How Lenovo survived the slowdown on global PC

It's the only vendor that did not experience a fall in shipments.

According to Maybank Kim Eng, Lenovo’s shares underwent a correction on concerns of slowdown on global PC industry which registered 11% YoY decline in unit shipments according to Gartner. 

Maybank noted that all geographies and vendors experienced YoY dips in shipments except Lenovo. On the plus side, Gartner indicated that the corporate replacement cycle continued to spur PC demand, and accounted for over 50% of global PC shipments.

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This momentum may be sustained, as Microsoft will discontinue technical support for its XP OS and Office 2003 within 12 months. 

The slowdown of PC demand in the March quarter will adversely impact Lenovo’s business outlook. The Lunar New Year and transition of political leadership in China resulted in weak demand there. But we think this is temporary, and growth could resume in the June quarter.

On a positive note, Lenovo’s strong momentum in the US (mostly corporate PCs) is likely to enhance profitability. Also note that Lenovo consolidated CCE’s operations in Latin America in 4QFY3/13.

CCE’s 2-3% net margin is immaterially higher Lenovo’s Asia-Pacific (ex-China) Latin America OPM of 0.3%. We expect Lenovo to generate revenue of USD8.0-8.1b and pre-tax-profit of USD160-165m with margins of 2.0-2.1% for Mar-quarter (vs 1.4% for Mar-2012). 

Despite the challenging PC outlook, we believe Lenovo is on track to achieving its target Pre-tax profit margin of 3.0-4.0% in the next 24-36 months.
Solid execution (cost control, in-sourcing and better scale), rapid growth of MIDH revenue (multiple new product offerings), localisation of its Latin American operations and a consolidation of PC industry are the key drivers.

The recent share price correction provides a good entry point, as valuations are now more attractive.