Mid-term results in 2020 are in line with our expectations
Lenovo Holdings announced results for the first half of 2020: revenue rose 3 per cent year-on-year to 184.9 billion yuan, while net profit fell 76 per cent to 637 million yuan, mainly due to impairment of car rental assets in China.
The results in the first half of the year are in line with our expectations.
Trend of development
The company's strategic investment remains resilient in the epidemic environment. Revenue from Lenovo's information services sector rose steadily 2.6 per cent year-on-year to 168.2 billion yuan, but net profit fell 5.4 per cent year-on-year. Lenovo Group Limited still maintains a leading position in the market, and the computer and mobile phone business is generally less affected by external fluctuations. Revenue from the agriculture and food sector rose 19.7% year-on-year to 8.96 billion yuan, with a loss of 58 million yuan, mainly because the impact of the epidemic on imported goods was offset by an increase in domestic brands and online sales. The financial services business achieved a net profit of 730 million yuan, which became the main driving force of the company's performance growth. The revenue of the new materials business increased by 1.5% year-on-year, and the net profit increased by 56.8%. The income of the innovative consumer sector fell 38.7% year-on-year to 263 million yuan, with a net loss of 1.64 billion yuan, mainly affected by an one-time loss of 3.8 billion yuan for car rental in China (the equity loss corresponding to Lenovo Holdings exceeded 1.01 billion yuan). Looking ahead, with the further improvement of the macro environment and considering that the company's investment portfolio is more robust and resilient, we expect Lenovo Holdings' strategic investment business to gradually recover from the impact of the epidemic.
The financial investment business performed steadily. The financial investment sector contributed 1.43 billion yuan in net profit, an increase of 5.7% over the same period last year. Lenovo Star has a total of nearly 30 projects for follow-up financing, withdrawing from four projects. Junlian Capital withdrew from 25 projects in the first half of this year, with a cash income of 1.3 billion yuan, which greatly improved the liquidity of the group. Considering that Lenovo Star and Junlian Capital plan to raise new funds in the second half of this year, we expect the financial investment sector to remain stable in the future. At the same time, regulators actively reform the capital market to bring investment income opportunities for investors through the listing of investment projects. Therefore, we believe that the company's financial investment will maintain a good return. In view of this, we believe that the company's net profit will pick up significantly in the second half of this year.
Profit forecast and valuation
As we raised Lenovo Group Limited's revenue forecast, we raised Lenovo's revenue forecasts for 2020 and 2021 by 4.7 per cent and 3.7 per cent, respectively. However, taking into account the operational impact of the epidemic on some portfolios until next year, as well as one-time asset impairment, we cut the company's net profit forecast by 22.3% and 3.7%, respectively. The company's current share price corresponds to 6.2 times forecast 2020 earnings. Maintain the neutral rating and the target price of HK $14.0 (based on the partial summation method), there is 35.1% room to rise.
Risk
Uncertainty of IT and innovative consumer business; volatility of capital market.