Shulou(Shulou.com)11/24 Report--

On September 5, S & P, an international rating agency, released a report that upgraded Lenovo's long-term issuer credit rating and unsecured note rating to "BBB", showing a stable outlook.

The S & P upgrade is a recognition of Lenovo's solid market position, firmly promoted intelligent transformation strategy and layout, as well as a clear and sustainable growth strategy, and also confirms once again Lenovo's rigorous financial management and sound business development.

Since 2020, Lenovo has been given a more positive and stable rating by the three major international rating agencies, including Fitch upgraded to "BBB" on March 1, 2021 and Moody's upgraded to "Baa2" on March 2, 2022.

These three agencies are the most authoritative rating agencies in the world, and the rating results are widely concerned by the market and can provide independent reference and guidance for investors. The upgrading of the rating will have a direct impact on the capital market and bring a lot of benefits to the subsequent bond issuance and financing of Lenovo Group.

Behind S & P's upgrade: robust profitability and ample cash flow

Not long ago, Lenovo Group announced the results of the first quarter of fiscal year 2023 for the fiscal year ending June 30, 2023: revenue of 90.3 billion yuan and net profit of 1.33 billion yuan. Lenovo's service-oriented transformation business is growing rapidly, with non-PC businesses accounting for 41.4 per cent of the group's overall revenue.

It can be said that Lenovo Group has effectively hedged the downward pressure on the PC industry with its diversified growth engine. Specifically, revenue from SSG Solutions Services, one of the three core businesses of Lenovo Group, maintained strong growth, up 18% from a year earlier, with an operating profit margin of 21%; core profit engine support services performed steadily, such as operation and maintenance services benefiting from strong demand for TruScale as a service solutions, up 54% from the same period last year. The project and solution services business benefited from the market demand for vertical solutions, growing by 9 per cent year-on-year, and the revenue of these two businesses accounted for more than 50 per cent of the total revenue of the SSG solutions services business.

ISG infrastructure solutions business, core products and services such as storage, software, services and other businesses have achieved strong growth. Driven by triple-digit growth, the storage business has reached the fourth place in the world in terms of market share. The emerging AI hardware infrastructure-related business has also achieved triple-digit year-on-year growth, ranking third in the world.

S & P points out that revenue from IDG's smart devices business is still dragged down by the industry's destocking cycle. But positive signs have emerged: global PC shipments and activation have converged, which means that channel inventory digestion is nearing completion, and Lenovo's position as the global PC leader remains solid.

S & P expects Lenovo's PC business to recover gradually over the next 24 months, with steady growth in revenue from non-PC and services businesses, resulting in a high single-digit percentage of revenue growth. Lenovo's hardware revenue may have bottomed out in the first quarter ended June 30, 2023, and is expected to grow on a month-on-month basis in the next two quarters.

S & P said that over the next two years, due to the increased penetration of services in hardware sales and the increasing popularity of the device as a service (device-as-a-service) model under higher capital costs, the model increased customer flexibility and should maintain a growth rate of more than 10 per cent.

Adequate cash flow is the most direct guarantee for Lenovo to maintain its competitiveness, and it is also one of the main considerations for S & P to upgrade Lenovo. According to the Lenovo Group's financial report, so far, the net cash generated by the company's operating activities has soared from 2.676 billion yuan to 4.695 billion yuan, while the asset-liability ratio has dropped to 84.56%, which shows that Lenovo Group is in a healthy financial position and has a good sustainable operation ability.

S & P said Lenovo has shown better operational flexibility with its robust profitability and cash flow. Better working capital management also generated $320 million in free net cash flow from operating activities in the quarter. The stronger cash flow comes mainly from falling inventories.

S & P believes that Lenovo's growing revenue from services and solutions, as well as good working capital management, will contribute to more stable cash flow. S & P said that while most of the revenue from Lenovo's Solutions and Services division (SSG) was related to hardware sales, the increase in service penetration contributed to the growth of service revenue.

Although EBITDA, an important indicator of the profitability and efficiency of business activities, has declined, S & P expects Lenovo's debt-to-EBITDA ratio to remain below 1.0x, and the adjusted net debt-to-EBITDA ratio should remain below 1.0x in fiscal years 2024 and 2025. This reflects Lenovo's efforts to cut costs and manage working capital during the PC downturn. S & P expects Lenovo to continue to keep its leverage ratio at current levels to enhance its capabilities in artificial intelligence and SSG.

Anchoring AI and computing power, confirmation of the effectiveness of Lenovo's intelligent transformation

In recent years, artificial intelligence ushered in a new round of outbreak. Driven by both policy and capital, AIGC is accelerating its commercial landing, and AIGC models with more than 100 billion parameters are constantly emerging. According to Sadie consultant data, a total of 64 large models were released in China from January to July this year. As of July 2023, a total of 130 large models have been published in China. This leads to a huge demand for computing power of artificial intelligence.

Previously, KPMG and Lenovo Group jointly released "Puhui Computing Power ushering in a New era of Computing" estimates that by 2025, the industrial output value of China's core computing power will be no less than 4.4 trillion yuan, and the scale of related industries will reach 24 trillion yuan. According to the calculations of the China Academy of Information and Communications, for every 1 yuan invested in computing power, it will drive 3 to 4 yuan of GDP economic growth.

Under the background that computing power has become a new engine to promote high-quality economic development, as the world's largest computing infrastructure and service provider, Lenovo Group, which is on the core track, spares no effort to fully embrace and seize the opportunity of the computing era.

Since 2017, Lenovo has put forward the "all in AI" strategy, and now it is making full efforts. Lenovo Group's latest financial data is proof: ISG business has a deep accumulation and strategic layout in the field of artificial intelligence infrastructure, can provide a full stack of rich product portfolio, as well as a strong AI server product line, and is a strategic partner of the world's leading AI service providers. According to IDC, Lenovo is the fastest-growing provider of AI hardware infrastructure (servers and storage) in 2022, up 139% from a year earlier, ranking third in the world.

This time, S & P upgraded Lenovo, confirming once again the effectiveness of Lenovo's intelligent transformation strategy. S & P expects the recovery of Lenovo's infrastructure solutions business group (ISG) to be supported by increased demand for AI artificial intelligence and an easing of GPU shortages.

"AI artificial intelligence and computing are Lenovo's two most important 'anchor' technologies, and we will continue to work hard and bring forth the new. At the same time, Lenovo's medium-and long-term commitment to maintaining good profitability remains unchanged." Yang Yuanqing, chairman and CEO of Lenovo Group, said, "in the future, we will control costs more effectively, weaken risks, enhance sustainable profitability improvement and growth, and will adhere to intelligent transformation and innovation." work together to build a better and smarter future. "

Lenovo will further strengthen its artificial intelligence strategy. An additional $1 billion will be invested in all areas of artificial intelligence over the next three years. Including server storage products, suitable for cloud computing vendors, but also enterprise-level. " Yang Yuanqing said. Chen Zhenkuan, vice president of Lenovo Group and general manager of the server business department of Lenovo's infrastructure business group in China, also said publicly that Lenovo's future 100% computing infrastructure products support AI,50% infrastructure research and development investment in the AI field.

In the view of Lenovo Group, accelerating the integration of data and reality, enabling various industries to have AI capabilities and achieving a comprehensive jump in productivity is a new driving force to promote the optimization and upgrading of the industrial structure and promote the sustained and healthy development of the economy and society. With the role of practitioner and enabler of intelligent transformation, it has created rich solutions in the fields of education, transportation, energy and finance, and helped more than 200 large and medium-sized enterprises to embark on the road of intelligent transformation.

In the future, Lenovo Group will fully embrace and seize the huge opportunities of the artificial intelligence era, based on the new IT technology architecture, with strong Puhui arithmetic support, to accelerate the intelligent transformation of Qianhang Baiye.

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