Morningstar | Lenovo’s 4Q Results Slightly Beat on the Back of Margin Expansion; Raising FVE to HKD 8 per Share
Lenovo has a strong track record of manufacturing and selling PCs and laptops, particularly in its home market of China. It has also made a start in the smartphone market, which will be increasingly important as customers shift more of their computing to mobile devices, especially in emerging markets, where the existing penetration of PCs is low. Recent operational and financial results have been strong in PCs. Although the firm has expanded rapidly and taken significant global market share during the past five years (9% global PC market share at year-end 2009 to 22.5% at year-end 2018), Lenovo's pretax margin for its PC and smart device business has steadily expanded to over 4.4% from 1.3% during that period.Its defensive strategy in its home market (China) and its expansion strategy abroad and in smartphones are logical and well considered, in our view. The company has a strong brand and a large distribution network in China, although this is mainly in PCs/notebooks. However, the smartphone market is highly competitive, and Lenovo's products run on the standard Android operating system, which means low switching costs. Outside of China, Lenovo's brand recognition remains lower than other consumer electronics companies, meaning it currently competes mainly on price. This is also reflected in pretax losses outside of China, compared with margins of around 4.4% in China. Management claims that as market share in a region hits about 15%-20%, margins improve dramatically; we saw this in the March 2015 quarter, when margins in Asia-Pacific (outside of China) hit 4.6% and those in Europe, the Middle East, and Africa, or EMEA, hit 3.2%. Much of Lenovo’s revenue growth has stemmed from taking global market share in a declining PC market. Future growth will rely on continued PC market share gains driving up margins and growth in smartphones and tablets.The company has a track record of growing both organically and through acquisitions and joint ventures. Integrating acquisitions has been one of its strengths. However, the initial results from its acquisition of the troubled Motorola smartphone business and the IBM x86 business have been below expectations.Lenovo Group is an investment holding company. Through its subsidiaries, Co. is engaged in: manufacturing and distribution of IT products and provision of IT services; manufacturing of computers and peripheral equipment; provision of business planning, management, global supply chain, finance, and administration support services; R&D of mobile software; and distribution of IT products as well as mobile phone, smart phone and tablet, server and storage. Co. also provides a full complement of ENERGY STAR® qualified notebooks, desktops, workstations, monitors, and servers. As of Mar. 31, 2015, Co. oeprated four geographical segments, China, Asia Pacific, Europe-Middle East-Africa and Americas.
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