Initiating Coverage, 11 June 2015
Lenovo Group (992 HK) Buy Technology - Hardware & Equipment Target Price: HKD14.80 Market Cap: USD16,049m Price: HKD11.20
Macro Risks 2 Acquisitions On Track To Drive Growth Growth . 2 0 Value .
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. 03 0 We initiate coverage on Lenovo with a BUY and DCF-derived HKD14.80 . Lenovo Group (992 HK) 0 Price Close Relative to Hang Seng Index (RHS) TP (32% upside), implying 16x FY16F P/E. It is the world’s largest PC 0 14.2 131 brand and we believe it can replicate its PC successes in smartphones 0 13.7 128 and enterprise servers via newly-acquired Motorola Mobility and
13.2 124 System X. We forecast 22% recurring net profit CAGR for FY15F-18F on
12.7 121 slower but more diversified topline growth and cost synergies from the new businesses. 12.2 117
11.7 114 PC still getting stronger. While the personal computer (PC) market has 11.2 110 declined in recent years, PCs have evolved to become more mobile- 10.7 107 friendly. Lenovo Group (Lenovo) led the global PC market with a 20%
10.2 103 market share in 2014, and we expect further share gains as smaller PC
9.7 100 makers like Sony (6758 JP, NR), Fujitsu (6702 JP, NR) and Toshiba (6502 JP, NR) exit the market. We expect its PC group to still book low 9.2 96 180 160 single-digit revenue growth and solid cash flow. 140 120 M&A growth opportunities. The acquisitions of IBM System X (System 100 X) and Motorola Mobility were completed on 1 Oct and 1 Nov 2014 80 60 respectively. While the acquired businesses are still loss-making at the 40 20 pre-tax level in 4QFY15 (Mar), Lenovo has maintained its targets of
Volm turning the mobile group profitable at the operating level within 4-6
14 15
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- quarters (c.1HFY17) and reaching USD5bn in revenue with the
Oct Apr
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Dec Aug enterprise group and enhancing its operating profit margin. Source: Bloomberg Earnings growth speeds up. Driven by margins improvement from new products and the streamlining of costs from M&As, we expect Avg Turnover (HKD/USD) 519m/66.9m 32%/22%/18% recurring net profit growth in FY16F-18F respectively Cons. Upside (%) 21.4 from 22% in FY15. Our adjusted EPS numbers are much higher than the Upside (%) 32.1 Bloomberg consensus as, unlike them, we excluded non-cash M&A 52-wk Price low/high (HKD) 9.63 - 13.9 accounting charges. Free float (%) 58 Initiate coverage with BUY and HKD14.80 TP. Our TP is derived using Share outstanding (m) 11,109 DCF, which implies 16x FY16F P/E (slightly higher than 2SD above its Shareholders (%) past 3-year mean). We believe that DCF is the most appropriate Legend Holdings Corp 30.6 valuation as: i) it captures the long-term benefits of cost synergies from the Motorola and System X acquisitions, and ii) the group now has a Yang Yuanqing 6.7 more diversified and less cyclical revenue base. Google Inc 4.7 Key risks. Slower PC & smartphone replacement cycles, potential
Share Performance (%) disruption from new technologies, fierce competition in the smartphone YTD 1m 3m 6m 12m market and the appreciation of the USD are all key risks. Absolute 9.8 (15.8) (3.8) 4.1 16.3 Forecasts and Valuations Mar-14 Mar-15 Mar-16F Mar-17F Mar-18F Relative (4.5) (13.7) (16.7) (10.6) 0.5 Total turnover (USDm) 38,707 46,296 53,355 55,627 58,053 Reported net profit (USDm) 817 829 1,004 1,304 1,534 Shariah compliant Recurring net profit (USDm) 817 997 1,324 1,610 1,894 Recurring net profit growth (%) 28.7 22.0 32.8 21.6 17.6
Recurring EPS (USD) 0.08 0.09 0.12 0.15 0.17 Christopher Tse +852 2103 9415 DPS (USD) 0.03 0.03 0.04 0.05 0.06 [email protected] Recurring P/E (x) 18.3 15.5 12.1 9.9 8.4
P/B (x) 4.99 3.93 3.42 2.88 2.45 Kong Yong Ng 852 2103 5844 P/CF (x) 10.2 57.2 6.1 6.5 5.9 [email protected] Dividend Yield (%) 2.1 2.4 2.9 3.7 4.4 EV/EBITDA (x) 8.26 8.94 6.49 5.12 4.77 Return on average equity (%) 28.8 23.4 22.9 25.4 25.3 Net debt to equity (%) net cash 0.7 net cash net cash net cash Our vs consensus EPS (adjusted) (%) 33.0 23.3 9.7
See important disclosures at the end of this report Source: Company data, RHB Powered by EFATM Platform 1
Lenovo Group (992 HK) 11 June 2015
Table of Content Investment Highlights 3 Valuation 4 Peer Comparison 5 Sensitivity Analysis And Key Risks 6 Earnings Outlook 7 Balance Sheet 13 Segmental Outlook 14 i. PC Group ii. Mobile Group iii. Enterprise Group Lenovo Products 25 Management Profile 30 Shareholding Structure 30 Financial Exhibits 32 SWOT Analysis 33
See important disclosures at the end of this report 2
Lenovo Group (992 HK) 11 June 2015
Investment Highlights A leading global PC brand. Lenovo leads the global PC market with a 19% market share in 1Q15. Its homegrown Lenovo smartphone brand was also among the Top 5 globally in terms of shipments in 2014. In Oct 2014, it successfully closed the acquisitions of Motorola from Google (GOOG US, NR) and the System X server product line from IBM (IBM US, NR), thereby expanding its existing mobile and enterprise businesses. Following the acquisition, Lenovo became third in terms of smartphone shipments and fourth in server shipments in 1Q15, possessing one of the most complete product portfolios in the consumer electronics and hardware space. It was listed on the Hong Kong Stock Exchange in Feb 1994 as Legend Holdings. The group was then subsequently renamed as Lenovo after spinning off its product distribution division, Digital China (861 HK, BUY, TP: HKD15.44), in 2001. It is now a constituent of the Hang Seng Index (HSI). Margin enhancement from new products and cost integration. We expect Lenovo’s GPM to improve to 15.3%/15.5%/15.5% respectively in FY16-18, driven by new products from Motorola and System X. We estimate that the businesses of Motorola smartphones and System X servers both have GPMs of about 20%, above Lenovo’s own 13-14% GPM in FY13-14. In addition, as both Motorola and System X have cost structures that overlap with that of Lenovo’s, management is confident that it could turn the mobile group profitable at the operating level in 4-6 quarters (c.1H17) and enhance the operating margins of its enterprise group. Going forward, we expect pre-tax losses in those divisions to narrow through higher GPM and lower operating expenses via the consolidation of the group’s research and development (R&D) teams and shifting of higher-cost overseas manufacturing operations to lower-cost existing facilities in China. Strong execution ability. Lenovo possesses a world-class management team with a strong track record of absorbing new businesses into its existing lines. In 2004, it acquired ThinkPad PC from IBM and, along with its own Lenovo PC brand, grew its PC business into the largest player in the world. We believe it can replicate its past successes with Motorola and Server X. More diverse revenue base. Although we forecast only a mild 8% revenue CAGR in FY15-18, we believe the group’s revenue base could be less cyclical going forward. This is due to a more diverse revenue mix across the PC, mobile and enterprise groups in terms of products and geographic regions (China, Europe and the Americas). Earnings growth accelerates. We expect recurring net profit to expand at a 22% CAGR in FY15-18, similar to 22% in FY15. Our EPS projections are based on recurring net profit being much higher than the Bloomberg consensus, as we exclude non-cash M&A accounting charges (note that Bloomberg does not impute this). Initiate coverage with BUY and HKD14.80 TP. We set our TP using DCF (WACC: 10.1%, TG: 2%), implying 16x FY16F P/E. This is above PC peers HP’s 9x FY Oct- 15 and Asustek’s 11x FY Dec-14 P/Es. We believe this is reasonable as Lenovo is the market share leader in PCs and its EPS growth is outperforming that of its peers.
Figure 1: Revenue and recurring net profit growth Figure 2: Gross & pre-tax margin trends
120% 18.0% Title: Title: Source: Source: 16.0% 100% 14.0% Please fill in the values above to have them entered in your report Please fill in the values above to have them entered in your report 80% 12.0%
10.0% 60% 8.0%
40% 6.0%
4.0% 20% 2.0%
0% 0.0% FY11 FY12 FY13 FY14 FY15 FY16F FY17F FY18F FY11 FY12 FY13 FY14 FY15 FY16F FY17F FY18F
Revenue growth Recurring NP growth Gross margin Pretax margin
Source: Company data, RHB Source: Company data, RHB
See important disclosures at the end of this report 3
Lenovo Group (992 HK) 11 June 2015
Valuation We initiate coverage on Lenovo with BUY and a TP of HKD14.80. We derive our TP using DCF, with a 10.1% WACC and 2% TG, implying 16x FY16F P/E. We believe that DCF is the most appropriate valuation methodology, because: i. It captures the long-term benefits of synergies from the Motorola and System X acquisitions ii. The group now has a more diversified and less cyclical revenue base.
Figure 3: Lenovo DCF valuation FYE March-31 (USDm) 2016 2017 2018 2019 2020 2021 2022 2023 2024 Revenue 53,355 55,627 58,053 59,932 61,690 63,080 64,242 65,227 66,027 YoY 15% 4% 4% 3% 3% 2% 2% 2% 1% EBITM 2.4% 3.0% 3.3% 3.5% 3.7% 3.9% 4.0% 4.1% 4.2% EBIT 1,282 1,661 1,927 2,118 2,306 2,483 2,589 2,693 2,792 YoY 15.6% 29.6% 16.0% 9.9% 8.9% 7.7% 4.3% 4.0% 3.7% tax rate -12% -15% -15% -17% -19% -20% -20% -20% -20% NOPAT 1,133 1,412 1,638 1,758 1,868 1,986 2,071 2,154 2,234 Depreciation 340 355 369 382 394 408 419 425 432 % of revenue 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% Amortization 484 499 495 493 493 493 494 495 497 % of revenue 0.9% 0.9% 0.9% 0.9% 0.9% 0.9% 0.9% 0.9% 0.9% Capex -907 -890 -929 -929 -956 -978 -964 -978 -990 % of revenue -1.7% -1.6% -1.7% -1.7% -1.7% -1.6% -1.6% -1.6% -1.6% Working capital change 677 145 170 -401 137 129 125 121 116 % of revenue 1.3% 0.3% 0.3% -0.7% 0.2% 0.2% 0.2% 0.2% 0.2% FCFF 1,728 1,521 1,743 1,303 1,935 2,038 2,145 2,217 2,289 Discounted cash flow 1,728 1,382 1,439 977 1,318 1,261 1,206 1,132 1,062 Total discounted cash flows 11,506 terminal growth 2.0% WACC calculation: Terminal value 12,192 WACC 10.1% Enterprise value 23,697 Cash 3,026 Equity portion: Debt portion: Debt 5,495 Equity weight 77.6% Cost of debt (after tax) 2.5% NCI 22 Cost of equity 12.3% Debt weight 22.4% Fair market cap (USD) 21,207 beta 1.03 Fair market cap (HKD) 164,564 Risk free rate 3.0% Mar-2016 target price (HKD) 14.81 Required return 12.0% Implied FY16F P/E 16.0 Source: RHB
Figure 4: Lenovo’s DCF sensitivity to key inputs WACC Terminal growth 9.1% 9.6% 10.1% 10.6% 11.1% 1.0% 15.73 14.71 13.80 12.99 12.27 1.5% 16.38 15.26 14.28 13.40 12.62 2.0% 17.13 15.89 14.81 13.86 13.02 2.5% 17.99 16.61 15.42 14.38 13.47 3.0% 18.99 17.44 16.11 14.97 13.96 Source: RHB
See important disclosures at the end of this report 4
Lenovo Group (992 HK) 11 June 2015
Our DCF valuation of HKD14.80 implies 16x FY16F P/E, vs its current 12x and above HP’s 9x FY Oct-15 and Asustek’s 11x FY Dec-15 P/Es. We believe this is reasonable as Lenovo is the market share leader by shipment and its 22% 3-year EPS CAGR is much higher than those peers (per Bloomberg).
Figure 5: Peer comparison I 3-Yr 3-mth FY1 FY2 Hist FY1 Last Mkt cap Hist FY1 FY2 EPS Hist FY1 Company Ticker Price avg t/o EPS EPS PEG Div Yld Div Yld reported (USDm) P/E P/E P/E CAGR P/BV P/BV (USDm) YoY (%) YoY (%) (%) (%) FY (%) Lenovo Group 992 HK 11.20 16,048 73 15.4 12.1 9.9 28.1 21.6 22.4 0.5 2.4 2.5 3.9 3.4 Mar-15
PC peers Hewlett-Packard HPQ US 32.58 58,853 382 12.2 8.9 8.6 37.3 4.4 13.5 0.7 1.9 2.1 2.2 2.2 Oct-14 Asustek Computer 2357 TT 300.50 7,215 24 11.5 11.0 10.2 4.3 8.1 6.6 1.7 N/A 6.0 1.3 1.3 Dec-14 Acer Inc 2353 TT 16.00 1,602 8 24.2 22.8 20.0 6.4 13.8 6.4 3.5 N/A 0.6 0.7 0.7 Dec-14 Average (outliers excluded) 15.9 13.7 12.2 19.0 12.0 12.2 1.6 2.1 2.8 2.0 1.9
Smartphone peers Apple Inc AAPL US 127.42 734,070 6,127 19.6 14.2 13.2 38.7 7.3 17.8 0.8 1.4 1.6 5.7 5.7 Sep-14 Samsung Electron 005930 KS 1,262,000 167,444 292 8.2 8.3 7.6 (0.4) 8.3 4.4 1.9 1.6 1.6 1.0 1.0 Jun-14 Tcl Comm Tech Hl 2618 HK 7.20 1,169 8 7.9 6.9 6.3 14.4 9.8 10.5 0.7 5.4 5.3 2.1 2.1 Dec-14 Coolpad 2369 HK 2.53 1,415 18 21.2 21.8 19.6 (2.8) 11.2 12.1 1.8 0.4 0.6 3.2 3.2 Dec-14 Average (outliers excluded) 14.2 12.8 11.7 12.5 9.1 11.2 1.3 2.2 2.3 3.0 3.0 Source: Bloomberg, RHB Figure 6: Peer comparison 2 Hist FY1 FY2 Hist GPM FY1 GPM FY2 GPM Hist NPM FY1 NPM FY2 NPM Symbol Company Revenue Revenue Revenue (%) (%) (%) (%) (%) (%) (USDm) (USDm) (USDm) 992 HK Lenovo Group 46,296 53,355 55,627 14.4 15.3 15.5 2.2 2.5 2.9
PC peers HPQ US Hewlett-Packard 111,454 104,781 104,351 23.9 23.8 24.1 4.5 6.4 6.6 2357 TT Asustek Computer 15,453 15,365 16,072 13.7 13.4 13.4 4.1 4.3 4.4 2353 TT Acer Inc 10,671 10,167 10,290 8.8 9.1 9.0 0.5 0.7 0.7 Average 15.5 15.4 15.5 3.0 3.8 3.9
Smartphone peers AAPL US Apple Inc 182,795 231,845 244,862 38.6 39.8 39.6 21.6 22.5 22.0 005930 KS Samsung Electron 186,106 192,979 201,374 37.8 38.7 39.0 11.2 11.1 11.5 2498 TT Htc Corp 6,082 4,890 4,916 21.7 19.5 19.6 0.8 -6.7 -2.5 2618 HK Tcl Comm Tech Hl 3,959 4,913 5,629 19.3 18.9 18.7 3.6 3.4 3.3 2369 HK Coolpad 3,212 3,780 4,234 12.1 11.6 11.3 2.1 1.7 1.7 Average 25.9 25.7 25.7 7.8 6.4 7.2 Source: Bloomberg, RHB Figure 7: 3 Year forward P/E band
16.00
[email protected] 14.00 [email protected]
[email protected] 12.00
[email protected] 10.00 [email protected]
8.00 Share PriceShare (HKD)
6.00
4.00 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15
Source: Bloomberg, RHB estimates
See important disclosures at the end of this report 5
Lenovo Group (992 HK) 11 June 2015
Sensitivity Analysis
Figure 8: FY16 recurring EPS sensitivity to revenue and GPM changes Revenue % change Ppt change in GPM -10% -5% 0% +5% +10% -2% -69.5% -69.2% -69.0% -68.8% -68.6% -1% -38.4% -36.5% -34.5% -32.6% -30.6% 0% -7.4% -3.7% 0.0% 3.7% 7.4% +1% 23.7% 29.1% 34.5% 39.9% 45.3% +2% 54.7% 61.9% 69.0% 76.2% 83.3% Source: RHB
Key Risks Fierce competition in smartphone business could erode ASPs and margins quickly. The competition among smartphone brands in China is expanding into the overseas market. For example, Xiaomi and Huawei are quickly growing their presence in South-East Asia. Disruptive new technologies or new products. The emergence of new technologies developed by Lenovo’s rivals or new product categories altogether could disrupt the PC market and put Lenovo at a disadvantage. For instance, PC sales were negatively affected when iPad tablets were first introduced by Apple (AAPL US, NR). Slower replacement of PCs may drag on PC sales. As the sizes of transistors are already close to physical limits, the leap in performance from newer generations of central processing units (CPUs) has been much less than previous advancements. This has lengthened the replacement cycles of PCs for consumers, as PCs that are 5-6 years can still adequately run daily applications such as web browsing and word processing for basic users. The slower replacement cycles have also been one of the reasons why PC sales have stagnated. Slight erosion from USD appreciation. As the reporting currency of Lenovo is in USD, the appreciation of USD currency will erode non-USD revenues on translation. Using FY15 as a benchmark, a 1% appreciation in USD would lower profit before tax by USD2.7m, or 0.3% of FY15’s reported earnings. Risk of sanctions. Lenovo’s Enterprise business could be affected by political actions of foreign governments, much like Huawei was barred from entering US government contracts and ZTE was investigated by the EU in an anti-dumping case.
See important disclosures at the end of this report 6
Lenovo Group (992 HK) 11 June 2015
Profit And Loss Strong recurring earnings growth Our recurring earnings forecasts are higher We expect Lenovo’s recurring earnings to rise 33%/22%/18% in FY16F-18F, mainly than the street’s estimates, mainly due to driven by the integration of costs of its acquired businesses amid modest revenue exclusion of the non-cash M&A charge growth. Our recurring EPS forecasts are 33%/23%/10% above the Bloomberg consensus, because we excluded M&A-related non-cash charges (mainly intangible assets amortisation, imputed interest charge on promissory notes and others) in our recurring net income figure while Bloomberg does not. Including these M&A charges, our FY16-18 net profit forecasts are in line with Bloomberg consensus and represents YoY growth rates of 21%/30%/18% respectively vs 1.4% in FY15.
Figure 9: Lenovo’s earnings (reported vs recurring) FYE 31 Mar (USDm) FY14 FY15 FY16F FY17F FY18F Net profit - reported 817 829 1,004 1,304 1,534 YoY 28.7% 1.4% 21.2% 29.8% 17.6% Net profit - recurring 817 997 1,324 1,610 1,894 YoY 28.7% 22.0% 32.8% 21.6% 17.6%
Source: Company data, RHB
Modest revenue growth outlook We expect just 8% revenue CAGR in Lenovo divides its revenues by product groups, namely: i) PC – mass consumer and FY15-18, but it will be less cyclical. business laptop/desktop Windows-based computers; ii) mobile – Android-based Management’s focus is currently on cost smartphones and tablets, iii) enterprise – System X and x86-based servers, and the reduction rather than on topline growth ThinkServer series mainly; and iv) others (or ecosystems group), which are mainly applications, cloud services and other consumer electronic products. We expect Lenovo to deliver 15% revenue growth in FY16F but also estimate this to slow down to 4% in FY17F/FY18F due to: i) slow PC revenue growth amid a declining PC market, and ii) slowing smartphone shipment growth as the smartphone market transitions from a new user market into a replacement one. We are not concerned about the slow revenue growth, as Lenovo ought to have a more diverse and less cyclical revenue base going forward. We believe it is also the group’s priority in the short to medium term to streamline costs of newly-acquired businesses rather than focus on topline expansion.
Figure 10: Lenovo’s quarterly revenue forecast FYE 31 Mar (USDm) 1Q15 2Q15 3Q15 4Q15 1Q16F 2Q16F 3Q16F 4Q16F 1Q17F 2Q17F 3Q17F 4Q17F PC 8,338 8,701 9,147 7,160 8,183 8,567 9,055 8,294 8,372 8,674 9,036 8,359 YoY 15% 11% 5% -8% -2% -2% -1% 16% 2% 1% 0% 1% Mobile 1,548 1,359 3,390 2,845 3,418 3,299 3,927 2,928 3,758 3,621 4,312 3,230 YoY 33% -5% 109% 148% 121% 143% 16% 3% 10% 10% 10% 10% Enterprise 156 184 1,222 1,066 1,089 1,125 1,163 1,202 1,227 1,253 1,280 1,308 YoY 77% 34% 683% 760% 598% 512% -5% 13% 13% 11% 10% 9% Others 353 232 333 263 268 274 279 285 290 296 302 308 YoY 33% -33% 7% -10% -24% 18% -16% 8% 8% 8% 8% 8% Total 10,395 10,475 14,092 11,334 12,958 13,265 14,424 12,708 13,648 13,844 14,929 13,205 YoY 18% 7% 31% 45% 25% 27% 2% 12% 5% 4% 4% 4%
Note: All forecasts are RHB’s Source: Company data, RHB Figure 11: Lenovo’s annual revenue forecast FYE 31 Mar (USDm) FY14 FY15 FY16F FY17F FY18F PC 31,632 33,346 34,099 34,441 35,242 YoY n.a. 5% 2% 1% 2% Mobile 5,354 9,142 13,571 14,921 16,066 YoY n.a. 71% 48% 10% 8% Enterprise 505 2,628 4,579 5,068 5,524 YoY n.a. 421% 74% 11% 9% Others 1,217 1,181 1,106 1,197 1,221 YoY n.a. -3% -6% 8% 2% Total 38,707 46,296 53,355 55,627 58,053 YoY n.a. 20% 15% 4% 4%
Source: Company data, RHB
See important disclosures at the end of this report 7
Lenovo Group (992 HK) 11 June 2015
Healthier mix of revenues by product and by country Lenovo also divides its revenues according to geographic regions. In the past, PCs were the main source of revenue. After the acquisition of Motorola and System X, PCs remained the main revenue source but the mobile and enterprise groups are expected to contribute over 30% of total revenue in FY16-18.
Figure 12: Lenovo’s revenue mix by product group
100% Title: 1% 6% 9% 9% 10% Source: 90% 14% 80% 20% 26% 27% 28% Please fill in the values above to have them entered in your report 70% 60% 50% 40% 82% 72% 30% 64% 62% 61% 20% 10% 0% FY14 FY15 FY16F FY17F FY18F
PC Mobile Enterprise Others
Source: Company data, RHB
Lenovo also divides its revenue according to geographic regions. In the past, China was the main revenue source, with PCs and smartphones. After the acquisition of Motorola and System X, its revenue source is much more balanced across China, Europe, the Middle East and Africa – ie EMEA – and the Americas.
Figure 13: Lenovo’s revenue by geographic segments
100% Title: Source: 90% 18.4% 18.5% 21.3% 26.4% 80% Please fill in the values above to have them entered in your report 70% 21.3% 22.2% Lenovo PC has about a 40% market share 24.8% in China but just c.10% in US. We think it 60% 27.7% still has room to grow in the US 50% 18.4% 16.3% 15.9% 40% 14.1% 30%
20% 41.9% 42.9% 38.0% 31.8% 10% 0% FY12 FY13 FY14 FY15
China Asia Pacific Europe & Middle East Asia Americas
Source: Company data
See important disclosures at the end of this report 8
Lenovo Group (992 HK) 11 June 2015
Acquisitions are accretive to gross margins Motorola/System X respectively contributed 5/6 months respectively to Lenovo’s 2H15 financial results vs none previously. In 3QFY15/4QFY15, Lenovo’s GPM jumped to 14.9%/15.7% respectively from 13.2% in 1QFY14-2QFY15 (pre- acquisition). This was partly due to improving profitability in its PC business – although this also reflects the GPM accretion arising from the acquisitions.
Figure 14: Lenovo’s GPM estimates before and after acquisitions Pre-acquisition (1Q14-2Q15) Post acquisition (3Q-4Q15) FY Mar-31 Group GPM was lifted by the acquisitions of PC 12.8% 13.5% Motorola and System X Mobile 13.3% 17.3% Enterprise 13.0% 19.4% Others 25.0% 25.0% Blended 13.2% 15.2%
Source: Company data, RHB
We expect Lenovo’s group GPM to increase to 15.3-15.5% in FY16F-18F respectively, driven by: i) enhanced production efficiency and the steadily improving bargaining power of its PC business, and ii) GPM accretion stemming from the Motorola and System X acquisitions.
Figure 15: Lenovo’s GPM forecasts by segment FY14 FY15 FY16F FY17F FY18F PC 12.6% 13.3% 13.5% 13.6% 13.6% Mobile 13.2% 16.1% 17.6% 17.7% 17.5% Enterprise 13.0% 18.5% 19.6% 19.5% 19.8% Blended GPM 13.1% 14.4% 15.3% 15.5% 15.5% Source: Company data, RHB
Pretax margin is rising. We expect Lenovo’s pre-tax income to be on an uptrend, as its PC GPM improves while losses booked at its mobile and enterprise divisions continue to narrow. Management has given firm targets to turn the mobile group into a profitable body within 4-6 quarters and achieving a 5% operating profit for the enterprise group (both excluding M&A charges). We expect Lenovo to deliver a steadily rising adjusted pre-tax margin (excluding M&A charges) of 3.7% in FY18, from 2.5% in FY15.
Figure 16: Lenovo’s segmental pre-tax margin forecasts Pretax margin could rise slower than GPM FY Mar-31 FY14 FY15 FY16F FY17F FY18F because of Motorola’s high cost structure PC 3.7% 5.3% 5.6% 5.8% 5.8% Mobile -1.1% -4.0% -4.3% -2.3% -1.1% Enterprise -13.5% -4.6% -2.5% -1.6% -0.8% Blended pretax margin 2.6% 2.1% 2.1% 2.8% 3.1% Adjsuted pretax margin 2.6% 2.5% 2.8% 3.4% 3.7% Source: Company data, RHB
Tax rates should remain low. Losses in Motorola and System X have dragged down Lenovo’s effective tax rate in 3QFY15/4QFY15 to 6.3%/6.5% respectively, from the 19.8% average in 1QFY13 to 2QFY15. We expect tax rates to gradually normalise back to this level in the future, but to remain low in the short term due to negative pre-tax income in the mobile and enterprise groups.
See important disclosures at the end of this report 9
Lenovo Group (992 HK) 11 June 2015
Figure 17: Lenovo’s detailed P&L (Quarter) FYE Mar-31 (USDm) 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16F 2QFY16F 3QFY16F 4QFY16F PC 8,338 8,701 9,147 7,160 8,183 8,567 9,055 8,294 Mobile 1,548 1,359 3,390 2,845 3,418 3,299 3,927 2,928 Enterprise 156 184 1,222 1,066 1,089 1,125 1,163 1,202 Others 353 232 333 263 268 274 279 285 Total revenue 10,395 10,475 14,092 11,334 12,958 13,265 14,424 12,708 YoY 18.3% 7.2% 30.6% 21.1% 24.7% 26.6% 2.4% 12.1% Cost of sales -9,046 -9,018 -11,995 -9,555 -11,042 -11,219 -12,219 -10,698 Gross profit 1,349 1,457 2,097 1,779 1,916 2,046 2,204 2,010 GPM 13.0% 13.9% 14.9% 15.7% 14.8% 15.4% 15.3% 15.8% Selling & distribution -467 -491 -687 -658 -685 -688 -726 -659 Admin expenses -369 -391 -577 -546 -600 -602 -635 -577 R&D expenses -180 -203 -414 -424 -428 -430 -454 -412 Other income 0 1 0 0 0 0 0 0 Other operating income -50 -8 -95 -16 0 0 0 0 EBIT 283 365 325 136 203 327 390 362 Opex / sales -10.3% -10.4% -12.6% -14.5% -13.2% -13.0% -12.6% -13.0% EBITM 2.7% 3.5% 2.3% 1.2% 1.6% 2.5% 2.7% 2.9% Finance income 18 8 6 -1 12 12 12 12 Finance costs -35 -43 -55 -52 -52 -52 -52 -52 Associates & JVs -2 -1 -2 22 4 4 4 4 Pretax income 264 329 275 104 167 292 354 326 Pretax margin 2.5% 3.1% 1.9% 0.9% 1.3% 2.2% 2.5% 2.6% Income tax -53 -57 -17 -7 -15 -29 -42 -46 Tax rate -20.2% -17.3% -6.3% -6.5% -9.0% -10.0% -12.0% -14.0% MI 3 -10 -4 3 0 0 0 0 Net profit - reported 214 262 254 100 152 262 311 280 YoY 22.8% 19.1% -4.4% -36.7% -29.0% 0.1% 22.5% 179.6% Net profit - recurring 214 262 327 194 234 343 390 358 YoY 22.8% 19.1% 23.4% 22.8% 9.4% 31.1% 19.1% 84.0% Source: Company, RHB
See important disclosures at the end of this report 10
Lenovo Group (992 HK) 11 June 2015
Figure 18: Lenovo’s detailed P&L (annual) FYE 31 Mar (USDm) FY14 FY15 FY16F FY17F FY18F PC 31,632 33,346 34,099 34,441 35,242 Mobile 5,354 9,142 13,571 14,921 16,066 Enterprise 505 2,628 4,579 5,068 5,524 Others 1,217 1,181 1,106 1,197 1,221 Total revenue 38,707 46,296 53,355 55,627 58,053 YoY 14% 20% 15% 4% 4% Cost of sales -33,643 -39,614 -45,177 -47,016 -49,044 Gross profit 5,064 6,682 8,178 8,611 9,009 GPM 13.1% 14.4% 15.3% 15.5% 15.5% Selling & distribution -1,900 -2,302 -2,758 -2,780 -2833 Admin expenses -1,403 -1,883 -2,413 -2,432 -2479 R&D expenses -732 -1,221 -1,724 -1,737 -1771 Other income 22 1 0 0 0 Other operating income 1 -169 0 0 0 EBIT 1,052 1,109 1,282 1,661 1,927 Opex / sales -10.4% -11.7% -12.9% -12.5% -12.2% Total opex -4,035 -5,406 -6,895 -6,949 -7,082 EBITM 2.7% 2.4% 2.4% 3.0% 3.3% Finance income 34 31 49 63 70 Finance costs -81 -186 -210 -205 -207 Associates & JVs 9 17 17 17 17 PBT 1,014 971 1,139 1,536 1,807 Pretax margin 2.6% 2.1% 2.1% 2.8% 3.1% Income tax -197 -134 -132 -230 -271 Tax rate -19.4% -13.8% -11.6% -15.0% -15% MI 0 -8 -2 -2 -2 Net profit - reported 817 829 1,004 1,304 1,534 YoY 28.7% 1.4% 21.2% 29.8% 17.6% Net profit - recurring 817 997 1,324 1,610 1,894 YoY 28.7% 22.0% 32.8% 21.6% 17.6%
Source: Company data, RHB
Figure 19: Key assumptions for Lenovo FYE 31 Mar (USDm) FY14 FY15 FY16F FY17F FY18F PC shipment 55 60 63 64 66 YoY 5.2% 8.8% 4.7% 2.2% 3.4% PC ASP 576 558 545 539 533 YoY n.a. -3.1% -2.3% -1.2% -1.0%
Mobile shipment 59.5 85.8 100.6 114.2 126.7 YoY 89.3% 44.2% 17.4% 13.4% 11.0% Mobile ASP 90 107 135 131 126.8 YoY n.a. 18.4% 26.5% -3.1% -3.0%
Source: Company data, RHB
See important disclosures at the end of this report 11
Lenovo Group (992 HK) 11 June 2015
Figure 20: Lenovo’s segmental margins FY14 FY15 FY16F FY17F FY18F PC Group Revenue 31,632 33,346 34,099 34,441 35,242 YoY n.a. 5% 2% 1% 2% Gross profit 3988 4429 4607 4687 4796 GPM 12.6% 13.3% 13.5% 13.6% 13.6% PC pretax income 1175 1771 1916 1993 2047 Pretax margin 3.7% 5.3% 5.6% 5.8% 5.8%
Mobile Group Revenue 5,354 9,142 13,571 14,921 16,066 YoY n.a. 71% 48% 10% 8% Gross profit 706 1,470 2,394 2,636 2,814 GPM 13.2% 16.1% 17.6% 17.7% 17.5% Mobile pretax income -57 -370 -584 -343 -177 Pretax margin -1.1% -4.0% -4.3% -2.3% -1.1%
Enterprise Group Revenue 505 2,628 4,579 5,068 5,524 YoY n.a. 421% 74% 11% 9% Gross profit 66 487 900 989 1,094 GPM 13.0% 18.5% 19.6% 19.5% 19.8% Enterprise pretax income -68 -121 -115 -82 -44 Pretax margin -13.5% -4.6% -2.5% -1.6% -0.8%
Ecosystem & other revenues Revenue 1,217 1,181 1,106 1,197 1,221 YoY n.a. -3% -6% 8% 2% Gross profit 304 295 276 299 305 GPM 25.0% 25.0% 25.0% 25.0% 25.0% Segment pretax income -36 -309 -79 -32 -20 Pretax margin -2.9% -26.2% -7.1% -2.6% -1.6%
Total pretax income 1,014 971 1,139 1,536 1,807 YoY 27% -4% 17% 35% 18% Source: Company data, RHB
See important disclosures at the end of this report 12
Lenovo Group (992 HK) 11 June 2015
Balance Sheet Lenovo was able to keep its working capital turnover days stable after the acquisitions of Motorola and System X. At end-FY15, inventory and receivables turnover were kept at 26/59 days respectively. By comparison, end-FY14 inventory and receivable turnover stood at 25 and 58 days respectively.
Figure 21: Lenovo’s working capital turnover FY Mar-31 FY14 FY15 FY16F FY17F FY18F Inventory turnover days 25 26 26 26 26 Trade & other receivable turnover days 58 59 60 60 60 Payables turnover days 120 117 115 115 115 Source: Company data, RHB
As at end-FY15, Lenovo had a slight net gearing at 0.7% vs being in a net cash position in previous years. This was largely due to the additional loans and long-term notes issued to finance the Motorola and System X acquisitions. We expect the group to return to a net cash position in FY16. The group currently has a USD1.5bn corporate bond with a 4.7% coupon outstanding. The bond will mature in May 2019 and is currently yielding 3.1%. In addition, it also issued a USD1.5bn promissory note (with no interest) to Google due in May 2017 for the acquisition of Motorola. We expect Lenovo to have adequate resources to pay off those loans, as it currently has a USD2.9bn cash balance and positive operating cash flow, with no need for ambitious capex plans going forward.
Figure 22: Lenovo’s key balance sheet ratio FYE 31 Mar FY12 FY13 FY14 FY15 FY16F FY17F FY18F Working capital turnover days Inventory 14 20 25 26 26 26 26 Receivables 58 63 58 59 60 60 60 Payables 123 131 120 117 115 115 115
Current ratio 1.0 1.0 1.0 0.9 0.9 1.0 0.9 Debt / equity 3% 19% 16% 86% 63% 54% 46% Net gearing net cash net cash net cash 1% net cash net cash net cash Average ROE 22% 25% 29% 23% 23% 25% 25%
Source: Company data, RHB
See important disclosures at the end of this report 13
Lenovo Group (992 HK) 11 June 2015
Segmental Outlook PC group Still the market leader. Global PC shipments contracted 2%/7% in 2014 and 1Q15 due to a combination of factors: i) the cannibalisation of laptop sales by tablets and smartphone devices, ii) longer replacement cycles, and iii) resistance to upgrades as Windows 8 has been said to offer a less user-friendly experience when compared against previous versions. i. We believe the launch of iPad (and to a lesser extent, Android tablets) and the leap in smartphones’ performance has placed PCs at a disadvantage, as the former are more mobile (having the advantage of a compact form) and have user-friendly operating systems. We believe the form factor advantage is shrinking, as Windows-based laptops/tablet hybrids have now evolved into much more mobile form factors with longer battery lives, enabled by power efficient chipset designs. Windows remains the platform with the largest selection of software and the keyboard/mouse combination remains a staple. Newer laptop/tablet hybrids, eg Surface Pro 3 by Microsoft (MSFT US, NR), typically also ship with detachable keyboards with minimal weight and touchscreens, closing the mobility gap between tablets and laptops.
Past performance gains have been derived ii. We believe a bigger problem lies in longer PC replacement cycles as the raw from miniaturisation of integrated circuits performance gain in each new generation of CPUs (mainly through (IC), but IC sizes are now close to physical miniaturisation) has become more marginal, and PCs purchased five years ago limits are still quite capable in terms of performance productivity and daily tasks such as word processing and internet browsing. iii. Many users have also refrained from upgrading their old PCs because new PCs Unifying PC, mobile and Xbox ecosystems are pre-installed with Windows 8. Although Microsoft will be releasing Windows is high on the to-do list for Windows 10 10 in 3Q15, we believe it would have a limited impact on PC replacement demand in 2015. This is because existing Windows 7 and Windows 8 users will receive the upgrade for free for one year. Overall, we forecast that the PC market will continue to contract by 3-5% per year in 2015-2018. In the past, the bulk of the PC shipment decline was borne by smaller brands that lacked global scale and Japanese brands with higher cost structures. In contrast, Lenovo has been able to consistently outgrow the market by a large margin in the past three years, while peers such as Hewlett-Packard (HP) (HPQ US, NR), unlisted Dell Inc and Acer Inc (2353 TT, NR) were able to keep their shipments relatively stable. We believe Lenovo has been able to grab market share due to the following: i) it possesses an efficient logistics and supply chain infrastructure to support a wide range of PC hardware customisations on its website that smaller peers lacked, ii) it could offer affordable pricing, and iii) has strong warranty coverage.
Figure 23: World PC market share by volume Volume share Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 2013 2014 Lenovo 15% 17% 18% 18% 18% 19% 20% 20% 19% 17% 19% HP 15% 16% 17% 16% 16% 18% 18% 19% 19% 17% 18% Dell 11% 12% 12% 12% 13% 13% 13% 13% 14% 12% 14% Acer 8% 9% 8% 7% 7% 8% 9% 8% 7% 8% 8% Asus 7% 6% 6% 8% 7% 7% 7% 8% 7% 6% 6% Apple 5% 5% 6% 6% 6% 6% 7% 7% 7% 5% 6% Others 39% 36% 34% 33% 34% 29% 27% 26% 27% 35% 28% Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Global PC shipment (m) 76,437 76,001 79,908 82,781 73,378 74,989 79,530 80,237 68,485 315,127 308,134 YoY -14% -13% -9% -8% -4% -1% 0% -3% -7% -10% -2% Lenovo (m) 11,640 12,600 14,090 15,474 12,910 14,500 15,700 16,201 13,259 53,804 59,311 YoY 0% -1% 2% 10% 11% 15% 11% 5% 3% 3% 10%
Source: International Data Corp (IDC), RHB
See important disclosures at the end of this report 14
Lenovo Group (992 HK) 11 June 2015
PC market consolidation presents opportunity to grow market share. We believe the full exit of the Sony VAIO (announced in Feb 2014) and the partial exit of Samsung Electronics (Samsung) (005930 KS, NR) and Toshiba in select countries (declared in Sep 2014) provides a further opportunity for Lenovo to cement its market leadership. In 2013-2014, Lenovo’s PC shipment growth has consistently exceeded the market by 12-13ppts and we expect it to continue increasing its share to 25% in 2018 from 20% in the Dec 2014 quarter. This implies a 3-4% YoY shipment increase in 2015-2018.
Figure 24: Lenovo’s PC shipments & market share (RHB forecasts)
30.0% 400,000 Title: Source: 350,000 25.0% 25.4% 300,000 24.0% Please fill in the values above to have them entered in your report 20.0% 22.6% 21.0% 250,000 19.2% 15.0% 17.1% 200,000 15.0% 150,000 10.0% 12.1% 9.5% 100,000 5.0% 50,000
0.0% 0 2010 2011 2012 2013 2014 2015F 2016F 2017F 2018F
Lenovo PC shipment (thousands) Market PC shipment (thousands) Lenovo market share
Source: IDC, Company data, RHB
Figure 25: Lenovo’s PC shipment growth vs market
35.0% Title: 28.9% Source: 30.0% 25.0% 18.9% Please fill in the values above to have them entered in your report 20.0%
15.0% 10.2% 10.0% 2.8% 3.9% 3.3% 3.0% 5.0% 2.6% 0.0% 1.7% -5.0% -2.2% -4.0% -4.0% -3.0% -3.0% -10.0% -5.0% -9.8% -15.0% 2010 2011 2012 2013 2014 2015F 2016F 2017F 2018F
Lenovo YoY Market YoY
Source: IDC, Company data, RHB
See important disclosures at the end of this report 15
Lenovo Group (992 HK) 11 June 2015
ASPs of PCs have been stable in the past, despite declining shipment volumes. Again, smaller brands bore the brunt of the decline while top brands such as Lenovo have been able to continuously improve their PC products, keeping ASPs largely stable. We believe this trend should continue going forward.
Figure 26: ASPs of PCs by brand Figure 27: Lenovo and market ASPs of PCs have been largely stable (USD) 2010 2011 2012 2013 2014 Lenovo 635 677 653 628 630 800 Title: Source: YoY n.a 7% -4% -4% 0% HP 689 648 628 620 632 Please fill in the values above to have them entered in your report YoY n.a -6% -3% -1% 2% 700 Dell 656 666 648 656 658 YoY n.a 2% -3% 1% 0% Acer 521 499 496 512 492 YoY n.a -4% 0% 3% -4% 600 Asus 551 552 557 574 569 YoY n.a 0% 1% 3% -1% Apple 1,472 1,470 1,436 1,492 1,496 YoY n.a 0% -2% 4% 0% 500 Others 626 594 575 557 539 2010 2011 2012 2013 2014 YoY n.a -5% -3% -3% -3% Market 659 653 637 640 649 Lenovo ASP ASP of smaller brands Market ASP
YoY n.a -1% -2% 0% 1% Source: IDC, RHB Note: “Smaller brands” here refers to “Others” in Figure 31 Source: IDC, RHB
Overall, we expect its PC group revenue to grow at a low single-digit pace, mainly because of slow PC shipment growth while its ASPs can be maintained by hardware specification and form factor upgrades, as well as lower competition as small players exit the market.
Figure 28: Lenovo’s PC segment shipment & ASP trend FYE 31 Mar FY14 FY15 FY16F FY17F FY18F PC shipment (m) 55 60 63 64 66 YoY n.a. 9% 5% 2% 3% PC ASP (USD) 576 558 545 539 533 YoY n.a. -3% -2% -1% -1% PC revenue (USDm) 31,632 33,346 34,099 34,441 35,242 YoY n.a. 5% 2% 1% 2%
Source: RHB
Overshot its PC profitability commitment. In FY12, Lenovo committed to improve the operational margin of its PC division (ie its internal measure) by 1% in three years. In FY15, it achieved this target with an operational margin of 3.2%, up from 2% in FY12. We believe this was driven by a higher PC GPM, from: i) a more efficient supply chain, ii) a lower Windows licensing cost, and iii) improving bargaining power amid the consolidating PC industry. We estimate Lenovo’s PC GPM at around 13- 14% in FY15 from about 12% in FY12. Along with effective cost control, this has translated into a steadily rising PC pre-tax margin, to 5.3% in FY15 from approximately 2% in FY12. We believe Lenovo may be able to keep its PC pre-tax margins on a slowly rising trend, due to its economies of scale, going forward.
Figure 29: Margin estimates for Lenovo’s PC group FYE 31 Mar FY12 FY13 FY14 FY15 FY16F FY17F FY18F GPM 11.7% 12.0% 12.6% 13.3% 15.3% 15.5% 15.5% Pretax margin 2.2% 2.8% 3.7% 5.3% 5.6% 5.8% 5.8%
Source: Company data, RHB
See important disclosures at the end of this report 16
Lenovo Group (992 HK) 11 June 2015
Segment outlook – mobile group Not much room left from feature phone conversion. We believe smartphone shipment growth is entering a slower growth phase as penetration rates have reached high levels in developed countries (eg 75% in the US and around 60% in Europe). In China, the key market for smartphones, shipment growth is also starting to slow down as market research firm International Data Corp (IDC) reported that smartphone shipments in China have declined by 4% YoY. In China, more than half of total mobile subscribers are now on 3G and 4G platforms. In particular, the penetration rate had already reached over 70% in the 18-34 age group, according to a study commissioned by Google in 2013.
Figure 30: Global smartphone shipments by company (calendar quarters) Smartphone Unit 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 Market 2013 2014 Market Shipment (millions) share share Total Smartphones 219 240 261 298 288 302 332 377 334 1018 1300 YoY 45% 53% 40% 30% 32% 26% 27% 27% 16% 41% 28% QoQ -4% 10% 9% 14% -3% 5% 10% 14% -11% n.a. n.a. Samsung 70 77 85 84 89 75 80 75 82 25% 316 318 24% Apple 37 31 34 51 44 35 39 74 61 18% 153 193 15% Lenovo + Motorola 12 15 16 19 19 24 25 25 19 6% 63 93 7% Huawei 9 10 13 17 14 20 16 24 17 5% 49 74 6% Xiaomi 3 4 6 6 11 16 17 17 15 4% 19 61 5% LG 10 12 12 13 12 15 17 16 15 5% 48 59 5% Alcatel / TCL 1 3 5 8 6 9 11 16 9 3% 18 41 3% Sony 8 10 10 11 9 9 10 12 8 2% 38 40 3% Other brands 51 57 64 71 67 76 97 98 108 32% 243 338 26%
* Lenovo & Motorola shipments: Lenovo 8 11 12 14 13 16 17 14 11 3% 45 60 5% Motorola 4 4 4 5 7 9 8 11 8 2% 17 34 3% Source: IDC, RHB, Company data
See important disclosures at the end of this report 17
Lenovo Group (992 HK) 11 June 2015
In China, about 94% of mobile phones Conversions from feature phones have peaked. Going forward, we believe shipped were smartphones in 2014 smartphone demand will largely be driven by: i) replacements made by existing smartphone users, and ii) first-time adoption in developing countries with large populations, such as India and Brazil. Using a replacement cycle of about 2.3 years (in line with historic levels), we forecast smartphone shipments to grow at 11% CAGR in 2014 to 2017 vs 28% YoY growth in 2014.
Figure 31: Smartphone market shipment forecasts Calendar year (unit in 2012 2013 2014 2015F 2016F 2017F 2018F millions) First time buyers 473 654 730 710 735 693 620 YoY 45% 38% 12% -3% 3% -6% -11% Smartphone replacement 251 364 570 747 885 1,062 1,218 YoY 50% 45% 57% 31% 18% 20% 15% Total shipment 724 1,018 1,300 1,458 1,620 1,755 1,838 YoY 46% 41% 28% 12% 11% 8% 5% Source: IDC, RHB
Figure 32: Replacement-related shipments are expected to exceed first time buyers in 2015
100% Title: Source: 90% First time buyers, 80% 39% 34% 49% 45% Please fill in the values above to have them entered in your report 70% 56% 65% 64% 60% 50% 40% Smartphone 30% 61% replacement, 66% 51% 55% 20% 44% 35% 36% 10% 0% 2012 2013 2014 2015F 2016F 2017F 2018F
Source: IDC, RHB
See important disclosures at the end of this report 18
Lenovo Group (992 HK) 11 June 2015
In 2014, Apple was the only original Android smartphone ASPs on a downtrend. Due to readily-available chipset equipment manufacturer (OEM) that was reference designs and a common set of components, Android smartphones are close able to increase the selling prices of its to commoditised (similar to PC). With slowing market shipment growth, ASPs of smartphones Android smartphones have seen strong downward pressure (-14% YoY and -2% QoQ in 1Q15) and we expect this to continue, moving forward. In contrast, Apple was able to increase the ASPs of its smartphones consistently, showing that consumers would readily pay a premium for: i) a fluid user experience, ii) custom-designed hardware and operating system, iii) a comprehensive applications ecosystem with exclusive quality apps, and iv) extensive warranty coverage and after-sales services.
Figure 33: Smartphone ASPs of major brands Calendar quarter (USD) 1Q14 2Q14 3Q14 4Q14 1Q15 Apple 648 613 635 696 720 Samsung 356 411 361 349 316 Lenovo (incl. Motorola) 122 129 114 147 140 Sony 158 169 183 183 201 Huawei 384 394 351 375 351 LG 330 290 268 244 238 Xiaomi 237 212 182 172 144 Microsoft (Nokia) 145 115 160 156 162 ZTE Corp 127 132 128 137 145 Alcatel TCL 111 105 95 98 102 Others 176 180 166 166 154 Blended 309 289 272 312 306
By operating system Android & other minor platforms 248 246 224 218 213 QoQ n.a. -1% -9% -3% -2% iOS 648 613 635 696 720 QoQ n.a. -5% 4% 10% 3%
Source: IDC, Company data, RHB
See important disclosures at the end of this report 19
Lenovo Group (992 HK) 11 June 2015
Acquisition of Motorola propels Lenovo’s smartphone market share to third place. The acquisition of Motorola from Google was largely completed on 31 Oct 2014 for a total consideration of USD3.1bn, This was paid by USD880m in cash, and 519m in Lenovo shares (worth USD750m) upfront with the remaining USD1.5bn deferred consideration in the form of promissory notes payable in May 2017 in cash. After the acquisition, the combined market share of Lenovo and Motorola was 6% as of 1Q15, ranking third behind Samsung and Appl. Lenovo also retained 3,000-4,000 patents related to mobile communications, out of the original 20,000 patents held by Motorola. We believe this could mitigate the risk of patent infringement in overseas markets and facilitate Lenovo’s expansion in overseas markets.
Google exited from China in 2010, and this In addition, we believe Motorola is highly complementary to the key markets of probably led to Motorola’s withdrawal in Lenovo. Motorola was a strong brand in the US and South America. According to 2012 when it was acquired by Google Motorola’s last public filing for end-FY11 (the last available public data before it was acquired by Google), the US, Brazil and China accounted for 52%, 20% and 12% of sales respectively. After Google acquired Motorola, it pulled out of China in 2012. We believe this was mainly because of Google’s tense relationship with the Chinese Government, while the rise of cheap local smartphones made Chinese smartphone market extremely competitive – under which Motorola was unprofitable due to its own high cost structure. Under Lenovo, Motorola is now making a full return to China, initially with mid-range handsets such as Moto G, Moto X and Moto X Pro. After the acquisition of Motorola, we expect contributions from Motorola to fully kick in in FY16. We forecast for Lenovo’s mobile devices shipment to reach 109m/123m in FY16/FY17, or 105/120m in 2015/2016 respectively. This is from 74m in FY15, or 68m in 2014.
Figure 34: Lenovo shipments vs market Calendar year 2012 2013 2014 2015F 2016F Lenovo smartphone shipment 24 45 68 88 99 YoY n.a. 91% 50% 29% 12% Smartphone market shipment 724 1,018 1,300 1,458 1,620 YoY 46% 41% 28% 12% 11% Lenovo smartphonemarket share 3.3% 4.5% 5.2% 6.0% 6.1% Note: Does not include tablet shipments and Motorola shipments prior to acquisition Source: Company data, RHB
See important disclosures at the end of this report 20
Lenovo Group (992 HK) 11 June 2015
ASPs uplift post acquisition Motorola did not adopt the best hardware, Before the acquisition, we estimate Lenovo had a smartphone ASP of about USD80. but focused on design and user-friendliness With Motorola’s mid- to high-end product line at the USD250 range, its mobile group blended ASPs immediately rose to USD140.
Figure 35: Mobile device ASPs of Lenovo and Motorola vs the market FY Mar-31 (USD) 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 Calendar quarter Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Lenovo smartphones 89 96 92 76 86 65 78 74 Motorola smartphones 263 271 230 212 210 220 230 230 Blended smartphone ASPs 132 141 129 122 129 114 147 140 Lenovo tablets 100 105 101 90 85 85 90 88 Lenovo Mobile Blended ASP 130 136 124 119 126 111 140 134 Source: IDC, Company data, RHB
If Windows 10 is successful in unifying PC We expect Motorola to drive up Lenovo’s mobile revenue by 48% YoY in FY16, and mobile platforms, a Windows phone before normalising to 8-10% in FY17F/FY18F. At this moment, we believe could spell an opportunity for Lenovo as it management’s priority is to engage in cost-cutting for Motorola to achieve a break- has a strong partnership with Microsoft even point at its operations level in 4-6 quarters rather than to focus on topline growth.
Figure 36: Lenovo’s mobile group revenue forecasts (RHB estimates) FY Mar-31 (USDm) FY14 FY15 FY16F FY17F FY18F Mobile devices shipment 59 86 101 114 127 YoY n.a. 44% 17% 13% 11% Mobile ASP (USD) 90 107 135 131 127 YoY n.a. 18% 26% -3% -3% Mobile Group revenue 5,354 9,142 13,571 14,921 16,066 YoY n.a. 71% 48% 10% 8% Source: Company data, RHB
See important disclosures at the end of this report 21
Lenovo Group (992 HK) 11 June 2015
GPM upside from Motorola... We estimate Motorola recorded a gross margin in the low 20s range while Lenovo’s smartphones have a GPM of about 13-14%, bringing Lenovo’s mobile group GPM post acquisition to 17-18% from just around13% prior to the acquisition. We consider HTC Corp (2498 TT, NR) and TCL Communication Technology (TCL) (2618 HK, NR) to be the most comparable peers to Motorola due to their fairly global footprint and product positioning. Meanwhile, ZTE Corp (763 HK, NR) and Coolpad (2369 HK, SELL, TP: HKD1.10) are more comparable to Lenovo’s smartphones, as their main markets are in China and are subject to the same market dynamics (ie operator subsidy cuts and fierce competition from online sales).
Figure 37: Mobile peers’ GPMs Calendar quarter Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Mobile peers GPM TCL Comm 16.4% 18.4% 19.6% 19.6% 19.6% 19.4% 19.0% 19.2% 19.1% HTC 20.3% 23.2% 20.4% 17.8% 21.0% 22.2% 22.9% 20.4% 19.7% ZTE n.a 15.4% n.a 13.6% n.a 15.9% n.a 15.4% n.a Coolpad n.a 13.0% n.a 12.8% n.a 13.6% n.a 9.9% n.a Average 17.5% 15.9% 17.8% 16.2% Source: Company data, RHB
Motorola marketed the Moto X as “made in …but it has yet to generate profit. According to Google’s quarterly filing, from 1Q of the US”. It announced the closure of its 2014 to 3Q of the same year – note that Motorola was transferred to Lenovo in Oct Texas production base in Mar 2014 2014 – the mobile phone maker operated at a pre-tax loss of USD590m on revenue of USD4,901m, ie a -12% pre-tax profit margin. We estimate that the GPM of Motorola smartphones ranged between 20-23%, implying that it had a very high sales, general and administrative (SG&A) cost ratio of about 35% under Google. The high- cost structure was likely due to Motorola’s US-based manufacturing operations, which began closing down in 2014. This put the group at a disadvantage against its peers, which typically had SG&A ratios in the 15-20% range.
Figure 38: Mobile segment’s operating margins Calendar quarter Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Mobile peers operating margin TCL Comm -10.5% 0.1% 3.9% 4.1% 3.5% 4.1% 3.7% 3.4% 2.5% HTC 0.1% 1.5% -7.4% -3.6% -6.2% 3.7% 0.4% 0.3% 0.0% LG Electronics 4.1% 2.0% -2.6% -1.2% -0.2% 2.4% 4.0% 1.8% 2.0% Sony n.a 4.4% 2.9% 1.9% -5.6% -0.9% 1.3% 2.2% -20.2% ZTE n.a 2.0% n.a -2.6% n.a 1.6% n.a 0.9% n.a Coolpad n.a 2.2% n.a 0.8% n.a 3.1% n.a 0.9% n.a Average 2.0% -0.1% 2.3% 1.6% Source: Company data, RHB
Confident of turning the mobile group profitable at the operating level. Management has reaffirmed its target of turning the mobile group profitable (ie booking a profit at the operating level without factoring in M&A charges) within 4-6 quarters even after the division’s pre-tax loss widened to 4% of revenue in FY15. We believe this could be achieved through a headcount reduction (ie in R&D) and shifting its higher-cost manufacturing operations from overseas to Lenovo’s existing lower cost facilities in China. Under our forecasts, Lenovo’s mobile and enterprise groups’ pre-tax margins ought to gradually improve but remain negative throughout FY16-18, mainly because of M&A charges.
Figure 39: Lenovo’s mobile group’s margin estimates FY Mar-31 FY14 FY15 FY16F FY17F FY18F GPM 13.2% 16.1% 17.6% 17.7% 17.5% Pretax margin -1.1% -4.0% -4.3% -2.3% -1.1% Source: Company data, RHB
See important disclosures at the end of this report 22
Lenovo Group (992 HK) 11 June 2015
Segmental outlook – enterprise group System X server business boosts Lenovo’s presence in enterprise. The We believe cloud and the IoT will be drivers of server demand acquisition of the System X server business from IBM was completed on 1 Oct 2014. The total consideration of the acquisition was USD2.1bn, comprising USD1.9bn in cash and the balance in 182m Lenovo shares, or about 2% of its total shares. After the acquisition, Lenovo’s market share by revenue in the server business rose to 7.6% in the Dec 2014 quarter from just 1% before. After the acquisition, Lenovo is able to offer a comprehensive product line, spanning from the low-end ThinkServers to System X. The acquisition of IBM’s System X has also propelled Lenovo into fourth place in terms of largest player by shipment in 2014. We believe the acquisition is beneficial in the long term as we believe the adoption of Internet of Things (IoT) and cloud will drive demand for servers.
Figure 40: Global server market share Calendar year (unit in thousands) 2010 2011 2012 2013 2014 Hewlett-Packard Co 2,794 2,801 2,659 2,550 2,316 Dell Inc 2,068 2,111 2,113 2,052 1,973 International Business Machine 1,128 1,141 1,062 871 537 Lenovo Group Ltd 100 160 191 222 478 Cisco System 48 138 208 264 307 Fujitsu Ltd 290 297 294 269 270 Inspur Electronic Information 65 76 115 157 266 Huawei Technologies 0 58 57 186 255 NEC Corp 139 134 142 136 138 Oracle Corp 74 114 90 63 53 All Other Vendors 1,612 1,610 1,746 2,193 2,631 Total 8,319 8,638 8,674 8,962 9,225 Source: IDC
Lenovo’s budget-friendly ThinkServer solutions tend to be small and medium enterprise (SME)-oriented, and this product line’s ASPs have been among the lowest in the market. After the acquisition of IBM’s System X, which is a low-end, low-margin product for the industry giant, Lenovo’s server ASPs jumped 76% YoY.
Figure 41: ASPs of global server market players USD per system 2010 2011 2012 2013 2014 Hewlett-Packard Co 5,507 5,463 5,322 5,192 5,761 Dell Inc 3,436 3,702 3,814 4,142 4,551 IBM 13,603 14,421 14,833 14,627 17,453 Cisco 7,890 7,405 7,757 8,449 9,455 Oracle Corp 21,448 28,259 29,583 36,941 44,223 Lenovo 1,606 1,609 1,811 1,825 3,205 Fujitsu 7,227 8,055 6,722 6,208 6,252 Inspur Electronic Information 2,326 2,416 3,133 3,243 3,474 Huawei Technologies n.a. 1,153 1,829 2,226 2,831 NEC Corp 6,412 7,151 7,201 7,542 7,729 All Other Vendors 4,133 3,218 3,386 3,070 3,057 Total blended 5,982 6,118 5,988 5,556 5,520 Source: IDC
After the acquisition of System X, management targets to reach USD5bn in revenue with the enterprise group by Sep 2015. This will be driven by: i) higher demand for server hardware from increased IoT and cloud adoption, and ii) enterprise customers who are up-selling/upgrading existing solutions. This aggressive target implies revenue of about USD1.5bn for each quarter of 1QFY16 and 2QFY16. As our forecast is more conservative, we estimate it to book revenues of USD4.6bn (+74% YoY) in FY16 and USD5.1bn (+11% YoY) in FY17.
See important disclosures at the end of this report 23
Lenovo Group (992 HK) 11 June 2015
Pre-tax losses narrow. The System X business line was only a small part of IBM’s business. We believe the System X business is comparable to HP’s enterprise business. We estimate that the latter’s enterprise hardware, software and services segments have a combined GPM of 22-25%. It also holds a leading position in the server market while IBM was in third place. We, therefore, consider 20-21% to be a reasonable guess for System X’s GPM. Combined with Lenovo’s ThinkServer business, we estimate its enterprise group GPM to be in the range of 19-20%. According to IBM financial filings, System X and related maintenance operations contributed USD4.6bn in revenue to the group in FY13 and was essentially breaking even at a pre-tax income level. Based on our assumption of an around 20% GPM, this would imply that System X also has a SG&A ratio of about 20% under IBM. Before the acquisition, Lenovo’s enterprise group incurred high losses (13.5% pre-tax loss margins in FY14). The acquisition of System X has lowered its pre-tax losses to 4.6% of revenue and, likely, generated a profit at the operating level. We forecast its enterprise group’s pre-tax losses to narrow further going forward, as Lenovo integrates the System X overseas supply chain into its existing manufacturing facilities and the business benefits from a larger scale.
Figure 42: Lenovo’s enterprise group’s margin estimates FY Mar-31 FY14 FY15 FY16F FY17F FY18F GPM 13.0% 18.5% 19.6% 19.5% 19.8% Pretax margin -13.5% -4.6% -2.5% -1.6% -0.8% Source: Company data, RHB
Ecosystem group The ecosystem group accounts for the rest of Lenovo’s group revenue. Topline from this segment has stayed relatively stable, at around USD300m. However, with increased integration between the group’s PC and mobile products and IoT, this segment could play a more significant role in the near future.
See important disclosures at the end of this report 24
Lenovo Group (992 HK) 11 June 2015
Lenovo Products Lenovo PCs come in a wide variety of customisations and form factors. It has retained the ThinkPad line of laptops from IBM, which serves as its premium business PC brand with an emphasis on security, durability and battery life. The Lenovo line features designs built for entertainment and day-to-day use with more stylish designs, with a wide range of customisations available.
Figure 43: Lenovo’s laptop products
Source: Company
See important disclosures at the end of this report 25
Lenovo Group (992 HK) 11 June 2015
Lenovo smartphones are classified according to the flagship Vibe series, mid-range S series and the affordable A and K series. Figure 44: Lenovo Vibe series smartphones
Vibe X2 Vibe Shot Announced: Sep-2014 Announced: March-2015 Chipset: Mediatek MT6595m Chipset: Qualcomm Snapdragon 615 Display: 1080x1920 (5.0 inches) Display: 1080x1920 (5.0 inches) Memory: 32GB with 2GB ram Memory: 32GB with 3GB ram Rear camera: 13MP Rear camera: 16MP OIS Price group: USD400 Price group: USD300 Source: Company Source: Company
Figure 45: A and K series
Lenovo A7000 Lenovo K3 Note Announced: March-2015 Announced: April-2015 Chipset: Mediatek MT6752m Chipset: Mediatek MT6752 Display: 720x1280 (5.5 inches) Display: 1080x1920 (5.5 inches) Memory: 8GB with 2GB ram Memory: 16GB with 2GB ram Rear camera: 8MP Rear camera: 13MP Price group: USD150 Price group: USD150 Source: Company Source: Company
See important disclosures at the end of this report 26
Lenovo Group (992 HK) 11 June 2015
Motorola smartphones fall within the mid- to high-end product line in terms of design, specifications and pricing. Motorola markets its smartphones mainly in three series, ie the flagship Moto X with customisable casing and the more budget-friendly Moto E and Moto G. Figure 46: Motorola X series
Moto Nexus 6 (Moto X Pro in Moto X China) Announced: Sep-2014 Announced: Oct-2014 Chipset: Qualcomm Snapdragon 801 Chipset: Qualcomm Snapdragon 805 Display: 1080x1920 (5.2 inches) Display: 1440x2560 (5.96 inches) Memory: 32GB with 2GB ram Memory: 64GB with 3GB ram Rear camera: 13MP OIS Rear camera: 13MP OIS Price group: USD480 - 600 Price group: USD650 Source: Company Source: Company
Figure 47: Motorola’s G series and E series
Motorola Moto G Motorola Moto E Announced: Sep-2014 Announced: Feb-2015 Chipset: Qualcomm Snapdragon 400 Chipset: Qualcomm Snapdragon 410 Display: 720x1280 (5.0 inches) Display: 540x960 (4.5 inches) Memory: 8GB with 1GB ram Memory: 8GB with 1GB ram Rear camera: 8MP Rear camera: 5MP Price group: USD180 Price group: USD150 Source: Company Source: Company
See important disclosures at the end of this report 27
Le novo Group (992 HK) 10 June 2015
Figure 48: Moto X with personalised designs
Source: Company
Besides traditional products, Lenovo has also showcased some innovative concepts at the recent Tech World event held in Beijing.
Figure 49: Virtual keyboard from a Lenovo smartphone
Source: Company
See important disclosures at the end of this report 28
Le novo Group (992 HK) 10 June 2015
Figure 50: Smartwatch with dual screen
Source: Company
Figure 51: Smart shoes with the ability to track steps, give directions
Source: Company
See important disclosures at the end of this report 29
Le novo Group (992 HK) 10 June 2015
Management Profile Mr Liu Chuanzhi (honorary chairman, senior advisor) is the founder of Lenovo and was a board member until 2011. He is also the Chairman of Legend Holdings Corp, Lenovo’s largest shareholder. Mr Liu sits as honorary chairman of Lenovo but is no longer involved in the management of the group and any of its subsidiaries. Mr Yang Yuanqing (chairman & CEO) has more than 20 years of experience in the field of computers. He has been an executive director of Lenovo since 1997. He holds a Master’s degree from the Department of Computer Science at the University of Science and Technology of China. Mr Yang is also a guest professor at the University of Science and Technology of China, a member of the New York Stock Exchange’s International Advisory Committee and a member of the International Advisory Council of Brookings Institute. Dr Peter D Hortensius (CTO) joined the group in 2005. He leads Lenovo’s global R&D teams and overseas product development for smartphones, tablets, PCs and servers. Dr Hortensius spent 17 years with IBM (including 10 years in IBM’s Watson Research Centre) before joining Lenovo. He holds a doctorate degree in electrical engineering from the University of Manitoba. Mr Gianfranco Lanci (COO) joined Lenovo in 2012. He leads all five of Lenovo’s geographic, PC and enterprise business groups. Before joining the group, Mr Lanci assumed leadership roles at Texas Instruments (TXN US, NR) and was the President and CEO of Acer in 2005-2011. He holds an engineering degree from Polytechnic University of Turin. Mr Liu Jun (president of the mobile business) joined the group in 1993. He currently leads Lenovo’s smartphone and tablets business. He previously held a broad range of leadership positions in Lenovo’s business, consumer and products units as well as the group’s global supply chain division. He holds an EMBA and Bachelor’s degrees in automation from Tsinghua University. Mr He Zhiqiang (president of ecosystems and cloud) joined Lenovo in 1986, and is responsible for building Lenovo’s ecosystem and drive its strategy for monetisation. Mr He was the group’s previous CTO. He holds a Master’s degree in computer engineering from the Institute of Computing Technology of the Chinese Academy of Sciences. Mr Gerry Smith (president of the Americas and enterprise groups) joined the group in 2006. He overseas Lenovo’s operations in the Americas and helms the building the group’s enterprise business. Before joining, Mr Smith held leadership roles in Dell involving notebook development, peripherals development and display lines. He holds a Bachelor’s degree in finance and marketing from Pacific Lutheran University
External Auditor PricewaterhouseCoopers has been Lenovo’s external auditor since at least 2001.
Shareholder Structure Legend Holdings Corp (30.6%) is a diverse conglomerate with direct and strategic investments in multiple start-up companies. Its portfolio companies span from IT, real estate and medical services to food & beverage supply chain and agriculture. Legend Holdings is seeking to list on the Hong Kong Stock Exchange. Mr Yang Yuanqing (6.7%). Mr Yang Yuanqing, CEO and chairman of Lenovo, has a one-third stake in Sureinvest. Google Inc (4.7%). Lenovo issued 519m shares (for an amount of USD750m) to Google as part of the consideration to acquire Motorola.
See important disclosures at the end of this report 30
Le novo Group (992 HK) 10 June 2015
Financial Exhibits
Profit & Loss (USDm) Mar-14 Mar-15 Mar-16F Mar-17F Mar-18F Total turnover 38,707 46,296 53,355 55,627 58,053 Cost of sales (33,643) (39,614) (45,177) (47,016) (49,044) Gross profit 5,064 6,682 8,178 8,611 9,009 Gen & admin expenses (2,135) (3,104) (4,137) (4,170) (4,249) Selling expenses (1,900) (2,302) (2,758) (2,780) (2,833) Other operating costs 24 (167) - - - Operating profit 1,052 1,109 1,282 1,661 1,927 Operating EBITDA 1,387 1,717 2,267 2,682 2,965 Depreciation of fixed assets (110) (208) (340) (355) (369) Amortisation of intangible assets (226) (399) (644) (666) (670) Operating EBIT 1,052 1,109 1,282 1,661 1,927 Net income from investments 9 17 17 17 17 Interest income 34 31 49 63 70 Interest expense (81) (186) (210) (205) (207) Pre-tax profit 1,014 971 1,139 1,536 1,807 Taxation (197) (134) (132) (230) (271) Minority interests (0) (8) (2) (2) (2) Profit after tax & minorities 817 829 1,004 1,304 1,534 Reported net profit 817 829 1,004 1,304 1,534 Recurring net profit 817 997 1,324 1,610 1,894
Source: Company data, RHB
Cash flow (USDm) Mar-14 Mar-15 Mar-16F Mar-17F Mar-18F Operating profit 1,052 1,109 1,282 1,661 1,927 Depreciation & amortisation 335 608 985 1,020 1,038 Change in working capital 279 (1,069) 663 145 170 Other operating cash flow (26) 22 - - - Operating cash flow 1,640 669 2,930 2,827 3,135 Interest received 34 31 49 63 70 Interest paid (71) (134) (210) (205) (207) Tax paid (137) (297) (132) (230) (271) Cash flow from operations 1,466 270 2,637 2,454 2,727 Capex (675) (973) (907) (890) (929) Other investing cash flow 58 (2,340) 17 17 (1,483) Cash flow from investing activities (618) (3,313) (890) (873) (2,412) Dividends paid (267) (327) (394) (432) (544) Shares repurchased (45) - - - - Proceeds from issue of shares 6 0 - - - Increase in debt (23) 2,599 (254) - - Other financing cash flow (101) (129) (160) (167) (174) Cash flow from financing activities (430) 2,143 (808) (599) (719) Cash at beginning of period 3,454 3,858 2,855 3,808 4,791 Total cash generated 418 (901) 939 983 (403) Forex effects (14) (102) 14 - - Implied cash at end of period 3,858 2,855 3,808 4,791 4,388
Source: Company data, RHB
See important disclosures at the end of this report 31
Le novo Group (992 HK) 10 June 2015
Financial Exhibits
Balance Sheet (USDm) Mar-14 Mar-15 Mar-16F Mar-17F Mar-18F Total cash and equivalents 3,953 3,026 3,979 4,962 4,559 Inventories 2,701 2,995 3,218 3,349 3,494 Accounts receivable 3,171 5,178 5,087 5,304 5,535 Other current assets 3,575 4,228 4,005 4,162 4,329 Total current assets 13,401 15,428 16,289 17,777 17,917 Total investments 56 119 119 119 119 Tangible fixed assets 1,060 2,033 2,184 2,297 2,410 Intangible assets 3,340 8,930 8,862 8,785 8,737 Total other assets 501 571 571 571 571 Total non-current assets 4,957 11,654 11,736 11,772 11,837 Total assets 18,357 27,081 28,025 29,549 29,754 Short-term debt 445 1,168 1,168 1,168 1,168 Accounts payable 4,751 4,662 6,690 6,962 7,262 Other current liabilities 8,266 11,331 9,854 10,216 10,612 Total current liabilities 13,462 17,161 17,713 18,346 19,042 Total long-term debt 10 1,886 1,632 1,632 1,632 Other liabilities 1,860 3,928 3,963 3,979 2,496 Total non-current liabilities 1,870 5,814 5,594 5,610 4,128 Total liabilities 15,332 22,975 23,307 23,957 23,170 Share capital 1,650 2,690 2,690 2,690 2,690 Retained earnings reserve 1,360 1,394 2,004 2,876 3,865 Shareholders' equity 3,010 4,084 4,694 5,566 6,555 Minority interests 15 22 24 26 28 Other equity 0 0 (0) (0) 0 Total equity 3,025 4,106 4,718 5,592 6,584 Total liabilities & equity 18,357 27,081 28,025 29,549 29,754
Source: Company data, RHB
Key Ratios (USD) Mar-14 Mar-15 Mar-16F Mar-17F Mar-18F Revenue growth (%) 14.3 19.6 15.2 4.3 4.4 Operating profit growth (%) 31.5 5.4 15.6 29.6 16.0 Net profit growth (%) 28.7 1.4 21.2 29.8 17.6 EPS growth (%) 27.9 (1.4) 16.9 29.8 17.6 BVPS growth (%) 13.2 27.1 14.9 18.6 17.8 Operating margin (%) 2.7 2.4 2.4 3.0 3.3 Net profit margin (%) 2.1 1.8 1.9 2.3 2.6 Return on average assets (%) 4.6 3.6 3.6 4.5 5.2 Return on average equity (%) 28.8 23.4 22.9 25.4 25.3 Net debt to equity (%) (115.6) 0.7 (25.0) (38.7) (26.7) DPS 0.03 0.03 0.04 0.05 0.06 Recurrent cash flow per share 0.14 0.03 0.24 0.22 0.25
Source: Company data, RHB
See important disclosures at the end of this report 32
Le novo Group (992 HK) 10 June 2015
SWOT Analysis
Comprehensive supply chain Price war by Chinese Strong management team and execution ability smartphone Possesses a strong patent portfolio. players Unforeseen disruption by the introduction of new technologies Cost synergies derived from its acquired businesses Opportunity to grow its market share amidst consolidation in the personal computer (PC) industry
The PC business is nearly commoditised The smartphone business is also heading towards commoditisation Lacks mobile chipset design capability, such as that possessed by Samsung, Huawei and Apple
P/E (x) vs EPS growth P/BV (x) vs ROAE
20 35% 6.0 35% 18 31% 5.0 29% 16 27% 14 23% 4.0 23% 12 19% 10 15% 3.0 18% 8 11% 2.0 12% 6 7% 4 3% 1.0 6% 2 -1%
0 -5% 0.0 0%
14 15 17 18 16 17 18 16 14 15
------
Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan
P/E (x) (lhs) EPS growth (rhs) P/B (x) (lhs) Return on average equity (rhs)
Source: Company data, RHB Source: Company data, RHB
Company Profile Lenovo Group manufactures and distributes i) personal desktop and laptop computers (PCs), ii) mobile devices (mainly smartphones) & tablets, and server solutions mainly for SMEs. The group also successfully acquired Motorola's smartphone and IBM's server X businesses in 2014. Lenovo ranked top and 3rd in terms of PC shipments and smartphone shipments in 2014.
See important disclosures at the end of this report 33
Le novo Group (992 HK) 10 June 2015
Recommendation Chart
Price Close 15
13
11
9
7
5
3 Jun-10 Sep-11 Dec-12 Mar-14
Source: RHB, Bloomberg
Date RecommendationTarget Price Price
2015-06-10 Source : RHB, Bloomberg
See important disclosures at the end of this report 34
RHB Guide to Investment Ratings
Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage
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The securities mentioned in this publication may not be eligible for sale in some states or countries or certain categories of investors. The recipient of this report should have regard to the laws of the recipient’s place of domicile when contemplating transactions in the securities or other financial instruments referred to herein. The securities discussed in this report may not have been registered in such jurisdiction. Without prejudice to the foregoing, the recipient is to note that additional disclaimers, warnings or qualifications may apply based on geographical location of the person or entity receiving this report.
RESTRICTIONS ON DISTRIBUTION
Malaysia This report is issued and distributed in Malaysia by RHB Research Institute Sdn Bhd. The views and opinions in this report are our own as of the date hereof and is subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Conduct Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. RHB Research Institute Sdn Bhd has no obligation to update its opinion or the information in this report.
Thailand This report is issued and distributed in the Kingdom of Thailand by RHB OSK Securities (Thailand) PCL, a licensed securities company that is authorised by the Ministry of Finance, regulated by the Securities and Exchange Commission of Thailand and is a member of the Stock Exchange of Thailand. The Thai Institute of Directors Association has disclosed the Corporate Governance Report of Thai Listed Companies made pursuant to the policy of the Securities and Exchange Commission of Thailand. RHB OSK Securities (Thailand) PCL does not endorse, confirm nor certify the result of the Corporate Governance Report of Thai Listed Companies.
Indonesia This report is issued and distributed in Indonesia by PT RHB OSK Securities Indonesia. This research does not constitute an offering document and it should not be construed as an offer of securities in Indonesia. Any securities offered or sold, directly or indirectly, in Indonesia or to any Indonesian citizen or corporation (wherever located) or to any Indonesian resident in a manner which constitutes a public offering under Indonesian laws and regulations must comply with the prevailing Indonesian laws and regulations.
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Singapore This report is issued and distributed in Singapore by RHB Research Institute Singapore Pte Ltd and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these categories of investors, RHB Research Institute Singapore Pte Ltd and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of RHB Research Institute Singapore Pte Ltd ’s interest and/or its representative's interest in securities). Recipients of this report in Singapore may contact RHB Research Institute Singapore Pte Ltd in respect of any matter arising from or in connection with the report.
Hong Kong This report is issued and distributed in Hong Kong by RHB OSK Securities Hong Kong Limited (興業僑豐證券有限公司) (CE No.: ADU220) (“RHBSHK”) which is licensed in Hong Kong by the Securities and Futures Commission for Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities. Any investors wishing to purchase or otherwise deal in the securities covered in this report should contact RHB OSK Securities Hong Kong Limited.
United States This report was prepared by RHB and is being distributed solely and directly to “major” U.S. institutional investors as defined under, and pursuant to, the requirements of Rule 15a-6 under the U.S. Securities and Exchange Act of 1934, as amended (the “Exchange Act”). RHB is not registered as a broker- dealer in the United States and does not offer brokerage services to U.S. persons. Any order for the purchase or sale of the securities discussed herein that are listed on Bursa Malaysia Securities Berhad must be placed with and through Auerbach Grayson (“AG”). Any order for the purchase or sale of all other securities discussed herein must be placed with and through such other registered U.S. broker-dealer as appointed by RHB from time to time as required by the Exchange Act Rule 15a-6.
This report is confidential and not intended for distribution to, or use by, persons other than the recipient and its employees, agents and advisors, as applicable.
Additionally, where research is distributed via Electronic Service Provider, the analysts whose names appear in this report are not registered or qualified as research analysts in the United States and are not associated persons of Auerbach Grayson AG or such other registered U.S. broker-dealer as appointed by RHB from time to time and therefore may not be subject to any applicable restrictions under Financial Industry Regulatory Authority (“FINRA”) rules on communications with a subject company, public appearances and personal trading.
Investing in any non-U.S. securities or related financial instruments discussed in this research report may present certain risks. The securities of non-U.S. issuers may not be registered with, or be subject to the regulations of, the U.S. Securities and Exchange Commission. Information on non-U.S. securities or related financial instruments may be limited. Foreign companies may not be subject to audit and reporting standards and regulatory requirements comparable to those in the United States. The financial instruments discussed in this report may not be suitable for all investors.
Transactions in foreign markets may be subject to regulations that differ from or offer less protection than those in the United States.
OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST
Malaysia RHB does not have qualified shareholding (1% or more) in the subject company (ies) covered in this report except for: a) -
RHB and/or its subsidiaries are not liquidity providers or market makers for the subject company (ies) covered in this report except for: a) -
RHB and/or its subsidiaries have not participated as a syndicate member in share offerings and/or bond issues in securities covered in this report in the last 12 months except for: a) -
RHB has not provided investment banking services to the company/companies covered in this report in the last 12 months except for: a) -
Thailand RHB OSK Securities (Thailand) PCL and/or its directors, officers, associates, connected parties and/or employees, may have, or have had, interests and/or commitments in the securities in subject company(ies) mentioned in this report or any securities related thereto. Further, RHB OSK Securities (Thailand) PCL may have, or have had, business relationships with the subject company(ies) mentioned in this report. As a result, investors should exercise their own judgment carefully before making any investment decisions.
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Indonesia PT RHB OSK Securities Indonesia is not affiliated with the subject company(ies) covered in this report both directly or indirectly as per the definitions of affiliation above. Pursuant to the Capital Market Law (Law Number 8 Year 1995) and the supporting regulations thereof, what constitutes as affiliated parties are as follows:
1. Familial relationship due to marriage or blood up to the second degree, both horizontally or vertically;
2. Affiliation between parties to the employees, Directors or Commissioners of the parties concerned;
3. Affiliation between 2 companies whereby one or more member of the Board of Directors or the Commissioners are the same;
4. Affiliation between the Company and the parties, both directly or indirectly, controlling or being controlled by the Company;
5. Affiliation between 2 companies which are controlled, directly or indirectly, by the same party; or
6. Affiliation between the Company and the main Shareholders.
PT RHB OSK Securities Indonesia is not an insider as defined in the Capital Market Law and the information contained in this report is not considered as insider information prohibited by law.
Insider means: a. a commissioner, director or employee of an Issuer or Public Company; b. a substantial shareholder of an Issuer or Public Company; c. an individual, who because of his position or profession, or because of a business relationship with an Issuer or Public Company, has access to inside information; and d. an individual who within the last six months was a Person defined in letters a, b or c, above.
Singapore RHB Research Institute Singapore Pte Ltd and/or its subsidiaries and/or associated companies do not make a market in any securities covered in this report, except for: (a) -
The staff of RHB Research Institute Singapore Pte Ltd and its subsidiaries and/or its associated companies do not serve on any board or trustee positions of any issuer whose securities are covered in this report, except for: (a) -
RHB Research Institute Singapore Pte Ltd and/or its subsidiaries and/or its associated companies do not have and have not within the last 12 months had any corporate finance advisory relationship with the issuer of the securities covered in this report or any other relationship (including a shareholding of 1% or more in the securities covered in this report) that may create a potential conflict of interest, except for: (a) -
Hong Kong RHBSHK or any of its group companies may have financial interests in in relation to an issuer or a new listing applicant (as the case may be) the securities in respect of which are reviewed in the report, and such interests aggregate to an amount equal to or more than (a) 1% of the subject company’s market capitalization (in the case of an issuer as defined under paragraph 16 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the “Code of Conduct”); and/or (b) an amount equal to or more than 1% of the subject company’s issued share capital, or issued units, as applicable (in the case of a new listing applicant as defined in the Code of Conduct). Further, the analysts named in this report or their associates may have financial interests in relation to an issuer or a new listing applicant (as the case may be) in the securities which are reviewed in the report.
RHBSHK or any of its group companies may make a market in the securities covered by this report. RHBSHK or any of its group companies may have analysts or their associates, individual(s) employed by or associated with RHBSHK or any of its group companies serving as an officer of the company or any of the companies covered by this report. RHBSHK or any of its group companies may have received compensation or a mandate for investment banking services to the company or any of the companies covered by this report within the past 12 months.
Note: The reference to “group companies” above refers to a group company of RHBSHK that carries on a business in Hong Kong in (a) investment banking; (b) proprietary trading or market making; or (c) agency broking, in relation to securities listed or traded on The Stock Exchange of Hong Kong Limited. 38
Kuala Lumpur Hong Kong Singapore
RHB Research Institute Sdn Bhd RHB OSK Securities Hong Kong Ltd. RHB Research Institute Singapore Level 11, Tower One, RHB Centre 12th Floor Pte Ltd (formerly known as DMG & Partners Research Jalan Tun Razak World-Wide House Pte Ltd) Kuala Lumpur 19 Des Voeux Road 10 Collyer Quay Malaysia Central, Hong Kong #09-08 Ocean Financial Centre Tel : +(60) 3 9280 2185 Tel : +(852) 2525 1118 Singapore 049315 Fax : +(60) 3 9284 8693 Fax : +(852) 2810 0908 Tel : +(65) 6533 1818 Fax : +(65) 6532 6211 Jakarta Shanghai Phnom Penh
PT RHB OSK Securities Indonesia RHB OSK (China) Investment Advisory Co. Ltd. RHB OSK Indochina Securities Limited Wisma Mulia, 20th Floor Suite 4005, CITIC Square No. 1-3, Street 271 Jl. Jend. Gatot Subroto No. 42 1168 Nanjing West Road Sangkat Toeuk Thla, Khan Sen Sok Jakarta 12710, Indonesia Shanghai 20041 Phnom Penh Tel : +(6221) 2783 0888 China Cambodia Fax : +(6221) 2783 0777 Tel : +(8621) 6288 9611 Tel: +(855) 23 969 161 Fax : +(8621) 6288 9633 Fax: +(855) 23 969 171
Bangkok
RHB OSK Securities (Thailand) PCL 10th Floor, Sathorn Square Office Tower 98, North Sathorn Road, Silom Bangrak, Bangkok 10500 Thailand Tel: +(66) 2 862 9999 Fax : +(66) 2 862 9799
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