Thursday, 13 August 2015

Lenovo - an out-of-favour HK listed consumer play

I have written about Lenovo before most recently noting back in May that:

'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'

Fortunately many stocks 'flagged' in the Chinese and Hong Kong stock markets over the last few months with the volatility in the local indices.  A HK$12 share price may have flagged in June but today that same share is worth less than HK$8 a share.

So why this sharp move?  Well no huge surprises that the global PC market has been shabby and worse than hopes...

...but amazing to see the sequential change in the smartphone market too. Put these two together and that is not the easiest combination especially with the all-important Chinese market being so weak in the smartphone space.
 And in terms of where the losses were made mobile did show up... surprises that this was away from Asia, in particularly the Americas due partially to the slow transition of the acquired Motorola business and also some particularly poor operating conditions in Brazil.  Given all the above, in hindsight not a great time to acquire more international smartphone interests.

With even profitability fading in their core Chinese heartland Lenovo appear to be doing more than just waiting for the acquired Motorola and server assets to become either fully integrated or bring out new products to be put through the Lenovo distribution mechanisms.  I liked the sound (from a purely investing perspective) of the cost cuts being employed... well as the other initiatives being employed to drive growth.  Frankly given Lenovo's culture and range of products you would back them beyond many others in the smartphones/PC marketplace.

With the faded profitability and now a little debt after the corporate acquisitions the shorter-term valuation rating is a little high.  However the near 3.5% dividend yield is one signal investors can grab hold of.  

So it feels horrible...but my instinct is that this one to keep on thinking very seriously about.  Perhaps not in the first tier of preferred Hong Kong listed stocks (like for example AIA or Samsonite) but certainly a second tier consumer/technology play.  

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