LENOVO GROUP:All eyes on the mobile division

Expect in-line 1Q FY17F results. We expect 1Q FY17F salesrevenue to decline 5.3% YoY (up 11% QoQ) to US$10.1b, after havingbeen weighed down by a sluggish mobile division and an anemicperformance from PC. Lenovo PC unit shipments declined 2.3% YoY in1Q FY17, though they still managed to outperform a 4.5% YoY industrydecline, according to IDC. We look for flat YoY gross profit margin of15.4%, net income growth of 19% YoY to US$125m and we expect theopex-to-sales ratio to decline 79bp YoY to 13.4%.

Mobile division playing catch up. Despite stronger seasonality, weforecast flat QoQ smartphone unit shipments at Lenovo in 1Q FY17F,amounting to 10.5m units. The company introduced the Moto Z and theLenovo Phab2 Pro on 9 Jun at Lenovo Tech World. Both have beenwell received by the market; however, we believe Lenovo needs moretime to revive its mobile business given intense competition in thespace. Accelerating the pace of model launches is a promising start.After several quarters enmeshed with the Motorola mobileconsolidation, we forecast record 3%/8% YoY growth for this businessin FY17F/18F.

Maintain Neutral rating and HK$5.00 target price. Our targetprice remains based on 10x forward P/E. We like Lenovo’s dominantposition in the global PC market and potential upside from the enterpriseserver business. Mobile business remains the company’s biggestperformance overhang, but we anticipate stock price upside followingChairman Yang’s share purchase on 7-8 Jul.