23/24FYQ4 results exceeded expectations. In the Q4 fiscal quarter, Lenovo Group's revenue was US$13.8 billion, +9.5%/-12% year over year, respectively, exceeding the agreed market expectations. Smart Device Business Group (IDG) /Infrastructure Solution Business Group (ISG) /Solution Service Business Group (SSG) each achieved revenue of US$105/25/1.8 billion, +7%/+15%/+10% compared to the same period last year. Q4 gross margin reached 17.6%, +0.6pct/month-on-month respectively, reaching a historically high level, mainly benefiting from the increase in the share of high-margin businesses such as SSG. The operating profit margin for the Q4 fiscal quarter was recorded at 3.5%, up 1.2 pct year on year; net profit to mother was 250 million US dollars, a sharp increase of 118% year over year, and net profit margin to mother was 1.8%, +0.9 pct/ month-on-month, respectively.
IDG: AI PCs hope to improve profitability. In the Q4 fiscal quarter, IDG's revenue was $10.5 billion, up 6.8% year over year, and OPM remained at a high level of 7.4%. According to the company's earnings report, PC/non-PC accounts for 78%/22% of IDG in the Q4 fiscal quarter, respectively. 1) As far as the PC business is concerned, the company's PC shipments rank first in the world, with 13.7 million units shipped in the Q4 fiscal quarter, with a market share of 23%. At the same time, the company actively innovates and cooperates. At the Tech World conference on April 18, Lenovo unveiled an AI PC series product with the built-in personal smart device “Lenovo Xiaotian”. On May 21, Lenovo announced its partnership with Qualcomm to launch Microsoft Copilot+ PC. We expect that with the continuous penetration of AI PCs, the ASP and OPM of the company's PC products are expected to increase significantly. 2) As far as non-PC devices are concerned, benefiting from strong performance in North America, EMEA and Asia, the company achieved double-digit growth in shipments and revenue in the Q4 fiscal quarter, which is significantly ahead of the market. In the future, the company will also gradually develop innovative products such as AI phones and MR.
ISG: It will take time to reverse the loss, but there are plenty of potential orders for AI servers. ISG's revenue for the Q4 fiscal quarter was 2.5 billion US dollars, up 15% year over year, mainly due to rapid growth in storage, software, and services businesses. ISG's OPM recorded -3.8%, and we expect the company to still take a few quarters to turn a loss into a profit. In the last fiscal quarter, the company made some breakthroughs in AI servers. The company currently has potential orders for GPU servers of about 7 billion US dollars. We believe that as the GPU supply situation gradually improves, the company's AI servers are expected to grow rapidly.
SSG: Steady business growth boosts the overall profitability of the company. SSG's revenue for the Q4 fiscal quarter was 1.82 billion US dollars, up 10.3% year on year. Double digit year-on-year growth for 12 consecutive quarters, and operating profit margin increased 1.7 pct/1.0 pct yoy to 21.4%. In terms of segmentation, revenue from support services/operation and maintenance services/project and solution services increased by 4%/29%/13%, respectively. During this period, SSG won the largest TruScale infrastructure-as-a-service order to date and obtained a huge deal for equipment and services from a leading automobile manufacturer, which is a landmark. We still believe SSG is poised to be one of the company's new engines of profit for a long time.
Investment advice: Considering the continued penetration of AI PCs, good profitability, and sufficient AI server potential orders, we appropriately raised the 25/26FY profit forecast. The company's revenue of 24/25FY, 25/26FY, and 26/27FY is estimated to be US$601/671/75.4 billion, +5.6%/+11.7%/+12.5% YoY; net profit to mother is US$12/19.27 billion, +62%/+38% YoY. Considering valuation factors such as the company's position in the industry, future growth, and improved profitability, we believe that the company's reasonable market value is HK$182.3 billion (target price HK$14.7 per share, based on the closing exchange rate on May 24), corresponding 12 times the P/E for the 25/26 fiscal year, maintaining a “buy” rating.
Risk warning: Global macroeconomic growth falls short of expectations; global PC market recovery falls short of expectations; AI PC penetration rate or profitability is unanticipated; server industry growth falls short of expectations; the increase in the company's server market share falls short of expectations; upstream raw material supply risks; new business development falls short of expectations; risk of exchange rate fluctuations; risk of uncertainty in calculation assumptions.