1QFY25 net profit to mother is in line with our expectations
The company announced 1QFY25 results: revenue of 15.447 billion US dollars, up 19.7% year on year; net profit to mother 0.243 billion US dollars, up 37.9% year on year; net profit to mother of 0.315 billion US dollars under non-Hong Kong financial reporting standards, up 65% year on year. 1QFY25 revenue exceeded our and market expectations, mainly due to ISG (Infrastructure Solution Business) revenue reaching a record high in a single quarter, but since ISG's profit margin was lower than the company's overall, the comprehensive gross margin fell 0.9ppt to 16.6% year on year, and net profit to mother was basically in line with expectations.
Development trends
The recovery momentum of the PC market continues to strengthen, and the AI PC market is receiving good feedback. 1QFY25's IDG revenue increased 11.3% year over year to $11.42 billion, with an operating margin of 7.3%, of which PC operating margin reached 8.8%. 1) PC: According to IDC, global PC shipments continued to grow in 2Q24, with a year-on-year increase of 3%. Lenovo's growth rate was 3.7%, ranking first with a market share of 22.7%. At the same time, thanks to richer product configurations, expanded high-end product portfolios, and reduced discounts, the average PC sales price increased year on year. In the AI PC field, the company's first AI PC product launched in China received positive feedback from users, and the company plans to release AI PC products for the global market at IFA and Tech World conferences in the second half of the year. We believe that the release of new AIPC products and the suspension of Win10 next year will hopefully drive PCs into a new cycle of switching.
2) Non-PC: The share of revenue from businesses other than personal computers increased to 47%, and 1QFY25 tablet and smartphone revenue achieved high year-on-year growth of 30% + and 28% respectively. Among them, smartphone revenue growth rates reached 245% and 59% in the Asia Pacific and EMEA regions, and sales of Razr folding screen phones were impressive.
ISG's revenue grew rapidly in a single quarter, and operating profit losses narrowed. 1QFY25's ISG business achieved revenue of 3.16 billion US dollars, a year-on-year increase of 65%, and operating profit margins narrowed by 2.0ppt/1.6ppt to -1.2% month-on-month, respectively. According to the company announcement, AI server pipelines (potential intended orders) increased by more than 20% month-on-month, orders (in-hand orders) increased 50% month-on-month, and Poseidon liquid-cooled server revenue increased 55% year-on-year. Looking forward to the future, we are optimistic that the company will seize the growth opportunities of the AI server and general server industry, achieve continuous transformation from intended orders to active orders, and further promote the return of ISG's business to positive profits by optimizing the enterprise infrastructure business model, simplifying the product portfolio, and improving operations.
Establish a strategic partnership with Alat to seize the growth potential of the Middle East region. In May 2024, Lenovo announced a strategic partnership with Alat, a subsidiary of the Saudi Sovereign Fund, to issue 2 billion US dollars of three-year zero-interest convertible bonds to Alat. The deal is currently awaiting shareholder approval. We believe this strategic cooperation is expected to help the company further penetrate the Middle East and Africa and build a new regional sustainable manufacturing and supply chain center.
Profit forecasting and valuation
Considering strong ISG orders, we raised ISG revenue expectations; adjusted AI PCASP expectations according to market conditions and lowered IDG revenue expectations accordingly; ultimately raised FY2025/26 revenue by 1% each. However, due to changes in the revenue structure, FY26 net profit was reduced by 8%, and FY25's net profit to mother was basically maintained. The current stock price corresponds to FY25/26 12.8/9.4 times P/E. Maintaining an outperforming industry rating and target price of HK$12.6, corresponding to FY25/26 16.1/11.8 times P/E, with 26% upside compared to the current stock price.