Revenue and profit increased rapidly during the Q1 fiscal quarter. In the 24/25Q1 fiscal quarter, the company achieved revenue of 15.4 billion US dollars, an increase of 20% year over year. Among them, IDG/ISG/SSG/ inter-division offsetting revenue was 114/3.2/1.9/-1 billion US dollars, respectively, and the three major business groups grew 11%/65%/10% year-on-year, respectively. In terms of product structure, the share of non-PC businesses further increased to 47%, a record high. In terms of profitability, the company recorded a gross margin of 16.6% for the Q1 fiscal quarter, a year-on-year decrease; net profit to mother was 0.243 billion US dollars, up 38% year on year, and net profit margin to mother 1.6%, up 0.2 pct year on year; net profit from non-Hong Kong financial reporting standards was 0.315 billion US dollars, up 65% year on year.

ISG's revenue growth reached a record high, and AI servers are growing steadily. In the 24/25Q1 fiscal quarter, ISG's business revenue was 3.16 billion US dollars, operating loss was 37.27 million US dollars, and OPM was -1.2%. The loss margin narrowed by 2 pcts year over year, improving 2.6 pcts from month to month. We expect the ISG business to reverse OP losses in the second half of the fiscal year. By business: 1) In terms of AI servers, the company has potential orders for GPU servers of about 7 billion dollars as of 23/24FY. According to the public results meeting for the 24/25Q1 fiscal quarter, the AI server pipeline increased by more than 20% month-on-month, and the order growth rate exceeded 30%. 2) Non-computing sales revenue, including storage and high-performance computing, accounted for 34% of ISG's revenue. Among them, the storage business recorded a record high in the Q1 fiscal quarter, achieving double-digit year-on-year growth for the 10th consecutive quarter.

IDG's business achieved double-digit growth, and AI PCs began to accelerate in the second half of the year. In the 24/25Q1 fiscal quarter, IDG's business revenue increased 11% year over year to 11.4 billion US dollars, and OPM recorded 7.3%, up 0.9 pct year over year. The company's AI PC products with five major characteristics began shipping in China in mid-May this year. The Q1 fiscal quarter achieved a medium single-digit penetration rate in China, which is expected to reach a penetration level of 10% by the end of the year. In the second half of the year, the company will launch more AI PC products at IFA and TechWorld to expand AI PCs to the global market.

Lenovo and Alat have established a strategic partnership to help seize rapid IT growth opportunities in the MEA region. On May 29, Lenovo Group disclosed the announcements of “Strategic Cooperation with ALAT and Proposal to Issue Convertible Bonds under Special Mandate” and “Proposed Issuance of Warrants under Special Mandate”. As part of the cooperation between the two parties, the company also signed a bond subscription agreement. According to the agreement, Lenovo Group will issue 2 billion US dollars of interest-free convertible bonds to Alat, which will expire 3 years after issuance (can be extended for 3 months according to terms and conditions), and can be converted into shares according to terms and conditions at maturity.

The convertible bond is subject to approval by Lenovo shareholders before it can be issued.

On August 19, Lenovo Group announced that it will hold an online+offline shareholders' meeting on September 12 to vote on the strategic cooperation framework agreement and bond subscription agreement between the company and Alat. We believe this strategic cooperation will not only provide Lenovo Group with greater financial flexibility, but also help the company expand its customers in the MEA region and promote a more global manufacturing layout.

Investment advice: We expect the company's revenue of 24/25FY, 25/26FY, and 26/27FY to be 62.1/68/77.3 billion US dollars, +9.3%/+9.4%/+13.7% YoY; net profit to mother of 1.2/1.5/2 billion US dollars, +17%/+31%/+29% 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$144.6 billion (target price of HK$12 per share, based on the closing exchange rate on August 16), 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 falls short of expectations; server industry growth falls short of expectations; increase in the company's server market share falls short of expectations; upstream raw material supply risk; new business development falls short of expectations; risk of exchange rate fluctuations; risk of uncertainty in calculation assumptions.