Key points of investment

Event: Lenovo Group announced its results for the first quarter of fiscal year 2025. FY2025 Q1 achieved revenue of 15.45 billion US dollars, +20% YoY, +12% month-on-month, gross profit of 16.6%, 1pct YoY, 1pct month-on-month, net profit to mother of 0.24 billion dollars, +38% YoY, -2% month-on-month, net interest rate 1.6% YoY, +0.2pct month-on-month.

IDG: PC & mobile phones performed well, and the AI PC market is progressing smoothly.

1) In the current fiscal quarter, IDG achieved revenue of 11.42 billion US dollars, +11% year-on-month, +9% month-on-month, operating profit of 0.83 billion dollars, +28% year-on-month, +7% month-on-month, and operating profit margin of 7.3%, and +0.9pct year-on-year.

2) The PC business product structure was optimized this fiscal quarter. Revenue from high-end products increased 21% year on year, accounting for an increase of 3.4pcts to 32%. The company maintained its leading position in the industry, with a market share of 23%. The company expects AI PCs to account for more than 50% of the market in 2027. We believe that the company will take the lead in deploying AI PCs, and with the launch of new AI PC products, it is expected to maintain its leading position in the industry.

3) The non-PC business maintained high growth in the current fiscal quarter, with revenue reaching 2.6 billion US dollars, accounting for 23%. Among them, mobile phone and tablet revenue both achieved a year-on-year increase of about 30%, and high-end mobile phone revenue was +142% year-on-year. The share of revenue among mobile phones increased by 14pcts year on year to a new high of 30%.

ISG: Revenue reached new highs & profits continued to recover, and AI infrastructure demand arrived. ISG achieved revenue of 3.16 billion US dollars in the current fiscal quarter, +65% year over month, +24% month on month, and operating profit of -0.04 billion US dollars. The year-on-year loss narrowed 38%, and the month-on-month loss narrowed 61%. Driven by cloud factories' AI investment demand, revenue from the company's storage, software and services, Poseidon liquid-cooled servers, and high-performance computing increased 59%/55%/30% year-on-year respectively, all reaching record highs. As AI investment continues to evolve and superimpose the company's product portfolio and operational improvements, profits are expected to continue to recover.

SSG: Steady growth and profit contribution, AI spawns new demand. In the current fiscal quarter, SSG achieved revenue of 1.89 billion US dollars, +10% YoY, +3.6% month-on-month, and operating profit of 0.4 billion US dollars, +10% YoY, and +2% month-on-month, mainly benefiting from productivity upgrades and digital transformation needs represented by AI empowerment.

Strategic cooperation with Saudi Alat takes globalization one step further. On May 29, 2024, the company signed a strategic cooperation framework agreement with Alat, a wholly-owned company of Saudi Arabia's largest sovereign wealth fund, the Public Investment Fund (PIF). The company issued $2 billion zero-interest convertible bonds to Alat, proposed a three-year share warrant issuance plan, and established a new regional headquarters in Riyadh. This cooperation and subsequent regional investment by the company will accelerate the company's development in the Middle East and Africa markets, and add another regional business center to the company's global development.

Profit forecast and investment rating: Considering that the company's various businesses have begun to benefit from the AI wave and will continue to benefit from this trend, we maintain our forecast for the company's FY2025/2026/2027 net profit of 1.24/1.73/1.99 billion dollars. As of the close of August 16, 2024, the corresponding PE was 12.4/8.9/7.8 times, respectively, maintaining a “buy” rating.

Risk warning: the recovery in PC market demand falls short of expectations, AI applications fall short of expectations, and the risk of increased competition in the industry