Thursday, 21 May 2015

Lenovo: challenges in Chinese smartphones

It has been a while since I last looked at Lenovo the HK-listed entity with a strong PC market share in China, a position they have augmented via server and smartphone acquisitions from companies like IBM and Google (parts of the Motorola unit).

The shares have performed strongly...

...but outside of the PC business I have not been blown away by recent market share gains in the smartphone and (to a slightly lesser extent) the tablet businesses.  

Of course market share is one thing, profitability is another. Looking at it from a full year results perspective whilst the PC business crunched forward both the 'Mobile' and 'Enterprise' divisions were loss-making.  

And geographically?  Interesting that Chinese revenues were slightly negative (although profitability was slightly higher as margins held up).  Geographically only the American region ("AG") saw lower margins.

Very interestingly taken an even more recent granular view throws up further insights.  What is really striking about the Q4 numbers specifically is that the critical Chinese market actually sees margins down due to an 'aggressive expansion' in the local smartphone business.  By contrast the other parts of the business seem fine. I note particularly the strong mobile growth elsewhere in the world plus positive PC market share development.  

Of course the Motorola Mobility acquisition (not yet a full year old) is still bedding down and the company note ongoing initiatives/product improvements but it can hardly be a huge surprise that life is not quite as rosy as in the core PC division.  With Enterprise acquisitions (via IBM) to complete the company's suite of products (and hence cross-selling scope) has yet to mature so whilst the future is certainly highly opportunistic I do wonder at the current (modestly improving year-on-year) US$1.1bn of profitability a prospective x17+ EV/ebit rating is not exactly super cheap.

I note the technical support/resistance at HK$12/share.  That is the 'flag' level for me.  Still a fascinating theme stock (China, technological devices) with strong historic execution and new opportunities/acquisitions to bed down but too rich a share price for me today. 

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