Lenovo’s December Quarter Profitability and Progress on Inventory Correction Are Impressive

While Lenovo’s December quarter revenue was down 24% year over year due to weak PC shipments, we are encouraged that the company maintained solid profitability. The operating margin of 4.9% in the December quarter was only slightly lower than 5.0% in the September quarter and up from 4.6% in the year-ago quarter, due to the solid margin expansion in the server business and the company’s cost-saving initiatives, which are impressive in a challenging environment. We expect the March quarter to be the bottom of Lenovo’s fundamentals due to the low seasonality and expected restructuring, but we believe that most risk factors are already priced in. We maintain our fair value estimate of HKD 10.50, which corresponds to 11 times P/E and 3.2 times price/book on a fiscal 2022 basis.