Incident: FY25Q1's revenue was 15.447 billion US dollars, up 19.7% year on year, up 11.7% month on month, and the share of non-PC business revenue increased 5 pct to 47%, reaching a record high; net profit to mother was 0.243 billion US dollars, up 37.3% year over year and 2% month on month, exceeding Bloomberg's agreed expectations of 0.231 billion US dollars by about 5.2 percent, corresponding to net interest rate due to mother of 1.6%, up 0.2 pct year on month.
The PC market recovered, and IDG (smart device) business revenue & operating profit increased year-on-month. 1) FY25Q1's IDG business revenue was 11.422 billion US dollars, up 11.3% year on year and 9.2% month on month; operating profit was 0.828 billion US dollars, up 27.5% year on year and 7.2% month on month, mainly due to the increase in the share of high-end PC products by 3.4 pct, and the opening of commercial PC switches to drive an increase in ASP. According to IDC data, in 24Q2, global PC shipments were 64.9 million units, up 3% year on year, achieving year-on-year growth for two consecutive quarters; Lenovo's PC shipments were 14.7 million units, up 3.7% year on year, ranking first in the world with a market share of 22.7%. 2) According to Canalys, global AI PC shipments will reach 44 million units in 2024 and 0.103 billion units in 2025. The company expects that with the transition of the operating system to Windows 11 and the significant increase in AI PC shipments, the world is expected to accelerate into a new round of PC switching cycles. The company actively cultivates its own intellectual property rights and expands its product matrix. The company develops AI's own intellectual property to improve inference speed, language model compression, and memory usage; continuously diversifying the product range from hardware to components and software, including AI Core chips, Yoga Creator Zone, ThinkShield security solutions, and AI Now personal assistants. According to Canalys statistics, FY25Q1's AI PC shipments increased 228% month-on-month.
3) Non-PC business: FY25Q1's non-PC business accounted for 23% of IDG's business revenue, while tablet/smartphone business revenue increased 33%/28% year-on-year, respectively. The company will further expand its smartphone product portfolio and promote high-end smartphone products to increase its market share.
FY25Q1 ISG (Infrastructure Solution) business revenue reached a record high, and pre-tax losses continued to narrow: FY25Q1ISG's business revenue was 3.16 billion US dollars, up 65.1% year over year and 24.7% month on month, and quarterly revenue reached a record high. The pre-tax loss was 37.27 million US dollars, and the loss continued to narrow, falling 59.4 million US dollars month-on-month and 23.14 million US dollars year-on-year. 1) Increased demand for AI servers. The company's AI server high-intention orders (pipelines) increased 20% month-on-month, and actual orders (orders) increased 50% month-on-month. 2) The quarterly revenue of liquid cooling solutions reached a record high, with a year-on-year increase. The company's exclusive Neptune hot water and liquid cooling technology collaborates with major GPU vendors to launch new AI infrastructure products and services. 3) The quarterly revenue of the storage business reached a record high, achieving double-digit year-on-year growth for ten consecutive quarters.
FY25Q1 SSG (Solution Service) business revenue continued to grow in double digits year over year: benefiting from the productivity upgrade and digital transformation of enterprise customers, the company's FY25Q1 SSG business revenue was 1.885 billion US dollars, up 10.0% year on year and 3.6% month on month; profit margin before tax was 21%.
Among them, revenue from support services/operation and maintenance services increased 2%/16% year over year, and the total contract value of equipment as a service and infrastructure as a service increased nearly 40% year over year. Since the establishment of SSG Group, it has achieved 13 consecutive quarters of double-digit growth with operating profit margins exceeding 20%, driving the company's overall profitability to increase.
Profit forecast, valuation and rating: We maintain our FY25-27 net profit forecast of $1.319/1.702/2.003 billion. The company's current stock price of HK$10.02 corresponds to FY25/26 12/9 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 valuations and maintain a “buy” rating.
Risk warning: Commercial PC demand recovery falls short of expectations; AI PC implementation progress falls short of expectations; downstream demand for infrastructure solutions falls short of expectations.