Lenovo Group Limited (HKG:992) might be a company that is familiar to most of us. After all, the company is the largest PC manufacturer in the world. However, that might be all we know it to be. And how wrong we will be able it.
Lenovo Group has business segments across many products and services. Besides its PC, the company has a sizeable mobile smart phone business. It also produced a wide range of other smart devices such as tablets, storage devices and much more.
The company also has an attractive dividend yield of more than 6.2% now. Is it worth investing in? Listed in Hong Kong and part of the Hang Seng Index, Here are 7 things you must know about Lenovo Group Limited.
TICKER SYMBOL: HKG:0992
MARKET CAP: HK$47.2 B
The company now segments its business unit into three main groups.
PC and Smart Device
This is its traditional PC business. It also includes its other smart devices such as tablet and personal storage products. The segment contributed about 70% of its USD10.0 billion revenue in Q1 FY17/18. It was the only segment that was profitable. It produced a pre-tax income of US$291 million during the quarter.
Revenue was relatively flat year-on-year with a pre-tax income margin of 4.2%. The PC business continues to be a tough and brutal business to compete in for Lenovo and the company claimed to be the leading PC manufacturer with the highest margin.
Lenovo is one of the biggest mobile smartphone manufacturers in China. Its products are also exported globally and the company commented that sales are picking up for its Latin America and Western Europe markets. It generated about 17.5% of the group’s revenue from this segment. However, due to cost pressure, the segment saw a loss of US$173 million.
Data Center Business
The company also serve the enterprise market with its data centre products. The segment produced a revenue of US$971 million, about 9.7% of the group’s revenue for the quarter. This segment also saw a loss of US$144 million for the quarter.
Its mobile products are still concentrated in China at the moment. However, the company has been focusing more on improving its international presence for its handset business. As it starts to export more of its products overseas, Lenovo Group could potentially become one of the largest handphone manufacturers globally. They have recently acquired Motorola from Google Inc. It has also started introducing Moto brand of handphone to the market. Using its previous playbook on tapping on the brands of Thinkpad, Lenovo could again use the Moto brand for its overseas market expansion.
Internet of Things (IoT) are gaining popularity globally. Although it is too early to know what type of product will become mainstream in the future, Lenovo has already been spending huge research resources on these projects. As IoT becomes more mainstream, Lenovo could be well positioned to take a pie of this new market.
Razor Thin Margins
The PC, mobile phone and data centre business are an extremely tough business to be in. Lenovo claimed to be the PC manufacturer with the highest margins and yet it only has a pre-tax profit margin of 4.2%. This means that the company is competing in a great big red ocean. Moreover, the PC market has also been struggling over the past few years and does not seem to be rejuvenating itself anytime soon.
With its mobile smartphone and data centre businesses, it is also competing in additional large red oceans. It seems hard for the company to find a sustaining economic moat in all its business segments.
Although the company only generates 25% of its revenue from China now, its home base is still the main profit contributor for the company. After so many years of gaining exposure and marketing in the overseas market, it seems that Lenovo has yet to reach sustainable profitability outside of China. This seems rather disheartening for investors and makes me wonder if Lenovo would be better off just focusing on the China market.
One bright spot for Lenovo Group now is its valuation. Although the company has a high Price to earnings ratio due to its depressed earnings, it is giving out a dividend yield of more than 6.2% at the moment.
Given its negative cash conversion cycle business model, it seems that the company might be able to sustain this high level of dividend for some time. Investors might want to think about whether the high yield is more than enough to compensate for the weak economics of the business.
Investor Relations Team
- Gary Ng- Vice President
- Bryan Hsu- Director
- Lisa Yang- Senior Manager
- Callis Cheng- Manager
(852) 2590-0228 (Hong Kong)
23rd Floor, Lincoln House, Taikoo Place, 979 King’s Road, Quarry Bay, Hong Kong
Top Shareholders (31st March 2017)
- Legend Holdings Corp: 31.47%
- Yang Yuanqing: 6.28%
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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Stanley’s personal capacity. It does not in any way represent those of his employer and other related entities. Stanley does not own any companies mentioned.
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