Huayuan Securities: Value reassessment under the PC replacement cycle First coverage of LENOVO GROUP (00992), with a "buy" rating.

Huayuan Securities released a research report stating that the global PC demand surged in 2020 due to the impact of the epidemic, and the replacement cycle for consumers and businesses has arrived. The wait-and-see consumers are expected to land the replacement demand, and LENOVO GROUP (00992) may be the first to benefit from this PC cycle. AIPC demand may penetrate towards the consumer end through cultivating user habits in office and learning scenarios, or bring about a new round of consumer PC volume. Lenovo's ISG reversed losses in a single quarter, SSG business focuses on local demand, AI strategic planning supports sustainable development of the company, first coverage, and a "hold" rating is given. Huayuan Securities main points are as follows: PC industry leader, three major businesses continue AI transformation. LENOVO GROUP, established in 1984, has gradually become a leading company in the domestic computer industry. In 1994, Lenovo was listed on the Hong Kong Stock Exchange. In 2005, Lenovo acquired IBM's personal computer business for $1.25 billion, becoming the third largest personal computer manufacturer in the world through resource integration and global layout optimization. The company's FY25 Q1-Q3 revenue was $52.93 billion, with core businesses distributed in three major groups: Intelligent Devices Group (IDG), Infrastructure Solutions Group (ISG), and Solution Services Group (SSG), accounting for 69%, 20%, and 11% of FY25 fiscal third-quarter revenue, respectively. The PC replacement cycle has arrived, and the transfer of Windows system market share is underway. In 2020, global PC demand surged due to the epidemic, and the replacement cycle for consumers and businesses has arrived. Windows 10 system will stop service in October 2025, and there will still be some devices that need to be replaced due to hardware issues. The wait-and-see consumers are expected to land the replacement demand, and the company may be the first to benefit from this PC cycle. Thinking big with small: DeepSeek solves key issues restricting AIPC penetration. End-side AI capabilities are key to empowering hybrid AI and enabling generative AI to achieve global scalable expansion. DeepSeek-R1 reconstructs the training process with a small amount of SFT data and multi-round reinforcement learning, achieving low memory usage, low computational overhead, and high model accuracy. Low parameter feature enables large model local deployment to run on AI terminals. Commercial PC demand may become the main growth engine for PCs in 2025. According to IDC's predictions, commercial (excluding education) PC shipments will reach 138 million units in 2025, a 4.3% increase year-on-year. Compared to consumer PC shipment forecasts, commercial PC performance is more optimistic. AIPC demand may penetrate towards the consumer end through cultivating user habits in office and learning scenarios, or bring about a new round of consumer PC volume. ISG reversed losses in a single quarter, SSG business focuses on local demand, AI strategic planning supports sustainable development of the company. The company's ISG business adopts the ODM+ model, using its own product design capabilities, supply chain scale, and global service support system to independently develop server motherboard design and manufacturing, becoming a globally serving end-to-end independent research and development company. Under the framework of global business strategy layout, Lenovo's SSG focuses on the actual needs of the Chinese local market, restructuring and upgrading AI-native solution services with the "one engine, three arrows" strategy. Both segments of the business benefit from opportunities brought about by AI transformation, driving sustainable development profits for the company. Profit forecast and rating: It is expected that the company's net profit attributable to shareholders for the fiscal years 2025-2027 will be $1.54/1.71/1.95 billion, with year-on-year growth rates of 52%/12%/14%, corresponding to PEs of 8X/7X/6X. Selecting the average PE of comparable companies for IDG and SSG business segments and comparing them with the company's PEs, assuming conservatively that the ISG business will maintain a break-even point in the fiscal year 2026, the corresponding PE for the fiscal year 2026 (corresponding to the natural year 2025) is 7X, which is lower than the average PEs of comparable companies for IDG and ISG, first coverage, and a "hold" rating is given.