Company Profile

Lenovo Group is the largest PC maker in the world. Its productlines include Think-branded commercial PCs, Idea-brandedconsumer PCs and mobile internet devices such as tablets andsmart phones. The Group has distribution channels in more than160 countries.

Investment rationales

2QFY14 results beat expectation: Lenovo posted better-thanexpectedquarterly results. Revenue for 2QFY14 climbed 12.7%YoY to USD9,774 mn. Profit attributable to shareholders came inat USD220 mn, up 35.6% YoY or 26.3% QoQ, beating ourestimate by 6.5%/ consensus by 9%. It was mainly due to highthan-expected top line growth and better cost control. The grossmargin declined 0.2 ppts YoY and 0.7 ppts QoQ to 12.9% in2QFY14, management attributed it to increase in Consumer PCwith lower margin (about 3 ppts lower than the commercial PC).

But we observed that the operating margin in 2QFY14 continued toimprove to 2.9% (up 0.6 ppts/ 0.5 ppts from 2QFY13/1QFY14) dueto uptick in scale and better cost control. Interim EPS came in atUSD3.79 cents, up 28.5% YoY. Interim DPS was HKD6 cents, up33.3% YoY, representing a higher dividend payout ratio of 20%.

Lenovo remained a net cash position with USD 2.56 bn. Total debtto equity increased 2.9 ppts to 16.5%.

MIDH business remained the main growth driver: For PCsegment, revenue in 2QFY14 rose 3.7% YoY to USD7,975 mn onmarket share gain. Market share in EMEA increased 4.1 ppts to14.9%, comparing to 2QFY13. Lenovo remained the largest PCmaker in PRC with market share of 33.9% and the leader inworldwide PC market with market share of 17.7%. We want tohighlight that revenue from MIDH business in 2QFY14 surged105.7% YoY/ 22.6% QoQ to USD1,476 mn, on increasingsmartphone penetration in China and lenovo's expansion intomore countries outside of China. As we said in previous researchreports, Lenovo’s MIDH business will be the main growth driverand more than offsetting the concern of global PC market slump.

Profitability continued to increase: Overall PBT marginimproved from 2.3% in 1HFY13 to 2.6% in 1HFY14. Operatingmargins improved in all geographical segments except in AG,mainly due to uptick in scale and more contribution fromsmartphone. Operating margin in China rose 1 ppt YoY to 5.3%due to better product mix and higher ASP. Operating margin in AGdropped on continued investments in Brazil.

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