Lenovo Group: King of the PC era, full-stack intelligence accelerates transformation. The company was founded in 1984 as the king of the PC era, with a full-stack AI layout from the cloud to the end. The company's core business is distributed in three major groups:
IDG Intelligent Equipment Business Group, ISG Infrastructure Solution Business Group, and SSG Solution Service Business Group, FY2024 accounted for 73.12%, 14.63%, and 12.25% of revenue. Affected by declining demand and inventory removal in the PC industry, FY2024's revenue and net profit to mother were 568.63 billion US dollars and 1,011 million US dollars, respectively, down 8.21% and 37% year-on-year. The company has a wide range of customer resources, covering well-known domestic and foreign Internet vendors, central state-owned enterprises and small and medium-sized enterprises, such as Alibaba, Baidu, Microsoft, State Grid, etc.
IDG: Leading a new major PC growth cycle. Demand for remote work and online education drove a sharp rise in PC sales in 2020; as demand for working from home declined in 22-23, PCs entered a long storage cycle, and sales declined significantly. According to IDC data, 1Q24 PC sales ended eight consecutive quarters of year-on-year decline, and began positive growth for the first time. Lenovo's PC market share reached 22.7% in 2023, ranking first in global shipments for many years, and its position in the industry is stable. AI PCs better meet the demand for data privacy and customization in the To-B scenario, while improving production efficiency, and may accelerate the volume of commercial orders in 2H24. The company has a pioneering advantage in the AI PC field. With the launch of the end-side model AI PC and the steady progress of the high-end strategy, it may lead the PC industry to start a new major growth cycle.
ISG: The founder of the AI computing power throne. The big model represented by ChatGPT has fueled the demand for AI computing power, driving the continued growth in global demand for AI servers. According to IDC data, global server shipments in 2018 were about 11.75 million units, global server shipments reached 13.71 million units in 2022, and the CAGR reached 3.9% in 18-22. The market demand for servers is increasing year by year. Lenovo is deeply involved in the server field and has adopted a unique ODM+ model. It has deep technology accumulation and brand recognition in the fields of supercomputing, liquid cooling, etc., and is the third largest AI infrastructure provider in the world. The company launched a server compatible with B200 and GB200 chips to advance the next generation of core products, which is expected to achieve good performance contributions in 2H24.
SSG: Profit growth engine to accelerate full-stack AI deployment. The operating profit margin of FY2024's Solution Service Business Group reached 21.4%, which is significantly superior to other business groups, which strongly drives the improvement of the company's overall profitability. Under the AI wave, the company's SSG business implemented the “one engine, three arrows” strategy to meet the intelligent needs of government enterprises, small and medium-sized enterprises, and consumer users, and help customers implement AI applications.
Investment advice: We expect the company FY2025-FY2027 to achieve revenue of 60.924/66.064/70.522 billion dollars, and achieve net profit of 1.215/1.547/1.903 billion US dollars, corresponding to the current market capitalization PE of 13/10/8 times, respectively. Currently, the PC and server industries have shown a clear bottom recovery trend. Lenovo's global launch of AI PCs is expected to lead the industry to start a new upward cycle; the company is a global server leader, with current AI chips Supply constraints are easing, and AI servers are expected to be scaled up, driving the profit center upward. We believe that the company is the core target of the AI wave and maintains a “recommended” rating.
Risk warning: PC recovery falls short of expectations, AI chip supply is tight, AI development falls short of expectations