Huatai Securities comments on Lenovo's Q2 performance: Continuously unleashing the growth potential of hybrid AI, maintaining target price of HK$14.

Recently, LENOVO GROUP announced its 2QFY26 performance: the company's revenue was $20.452 billion, a year-on-year increase of 14.6%; non-HKFRS net profit was $5.12 billion, a year-on-year increase of 25.2%; net profit attributable to the parent company was $3.40 billion, a year-on-year decrease of 5.1%, with non-cash fair value gains related to warrants amounting to $1.48 billion, and nominal interest on convertible bonds amounting to $28.47 million. In response to this, Huatai released a report stating that in comparison with other PC/server manufacturers, Lenovo has significant advantages in terms of 1) shipment volume scale (number one in the global PC market share), 2) procurement scale, and supply chain management capabilities (ranked 8th globally by Gartner and 1st in Asia), showing strong ability to withstand industry cycles. The management team stated at the performance meeting that due to long-term cooperation with suppliers, the profitability of the PC business in the next two quarters and next year will not be affected. Therefore, a "buy" rating is maintained with a target price of HK$14. Specifically in each business segment: IDG: AI PC penetration rate improvement and supply chain advantages may partially offset the impact of storage price increases. IDG (Intelligent Devices Business) 2QFY26 revenue increased by 11.8% yoy, with an operating profit margin of 60%, demonstrating resilience under a storage price increase cycle. According to IDC, in 2QFY26, the company's global PC market share increased by 1.8pct yoy to 25.6%, reaching a record high, leading the second place by 5.7pct, and expanding its market share advantage. According to company disclosures, driven by hybrid AI, PC revenue increased by 17% yoy, with AI PC penetration rate increasing by 16pct yoy, accounting for 33% of total PC shipments, and 31.1% of the global Windows AI PC market share, maintaining the leading position. Revenue from the Moto brand's Edge & Razr series increased by 28% yoy, with strong sales performance in the Asia-Pacific region, and strong demand for high-end devices in the Indian market. In the second half of the year, Lenovo is expected to leverage its scale and supply chain advantages to partially absorb the impact of storage price increases, and AI is expected to drive stable revenue growth in the IDG business. ISG: Profit improvement driven by AI infrastructure demand, Neptune liquid cooling revenue increased significantly by 154% yoy. ISG 2QFY26 revenue increased by 23.7% yoy, mainly benefiting from the dual drive of cloud infrastructure and enterprise infrastructure demand for ToB. In 2QFY26, the company's AI server business recorded high double-digit revenue growth, with strong order backlog. The industry-leading Neptune liquid cooling technology revenue in 2Q increased by 154% yoy, further consolidating the company's leadership in energy-efficient AI infrastructure. In terms of profitability, due to increased investment in AI infrastructure, ISG recorded an operating loss of $32.04 million (a 16% decrease yoy), but the operating profit margin increased by 0.3pct yoy and 1.2pct qoq, indicating a stable recovery. Looking ahead, as global AI enters the realization stage of inference, rapid growth in hybrid AI infrastructure demand, combined with the continued conversion of the company's sovereign AI projects in Saudi Arabia and other countries, it is expected that the profitability of the ISG business will continue to improve. SSG: Continuously tapping into the potential for growth in hybrid AI SSG (Solution Services Business) 2QFY26 revenue increased by 18.3% yoy, maintaining double-digit growth for the 18th consecutive quarter, with an operating profit margin exceeding 22% (up 2.3pct yoy), maintaining the highest profit margin among the company's business units. Among them, the sum of project and solution business and operation services account for 60% of SSG's overall revenue, an increase of 1pct yoy. It is expected that SSG's revenue for FY26 will continue to maintain robust double-digit growth.