UOB Kay Hian
23 May 2025

Lenovo Group (992 HK): Strong Core Performance in 4QFY25, Despite One-Off Losses — Is Now the Time to Buy?

Overview: Robust Business Momentum, Temporary Headwinds

Lenovo Group, a global leader in intelligent devices, continues to demonstrate resilience and growth in its core businesses. The latest results for 4QFY25 reveal a solid operational performance, with exceptional growth in infrastructure solutions. However, non-core items, including a significant fair value loss, impacted reported earnings. UOB Kay Hian maintains a bullish stance on Lenovo, reiterating a “BUY” rating with a revised target price of HK\$12.10, reflecting a 26.4% upside from current levels.

Key Highlights: 4QFY25 Results at a Glance

• Share Price: HK\$9.57
• Target Price: HK\$12.10 (previously HK\$13.00)
• Upside: +26.4%
• Market Cap: HK\$118,713m (US\$17,458m)
• Major Shareholder: Legend Holdings Corp (31.41%)

Company Snapshot: Lenovo Group’s Global Footprint

Lenovo Group develops, manufactures, and distributes a wide range of intelligent devices, including laptops, desktops, tablets, data center equipment, and software solutions. The company’s reach extends worldwide, serving both consumer and enterprise markets with innovative technology.

Financial Performance: Core Businesses Drive Revenue Beat

Lenovo’s 4QFY25 revenue soared to US\$17.0 billion, a 22.8% year-on-year increase, outperforming both UOB Kay Hian and consensus estimates by 8-9%. This strong result was driven primarily by the Infrastructure Solutions Group (ISG), which posted robust growth in both general-purpose and AI infrastructure. The Intelligent Devices Group (IDG) and Solutions and Services Group (SSG) also posted solid double-digit growth, although their results were largely in line with expectations.

Operating Margins: Shifts in Business Mix Impact Profitability

The surge in ISG revenue, a lower-margin business, led to a blended operating margin of 2.0% in 4QFY25, slightly below estimates. Segment-wise, both IDG and ISG margins were in line with expectations, while SSG outperformed, beating estimates by over 1ppt.

Bottom Line Impacted by Non-Core Items

Despite solid operating results, reported net profit for 4QFY25 was only US\$90 million, falling well short of expectations. This was mainly due to:

• A US\$118 million loss from the ALAT warrant’s fair value change
• Impairment items
• US\$25 million interest expense related to a zero-coupon bond

Excluding these non-core items, adjusted net profit would have been much closer to forecasts, signaling underlying business strength.

Key Estimate Changes: Updated Financial Projections

UOB Kay Hian made several adjustments to its forecasts, reflecting higher revenue and slightly lower margins, plus increased financial expenses. Key changes include:

Segment Performance: ISG Outshines, IDG and SSG Steady

• Intelligent Devices Group (IDG): Revenue grew 12.9% yoy in 4QFY25, with operating margins at 6.8%, stable despite shifting production from China to Vietnam. The transfer is progressing ahead of schedule and expected to conclude by end-April, limiting exposure to new tariffs.
• Infrastructure Solutions Group (ISG): Star performer, with 62.6% revenue growth yoy in 4QFY25. The group benefited from strong demand for both general and AI-specific infrastructure solutions.
• Solutions and Services Group (SSG): Revenue up 18.1% yoy in 4QFY25, with operating margins at a robust 22.7%.

Management Commentary and Outlook

• PC Market Outlook: Management expects global PC shipments to grow in the mid-single digits in 2025, slightly more conservative than prior 5-10% guidance, reflecting tariff uncertainties.
• Geographical Demand: US demand includes some pull-in ahead of tariffs, but rest-of-world momentum remains very strong and is expected to persist.
• Production Relocation: The shift of PC production to Vietnam is ahead of schedule, minimizing tariff exposure. The one-month disruption in April will have a modest 0.5-0.6ppt negative impact on IDG operating margins.
• Handset Business: Relocation is slower, but its overall impact on group margins is limited.
• 1QFY26 Guidance: Revenue expected to rise 10% yoy to ~US\$17b. IDG will grow at high single digits, ISG at high teens, SSG at low teens. Core operating margins should remain stable, and adjusted net profit is projected to rise 5.4% yoy to US\$337m.

Risks and Sensitivities

• Non-core Items: Zero-coupon CB interest expenses and ALAT warrant fair value changes are the primary sources of earnings volatility. Every 5% share price movement in the quarter impacts operating profit by US\$40 million due to warrant mark-to-market.
• Forecast Exclusions: ALAT warrant fair value changes are not forecasted due to unpredictability.

Valuation and Recommendation

• Maintained BUY rating.
• Target price trimmed to HK\$12.10, reflecting 11.5x FY26F PE, based on adjusted (not reported) net profit to better reflect core performance.

Comprehensive Financial Table: Key Metrics and Forecasts

Conclusion: Solid Fundamentals, Attractive Upside

Lenovo’s 4QFY25 results underscore the company’s underlying strength, particularly in its core business segments. Short-term earnings were weighed down by non-core items—most notably the ALAT warrant fair value loss and zero-coupon bond interest—but these are not reflective of operational performance. With strong growth in ISG, steady progress in IDG and SSG, and proactive management of geopolitical risks, Lenovo is well positioned for continued success. The current valuation, combined with a healthy dividend yield and robust ROE, supports UOB Kay Hian’s positive outlook and “BUY” recommendation.