Lenovo Earnings: PC Shipments To Return to a Growth Trajectory in Late 2023; Shares Undervalued

Despite Lenovo’s lower-than-expected profitability in the March quarter, we maintain our fair value estimate at HKD 10.50. We are somewhat disappointed that the operating margin of the IDG segment, which is mainly PCs, fell to 6.7% from 7.3% in the previous quarter, and the company expects an even lower profitability in the June quarter. However, we note that Lenovo has reduced its inventory by 15% from three months ago, suggesting that the lower profitability is due to the incentives paid by the company to prioritize inventory reduction in the off-season. As management expects the inventory digestion in the channel to be completed by the end of this quarter, we expect Lenovo’s profitability to improve from the September quarter.