Reiterate Neutral: solid server turnaround, but largely priced in

Research evidence excerpt

Reiterate Neutral: solid server turnaround, but largely priced in

Valuation discussion

We lift Lenovo’s FY27-28E earnings by 72-80% to reflect the stronger-than-expected

server profit expansion, and introduce 2029E. We raise our PO to HK$26.5 (16x FY27E

P/E, was 11x) from HK$9.9. We note PC cycle and server profit are the two key drivers

behind Lenovo’s valuation historically. Our target multiple of 16x is at the peak level of

Lenovo’s historical trading range since 2019, which we believe is justified by the

company’s server turnaround.

We also did a SOTP valuation for sanity check, in order to better reflect Lenovo’s server

business. We derived a value per share of HK$27 and an implied P/E of 16x, by using: (1)

15x FY27E P/E for IDG and SSG businesses, matching the average P/E of Lenovo’s key

PC peers; and (2) 20x FY27E P/E for ISG business, at the higher end of the trading range

of Taiwan ODMs and Dell (15-22x), justified by strong profit expansion in early stages of

business turnaround.

We reiterate Neutral on Lenovo due to fair valuation. The stock now trades at 16x FY27E

P/E, similar to leading server ODMs like Hon Hai/Quanta/Wiwynn while below Dell’s 21x.

We highlight that Lenovo’s server scale and operating margin are both lower than

industry leaders like Taiwan ODMs and Dell (Exhibit 5, Exhibit 6). Thus, more efforts are

needed to gain share and improve efficiency. A positive could be potentially faster-than-

expected server expansion.

Exhibit 1: We lift Lenovo’s FY27-28E earnings by 72-80% to reflect stronger-than-expected server profit expansion

Earnings estimate changes, FY27-28E

FY2027 FY2028

US$mn New Old Diff. New Old Diff.

Sales 93,884 85,858 9% 105,957 90,897 17%

Gross profit 15,491 13,197 17% 17,743 14,210 25%

Op profit 4,552 2,951 54% 5,456 3,385 61%