Lenovo (992) reported solid 4QFY13 earnings – Maintain BUY

Lenovo (992, $7.38) reported revenue and net profit of US$33.8bn and US$635mn for the year ended 31 March 2013, up 14% and 34% yoy respectively. In 4QFY13, revenue rose 4% yoy to US$7.8bn and net profit was up 90% yoy to US$127mn (EPS: US$0.0096 in 4QFY13, up 88% yoy). Comment: 4QFY12 revenue and net profit were ahead of market expectation in spite of global PC shipment dropped by ~14% during the period. Remarkably, gross margin improved from 11.8% in 3QFY13 to 12.3% in 4QFY13 due to improvement in product mix. Operating expenses are so far well controlled and OPM ticked up from 2.2% in 3QFY13 to 2.3% in 4QFY13. Notably, smartphone segment posted profit for two consecutive quarters.

Management’s execution capability in past three years is very impressive that Lenovo has been outperformed the global market for 16 consecutive quarters. In FY13, Lenovo’s global market share grew 2.6 ppt yoy to record-high 15.5%, with strong PC shipments growth of 10% yoy to record-high 52.4mn units, against global PC shipment contraction of 8% yoy. In response to global PC market transition, Lenovo will shuffle the product mix in coming financial year. Shipment targets on smartphone and tablet shipment are 50mn (up 67% yoy) and 10mn units (up 5x yoy) respectively.

In response to product reshuffle and hence margins improvement, analysts in general tuned up the counter’s GPM and OPM forecast in FY14. We are also positive that momentum of margin improvement will continue and a strong quarterly results for 1QFY14 (due in late August) with better-than-expected GPM and OPM can be a potential share price catalyst.

Traded at 13.1x FY14 PER, the counter’s valuation looks excessive compared to forward PER of 9.9x for the Hang Seng Index. However, we think Lenovo can sustain its premium valuation as long as its global market share continues to increase. The lukewarm shipment data of IDC in early April has triggered selloff of the counter as investors worried the counter’s growth story may come to an end. The release of this financial result will revive investor’s confidence on the counter’s growth story, in our view. We maintain assumption of 11% yoy growth in revenue and operating margin of 3.0% in FY14, and expect FY14 EPS to grow 22% to US$0.072 (HK$0.56). Maintain BUY with unchanged 6-month target price of $8.40, roughly equivalent to 15x FY14 earnings.