CICC International: As a core beneficiary of the AI PC wave and AI infrastructure investment, raises target price of LENOVO GROUP (00992) to 15 Hong Kong dollars.

date
28/02/2025
avatar
GMT Eight
On February 21, CICC International released a research report stating that as a core beneficiary of the AI PC wave and AI infrastructure investment, it maintains a "outperform" rating on LENOVO GROUP (00992), with a target price raised from HK$12.5 to HK$15. Due to the improved sales prospects of Lenovo (driven by Windows 11 and the momentum of AI PCs leading to higher average selling prices and increased shipments), revenue forecasts for fiscal years 2025/26/27 have been raised by 1%/3%/1%. CICC International pointed out that LENOVO GROUP exceeded expectations in the third quarter of fiscal year 2025. In the December quarter, revenue increased by 20% year-on-year and 5% quarter-on-quarter to USD 18.8 billion, exceeding CICC International's and Bloomberg's consensus expectations by 8%/5%. Gross margin was 15.7%, down 0.8 percentage points year-on-year (up 0.1 percentage points quarter-on-quarter). Pre-tax profit increased by 10% year-on-year to USD 517 million, net profit increased by 106% year-on-year to USD 693 million, up 93% quarter-on-quarter; both indicators exceeded CICC International's and the market's expectations. The sharp increase in net profit was mainly due to a one-time income tax offset of RMB 2.82 billion. Excluding this tax benefit, the year-on-year/quarter-on-quarter growth in net profit was 22%/15%. Benefiting from increased cloud service investment and the recovery of the server business, the Infrastructure Solutions Group (ISG) achieved a 59% year-on-year revenue growth, with operating profit margin turning positive after six consecutive quarters of losses. The PC business outperformed the market, and the smartphone business took off. According to IDC data, Lenovo maintained its leading position in the global traditional PC market, with shipments reaching 16.9 million units in the fourth quarter of 2024 (corresponding to the third quarter of fiscal year 2025 for Lenovo), an increase of 4.8% year-on-year and a market share of 24.5%. The overall PC market showed a slow recovery, with shipments increasing by only 1.8% year-on-year. With the increase in the proportion of high-end and gaming PCs, Lenovo's ASP achieved a year-on-year growth of about 4.9% and a quarter-on-quarter growth of 1.7%. Considering the transition to Windows 11 and the new AI PC models introduced in 2024, CICC International expects the PC market recovery to accelerate in fiscal year 2025. In terms of the mobile business, smartphone revenue in the quarter grew strongly by 21% year-on-year, with shipments in the Asia-Pacific region (up 155% year-on-year) and EMEA region (up 28% year-on-year) surging. Tablet business achieved a stable 5% year-on-year growth. Considering the positive outlook for PCs and the increase in smartphone market share, CICC International expects the Intelligent Devices Group (IDG) to achieve a 12% year-on-year growth in revenue in fiscal year 2025 (compared to a 10% decline in fiscal year 2024), and an 8% growth in fiscal year 2026. With the advantage of AI PC storage, Lenovo's AI PC products continue to lead the market. The company expects AI PCs to account for about 80% of its total PC shipments by fiscal year 2027, with Lenovo's AI PC equipped with Intel Meteor Lake (and a small portion using Qualcomm chips) receiving widespread praise. Currently, Lenovo holds a 30% share of the global AI PC market. In the Chinese market, Lenovo's AI PC is equipped with its self-developed AI model "Xiaotian," fully demonstrating its hardware and software advantages.

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