large models will officially go on sale on May 20, and the 618 promotion is coming soon. The company will join hands with Qualcomm and Microsoft to launch a next-generation AI PC, Copilot+PC. We believe AI PCs will officially launch in the first year, and the AI PC penetration rate is expected to continue to increase.
ISG (Infrastructure Solutions Business Group) FY2023/24Q4, ISG achieved revenue of US$2,533 billion (YoY +15%, QoQ +2%), accounting for 17% of total revenue, and operating margin of -3.8%. ISG's losses widened during the quarter due to R&D investment, slow DDR5 transition, and GPU supply restrictions, which were the main reasons for the poor performance of the business line throughout the fiscal year. In the non-server business, consolidated revenue from storage, services, and software reached a record high throughout the year, exceeding $3 billion for the first time in the company's history. It is worth mentioning that the company has become one of the fastest-growing storage solution vendors in the world. On FY2023/24, ISG achieved revenue of $8.922 million (YoY -9%) and operating loss of $248 million. Looking ahead to the new fiscal year, ISG's strategic focus remains on building a competitive artificial intelligence product portfolio. Additionally, ISG has developed a “Profitability Recovery Plan” to turn losses into profits and achieve growth in the new fiscal year.
SSG (Solution Service Business Group) FY2023/24Q4, SSG achieved revenue of US$1.82 billion (YoY +10%, QoQ -10%), accounting for 12% of total revenue and operating profit margin of 21.4%, continuing to maintain its position as the company's growth and profit engine. Among them, the turnover of operation and maintenance services, project and solution services businesses accounted for 55% of SSG, an increase of 5 percentage points over the previous year. The company launched artificial intelligence services such as AI Discover and AI Fast Start to help customers adopt AI; in addition, TruScale's service momentum is strong, and the number of contracts signed has achieved double-digit year-on-year growth. SSG's operating profit for the full fiscal year reached 35% of the three major business lines combined, the highest level in history. We believe that with the AI infrastructure in place, hybrid artificial intelligence services will become the core driving force of this business line, and SSG's revenue is expected to grow further.
Profit forecast and investment ratings In view of the recovery of the PC market, the continuous iterative penetration of AI PCs, and the gradual easing of GPU supply restrictions on shackled server orders, we believe that the company's performance for the new fiscal year is expected to improve quarterly. We have adjusted this profit forecast. We expect the company's FY2025-2026 revenue to be US$623.98 and US$71.789 billion, respectively, and net profit to mother of US$12.77 and US$1,843, respectively. The corresponding EPS ratio is $0.11 and 0.15, respectively. 13.45X and 9.32X, maintaining a “buy” rating.
Risks suggest that competition in the industry is intensifying; the degree of recovery in PC and server businesses falls short of expectations; geopolitical conflicts have led to supply chain disruptions; technology leapfrogging and substitution, disrupting the company's existing technical advantages; and the progress of AI applications in terminals falls short of expectations.