Guosheng Securities: AI Personal Computers Expected to Drive Average Prices, Boosting Lenovo Group (00992) Profitability.

On February 6th, Guosheng Securities issued a report recommending overseas gold stocks for February 2025, pointing out the opportunities in domestic AI hardware and software. It suggested focusing on Lenovo Group (00992), a consumer electronics chain enterprise benefiting from new machine iteration, good growth prospects, and improved profitability due to the enhancement of consumer electronics and AI innovation. AI PCs are expected to drive up prices and help improve the profitability of Lenovo Group. AI PCs contribute to performance with a significant increase in PC ASP. The revenue of Lenovo IDG Business Group in Q2 fiscal quarter increased by 17% to $13.5 billion, with an OPM of 7.3%, which remained stable compared to the previous quarter. In the core PC business, the quantity-sales double increase was evident in Q2 fiscal quarter. In terms of prices, the product structure drove the increase in average price. The proportion of AI PCs with five major features in the company's Q2 fiscal quarter increased significantly from 5% in the previous quarter to 14%. This to some extent boosted the ASP of Lenovo PC products. We estimate that the ASP of Lenovo PCs increased by approximately 5% on a quarterly basis. In terms of shipment volume, benefiting from factors such as the popularity of "Black Myth: Wu Kong" and the domestic policy of exchanging old for new, there was strong demand for Lenovo PC products, with a year-on-year/quarter-on-quarter increase of 3%/12% to 16.5 million units, further increasing market share to 24%. We expect that in the future, with the discontinuation of support for Win 10, the upgrade demand for AI PCs, Lenovo's PC core business is likely to continue to maintain growth in shipments, prices, and profitability. In the IDG business group, the performance of the smartphone/tablet business is remarkable. The revenue from smartphones/tablets achieved year-on-year growth rates of 43%/19% in the Q2 fiscal quarter. This is mainly due to market expansion, particularly in North America, EMEA, and the Asia-Pacific markets, which achieved year-on-year growth rates of 20%/35%/282% respectively. Looking ahead, under the AI trend, Lenovo is expected to leverage its extensive product matrix and ecosystem to provide consumers with more intelligent user experiences. It is expected that ISG will turn a profit in the first half of the fiscal year 25-26. The revenue of the ISG business in the Q2 fiscal quarter increased by 65% to $3.3 billion, reaching a new high, with OPM improving by 1.6pct/0.1pct year-on-year/quarter-on-quarter to -1.1%. In terms of products, the liquid-cooled servers showed promising performance in the Q2 fiscal quarter, with a 48% year-on-year growth in Neptune water-cooled products. In the future, the server sector is expected to continue growing with products such as the N1380 with 100% direct hot water cooling and the SC777 V4 with GB200. At the customer level, due to strong growth in CSP business and cost amortization, there is some pressure on profitability in the short term. However, it is expected to turn losses into profits and gradually improve as more small and medium-sized enterprises join the AI trend and cost amortization decreases. The expected turnaround point for ISG business is in the first half of the fiscal year 25-26. Guosheng Securities predicts that Lenovo's revenue for FY24/25, FY25/26, and FY26/27 will be $66/71/79.3 billion, with year-on-year increases of +16.1%/+7.8%/+11.4%; net profit attributable to shareholders will be $1.3/1.5/1.8 billion, with year-on-year increases of +25.7%/+15.9%/+19.5%. They maintain a "buy" rating on the company.