Weak PC Shipments To Be Offset by the Better Product Mix; Lenovo’s HKD 12.60 FVE Maintained

Based on Lenovo’s solid profitability in the March quarter, we retain our view that the company’s profitability would not deteriorate as much as the market is factoring in. In the short term, we expect weaker PC shipments to be partially mitigated by the better product mix, underpinned by the recovery of commercial PC demand and solid demand for high-end consumer PCs such as gaming PCs. In the longer term, we believe better-than-expected sales of servers and smartphones would support Lenovo’s margin recovery. While we incorporate the near-term headwinds into our numbers, overall, we broadly maintain our earnings forecasts for the next five years, as well as our fair value estimate of HKD 12.60. Although lacking near-term catalysts, we believe Lenovo’s shares are undervalued as they currently trade at 2.2 times price/book and 6 times 2023 price/earnings, which are both at the bottom of the historical range.