Lenovo's impressive financial report reveals a hidden source of dissatisfaction

Lenovo, the big brother that has been criticized by the public for its lack of technology, released its performance report for the 20/21 fiscal year ending June 30, 2020 on August 13.
 
Unlike in the past, in this new financial report, Lenovo, which has been in a sluggish period, finally danced like an elephant, demonstrating its strength. However, in Lenovo's eye-catching financial report, the PC business and the mobile business present two extremes.
 
As Lenovo's trump card business, the PC business is still coming on strong and has achieved good revenue. However, Lenovo Mobile, which was once a member of the "China Cool Union", has not been able to turn around, and its mobile business revenue has even declined further.
 
The reversal against the trend did not bring about a rise in stock prices .
In the new quarter's financial report, Lenovo, an old national brand that has been constrained by slow revenue growth, has finally re-demonstrated its speed and passion.
 
According to the financial report data, Lenovo's revenue was US$13.348 billion (RMB 94.6 billion), a year-on-year increase of 6.7%; pre-tax profit was US$332 million (RMB 2.35 billion), a year-on-year increase of 38%; net profit attributable to the parent was US$213 million (RMB 1.5 billion), a year-on-year increase of 31%.
 
Lenovo's better-than-expected performance has also been recognized by many major banks.
 
Among them, a research report released by Morgan Stanley pointed out that Lenovo's data center business profitability seems to be crucial to investors. Although the overall performance and prospects are promising, there are limited recent catalysts. Morgan Stanley raised its target price by 6.5% to HK$4.9, maintaining "synchronization with the market."
 
Macquarie's research report believes that Lenovo's operating profit for the fiscal quarter ending at the end of June increased by 20% year-on-year, 43% higher than market expectations; net profit increased by 31% year-on-year, 70% higher than market expectations. Lenovo's net profit forecast for fiscal year 2021 was raised by 3%, while the net profits for fiscal years 2022 and 2023 were lowered by 1% and 2%, respectively. Lenovo's original target price of HK$7.71 was raised to HK$8.1, maintaining an investment rating of "outperforming the market".
 
However, despite Lenovo's impressive financial report and the praise of major banks, Lenovo's stock price fell again with the release of the financial report. On August 13, Lenovo's stock price opened sharply higher, with a peak increase of 3.7%. After Lenovo released its financial report at noon, the stock price fluctuated sharply, closing at HK$4.72 per share, down 3.08%, and then fell again the next day. The embarrassing
 
stock price with a bright financial report seems to have become a dilemma that Lenovo, an older generation of national brands, is difficult to get rid of. Under such circumstances, the pressure on Lenovo's various businesses can be imagined.
 

PC business is not stable.
Lenovo founder Liu Chuanzhi once said, "Lenovo is my life." For Lenovo at present, PC business is Lenovo's life.
 
Financial report data shows that in the latest fiscal quarter, Lenovo's personal computer and smart device business accounted for 80% of the group's overall revenue, with revenue increasing by 10.1% year-on-year to US$10.603 billion; and the pre-tax profit margin of the personal computer and smart device business increased by 0.9 percentage points to 6.3%, so the pre-tax profit during the period increased by 28% year-on-year to US$670 million.
 
Lenovo's PC business has regained its vitality, which is inseparable from the promotion of the variable of the black swan epidemic. Under the influence of the epidemic, working from home and online education have become the needs of the public, making tablets a temporary rigid demand.
 
In addition, due to Lenovo's online layout, its personal computer business has achieved sales growth through online stores, with a year-on-year increase of 53%.
 
Canalys, a data research organization, released statistics on global tablet shipments in the second quarter of 2020 in July. The report shows that due to the catalysis of demands such as working from home and online education, the global tablet computer market shipments reached 37.5 million units, a year-on-year increase of 26%.
 
According to Gartner data, global PC shipments reached 64.8 million units in the second quarter of this year, a year-on-year increase of 2.8%. Among them, Lenovo's shipments grew rapidly, with shipments of 16.19 million units, a year-on-year increase of 4.2%, accounting for 25% of the global market share, ranking first.
 
However, although Lenovo's PC business has also maintained its leading advantage worldwide, its strong competitor HP's performance is not bad. According to Gartner data, HP's PC shipments in the second quarter of this year were 16.165 million units, with a market share of 24.9%, which is comparable to Lenovo's market share.
 
In addition, for Lenovo, which has a disproportionately large proportion of PC business, it is also questionable whether the PC business, which has seen revenue growth due to short-term factors, can continue to maintain its position. In Lenovo's financial report, the performance of its mobile business is not optimistic either.
 
The sinking dream of mobile phones 
In July of this year, Lenovo launchedThe Savior gaming phone once again brought Lenovo's mobile phones to the public.
 
However, compared to the hard-earned popularity of Lenovo's gaming phones, Lenovo's mobile business has once again encountered a cold wave, and its revenue has fallen again.
 
According to the financial report, Lenovo's mobile business had revenue of US$1.063 billion in the latest fiscal quarter, a year-on-year decrease of 27%, accounting for 8% of total revenue, compared with 11.6% in the previous year.
 
Lenovo explained in its financial report that the sharp decline in its mobile business was mainly due to the shrinking demand in the Latin American market. Data shows that the market demand in Latin America, the largest core market for mobile business, has fallen by 30% year-on-year in terms of shipments. The weak market has also led to the suppression of Lenovo's mobile business in Latin America.
 
Although Lenovo believes in its financial report that the poor revenue of its mobile business is due to the turmoil in the Latin American market, in fact, the decline of Lenovo's mobile phones has already appeared.
 
According to Counterpoint data, Lenovo shipped 39.6 million mobile phones worldwide in 2019, with a market share of 3%, ranking seventh in the world. The latest data from CINNO Research shows that in the first half of 2020, Lenovo's mobile phone market share in China was only 0.1%.
 
Although Lenovo has launched the Savior gaming phone, Xiaomi, Huami, and OV have already occupied the vast majority of the domestic market. It may be difficult for Lenovo to make a comeback with the Savior.
 

Lenovo
has been in the midst of public opinion disputes, and this situation is further exacerbated.
 
In China, Lenovo has been burdened by the original "5G voting incident". At the 5G discussion meeting of 3GPP in November 2016, Lenovo failed to support Huawei, a domestic enterprise, which led to Huawei's final loss by a narrow margin.
 
Then the difference in the price of Lenovo computers at home and abroad pushed Lenovo to the forefront of public opinion, and also greatly reduced the enthusiasm of domestic consumers for Lenovo.
 
At present, Lenovo, which occupies an important position in the international market, has also encountered obstacles internationally. On
 
July 3, Nokia filed a accusation against Lenovo with the US International Trade Commission. The US International Trade Commission has issued a 337 investigation on certain tablet computers and components produced by Lenovo. The 337 investigation prohibits unfair competition or unfair trade practices in US export products.
 
If the accusation is established, Lenovo will be banned from entering the United States. Media reports show that Lenovo has encountered 9 337 investigations in the past 5 years.
 
The above experiences are all difficult and dangerous obstacles that are difficult to overcome for Lenovo, a giant that wants to transform. Although Lenovo has become a minority that has benefited from the epidemic, when the headwinds fade away, how Lenovo, a huge company, can continue to soar has become a concern for investors.