07 November 2014 Asia Pacific/Hong Kong Equity Research IT Hardware

Lenovo Group Ltd

(0992.HK / 992 HK) Rating OUTPERFORM* Price (06 Nov 14, HK$) 10.78 REINSTATEMENT

Target price (HK$) 13.00¹ Upside/downside (%) 20.6 Mkt cap (HK$ mn) 119,751 (US$ 15,447) Near-term pain and long-term gain Enterprise value (US$ mn) 11,356 Number of shares (mn) 11,108.65 ■ Reinstate coverage with OUTPERFORM and 12M TP of HK$13. FY2Q15 Free float (%) 50.0 sales were 7% below consensus—the first time in two years, due to China 52-week price range 12.62 - 7.72 issues. Pre-tax profit was still 1% ahead from PC execution. Our ADTO - 6M (US$ mn) 52.3

*Stock ratings are relative to the coverage universe in each investment thesis has been: improving PC scale translates into faster pre-tax analyst's or each team's respective sector. profit growth than sales. This was still the case with 24% YoY profit growth vs ¹Target price is for 12 months. 7% sales. IBM consolidates for the full December quarter; two months for

Research Analysts . has cleared five US deals with CFIUS since 2005. Thompson Wu ■ Long-term profit expansion outweighs near-term risks. We are 886 2 2715 6386 [email protected] preparing for integration risks, restructuring charges, and heightened PC/smartphone competition leading to depressed results for the next two Irene Wu 886 2 2715 6365 quarters. Afterwards, we believe Lenovo can drive supply-chain synergies [email protected] from the deals (more immediately from IBM), consolidate server market share, and increase PC, smartphone and enterprise profits faster than even what the market expects. ■ PC business still solid. PC results need to be strong in the meantime. September quarter PC sales increased 11% YoY; its September quarter share was ~20%. It is possible for Lenovo to reach a 25% global market share in 2-3 years by maintaining its China position and consolidating outside, in our view. Its market share ex China is only 14%. We believe it can continue to grow outside of China, and IBM's x86 server business will likely give the PC business a big boost in scale. ■ Valuation. We are confident that Lenovo's combined pre-tax margins and profits can meaningfully rise over the next 12-24 months. If Lenovo's execution is as crisp as it has been over the past two years, we would expect a faster turnaround in both IBM and Lenovo (i.e., 4-6 quarters). Our TP is based 15x our P/F FY16E EPS (or 18x GAAP EPS), vs the historical multiple of 11-18x.

Share price performance Financial and valuation metrics

Year 3/14A 3/15E 3/16E 3/17E Price (LHS) Rebased Rel (RHS) Revenue (US$ mn) 38,707.1 47,139.0 54,913.8 58,153.5 14 160 EBITDA (US$ mn) 1,307.2 1,501.2 2,006.9 2,609.1 12 140 EBIT (US$ mn) 1,052.1 1,034.5 1,443.1 1,987.4 10 120 Net profit (US$ mn) 817.2 735.9 1,050.9 1,421.7 8 100 EPS (CS adj.) (US$) 0.08 0.07 0.09 0.13 6 80 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Change from previous EPS (%) n.a. -22.7 -0.8 32.3 Consensus EPS (US$) n.a. 0.08 0.10 0.13 The price relative chart measures performance against the EPS growth (%) 28.2 -14.7 42.8 35.3 HANG SENG INDEX which closed at 23649.31 on 06/11/14 P/E (x) 17.9 20.9 14.7 10.8 On 06/11/14 the spot exchange rate was HK$7.75/US$1 Dividend yield (%) 2.2 1.5 1.3 1.7 EV/EBITDA (x) 9.1 7.6 5.5 3.6 Performance over 1M 3M 12M P/B (x) 4.9 4.8 3.8 2.9 Absolute (%) -10.5 -2.4 28.0 — ROE (%) 28.8 23.6 28.9 30.7 Relative (%) -11.4 0.4 25.4 — Net debt/equity (%) net cash net cash net cash net cash

Source: Company data, Thomson Reuters, Credit Suisse estimates

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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07 November 2014 Focus tables and chart

Figure 1: Lenovo FY2Q15 results review and FY15/16 earnings estimates (in US$ mn) F2Q15A (Sep-14) F3Q15E (Dec-14) F2015E (Mar-15) F2016E (Mar-16) Actual Cons. +/- % CS Cons. +/- % CS Cons. +/- % CS Cons. +/- % Revenue 10,476 11,275 -7.1 13,653 13,462 1.4 47,139 46,618 1.1 54,914 55,963 -1.9 YoY% 7.2% 15.4% 26.6% 24.8% 21.8% 20.4% 16.5% 18.7% QoQ% 0.8% 8.5% 30.3% 19.4% Operating profits 366 339 7.7 288 357 -19.3 1,035 1,191 -13.1 1,443 1,402 2.9 Pre-tax income 329 325 1.1 253 325 -22.1 910 1,104 -17.5 1,314 1,350 -2.7 Net income 262 260 0.9 207 270 -23.1 736 890 -17.4 1,051 1,075 -2.2 GAAP EPS (US$) $0.025 $0.025 0.9 $0.019 $0.024 -23.1 $0.066 $0.080 -17.4 $0.095 $0.097 -2.2 P/F EPS (US$) (1) $0.026 $0.023 $0.076 $0.112 GM (%) 13.9% 13.0% 13.3% 13.6% 13.3% 13.3% 13.8% 13.7% Opex/Sales (%) 10.4% 10.0% 11.2% 10.9% 11.1% 10.7% 11.2% 11.2% OPM (%) 3.5% 3.0% 2.1% 2.7% 2.2% 2.6% 2.6% 2.5% NM (%) 2.5% 2.3% 1.5% 2.0% 1.6% 1.9% 1.9% 1.9% (1): Assume US$60 mn intangible amortisation per quarter associated with Motorola/IBM x86 server. Source: Company data, the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates

Figure 2: Significant difference between consensus expectations and Lenovo's FY16 results (US$ mn) Low Mean Median High Revenues 43,017 55,963 58,545 65,088 Operating profit 684 1,402 1,436 1,774 Pre-tax profit 657 1,350 1,428 1,803 Net income 512 1,075 1,142 1,427 GAAP EPS (US$) $0.046 $0.099 $0.100 $0.130 Gross margin (%) 12.70% 13.70% 13.40% 15.70% Opex/sales (%) 11.1% 11.2% 10.9% 13.0% OPM (%) 1.6% 2.5% 2.5% 2.7% Source: the BLOOMBERG PROFESSIONAL™ service Consensus

Figure 3: Lenovo forward P/E—trading at 16.4x vs the historical range of 11-18x 20.0x

18.0x

16.0x

14.0x

12.0x

10.0x

8.0x

Jul-13 Jul-11 Jul-12 Jul-14

Jan-11 Jan-12 Jan-13 Jan-14

Mar-12 Mar-11 Mar-13 Mar-14

Nov-11 Nov-12 Nov-13 Nov-14

Sep-11 Sep-12 Sep-13 Sep-14

May-11 May-12 May-13 May-14

Lenovo P/E Avg -2.0x std -1.0x std 1.0x std 2.0x std

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse

Lenovo Group Ltd (0992.HK / 992 HK) 2 07 November 2014 Reinstating coverage with OUTPERFORM We expect over the next 24 months, Lenovo will turn around both IBM x86 server and Motorola businesses to higher profitability than the market expectations, but also execute sooner on their targets given their track record (i.e., four to six quarters for Motorola and Giving credit to Lenovo's within a year for IBM x86 server). Results in the next two quarters (FY3Q15-Dec and track record and we are FY4Q15-Mar) are likely to be depressed; we have modelled accordingly. Overall, we expecting faster a turn- forecast Lenovo's group sales increase of 22%/16.5% and pre-tax profits of -10%/+44% in around for both IBM x86 FY15/16E to US$47.1 bn/US$54.9 bn and US$910 mn/US$1.3 bn, respectively. We server and Motorola expect IBM to add pre-tax profits (excluding amortisation) of US$134/US$410 mn with pre- tax margins of 6.2%/7.2% in FY15/16E, and Motorola to reduce US$337/$162 mn in pre- tax profits (excluding amortisation) with pre-tax margins of -12.0%/-2.6%. Lenovo expects US$250-300 mn in amortisation expense p.a.

Figure 4: Lenovo closes IBM x86 server and Motorola in ten months; five US deals cleared with CFIUS since 2005 (US$) Close date Acquisition Deal Size Existing Cash Equity Debt issue Strategy April 2005 IBM PC $1,250 $694 $556 n.a. Becomes a global PC vendor, builds scale, globalised brand June 2011 NEC JV $219 $58 $161 n.a. Becomes the #1 PC vendor in Japan and drives scale August 2011 Medion $552 $479 $73 n.a. Enhances brand, channel, and scaling in Western Europe April 2012 Compal JV $150 $150 n.a. n.a. Optimises manufacturing and accelerates innovation December 2012 Stoneware $44 $44 n.a. n.a. Expands cloud computing solutions December 2012 EMC/Iomega $59 $59 n.a. n.a. Enhances technology in x86 servers and network storage January 2013 CCE $146 $102 $43 n.a. Establishes local brand and manufacturing September IBM x86 server $2,080 $1,800 $280 n.a. Accelerates enterprise strategy and server brand and tech 2014 October 2014 $2,910 $660 $750 $1,500 Accelerates mobile strategy and smartphone brand, and IP Source: Company data, Credit Suisse Key near-term risks to consider Consolidation of IBM x86 server and Motorola will make business operations challenging for Lenovo, for its share price, and for its shareholders, in our view. In addition, we foresee intensifying competition in PC and smartphone, and Lenovo's dreaded March quarter seasonality leading to likely depressed results. We have modelled accordingly in Dec-14 and Mar-15 quarters. After this initial integration pain, we are confident that the x86 server business (click here) and Motorola Mobility will increase Lenovo's profits and margins. ln the meantime, we believe the market should brace for the following near-term risks:

■ Integration always a risk: Lenovo is melding two company cultures. Lenovo has had experience with IBM PC before and should make the cross-over easier with IBM x86 servers, in our view. Motorola will be more challenging, but keep in mind Lenovo's plans are to run the company as a wholly owned subsidiary. This gives "Motoroleans" more room and time to digest the deal. They have planned for no major restructuring.

■ Likely IBM restructuring: Lenovo said it had no plans to restructure Motorola, and did not specifically comment with respect to IBM. IBM adds 6,500 employees across over 60 countries to Lenovo's workforce of 54,000 (including joint-ventures) in more than 60 countries. Motorola adds 3,500 employees in over 33 countries. There is bound to be overlap in roles, and we expect this to lead to small workforce restructuring (or "re- balancing"). In particular, we believe restructuring is likely at IBM given the overlap in supply chain with Lenovo's PC business. We have NOT factored meaningful restructuring charges into our estimates, only stock-based compensation.

■ Server landscape shifting with profit pool favouring Taiwan server ODMs: Large buyers of servers currently with growing server budgets are cloud/internet companies (i.e., Facebook, , , etc.). Their server needs are simplified and through

Lenovo Group Ltd (0992.HK / 992 HK) 3 07 November 2014

the Open Compute Project is shifting purchasing directly to Taiwan server ODMs Quanta, Hon Hai, Wistron and Inventec. In response, branded server vendors (i.e., HP/) launched stripped-down OCP compliant servers to stay competitive. Lenovo needs to determine a strategy for these cloud/internet data-center customers, particularly , Alibaba and as they race to launch Project Scorpio; and at the same time are sticking to project roadmaps for the core large enterprise customer.

■ Easy PC share gains subsiding: The core PC business generates over 95% of profit. This needs to be on track, or our view on the two deals is irrelevant. PC competition is increasing. The top five PC vendors including Lenovo expressed plans to gain market share in 2015 against a flat unit backdrop. This generally leads to pricing pressure. Easy share gains from Sony, , and Toshiba PC restructuring and Windows XP-led corporate refresh are subsiding. Lenovo has momentum. It kept its portfolio fresh (i.e., Yoga 3 tablet, ThinkPad Helix). Its scale gets a big push with IBM servers. We believe at the very least Lenovo's PC position from a market share and supply- chain perspective is much stronger now than twelve months ago.

Figure 5: Lenovo's "easy gains" from Toshiba, Samsung, and Sony's subsiding % of PC shipments 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 2011 2012 2013 Hewlett-Packard 15.1% 16.2% 17.1% 16.4% 16.0% 17.4% 17.9% 16.6% 16.0% 16.2% Acer Group 8.4% 8.5% 7.8% 7.3% 7.3% 7.5% 8.6% 10.8% 10.3% 8.0% Dell Inc 11.2% 11.9% 11.6% 11.8% 12.6% 13.3% 12.8% 11.7% 10.6% 11.6% Lenovo Group 14.9% 16.7% 17.7% 18.3% 17.0% 19.1% 19.8% 11.9% 14.9% 16.9% 6.5% 6.1% 6.2% 7.5% 7.2% 6.8% 7.3% 5.7% 7.1% 6.6% Toshiba 5.2% 4.1% 4.1% 4.8% 5.0% 4.1% 3.9% 5.2% 4.8% 4.5% Apple 5.1% 5.0% 5.7% 5.8% 5.5% 5.8% 7.0% 4.9% 4.8% 5.4% Samsung 5.0% 4.0% 3.4% 1.9% 2.3% 1.8% 1.4% 3.9% 4.7% 3.5% Sony 2.1% 1.9% 1.8% 1.8% 1.5% 0.2% 0.0% 2.3% 2.0% 1.9% Fujitsu 1.8% 1.3% 1.7% 1.8% 2.4% 1.6% 1.3% 1.5% 1.6% 1.7% Source: Gartner Preliminary 3Q14 PC Market Results, Credit Suisse research

■ China smartphone competition is still there: iPhone 6 launched with strong demand. China telecoms' subsidies are tightening, although possibly more for foreign brands. Samsung plans to re-enter China at the low-to-mid end. Local vendors and are doing very well and becoming more cost competitive using Taiwan ODMs. Motorola improves Lenovo's scale significantly; offers entry into higher price-bands and new regions (i.e., the US and Latin America), which offer higher profitability. We view Lenovo's smartphone business as more competitive now than ten months ago too.

Figure 6: Samsung's China smartphone re-entry strategy is to attack at the low-to-mid range—this is where Lenovo has found success, and now is moving up the value chain % of smartphone shipments 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 2011 2012 2013 Samsung 17.6% 18.5% 17.7% 17.2% 17.5% 13.3% 17.5% 16.9% 17.7% Xiaomi 2.6% 3.0% 4.0% 6.2% 9.4% 11.7% 0.5% 1.6% 4.1% Lenovo (1) 10.2% 13.0% 13.1% 12.3% 10.9% 10.9% 2.2% 12.2% 12.3% Yulong 9.8% 9.4% 9.0% 9.2% 9.5% 10.0% 4.4% 8.8% 9.3% Apple 9.7% 7.3% 6.4% 7.9% 8.7% 7.0% 10.0% 11.0% 7.7% Huawei 10.1% 8.2% 8.2% 10.0% 8.1% 9.6% 10.4% 9.8% 9.1% Others 40.1% 40.6% 41.6% 37.0% 35.9% 37.6% 55.0% 39.7% 39.8% Note: (1) Lenovo excludes Motorola Mobility. Source: Gartner, Credit Suisse We explicitly model the P&L for organic/existing Lenovo business, IBM x86 server and Motorola Mobility

Lenovo Group Ltd (0992.HK / 992 HK) 4 07 November 2014

FY15/16 P/F EPS forecasts Our estimates for pre-tax profits in FY15/16E are US$910 mn/US$1.3 bn, and US$1.0 bn/US$1.6 bn excluding amortisation expense for the deals. Lenovo has asked the investment community to take out non-cash amortisation expenses. We used a combination of historical financial reported data, peer comparison and industry data to build our forecasts. On a product basis, we took into account supply-chain savings and scale by adjusting our gross margins. A snapshot of our earnings forecasts is provided above in Figure 1. We have outlined our forecasting methodology for IBM x86 server and Motorola below.

■ IBM x86 server forecasting: We built an IBM x86 server income statement using IBM's disclosures for its Systems and Technology business and operating metrics of stand- alone server peers (i.e., SGI and Supermicro). Our IBM x86 server unit starting point is based on 7% global market share in CY2Q14. Our forecasts imply its share of 6.5%/7.5% in CY14/15E. Included in our revenue forecasts are IBM x86 server hardware and OEM/reseller sales from storage, networking and related . We used Gartner/IDC data to back-test our revenue forecasts to System x sales growth rates provided in IBM quarterly slides. We assume server maintenance is built into the cost of server deals. IBM's Systems and Technology gross margins were 31.9% YTD. SGI and Supermicro generated 26.2%/15.5% for the same period. For the IBM x86 server business, we used a starting point of 12.6% GM in FY15 and improving to 13.6% in FY16 reflecting in supply chain synergies and scale. We applied this analysis to operating expenses and assume 10.9%/8.5% of sales in FY15/16E, which translates into 1.6%/5.1% in operating margins.

■ Motorola forecasting: Google provided Motorola Mobility income statement from CY1Q12-4Q13 before shifting it discontinued operations reporting. Even then we have revenues, pre-tax income, and amortisation and restructuring expenses. We forecast smartphone shipments of 19 mn/20 mn in FY15/16E. Motorola is already on track to 55% of our FY15E shipments. This suggests market share of 1.5%/1.5% in CY14/15. In our revenues, we have also included and tablet shipments using Gartner and IDC data. We have not forecast it in accessories as it is minimal to earnings. We used CY1Q12-4Q13 opex/sales factoring out one-time costs as a base line for YTD 2014 opex/sales. Applied to reported YTD sales and discontinued operating income, we backed into Motorola's gross margins of 8-9.5% in CY1-3Q14. We assume gross margins would improve with Lenovo's supply chain help and opex/sales scale-down. Overall, we forecast Motorola generates US$337/$162 mn in FY15/16E pre-tax loss excluding amortisation, and translates into -12.0%/-2.6% pre-tax profit margins. Investors struggle with valuation Valuation is the biggest point of contention in our conversation with investors. The shift to pro-forma earnings to exclude amortisation is concerning investors. In our experience looking at US technology stocks, mega-deals such as IBM x86 servers and Motorola will lead to one-time costs and a shift to pro-form earnings. We believe it is appropriate to do with Lenovo's case of amortisation and restructuring-related costs. Consolidating and then forecasting IBM and Motorola are leading to a wide-range of FY16 earnings forecasts. Lenovo could do itself a favour and provide better guidance. On Bloomberg, we see a wide range FY16 EPS forecasts ranging from US$0.046 to US$0.130.

Lenovo Group Ltd (0992.HK / 992 HK) 5 07 November 2014

Figure 7: Significant difference between consensus expectations and Lenovo's FY16 results (US$ mn) Low Mean Median High Revenues 43,017 55,963 58,545 65,088 Operating profit 684 1,402 1,436 1,774 Pre-tax profit 657 1,350 1,428 1,803 Net income 512 1,075 1,142 1,427 GAAP EPS (US$) $0.046 $0.099 $0.100 $0.130 Gross margin (%) 12.70% 13.70% 13.40% 15.70% Opex/sales (%) 11.1% 11.2% 10.9% 13.0% OPM (%) 1.6% 2.5% 2.5% 2.7% Source: the BLOOMBERG PROFESSIONAL™ service consensus Investors are asking whether to use price-to-book or EV/EBITDA. A shift in valuation methodology rarely benefits share price. In technology, investors pay for growth, which is why we stick with P/E multiple. The multiple is another big concern. The stock trades at 12.4x our P/F FY16E EPS. Historically, it traded at 11-18x NTM EPS and currently at 16.4x consensus NTM EPS. This looks expensive despite its earnings growth potential and given the near-term risks. We are confident that the group's combined pre-tax margins and profits will increase meaningfully the next 12-24 months, which is tough to say in PC and in the tech sector. The trajectory of this growth is uncertain and could create re-entry points back into the stock, in our view. We believe a 15x mid-point multiple balances near-term challenges with longer-term growth. Our TP of HK$13 is based 15x our P/F FY16E EPS.

Figure 8: Lenovo forward P/E—trading at 16.4x vs historical range of 11-18x 20.0x

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Jul-13 Jul-11 Jul-12 Jul-14

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Mar-12 Mar-11 Mar-13 Mar-14

Nov-11 Nov-12 Nov-13 Nov-14

Sep-11 Sep-12 Sep-13 Sep-14

May-11 May-12 May-13 May-14

Lenovo P/E Avg -2.0x std -1.0x std 1.0x std 2.0x std

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse

Lenovo Group Ltd (0992.HK / 992 HK) 6 07 November 2014

FY2Q15 (September) review: Core business still solid

Figure 9: Lenovo Group consolidated FY2Q15 earnings review in US$ millions, unless otherwise stated Actual Cons. +/- % Revenue 10,476 11,275 -7.1% YoY% 7.2% 15.4% QoQ% 0.8% 8.5% Operating profits 366 339 7.7% Pre-tax income 329 325 1.1% Net income 262 260 0.9% GAAP EPS (US$) $0.025 $0.025 0.9% GM (%) 13.9% 13.0% Opex/Sales (%) 10.4% 10.0% OPM (%) 3.5% 3.0% Source: Company data, the BLOOMBERG PROFESSIONAL™ service

■ Revenues downside. Revenues increased about 1% QoQ vs seasonality of +14%. The primary drag came from China which appear down 28% QoQ. Inventory in transit at quarter for the Vibe X resulted in the decline. Normalising for this dynamic, sales would have been flattish, implying roughly 2-2.5 mn shipments were pushed into December. That being said, expectations for smartphones were to grow QoQ, which highlights the softness in China and pricing pressure. PC units of 15.7 mn increase 9% QoQ, exceeding estimates; tablet units of 3.2 mn increased 32% QoQ.

■ Higher gross margin. Gross margins improved nearly 100 bp YoY and 90 bp QoQ. The sequential improvement offset sales declines. Favourable PC product mix; and stringent cost controls helped drive this improvement.

■ Better operating margins. Opex/sales was higher than consensus. G&A increased over 23% YoY due to M&A-related costs. Nevertheless, better GM was offset, yielding a 3.5% OPM. IBM x86 server deal makes sense Lenovo paid US$2.1 bn to acquire IBM's x86 server business and ink an OEM/reseller "We intend to have a agreement for storage and related software solutions. The deal was announced on 23 profitable enterprise January and closed about ten months later on 1 October. Combined, Lenovo now ranks business within the year" third in the global x86 server market though with share gain opportunity from HP and Dell. Lenovo CEO and Chairman, Importantly, Lenovo is No. 1 in China though not as dominant as it is in PC, suggesting Yang Yangqing room for growth. China is the fastest growing market in terms of shipments and spending. Overall, we forecast IBM's x86 server business adds an incremental US$2.2/US$5.7 bn in revenues in FY15/16 and US$74/US$290 mn in operating profits.

Lenovo Group Ltd (0992.HK / 992 HK) 7 07 November 2014

Figure 10: Global x86 server spending is expected to increase 2% compounded through 2018 (US$59 bn); China is expected increase 8% compounded (US$8.8 bn) 20.0%

15.0%

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-5.0%

-10.0% 2010 2011 2012 2013 2014 2015 2016

YoY% China x86 server revenue chg YoY% Global server revenue chg

Source: Gartner Strategically sound providing solid footing in the global server market and China Lenovo enterprise plans to take a huge step forward with IBM x86 server, adding leading technology in providing a big push in its scale; streamline costs in the supply chain and dial-up profit. PCs and x86 servers share a similar supply chain and channel. Former HP CEO Mark Hurd's tenure was applauded for growing sales and profits during 2007-09. A key aspect of Mr Hurd's strategy was consolidating its supply chain, which was largely in PC and servers. Mr Hurd consolidated teams amplifying purchase powering for shared components. The components are also purchased from the same few vendors.

Figure 11: Lenovo is now the third-largest x86 server vendor globally % of x86 server shipments 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 2011 2012 2013 Lenovo 1.8% 2.1% 2.3% 2.7% 2.8% 3.2% 3.3% 1.7% 2.0% 2.3% IBM 9.2% 8.1% 7.5% 8.4% 6.6% 7.3% 6.7% 11.6% 10.4% 8.3% Lenovo and IBM 11.1% 10.2% 9.8% 11.1% 9.4% 10.5% 10.0% 13.3% 12.4% 10.5% HP 25.1% 23.9% 26.8% 28.1% 22.7% 23.0% 25.4% 29.7% 27.8% 26.0% Dell 22.5% 22.7% 19.6% 19.8% 19.9% 19.8% 19.0% 22.6% 22.5% 21.1% Note: Based on x86 32/64 bit servers. Source: Gartner Quarterly Server Statistics, Credit Suisse

Figure 12: Lenovo is the largest x86 server vendors in China with ample room to grow % of x86 server shipments 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 2011 2012 2013 Lenovo 11.0% 10.6% 11.2% 11.5% 10.6% 11.8% 10.5% 11.9% 11.1% IBM 17.5% 11.3% 9.5% 9.2% 10.2% 10.8% 19.3% 18.4% 11.4% Lenovo and IBM 28.4% 22.0% 20.8% 20.7% 20.8% 22.6% 29.8% 30.3% 22.5% Inspur Electronics 6.5% 15.7% 11.8% 13.1% 19.1% 12.5% 5.2% 7.5% 12.1% Sugon 7.2% 9.0% 10.2% 8.9% 8.3% 9.7% 6.0% 8.4% 8.9% HP 13.4% 9.7% 14.1% 11.9% 10.0% 10.6% 18.9% 16.5% 12.2% Dell 18.0% 20.8% 19.8% 20.8% 16.8% 19.8% 23.9% 21.6% 20.0% Note: Based on x86 32/64 bit servers. Source: Gartner Quarterly Server Statistics, Credit Suisse

Lenovo Group Ltd (0992.HK / 992 HK) 8 07 November 2014

Figure 13: PC and x86 server share similar supply chains Figure 14: Record HP OPM with PC/server combined % unit share ; FYE October HP GAAP OPM 35.0% 12.0% 11.4% 11.0% 10.8% 31.7% 32.1% 31.8% 30.7% 10.0% 31.2% 10.0% 30.0% 30.3% 29.9% 30.3% 9.2% 28.8% 28.5% 8.0% 8.0% 25.0% 6.4% 6.2% 6.3% 6.0% 18.8% 20.0% 18.1% 4.3% 17.7% 17.5% 16.6% 16.1% 4.0% 15.3% 14.1% 14.1% 14.1% 15.0% 2.0%

10.0% 0.0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

HP global PC unit share HP global x86 unit share HP OPM

Source: Company data, Credit Suisse Source: Company data, Credit Suisse Lenovo pays US$2.1 for IBM x86 server business: Transaction details Lenovo paid US$1.8 bn in cash and US$280 mn in Lenovo stock based on 26 September closing price of HK$11.82 (1.75% in EPS dilution). The shares for Lenovo that IBM receives are subject to a one-year lock up period from date of close (1 October 2014). Lenovo will integrate IBM; it began this process on 1 October and expects to complete in early 2015. System x and related suite included but also inks OEM/reseller agreement Lenovo acquired IBM's system x server portfolio which includes: (1) towers, racks, high- density and blades; (2) the x86 sales, R&D labs, and other facilities supporting these product, which includes 6,500 employees in more than 60 countries staffed in Shanghai and Shenzhen, China, and Taipei, Taiwan; Austin, Texas; Raleigh, North Carolina; and Rochester, Minnesota; and (3) IBM Systems Networking portfolio assets including embedded, top-of-rack switch and software. All relevant IPs will be transferred. Lenovo will be an OEM to IBM and a reseller of selected products from IBM's storage and software portfolio including entry and mid-rage Storwize storage systems, and Linear Tape Open (LTO) products; Smart Cloud, GPFS, and Platform computing software.

Figure 15: IBM x86 server business acquired and OEM/reseller agreements vs market growth, share and competitors in millions, unless otherwise stated Transaction Company Market Global market details China market details Competitors Type 2014E (US$ 14-18E 1H14 IBM 2014E (US$ 14-18E 1H14 IBM bn) (1) CAGR share bn) (1) CAGR share Acquired IBM x86 server x86 server 40.6 3.2% 10.6% 5.8 8.4% 17.6% HP, Dell, Cisco, Oracle, Acquired x86 server support Hardware support 86.7 (2) 0.5% 8.7% (3) 2.8 (2) 1.9% 16.4% (3) HP, Dell, Cisco, Oracle, Network HP, Dell, Cisco, Acquired Networking (4) 37.8 0.5% 1.0% 3.7 3.9% n.a. equipment Juniper, Huawei OEM/reseller Storwize storage ECB storage 22.7 2.6% 10.9% 1.6 7.9% 10.0% EMC, NetApp, HP, Dell System mgmt. Infrastructure , Oracle, SAP, OEM/reseller 182.3 6.1% 14.1% (3) 5.4 9.9% 17.7% (3) software software EMC, HP Note: (1) Vendor revenue; (2) end-user spending; (3) 2013 market share; (4) top-of-rack switches/software. Source: Gartner, Credit Suisse System x brand and Lenovo ThinkServer continue to operate in tandem Lenovo will continue to use the IBM brand on System x for about a year. The team has not made a decision to change branding afterwards. There are no plans to alter the product roadmap. Adalio Sanchez, current GM of IBM's System x and Pureflex joined Lenovo as part of the acquisition. He will continue to lead IBM's System x business as SVP of Enterprise Systems and reports to Gerry Smith, EVO of Enterprise Business Group. Lenovo will continue with its own ThinkServer brand. There is no change to its agreement with EMC on storage products, which target the entry and high-end. Lenovo's ThinkServer

Lenovo Group Ltd (0992.HK / 992 HK) 9 07 November 2014 business was generating US$100-150 mn in quarterly sales this year; with the majority of its units in China. IBM's largest market is China, but it has much exposure to other regions.

Figure 16: Lenovo's current x86 server business is Figure 17: IBM's x86 server business is more balanced heavily skewed to China (70% of its 2Q14 volumes) though China is its largest market % of x86 server shipments in 2Q14 % of x86 server shipments 2Q14

Eastern Europe Middle East & Middle East & Africa 0% Eastern Europe Asia/Pacific ex. Western Europe Africa 4% 0% 4% China 7% Asia/Pacific ex. 19% Latin America China 2% 0% Western Europe 20% North America 21%

Latin America Japan 6% 0% China 28% China 70% North America 15% Japan 4% Source: Gartner Quarterly Server Statistics, Credit Suisse Source: Gartner Quarterly Server Statistics, Credit Suisse Matched in smartphones with Motorola, but losses in a more competitive market lends so some concern

Figure 18: Motorola new , Droid and smartphones volumes are promising YoY% smartphone unit change Lenovo CEO expects to turn 100.0% around the Motorola 80.0% business in 4-6 quarters

60.0%

40.0%

20.0%

0.0%

-20.0%

-40.0%

-60.0% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14

Global smartphone unit YoY % change Motorola smartphone unit YoY % change

Source: Gartner Device Market Share, Credit Suisse Lenovo paid US$2.91 bn for Motorola Mobility. It came with the Moto and Droid series brands, which have shown promising results YTD and access wireless patents and IP, and carrier relationships. Motorola's sales were US$4.7 bn in CY1Q-3Q14 (+48% YoY) and US$6.0 bn over the last 12 months (+27% YoY), but the business was in operating loss over this period. Overall, we forecast Motorola adds an incremental US$2.8/6.4 bn in sales in FY15/16 with operating losses of US$397/282 mn. Motorola marries well with Lenovo smartphone products and strategy To date, the majority of Lenovo's smartphones sold are into China (80% in the Sept quarter) and are expanding into Asia Pacific, Russia, and India. Many of the devices are sold within the US$100-150 price-point. Motorola volumes are largely in the and Brazil. Motorola's newly launched Moto X series, Droid, and Moto G series are

Lenovo Group Ltd (0992.HK / 992 HK) 10 07 November 2014 showing promising demand. Lenovo can cross-license >2,500 wireless and related IP from Google, improving the cost profile and development times of Lenovo's branded smartphones sold in these region. Lastly, Motorola has over 30 global carrier relationships.

Figure 19: Motorola's key smartphone markets are North Figure 20: Vast majority of Lenovo's smartphones sold America and Brazil; India is also very promising are into China and at entry-level price points % of 2Q14 Motorola smartphone shipments % of 2Q14 Lenovo smartphone shipments Eastern Latin America Europe 1.3% 5.5% North America Japan MEA 29.5% 0.0% 2.1%

Latin America 46.8%

Western Europe MEA7.0% 0.2% Japan Asia Pac 0.0% 16.5% Asia Pac 91.1% Source: Gartner Device Market Share, Credit Suisse Source: Gartner Device Market Share, Credit Suisse Lenovo paid US$2.91 bn for Motorola Mobility: Transaction details Lenovo used US$660 mn in cash, issued US$750 mn in Lenovo stock, and US$1.5 bn in deferred consideration in the form of three-year interest-free promissory note. Lenovo issued 519.1 mn shares to Google for the stock consideration portion at a price of HK$11.2173 per share (closing price on 30 October), which results in a ~5% share dilution. Google has a one-year lock-up period for the 519.1 mn Lenovo shares it was granted. The lock-up starts on date of deal completion date (30 October 2014). A separate cash payment of US$228 mn was also paid to Google primarily for the cash and working held by Motorola at the time of close. The deal includes handset portfolio but also more The deal included Motorola Mobility's business, which includes Moto X and Droid series brands for the premium category and Moto G and E series for in value segments. In addition, Lenovo will add Moto 360 Android Wear Motorola Xoom and Xoom Wi-Fi Accessories Bluetooth adapters, headsets, speakers, and related peripherals. Lenovo will also gain 3,500 technical and other employees staffed in 33 locations globally (2,800 are U.S. based), of which 2,500 have technical expertise and IP background. Lenovo said on its 30 January media conference call that it will retain Motorola's Chicago-area based headquarters and has NO plans to lay-off personnel.

Lenovo Group Ltd (0992.HK / 992 HK) 11 07 November 2014

Figure 21: Motorola launched smartphone portfolio is streamlined to five models target entry, mid, and high-end Manufacturer Motorola Motorola Motorola Motorola Motorola

Model Moto X (2014) Moto G (2014) Announce date Sep-14 Oct-14 Oct-14 Sep-14 May-14 Ship date Sep-14 Oct-14 Nov-14 Sep-14 May-14

Form factor: Display size (in) 5.2 5.2 5.96 5.0 4.3 Resolution 1080 x 1920 1440 x 2560 1440 x 2560 720 x 1280 540 x 960 Height x Width x Depth (mm) 140.8 x 72.4 x 10 143.5 x 73.3 x 8.3 - 11.2 159.3 x 83 x 10.1 141.5 x 70.7 x 11 124.8 x 64.8 x 12.3 Weight 144 g 169 g 184 g 149 g 142 g

Core internals Processor MSM8974AC Snapdragon 801, 2.5 GHz Snapdragon 805 quad-core, 2.7 GHz Snapdragon 805 quad-core, 2.7 GHz MSM8226 Snapdragon 400, 1.2 GHz Snapdragon 200, 1.2 GHz Memory 2 GB RAM 3 GB RAM 3 GB RAM 1 GB RAM 1 GB RAM Android 4.4.4 (KitKat) Android 4.4.4 (KitKat) Android 5.0 (Lollipop) Android 4.4.4 (KitKat) Android 4.4.2 (KitKat) Storage type/capacity (GB) 16 / 32 GB 32 / 64 GB 32 / 64 GB 8 / 16 GB 4 GB

Features Battery life (hrs) NA Up to 48 h () Up to 24 h Up to 24 h (3G) NA Standby (days) NA NA NA NA NA Camera Yes Yes Yes Yes Yes Rear-camera (MP) 13 MP 21 MP 13 MP 8 MP 5 MP Front-camera (MP) 2 MP 2 MP 2 MP 2 MP No Wireless technology 4G LTE 4G LTE 4G LTE 3G 3G Wi-Fi Yes Yes Yes Yes Yes GPS Yes Yes Yes Yes Yes Bluetooth BT4.0 BT4.0 BT4.1 BT4.0 BT4.0

Retail Price ($USD) US$499.99 US$599.99 US$649 $179.99 US$129

Source: Company data, Credit Suisse Google cross-licenses Motorola's mobile patent portfolio Google maintains the vast majority of the Motorola Mobility's patent portfolio. This includes current patent application and inventions pending approval. They will license back to Motorola Mobility. Motorola will retain over 2,000 patents assets and a "large-number" of patent cross-license agreements, plus the brand and trade market portfolio. In 2013 when Google acquired Motorola Mobility, Motorola had 24,500 patents covering its Home and Mobile operating segments. These patents cover a wide range of technology include smartphones and handsets, mobile and telecom standards, video, etc. Established internet-focused smart device company in China next year like small-rice Lenovo announced (click here) in October 2014 that it plans to create a new company focus on building an "internet-based smart device company" in China. Operations are set for 1 April 2015 and operates under a separate name and brand. Chen Xudong, President of Lenovo China and Asia-Pacific Emerging Markets will become CEO of the new company. Lenovo's strategy is to target China's consumer mobile device market from both a hardware and software/application perspective. The new company will use a direct internet-based business model. This appears to draw on similar characteristics of Xiaomi's business model. No updates were provided during this quarter's earnings call 25% PC share in 2018 is achievable We are forecasting Lenovo's PC shipments will increase 11%/5% in CY14/15E. Its PC shipments have increased 12% YoY YTD, outpacing the overall market of 1% decline. We expect Lenovo to continue to consolidate market share though easy share gains (i.e., Sony, Toshiba, and Samsung reduction in PC scale) fades as the top five vendors become more aggressive in the market. We have concerns this may stimulate price competition. We are hopeful of Lenovo's synergies from the IBM x86 server deal such as component procurement and sales/channel, and expect it to gain share from peers. In the long term, we see a scenario where its global PC market share can rise to close to 25% in 2018 from close to 20% currently.

Lenovo Group Ltd (0992.HK / 992 HK) 12 07 November 2014

Credit Suisse forecasts PC shipments to decline 4.5%/1% in CY14/15E Our conversations with ODMs and PC brands suggest their expectations for global PC shipments are for flat volumes in 2015. The improving factors are consumer refresh in emerging markets; tablet declines drive incremental dollars spent to PCs and smartphones; return of entry-level priced notebooks led by Microsoft Windows O/S licensing cuts. Lenovo said that it is seeing stabilisation in China PC and its PC shipments in the country rose 5% YoY, the first time in six quarters. The offsetting factors may include slowing mature market consumer adoption and easing corporate refresh benefits.

Figure 22: Ample opportunity for Lenovo to consolidate PC market share 2011 2012 2013 #1 #2 #3 Commercial PC share% China 34.0% 38.6% 38.7% Lenovo (38.7%) Dell (8.4%) HP (7.5%) APAC ex China 9.8% 11.7% 10.2% HP (20.4%) Dell (13.3%) Lenovo (10.2%) Japan 19.0% 28.6% 27.8% Lenovo (27.8%) Fujitsu (22.3%) Dell (14.4%) EMEA 8.1% 9.8% 12.5% HP (22.4%) Lenovo (12.5%) Dell (11.3%) North America 11.0% 11.7% 12.7% Dell (26.6%) HP (25.0%) Lenovo (12.7%) Latin America 9.7% 12.0% 19.7% Lenovo (19.7%) HP (14.1%) Dell (9.4%) Worldwide 15.2% 17.8% 19.1% Lenovo (19.1%) HP (18.4%) Dell (14.2%) Consumer PC share% China 25.6% 27.5% 29.6% Lenovo (29.6%) Dell (9.3%) Asus (7.5%) APAC ex China 5.6% 7.2% 9.2% Acer Group (15.8%) Asus (14.9%) HP (11.6%) Japan 12.8% 20.9% 22.7% Lenovo (22.7%) Toshiba (14.0%) Fujitsu (13.1%) EMEA 4.1% 9.2% 15.2% Lenovo (15.2%) HP (15.1%) Acer Group (10.8%) North America 2.7% 4.9% 6.9% HP (26.0%) Dell (16.5%) Apple (14.0%) Latin America 2.6% 2.4% 4.2% HP (12.5%) Samsung (11.6%) Positivo Informatica (9.7%) Worldwide 8.4% 11.4% 14.4% Lenovo (14.4%) HP (13.8%) Asus (9.3%) Source: Gartner, Credit Suisse

Figure 23: Lenovo may be able to reach almost 25% global PC share in 2018 HP Lenovo 13-18 PC unit CAGR 2013 2013 2018E Lenovo Global PC Commercial PC share% China 7.5% 38.7% 38.7% 3% 3% APAC ex China 20.4% 10.2% 18.0% 16% 4% Japan 13.9% 27.8% 27.8% -12% -12% EMEA 22.4% 12.5% 22.0% 9% -2% North America 25.0% 12.7% 17.5% 4% -3% Latin America 14.1% 19.7% 24.0% 1% -3% Worldwide 18.4% 19.1% 25.0% 5% -1%

Consumer PC share% China 4.9% 29.6% 33.0% -2% -4% APAC ex China 11.6% 9.2% 22.0% 17% -2% Japan 2.5% 22.7% 25.0% -2% -4% EMEA 15.1% 15.2% 25.0% 7% -4% North America 26.0% 6.9% 18.0% 15% -5% Latin America 12.5% 4.2% 15.0% 25% -3% Worldwide 13.8% 14.4% 23.5% 6% -4% Source: Gartner, Credit Suisse

Lenovo Group Ltd (0992.HK / 992 HK) 13 07 November 2014

Financial statement

Figure 24: Lenovo Group income statement March fiscal year-end F1Q14 F2Q14 F3Q14 F4Q14 F1Q15 F2Q14 F3Q15E F4Q15E F1Q16E F2Q16E F3Q16E F4Q16E F2013 F2014 F2015E F2016E F2017E In US$ millions, except EPS Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Shipments (000's) PC shipments 12,609 14,090 15,153 12,846 14,460 15,721 16,309 13,830 15,130 16,280 17,254 15,210 52,176 54,698 60,320 63,874 66,185 Lenovo smartphone 11,389 12,282 13,894 12,582 15,819 16,981 16,500 13,700 15,700 16,750 17,400 14,150 28,682 50,146 63,000 64,000 66,000 Motorla smartphone 0 0 0 0 0 0 3,800 4,800 5,200 5,700 6,000 3,100 0 0 8,600 20,000 25,000 Lenovo and MOT tablet 1,454 2,336 3,400 2,010 2,330 3,070 3,975 2,425 2,825 3,475 4,025 1,775 2,233 9,200 11,800 12,100 12,600 Lenovo and IBM server 52 58 69 65 78 85 230 252 275 295 290 315 205 244 645 1,175 1,400

Revenues Lenovo core 8,787 9,774 10,789 9,358 10,395 10,476 11,416 9,884 10,457 11,017 11,889 9,509 33,873 38,707 42,170 42,873 43,307 IBM 999 1,174 1,278 1,360 1,455 1,591 2,174 5,684 6,923 Motorola 1,238 1,558 1,659 1,817 1,899 982 2,796 6,357 7,923 Consolidated 8,787 9,774 10,789 9,358 10,395 10,476 13,653 12,615 13,395 14,194 15,242 12,083 33,873 38,707 47,139 54,914 58,153

Gross profit Lenovo core 1,191 1,265 1,363 1,245 1,349 1,457 1,532 1,345 1,346 1,447 1,633 1,312 4,074 5,064 5,683 5,797 5,986 IBM 134 155 169 179 204 221 289 774 941 Motorola 154 163 207 235 330 226 317 998 1,460 Consolidated 1,191 1,265 1,363 1,245 1,349 1,457 1,819 1,664 1,721 1,862 2,168 1,759 4,074 5,064 6,289 7,569 8,387

Gross margin% Lenovo core 13.6% 12.9% 12.6% 13.3% 13.0% 13.9% 13.4% 13.6% 12.9% 13.1% 13.7% 13.8% 12.0% 13.1% 13.5% 13.5% 13.8% IBM 13.4% 13.2% 13.2% 13.2% 14.0% 13.9% 13.3% 13.6% 13.6% Motorola 12.4% 10.5% 12.5% 12.9% 17.4% 23.0% 11.3% 15.7% 18.4% Consolidated 13.6% 12.9% 12.6% 13.3% 13.0% 13.9% 13.3% 13.2% 12.9% 13.1% 14.2% 14.6% 12.0% 13.1% 13.3% 13.8% 14.4%

Operating expense Lenovo core 990 981 1,029 1,013 1,066 1,092 1,127 1,041 1,025 1,110 1,188 1,039 3,274 4,012 4,325 4,362 4,397 IBM 104 111 117 119 122 125 215 484 555 Motorola 300 413 374 350 331 226 714 1,281 1,448 Consolidated 990 981 1,029 1,013 1,066 1,092 1,531 1,566 1,516 1,579 1,641 1,390 3,274 4,012 5,254 6,126 6,400

Opex/sales% Lenovo core 11.3% 10.0% 9.5% 10.8% 10.3% 10.4% 9.9% 10.5% 9.8% 10.1% 10.0% 10.9% 9.7% 10.4% 10.3% 10.2% 10.2% IBM 10.5% 9.5% 9.2% 8.8% 8.4% 7.9% 9.9% 8.5% 8.0% Motorola 24.2% 26.5% 22.5% 19.3% 17.4% 23.0% 25.5% 20.1% 18.3% Consolidated 11.3% 10.0% 9.5% 10.8% 10.3% 10.4% 11.2% 12.4% 11.3% 11.1% 10.8% 11.5% 9.7% 10.4% 11.1% 11.2% 11.0%

Operating income Lenovo core 202 284 334 232 283 366 405 304 321 337 445 274 800 1,052 1,358 1,436 1,590 IBM 29 44 52 60 82 96 74 290 386 Motorola -146 -250 -167 -114 -1 0 -397 -282 12 Consolidated 202 284 334 232 283 366 288 98 205 283 527 369 800 1,052 1,035 1,443 1,987 39% Operating margin% Lenovo core 2.3% 2.9% 3.1% 2.5% 2.7% 3.5% 3.5% 3.1% 3.1% 3.1% 3.7% 2.9% 2.4% 2.7% 3.2% 3.3% 3.7% IBM 2.9% 3.8% 4.0% 4.4% 5.7% 6.0% 3.4% 5.1% 5.6% Motorola -11.8% -16.1% -10.1% -6.3% 0.0% 0.0% -14.2% -4.4% 0.2% Consolidated 2.3% 2.9% 3.1% 2.5% 2.7% 3.5% 2.1% 0.8% 1.5% 2.0% 3.5% 3.1% 2.4% 2.7% 2.2% 2.6% 3.4%

Other income and expense 14 -19 -13 -20 -19 -36 -35 -34 -32 -32 -33 -32 1 -38 -124 -129 -160 Pre-tax income 215 265 321 212 264 329 253 64 173 250 495 337 801 1,014 910 1,314 1,827 Pre-tax margins 2.5% 2.7% 3.0% 2.3% 2.5% 3.1% 1.9% 0.5% 1.3% 1.8% 3.2% 2.8% 2.4% 2.6% 1.9% 2.4% 3.1%

Tax expense 46 51 56 44 53 57 46 12 35 50 99 79 170 197 167 263 365 Tax rate 21.1% 19.3% 17.3% 20.9% 20.2% 17.3% 18.0% 18.0% 20.0% 20.0% 20.0% 23.5% 21.2% 19.4% 18.4% 20.0% 20.0%

Net income 174 220 265 158 214 262 207 53 138 200 396 258 635 817 736 1,051 1,422 Net income margin 2.0% 2.2% 2.5% 1.7% 2.1% 2.5% 1.5% 0.4% 1.0% 1.4% 2.6% 2.1% 1.9% 2.1% 1.6% 1.9% 2.4%

GAAP EPS (US$) $0.016 $0.021 $0.025 $0.015 $0.020 $0.025 $0.019 $0.005 $0.012 $0.018 $0.036 $0.023 $0.061 $0.078 $0.066 $0.095 $0.128 YoY % change 23.6% 35.3% 29.0% 24.3% 23.5% 18.5% -25.8% -68.4% -38.7% -27.3% 90.7% 388.0% 32.7% 28.2% -14.7% 42.8% 35.3%

P/F GAAP EPS (US$) $0.016 $0.020 $0.025 $0.016 $0.020 $0.026 $0.023 $0.009 $0.017 $0.022 $0.040 $0.027 $0.061 $0.078 $0.076 $0.112 $0.149

Share outstanding 10,555 10,468 10,512 10,501 10,494 10,540 11,082 11,082 11,082 11,082 11,082 11,082 10,463 10,501 11,082 11,082 11,082 Source: Company data, Credit Suisse estimates

Lenovo Group Ltd (0992.HK / 992 HK) 14 07 November 2014

Companies Mentioned (Price as of 06-Nov-2014) Holding Limited (BABA.N, $108.67) Amazon com Inc. (AMZN.OQ, $296.52) Baidu Inc (BIDU.OQ, $237.7) Facebook Inc. (FB.OQ, $74.83) Google, Inc. (GOOGL.OQ, $555.95) Hewlett Packard (HPQ.N, $36.18) Hon Hai Precision (2317.TW, NT$95.9) International Business Machines Corp. (IBM.N, $161.82) Inventec Co Ltd (2356.TW, NT$21.1) Lenovo Group Ltd (0992.HK, HK$10.78, OUTPERFORM, TP HK$13.0) Microsoft Corporation (MSFT.OQ, $47.86) Quanta Computer (2382.TW, NT$76.4) (005930.KS, W1,204,000) Sony (6758.T, ¥2,231) Super Micro Comp (SMCI.OQ, $32.25) Tencent Holdings (0700.HK, HK$123.6) Toshiba (6502.T, ¥496) Wistron (3231.TW, NT$28.9)

Disclosure Appendix Important Global Disclosures I, Thompson Wu, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Lenovo Group Ltd (0992.HK)

0992.HK Closing Price Target Price Date (HK$) (HK$) Rating 04-Jan-12 5.28 6.30 O 10-Jan-12 5.89 6.95 09-Feb-12 6.49 7.15 23-Apr-12 7.29 8.30 24-May-12 6.73 7.70 04-Sep-12 6.62 7.50 05-Sep-12 6.12 R 06-Sep-12 6.36 7.50 O 18-Dec-12 7.27 8.30 08-Jan-13 7.42 8.40 OUTPERFORM REST RICT ED 31-Jan-13 8.07 10.00 24-May-13 7.66 9.30 31-May-13 7.99 R 26-Jun-13 7.01 9.30 O 08-Nov-13 8.53 10.30 08-Jan-14 8.99 10.60 27-Jan-14 9.90 R * Asterisk signifies initiation or assumption of coverage. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within

Lenovo Group Ltd (0992.HK / 992 HK) 15 07 November 2014 an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10- 15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 45% (54% banking clients) Neutral/Hold* 39% (51% banking clients) Underperform/Sell* 13% (43% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

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Price Target: (12 months) for Lenovo Group Ltd (0992.HK) Method: Our HK$13 target price for Lenovo is based on 15x FY16E earnings per share (EPS). This price/earnings (P/E) multiple is at the mid point of its historical trading range. We believe Lenovo should trade at a premium on the back of its ability to leverage the corporate PC cycle, a net share gainer from disruption at HP and Acer, its defensible position in China, which also provides further growth oppurtunity. Risk: The key risks to our target of HK$13 for Lenovo include: (1) China demand is weaker than expected, (2) the corporate rebound is slower than expected and (3) Lenovo is unable to gain share in PC markets outside of China. All these factors may restrict operating margin expansion, which would be another key risk.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names The subject company (0992.HK, IBM.N, GOOGL.OQ, AMZN.OQ, FB.OQ, 2317.TW, 3231.TW, HPQ.N, BABA.N, 0700.HK, 6758.T, 005930.KS, MSFT.OQ) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (0992.HK, IBM.N, GOOGL.OQ, AMZN.OQ, FB.OQ, 2317.TW, HPQ.N, BABA.N, 0700.HK, 6758.T, 005930.KS, MSFT.OQ) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (IBM.N, BABA.N, 0700.HK, MSFT.OQ) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (0992.HK, GOOGL.OQ, FB.OQ, HPQ.N, BABA.N, 0700.HK) within the past 12 months.

Lenovo Group Ltd (0992.HK / 992 HK) 16 07 November 2014

Credit Suisse has received investment banking related compensation from the subject company (0992.HK, IBM.N, GOOGL.OQ, AMZN.OQ, FB.OQ, 2317.TW, HPQ.N, BABA.N, 0700.HK, 6758.T, 005930.KS, MSFT.OQ) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (0992.HK, IBM.N, GOOGL.OQ, AMZN.OQ, FB.OQ, 2317.TW, 3231.TW, HPQ.N, BIDU.OQ, BABA.N, 0700.HK, 6758.T, 005930.KS, 6502.T, MSFT.OQ) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (IBM.N, BABA.N, 0700.HK, MSFT.OQ) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (IBM.N, GOOGL.OQ, AMZN.OQ, FB.OQ, HPQ.N, BIDU.OQ, BABA.N, 6758.T, 6502.T, MSFT.OQ). As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (2382.TW, 2317.TW, 3231.TW). Credit Suisse has a material conflict of interest with the subject company (0992.HK) . Credit Suisse is acting as financial advisor to Lenovo Group Limited for its proposed acquisition of Motorola Mobility Group from Google. Credit Suisse has a material conflict of interest with the subject company (FB.OQ) . Credit Suisse has been named as a defendant in various putative shareholder class-action lawsuits relating to Facebook, Inc.’s May 2012 initial public offering. Credit Suisse’s practice is not to comment in research reports on pending litigations to which it is a party. Nothing in this report should be construed as an opinion on the merits or potential outcome of the lawsuits. Credit Suisse has a material conflict of interest with the subject company (005930.KS) . Credit Suisse is acting as exclusive financial advisor to Samsung Electronics and Samsung Fine Chemicals in relation to the proposed sale of their ownership stakes in the semiconductor wafer joint ventures with SunEdison, SMP Ltd and MEMC Korea Company Ltd, to SunEdison. Credit Suisse has a material conflict of interest with the subject company (6502.T) . Credit Suisse Securities (USA) LLC is acting as an advisor to Landis+Gyr on the announced acquisition by Toshiba Corporation. This acquisition remains subject to regulatory approvals and other customary closing conditions.

For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683. Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (0992.HK, IBM.N, GOOGL.OQ, AMZN.OQ, FB.OQ, 2382.TW, 2317.TW, 3231.TW, HPQ.N, BIDU.OQ, BABA.N, 0700.HK, 6758.T, 005930.KS, 6502.T, MSFT.OQ) within the past 12 months Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. An analyst involved in the preparation of this report received third party benefits in connection with this research report from the subject company (HPQ.N) Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (0992.HK, IBM.N, GOOGL.OQ, FB.OQ, HPQ.N, BABA.N, 0700.HK, MSFT.OQ) within the past 3 years. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Taiwanese Disclosures: This research report is for reference only. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. Reports may not be reprinted without permission of CS. Reports written by Taiwan based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Lenovo Group Ltd (0992.HK / 992 HK) 17 07 November 2014

Credit Suisse AG, Taipei Securities Branch ...... Thompson Wu ; Irene Wu

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Lenovo Group Ltd (0992.HK / 992 HK) 18 07 November 2014

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