Lenovo Report PDF

Investment Research Report
Company Result 15 April 2014

Lenovo Group Ltd BUY
SHARE PRICE HKD 9.14

TARGET PRICE HKD 10.80
COMPANY DESCRIPTION
Lenovo Group, designs, develops,
manufactures and sells personal
computers, tablet computers,
smartphones, workstations, servers,
electronic storage devices, IT management
software and smart televisions.
STOCK DATA
Hang Seng/Bloomberg code 992:HK
Board/Sector Main/Technology
Issued shares (m) (31/3/2014) 10406.38
Market cap (HKD m) 95114.27
52wk Range: 4.86-12.46
Beta (against HKSE) 0.91
30 Day Average Daily Volume 47m
RECOMMENDATION
• Buy 3% now at current
price of HKD 9.14
• Hold till 2016 to
benefit from generous
dividends
• Target selling price at
2016 is HKD 14.52
Source: Lenovo website
SHAREHOLDING STRUCTURE
Table of Contents
I. Executive Summary ................................................................................................1
II. Company Profile .................................................................................................... 2
III. Economic Evaluation ............................................................................................ 3
IV. Industry Overview & Competitor Analysis ........................................................... 7
V. SWOT Analysis ..................................................................................................... 10
VI. Strategic Review ................................................................................................... 11
VII. Financial Analysis................................................................................................. 14
Financial Ratios
Income Statement
Balance Sheet
Valuations
VIII. Recommendation ................................................................................................ 22
IX. Conclusion ........................................................................................................... 25
0
Executive Summary
The following report is transcribed to analyze the credibility in investing in Lenovo by taking
into consideration the financial as well as well as the strategic performance and outlook of the
company. The report has been prepared for Mr. Shahrukh Khan in order to aid him regarding the
decision to invest in Lenovo.
The report is commenced with a brief introduction of Lenovo and its operations. Next, a critical
analysis of the Chinese economy as well as the relevant industry breakdown is dissected. This is
followed by examination of non-financial information by analyzing Lenovo’s current and
prospective operations in the form of SWOT analysis and a strategic review of their past, current
and future performance and prospects.
Ensuing that, a financial review of Lenovo was prepared by analyzing the financial ratios,
forecasting the financial statements and was followed by the valuation.
The information and the forecast are used to provide evidence in lieu of the decision to make an
investment decision.
1
Company Profile
Lenovo is a Fortune 500 Chinese multinational technology company which has its headquarters
in China and United States. Originally established in 1984, Lenovo started off under the name
“Legend”. In 2003, the company publicly announced the “Lenovo” brand name in an effort to
expand outside the Chinese market.
Innovation is one of the core values of the US$34 billion company and they boast an impressive
track record for innovations in PC industry. Lenovo states that innovation is how they achieve
competitive differentiation and set new market opportunities to motion.
It came into existence after taking over IBM in 2005. The company chiefly develops,
manufactures and markets reliable, user friendly technology products and services. Lenovo’s
product line includes commercial and consumer PCs, workstations, mobile internet devices,
tablets and smartphones.
Lenovo currently sits at the top of the PC industry as well as the notebook industry.
The recent acquisition of Motorola resulted in Lenovo taking the 3rd spot in the overall
smartphone industry. Additionally the buyout of IBM’s server division gives a peek to their
ambitions to expand and enhance their MIDH sector.
2
Economic Evaluation
Lenovo’s main customer base is in China and hence the country’s economic condition is of
major consequence to the success of the company. Although China’s GDP has fallen from a rate
of 9.3% in 2011 to 7.6% in 2013, China is globally accepted as the most swiftly growing
economy in the world, having an average growth rate of 10% over the last 30 years. (CIA, 2014)
Since opening its doors in 1978, the Chinese economy has seen an exponential development in
their GDP, currently estimated at over $8000 billion after initially starting off at well below $150
billion. (Bloomberg, 2014)
Source: World Bank
Growth in exports has been a vital support in the rapid expansion of the Chinese economy. 30%
of the GDP is derived from exports of goods and services. China’s major exports are:
electromechanical products (57 percent of total exports) and labour-intensive products like
clothing, textiles, footwear etc. Exports in China, regulated by the General Administration of
Customs, decreased to US $11.41 Million in February of 2014 from US $20.71 Million in
January of 2014. Exports averaged US $4.64 Million from 1983 until 2014, reaching an all-time
high of US $20.77 Million in December of 2013. (Trading Economics, 2014)
This growth has largely been attributed by the ever-increasing labour supply and swift capital
accumulation. Even though these factors are of great importance, economists have the view that
China must rely more on productivity growth – getting more output from existing capital stocks
and labour. Emphasis has been put by the government on the need to rebalance growth, a focal
focus on increasing domestic consumption along with living standards. Decomposition of
China’s GDP growth ascertains the fact that capital has been a major driver to China’s growth.
(Purdy, M., 2013)
3
Source: Oxford Economics
Most of the country’s output is generated by the country’s urban workforce and this has shown a
trend of very slow growth. The age bracket from which the workforce sprouts is currently
decreasing. In 2013 the working age population figure reduced by 2.44 million, after already
falling by several million the year before. (The Economist, 2013)
Since the drastic fall in unemployment in 2007, China’s unemployment statistics have been quite
gradual. However the percentage of the working-age population in China who are either looking
for employment or are already employed has seen a decline in the years: from 0.87 in 1995 to
0.82 in 2010.
Source: United Nations
Attending to Inflation and exchange rate changes, China’s reported rate in 2013 was 2.6%, well
below the government set target of 3.5%. The second year in a row of mellow inflation data
4
came as China's economy showed some signs of strength in the second half of 2013, after a
growth slowdown during the first six months.
When the financial crisis hit Asia in 1998-1999, China made a decision to maintain their
currency as fixed versus the value of the US dollar. China continued to do so until 2005, when
they changed to a managed float of USD/CNY. This resulted in the gradual increase in value of
the Yuan in comparison to the US dollar (meaning the USD/CNY reduced). During this period
the value of the Yuan appreciated by as much as 21%. A change in China’s exchange rate policy
came about in August 2008, as China’s export sector came under enormous pressure after the US
subprime crisis eventually led to a wide decline in world trade. In order to protect the Chinese
exporters from even further competitive pressure, China decided to “peg” its currency with the
US dollar. In June of 2010, the People’s Bank of China decided to announce that the exchange
rate would be again made flexible, following this the USD/CNY progressively increased at a 5%
annual level.
Source: The Economist
The Corporate Tax charge in China is of 25%. However, firms with thin profit margin and state-
encourage new high technology enterprises pay 20% and 15% respectively. According to the
Chinese Tax Relief Law a firm can get tax exemption of up to 50% of its R&D expenditure
(Deloitte, 2013). This is beneficial for Lenovo which has increased its R&D expenditure
considerably over the past few years to capture greater market share. At the same time tax
exemptions also apply to software industry. The recent acquisition of Stoneware by Lenovo can
help them exploit this tax exemption and increase the overall profitability of the business. China
has also tax treaties with almost all countries Lenovo has its operations in. This helps them avoid
the payment of double taxation on the income.
Average disposable income in China was 18,311 Yuan ($3,006) in 2013--up 8.1% on year in real
terms, the National Bureau of Statistics. In Urban areas (Lenovo’s Target demographic) it rose
by 7% in real terms. This rising trend in disposable income is good for Lenovo as this means
5
more consumption of normal goods in China which is Lenovo’s revenue centre. Lenovo’s focal
targeted age group is between 18 and 35. The current demographic figures in China look
favourable for Lenovo as more than half of the population lies in the target age group. However,
in the near future this can pose as a problem due to the increase in aging dependant population
which went up by 3% and people under the age of 14 dropped by 6%.
6
Industry Overview & Competitor Analysis
PC industry has been expanding throughout America and worldwide over the past 30 years -
from 1960 to 1980, the shipments increased from 2,000 to 900,000 units then to 7 million units
in 1990 to more than 15 million units annually in 2003. Recently in 2013, the industry worldwide
witnessed declining shipments for seventh consecutive quarter: decrease of 6.9% for the quarter
and 10% for the year. Gartner’s 2014 report labelled it the as the worst decline in the history of
PC market. Despite this decline, all major PC manufacturers saw a decrease in their revenues
with the exception of Lenovo and Apple. (IDC, 2014) The PC market in China has experienced a
rapid growth at an average of 15% annually compared with that the growth of global PC market
which has slowed down in recent years (Cui, 2009).
According to The Wall Street Journal (2011), China surpassed the U.S. to become the world's
largest PC market, emphasizing the increasing importance of a country where China’s Lenovo
Group Ltd key player in comparison to major US PC makers.
Both Gartner and IDC have given

Lenovo the top spot with Gartner
concluding that the lead has increased
against HP while IDC reported that it
has reduced. Lenovo’s market share
ranges from 17.3% to 17.7% while
HP’s is between 16.7% to 17.1% and
Dell rounds out the top three with
about an 11.6% share (Forbes, 2013).
HP and Lenovo have been locked in a
close competition for the top global
position in the PC market in 2013.
Lenovo overtook HP in the fourth
quarter of 2013 and accounted for
7
18.1% of total global PC shipments. Lenovo grew swiftly in all regions except for
Asia/Pacific where China posed as an obstacle to growth. HP’s shipments declined by 7.2% in
the fourth quarter (Gartner, 2014). Dell, on the other hand, is likely to face uncertainty with its
restructuring but still managed to perform better than average in the industry with a decline of
-4.5%.
However, in emerging markets a sharp increase in consumption of smartphones and tablets was
observed due to changing consumer preferences.
This change in consumption pattern in the
emerging markets negatively impacted the
growth of PC industry (Gartner, 2014). This
collapse of the global PC market has been
affecting all major PC makers from 1Q12 to
1Q13 except Lenovo. (IDC, 2013)
Lately, Lenovo has also proved to be a key

player in the Chinese smartphone industry.
China based smartphone vendors are expected to
increase global shipments by 30.7% from 2013
and reach 412 million units in 2014 (Digitimes
Research). Lenovo and Huawei are expected to
reach 50 million units in 2014; whereas, ZTE's
shipments are expected to reach 35.5 million units. As Huawei is an experienced player in
overseas market their export portion is greater than that of Lenovo’s. Lenovo grew 216% year-
on-year, moving 9.5
million units to take fifth
place. World’s largest
phone market, China, was
a key element in the
growth stories of these
manufacturers. According
to Nielsen (2013), 73% of
shipments in China were
that of smartphones, a
40% increase from last
year. This shipment trend
differentiates China from
other emerging economies
(India, Brazil and Russia)
where feature phones are
still in high demand.
Volumes of smart phones
sold in China grew by 113% to 64.7 million units. Samsung, Lenovo and Yulong claimed the top
three spots. Huawei beat ZTE by over a million units for fourth place. Apple failed to show any
significant growth in terms of market share. (Canalys, 2013)
Acquisition of Motorola might give Lenovo some awareness and credibility in North American
smartphone industry. According to Gartner, Lenovo and Motorola individually control 1.3%
8
and 5.1% respectively and is quite clear that either company would have any chance on their
own. Motorola is expected to continue to leverage its position in the US and Lenovo to do the
same even though Motorola would have a steeper hill to climb. (Gartner, 2014)
Lenovo also is gradually entering the market of tablet PCs, the following Pie Chart below
displays the results of a research conducted by ZDC (2012) in China posing the question,
“Which tablet maker do you use?”
Apple 41.1% DELL 1.9%

Lenovo 23.8% Acer 1.6%
Samsung 9.1% Huawei 1.4%
Newman 6.7% Aigo 0.8%
Asus 2.7% Other 8.4%
Smart Devices 2.5%
**Refer to Appendix A for further information
9
SWOT Analysis
**Refer to Appendix B for further information

10
Strategic Review
Lenovo Group Ltd achieved their long term goal of becoming a global leader in the PC market at
the end of 2013. More recently their strategies have been focused on diversifying into different
markets and regions. They aim on maintaining their leadership in markets in which they already
are frontrunners and at the same time are vigilant on capitalizing opportunities in the emerging
markets and sectors. Their main strategies are as follows:
Increasing smartphone strategy:

Lenovo held 4.7% of the smartphone industry and were 5th overall at the end of 2013. After the
takeover of Motorola, Lenovo jumped two spots and currently sit number 3 in the overall
smartphone industry. The takeover of Motorola also had a global strategic agenda. The takeover
meant that Lenovo gained relationships with over 50 wireless carriers worldwide. It also helps to
protect the company from patent related lawsuits. Mr Yang was also quoted as saying that
Lenovo already has a sizable handset business in Asia, and integrating Motorola's operations will
let the company significantly reduce material-procurement costs and other expenses. The
company also has no plans of integrating the two companies and will continue operations under
the respective brand names. With the added benefits that Motorola brings, Lenovo aims to
increase their market share.
Aggressive merger and acquisition strategy:

Lenovo is famous for its success story with IBM. It took over IBM in 2005; this helped the firm
become the 3rd largest PC manufacturer from number nine. The strategy which Lenovo adopted
with IBM ThinkPad was to maintain the brand name and penetrate the western market to get the
Lenovo name recognised simultaneously. This strategy worked to the maximum of advantage for
Lenovo as the ThinkPad notebooks took the rankings by storm and made the business highly
profitable for Lenovo. It also helped Lenovo emerge as a reliable brand across the globe.
Lenovo is aiming to turn the tables in similar way with Motorola. As the deal was closed Lenovo
took the third spot in the smartphone market. It is planning to capitalize on Motorola's
relationship with carriers in USA to emerge as a key player in the smartphone market in the
USA. It also aims to reintroduce Motorola in China in hope of the Chinese customers embracing
11
Motorola again. It will make use of Motorola’s patents and licences as well as take advantage of
their product design team to achieve higher market share.
With their most recent acquisition of IBM X86 Servers, Lenovo has become number 3 globally in
the server market. The aim of the acquisition is to strengthen the position in China where the
server demand is still strong. They also plan on using Lenovo’s strong channel relationship to
increase server growth. They want to use the higher profit margins from the server market to
increase the overall profitability of the firm.
Using “Cost Innovation” strategy:

Lenovo harness their ability to make variety of highly technological and speciality products at a
low cost. Starting up in China had great strategic significance for Lenovo as it provided a strong
foundation upon which they could build. Lenovo gained the advantage of low cost design and
research and development programs, low cost manufacturing as well as low administration and
engineering costs. Lenovo’s proximity and control on manufacturing and their low-cost
innovations allowed them to provide highly customized products as a result of incremental and
adaptive innovation. Customization and adaptive innovative is quite suitable for Lenovo as one
of their core competencies is founded upon assembly and manufacturing.
Protect and Attack strategy:

Lenovo previous focus had been the PC industry. More recently, however, the firm has adopted a
“Protect and Attack” strategy. Under this the firm plans to maintain its current dominance in the
PC and laptop markets and at the same time explore and penetrate new growth areas like
smartphones and software industry. According to Lenovo reports, the attack strategy has
contributed to 50% of revenues up from 32% when the strategy was initially introduced four
years ago. According to the CEO Yang Yuanqing has helped them achieve record revenue, profit
and PC market share and has also helped them deliver hyper growth in the smartphone and tablet
market. Also the strategy has helped them turn their global tablet and China smartphone
businesses into profitable ones.
The attack strategy has two aspects: regions and products. Lenovo has targeted emerging markets
in Europe, Middle East and Africa (EMEA) where it witnessed the highest growth in PC
12
shipment up by 25.5%. It achieved growth in regions
where the market saw an overall decline like North
America where it captured 9% share. The second
aspect is to focus on growing markets like
smartphones and software. The company is aiming to
diversify its product line and reduce reliance on PC
market revenue. In the third quarter of 2013 revenue
from these new markets was 15.1% which is an
increase from the second quarter revenue of 8.3%.
Lenovo has also decided to keep R&D an important

aspect of this Attack strategy. The company’s R&D expenditure grew to 24% in order to design
new devices and improve its existing portfolio to meet market demand. Lenovo will continue to
invest in R&D and marketing of its mobile devices to fuel growth at the expense of margins.
Strategy of Differentiation
Lenovo has decided to separate its desktop, laptop and tablet product line into two brands. The
first one will be simply called “Lenovo” and they will concentrate on low end and mainstream
products. The second name it will operate under is “Think”: it is the flagship brand for Lenovo
and will cater to the high end markets and the only brand which can compete with established
brands like Apple.
Lenovo has been working on differentiating its products and make them stand out from that of
competitors. Lenovo’s Yoga series had become extremely popular in emerging markets like
India as Lenovo designs are unique and affordable. The Lenovo design team achievements were
recognised when in 2013 they won “Red Dot- Design team of the year award”. With its recent
acquisition of Motorola Lenovo plans on using the creative design team of Motorola to emerge
as unique design smartphone manufacturers in the market.
13
Financial Analysis
Financial Ratios
Liquidity Ratios
Profitability Ratios
14
Leverage Ratios
15
Income Statement
16
Balance Sheet
**Refer to Appendix E for further information
17
Valuations
Two different valuation techniques were used for the purpose of this report. They are: Price
Earnings Ratio and Market to Book Value Model. Both the models are based on historical data
from the annual report (till 2013) along with data forecasted by our analysts. In order to ease
down the calculation the exchange rate was fixed at the current exchange rate between USD and
HKD. This can be considered a limitation of the valuation as this does not take into account the
fluctuations in the exchange rate.
The Dividend Growth Model is unable to provide acceptable data when the growth rate of
dividend surpasses the expected market return. Lenovo’s growth has been much higher than the
market return, which makes the model inaccurate.
The data for total number of ordinary shares of Lenovo from 2010 to 2013 was taken from the
annual report and for the year ending 2014 the data was taken from the company profile at the
Hang Seng website. The average increase in ordinary shares was then calculated and found to be
growing at a rate of 1% annually. Using this growth rate, the outstanding ordinary shares of 2015
and 2016 were calculated.
Earnings Multiple Model

This equity valuation measure is defined as market price per share divided by annual earnings
per share.
Calculation Techniques
The P/E ratio is calculated for historical data, using the price per share and earnings per share.
For the forecasted data the earnings per share is calculated by dividing annual earnings by total
number of forecasted ordinary shares. The historical P/E ratio is analyzed along with the P/E
ratio of the industry and P/E ratio for the future is estimated to be 15. Using this multiple the
expected price of the share is calculated.
18
Findings
The expected share price at 31st March 2014 was estimated to be HKD 9.38 according to the P/E
Model. At 31st March 2014, Lenovo’s share was trading at HKD 8.57 which shows that the
share was undervalued. According to the P/E Model the share price of Lenovo is expected to be
trading at 10.80 and 14.52 at the end of the financial year 2015 and 2016.
Recommendation
Based on the valuation, Lenovo share price is expected to be HKD 10.80 at 31st March 2015, the
stock is currently trading at HKD 9.14 (closing price at 15th April 2014). According to this
model, it is recommended to buy the share at the market price since the stock price is expected to
rise, however if the stock price rises above HKD 10.80 it is recommended to sell.
19
Market to Book Value Model
A ratio used to find the value of a company by comparing the market value of a firm to its book
value. Book value was calculated by looking at the firm's historical cost, or accounting value.
Market value was determined in the stock market through its market capitalization.
Calculation Technique
Book value was calculated by deducting the Total Liabilities from Total assets, resulting in total
equity (net assets). Market value is the product of price of each ordinary and the number of
shares. The market to book value was calculated from 2010 till 2013 to determine the ratio; to
calculate the minimum market to book value, dividends were added back to the total equity
making earnings as expected. The market to book value was kept constant for the forecasted
years and the range of the share price for the forecasted years was calculated.
Findings
The market to book value calculated for 2013 was 3.83 and minimum was 3.50. Using this
information, the maximum and minimum range of share price through was obtained. For 31st
March 2014, the highest range was HKD 9.13 and the minimum was HKD 8.34. The share price
at the date was HKD8.57, showing that the share was trading within the range. For 31st March
2015, the maximum is HKD 9.80 and the minimum is 8.95. By the end of the financial year
2015-2016 the share price is expected to range from HKD 10.4 to HKD 9.53.
20
Recommendation
Based on the valuation, it is expected that the Lenovo share price can increase to a maximum of
HKD 9.80 and fall to a low of 8.95 at 31st March 2015. The stock is currently trading at HKD
9.14 as at 15th April 2014, lying within the calculated range.
**Refer to Appendix F for assumptions and dividend growth model calculations
21
Recommendation
After consideration of financial, economic and strategic analysis Lenovo can be viewed as a
company with numerous growth opportunities in the future. The outlook of Lenovo depicts a
positive profitability prospect and according to the estimates of our analysts revenues are
expected to grow at an average of 15% in the coming years. From the valuation of the PER
model the share price of Lenovo is expected to increase from HKD 9.14 to HKD 14.52 by the
end of 2016. MBV ratio has also increased from 3.74 times to 3.83 times. This increase in MBV
ratio shows that the market is anticipating an increase in the earnings received on Lenovo stocks.
As can be seen from the graph, both valuation models portray that the share price of Lenovo is
going to increase in the future.
Lenovo has a history of high dividend pay-out ratio. Due to their unrelenting growth strategies
the pay-out ratio saw a dip in 2011 but has been on a rise ever since. The amount of dividend
paid in 2013 rose by 34% from the preceding year. The dividend pay-out ratio is currently at an
impressive rate of 39%, showing that investors of Lenovo shares are receiving a high yield on
their investment.
22
Based on the findings of the valuation models (shares of Lenovo are under-priced) and good
return prospects in the future we recommend Mr. Shahrukh Khan to buy 3% of the Lenovo
shares. We have advocated two investment proposals for the client to follow dependent upon the
length of the investment.
Long term Investment proposal
The first type of investment Mr. Shahrukh Khan can engage in is long term where the investor
can take advantage of the high dividends paid by Lenovo. Depending on the risk appetite of the
client we have proposed two long-term investment approaches.
In the risk averse approach, Mr. Shahrukh Khan can buy 2% shares of Lenovo immediately at
the market price of HKD 9.14. The purchase of the remaining 1% shares depends on the share
price cycle of Lenovo. He should invest in the 1% shares when the share price hits its support
level of HKD 8.23 or when it crosses its current resistance price of HKD 9.48. This investment
position is to be held till 2016 by the end of which he can sell the shares at a price of HKD 14.52
to realize profits.
If Mr. Shahrukh Khan is less risk averse he ought to invest in the 3% shares of Lenovo at the
current market price of HKD 9.14. He should hold the stocks till 2016 where they can sell it at a
profit making price of HKD 14.52.
23
Short term investment proposal
If this investment position is taken Mr. Shahrukh Khan is advised to hold stocks for not more
than a year. In this proposal we recommend that 3% share investment be made immediately at
the market trading price of HKD 9.14. The shares are to be sold by the end of the year at the
expected price of HKD 10.8. However, if at any time during the holding period the price exceeds
HKD 10.8, the stocks held are to be sold immediately to realize gains.
**Refer to Appendix G for assumptions and dividend growth model calculations
24
Conclusion
We have made our recommendation regarding Lenovo on the basis of both financial and
strategic objectives. We believe our investment proposal will strengthen our investors’
shareholding profile as well as provide an opportunity for capital appreciation. Lenovo is a
lucrative investment candidate due to its impressive title as market leader in the PC market and a
key emerging player in the booming smartphone, tablet and software sector. Additionally,
Lenovo’s management team is incomparable with regard to experience and socially responsible
corporate culture. Lenovo’s ever-increasing dividend pay-outs are complemented by its dropping
debt/equity ratio which forms a stable base for the company to launch itself to greater heights. Its
improving liquidity ratios and unwavering dedication to preserving its operational efficiency
ensures growth while sustaining profits. Our proposed structure ensures protection of minority
shareholder interests while ensuring attractive returns on investment. Nevertheless, we very
strongly recommend additional investments in other companies, preferably in other sectors and
listed on other stock exchanges in order to diversify away unsystematic risk.
25
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• Industry Overview
Appendix A
• SWOT Analysis
Appendix B
• Financial Ratio Analysis

Appendix C
• Statement of Comprehensive Income

Appendix D
• Statement of Financial Position

Appendix E
• Stock Valuation
Appendix F
• Support and Resistance

Appendix G
• Portfolio Management
Appendix A - Industry Overview
IBM, known as the pioneer of the PC industry, launched its first PC in August, 1981 and later
in the 1990s Dell, Compaq (later bought by HP), Acer, Apple and its Macintosh, Hewlett
Packard, Asus and few others. HP, IBM, Dell and Apple are the only PC makers to be able to
retain a significant market share in the industry until 2000s. Lenovo acquired IBM’s PC
Division in 2005 when IBM was the third top vendor in the PC industry. After this
acquisition Lenovo automatically became the third largest manufacturer of desktop and
notebook computers in the world with HP and Dell taking the lead respectively.
By 2000, mainland Chinese purchased more than seven million PCs in a single year. During
the same time, China’s production of computer hardware grew from less than US$1 billion to
US$23 billion (Oxford, 2001). Now the PC market is mature and close to saturation in the
developed countries, while the development of PC industry is still experiencing a rapid
growth in the developing countries such as China (Cui, 2009). Chinese PC industry not only
attracts many foreign PC makers to enter their market but also fosters world-class local
companies to enter the global PC markets. Until 2001, China had become the fourth largest
computer manufacturer worldwide (Kraemer, 2002). PC Industry has played a more and more
important role in national economy of China, and has an important effect on the society.
Since the emergence, PC has become a necessary tool in daily life in the society. Moreover,
with the advances of technology, PC carries more and more functions and attracts more and
more users. During the economic recession, domestic manufacturers like Lenovo explored
and exploited the rural market in China by providing first time PC users with affordable
desktops and notebooks. Lenovo managed to open their stores in villages where people were
never exposed to PCs or laptops. China has become an important PC market in the world.
The PC market in China has experienced a rapid growth at an average of 15% annually
compared with that the growth of global PC market which has slowed down in recent years
but the growth in Asia specially in China is very rapid. The centre of development of PC
market has been gradually transferred from the developed countries with mature market to
the developing countries with great growth potentiality like China (Cui, 2009).
Looking out to 2014 Loren Loverde, IDC’s Vice President Worldwide PC Trackers, said,
“Whether constrained by a weak economy or being selective in their tech investments, buyers
continue to evaluate options and delay PC replacements. Despite being a little ahead of
forecast, and the work that’s being done on new designs and integration of features like
touch, the third quarter results suggest that there’s still a high probability that we will see
another decline in worldwide shipments in 2014.”
Even Apple's good news -- an estimated 28.5% increase in U.S. unit sales year over year,
according to Gartner -- looked well than it was. That's because last quarter's Mac sales are
being compared with the same quarter in 2012.
That was the quarter when the iMac's production schedule got "screwed up“(Tim Cook's
verb) and hardly any of the new models made it out the door before the quarter ended. As a
result, Mac sales fell 22% when the industry grew nearly 7%. And the 26-quarter streak
during which the Mac outpaced the rest of the PC industry came to an abrupt end.
Lenovo took the top PC vendor title, continuing its

streak of gains following channel expansion and
solid product development. In 2Q13, Lenovo
continued to make impressive gains outside of
APeJ. However, the headwinds in China continued
to affect its home turf significantly. Lenovo ended
the quarter with a double-digit decline in
Asia/Pacific (excluding Japan). Overall growth has slowed from prior quarters, and slipped
into negative territory this quarter, but still outpaced the market and top competitors.
HP slipped to second place, but growth improved from recent quarters. The company
received a strong boost from shipments to India as part of large education projects. Shipments
continued to decline significantly in EMEA, although the company's U.S. business stabilized
a bit after a significant decline in the first quarter of 2013. The firm continued to seek
opportunities at all levels of the pricing spectrum and managed to perform above market in
all key regions except Asia/Pacific (excluding Japan).
(IDC, 2013)
Jay Chou, Senior Analyst

at IDC Worldwide PC
Tracker said, "Slower
growth in Europe and
China reflect the risks,
while the improved U.S.
outlook reflects potential
improvement. Still, the
weakness in emerging
markets is a threat to a
core long-term growth
area. In addition, while efforts by the PC ecosystem to bring down price points and embrace
touch computing should make PCs more attractive, a lot still needs to be done in launching
attractive products and addressing competition from devices like tablets."
That sounds a lot like the post-PC era that Steve Jobs envisioned in 2010, except most of the
smartphones and tablets sold in emerging markets are Androids, not Apples.
Indeed, a few indigenous firms, such as Huawei and ZTE, have managed to catch up on
technological ladder by taking advantage of the domestic market and the distinct feature of
the technological regime in the telecommunications (switching system) industry (Mu and
Lee, 2005). According to IDC's China Quarterly Mobile Phone Tracker, 2Q2013, China’s
total mobile phone shipments have reached 110 million in Q2 2013. Smartphone shipments, a
subset of mobile phone shipments, reached 86 million, growing by 10% on a quarterly basis.
“The smartphone market has maintained a two-digit quarter-on-quarter growth rate in Q2 due
to two reasons. First, the substantial shipments of low-end smartphones at a unit price of less
than RMB 800 that support China Mobile’s 3G network. Second, the shipments prepared by
mobile phone vendors to meet the market demands of students during the summer vacation,”
says Antonio Wang, Associate Director for Client System Research, Imaging, Printing &
Document Solution Research, Research Operation Center, IDC China. Driven by the
subsidies of operators and the strong demand of consumers for upgrading mobile phones,
IDC forecasts that China’s smartphone shipments will reach 360 million in 2013.
With the issuance of 4G licenses and the launch of Apple's new iPhones by China Mobile,
IDC expects China’s smartphone shipments to exceed 450 million in 2014, including 120
million smartphones that would support 4G functions and over 32 million smartphones that
would adopt China Mobile’s TD-LTE air interface.
That would benefit the upstream 4G chip and screen vendors, midstream mobile phone
vendors and APP developers, and channel distributors and accessory vendors, which would in
turn, accelerate other innovations in the mobile communication and Internet industry.
(IDC, 2013)
The advisory firm said it
estimated negligible growth in
smartphone shipments in the
US, a major market, moving
forward. The country already
has a smartphone penetration
rate of 65% and is therefore
highly saturated. US
smartphone sales fell 6.5% on a year-over-year (YoY) basis in the fourth quarter of 2013 to
49.3 million units.
Instead, IDC pegs most of the future increases in global smartphone shipments to penetration
in emerging markets, where consumers will be looking for low-cost devices.
The decline in shipments to maturing markets has historically been offset by growth in
shipments to emerging markets, especially China. However, the world’s second-largest
economy registered its first decline in smartphone shipments at the end of 2013, when
shipments to the country declined 4.3% on a YoY basis to come in at a total of 90.8 million
units. (IDC, 2014)
Digitimes Research (2011) expects demand in the domestic

China market to reach 422 million smartphones in 2014, with
278 million units contributed by China-based smartphone
vendors. The continued expansion by international vendors
Samsung and Apple will push up their sales to almost 144
million units, accounting for nearly 4% growth from 2013. As
competition in the local market heats up, China-based vendors
are turning to overseas markets in order to maintain their
shipment volumes, especially taking an aggressive approach to
penetrating emerging markets, which hold higher barriers for
overseas vendors to enter. Overseas shipments will account for
about 126 million units. While shipments to mature markets are
expected to grow on a small scale, shipments to emerging
markets are expected to expand at strong rates, mainly due to the
low base they are starting from.
Acquisitions that strengthen the position of the acquirer are (understandably) sensible ones,
and here we're talking about two relatively small players in the overall smartphone industry
combining with hopes of increasing market (and revenue) share. With both Motorola and
Lenovo controlling single digit percentages of the smartphone market (1.3% and 5.1%,
respectively, according to Gartner) it's clear that neither party has a chance independently.
Lenovo could leverage its position in China, while Motorola would hopefully be able to do
the same in the US (although with a much steeper slope to climb)
“The acquisition of such an iconic brand, innovative product portfolio and incredibly talented
global team will immediately make Lenovo a strong global competitor in smartphones. We
will immediately have the opportunity to become a strong global player in the fast-growing
mobile space,” said Yang Yuanqing, chairman and CEO of Lenovo. “We are confident that
we can bring together the best of both companies to deliver products customers will love and
a strong, growing business. Lenovo has a proven track record of successfully embracing and
strengthening great brands – as we did with IBM’s Think brand – and smoothly and
efficiently integrating company’s around-the-world. I am confident we will be successful
with this process, and that our companies will not only maintain our current momentum in the
market, but also build a strong foundation for the future.”
“Lenovo has the expertise and track record to scale Motorola Mobility into a major player
within the Android ecosystem. This move will enable Google to devote our energy to driving
innovation across the Android ecosystem, for the benefit of smartphone users everywhere,”
said Larry Page, CEO, Google.
“As part of Lenovo, Motorola Mobility will have a rapid path to achieving our goal of
reaching the next 100 million people with the mobile Internet. With the recent launches of
Moto X and Moto G, we have tremendous momentum right now and Lenovo’s hardware
expertise and global reach will only help to accelerate this,” said Dennis Woodside, CEO,
Motorola Mobility.
The transaction is subject to the satisfaction of regulatory requirements, customary closing
conditions and any other needed approvals.
Appendix B – SWOT Analysis
Strengths:
Lenovo has increased its research

and development expenditure in
recent years to up US$303 million.
Research and development
expenditure is significant as a
percentage of revenue for Lenovo.
As it can be seen from the table
while HP and Dell have reduced their
R&D expenditure, that of Lenovo
has increased as a percentage of its
revenue to 1.4%.
This focus on R&D has led to low cost innovation and low production costs. Lenovo has set
up production units in low cost regions like China, Brazil and Argentina. This has allowed it
to focus on incremental and adaptive innovation leading it to provide customized products.
Customization and adaptive innovation suits Lenovo well: as a company whose core
competence has been on assembly and manufacturing. This has led to Lenovo achieving
economies of scale which helps them compete on the basis of prices in a highly competitive
market.
Lenovo’s business strategy over the years has helped it emerge as a key player in the market.
It’s taking over of IBM PC section made it number 3 globally and a leader in key growth
markets. It helped Lenovo penetrate markets beyond Asia and now the ThinkPad has become
a major source of revenue. More recently it is taking over IBM server section which will
boost their presence in China significantly. The Motorola acquisition from Google will pace
up the smartphone market penetration process and poses increased opportunities of
reintroducing the brand in China.
China is the biggest consumer market in the world. Lenovo has a strong understanding of this
emerging market and has been successful in introducing products appealing to the consumers.
It has around 25% of the market share, and every 1 in 3 PCs in China is a Lenovo. The firm
also enjoys support from the government because Lenovo is one of the few Chinese firms
enjoying global success.
Weaknesses:
One of the biggest weaknesses of Lenovo is

the firm’s heavy reliance on the Chinese
market for revenues. As can be seen from
the chart taken from the company’s 2012-
2013 annual report 43% of revenue comes
from China. One of the reasons for this is the
poor brand perception of Lenovo in
developed markets like Europe and America
which has overshadowed its presence in
these economies.
A major factor behind this poor brand

perception is low product differentiation.
Lenovo products are slightly differentiated
from competitors’ products and have a
competitive disadvantage if the price offered
by competitor is lower.
Also high revenue streams come from

hardware products like laptops and PCs which
are sold at a low profit margin. This means
high costs are being incurred on less profitable
components. This has also left Lenovo with poor profit margins compared to its competitors.
In 2013, HP and Dell had a profit margin of about 4.17% and 4.55% respectively, whereas
Lenovo’s was fewer than 2%.
Opportunities:
As China is the main hold of Lenovo, there is still room for Lenovo to capture further market
share in the SMB market where it has 19% share till date. At the same time Lenovo is
strategizing to penetrate markets like USA (by expanding manufacturing operations in the
region) and emerging markets like India. It has targeted to increase market share in both the
regions to 10%
Lenovo has recently restructured its business

groups and one key focus of the firm is the
smartphone industry. The smartphone market is
estimated to grow by almost 10% in the near
future. Lenovo is at number 5 in terms of
smartphone shipment in the 4th quarter of 2013.
By acquiring Motorola, Lenovo gets the
advantage of using its connections with over 50
wireless carriers worldwide, the product design and development team, and Motorola’s
reputation Lenovo; and aims to improve their ranking in the USA in the smartphone market.
One potential market Lenovo can target in this regard this that of India. India’s smartphone
market is one of the least penetrated among Asia/Pacific countries. Lenovo could easily
penetrate India’s market with its already successful low price LePhone.
Lenovo’s Mobile Internet and Digital Home (MIDH) segment, which includes smartphones
and tablets as well as Smart TVs, accounted for 15.1% of corporate revenue in 3Q13 up from
8.3% in 3Q12. TBR believes Lenovo’s strong growth in 3Q13 in smartphones and tablets,
combined shipments outnumbering PCs for the second consecutive quarter, will help the
company diversify its revenue mix and reduce its dependence on PCs, helping to stave off
potential declines as the PC market remains in flux. While profitability is likely to improve as
the segments benefit from increased production and scale, TBR believes Lenovo’s short-term
focus will be on expanding into new markets with these devices, opting to invest in channel
expansion, R&D and marketing to capture market share that will position the company for
long-term revenue and margin growth.
Threats:
The company faces intense competition in all its business segments. It competes in terms of
price, quality, brand, technology, reputation, distribution and range of products, with Acer,
Apple, Dell, HP and Toshiba. The serious threat that Lenovo and the other tech companies
are facing is a rapid technological change. Companies are under the pressure to release the
new products faster and faster. As companies delve further into the ever changing field of
technology, the rapid change might pose a challenge for Lenovo as they may have to play
catch up to the other competitors. Lenovo’s adherence to low cost innovation may possibly
backfire as competitors keep pouring money into research and development
The PC market has been a major source of revenue for Lenovo but recent data suggests
PC market has been on the decline.
Lenovo’s heavy reliance on PC sales might falter their position and have a negative impact
on their revenue. . Growth rate of the computer market is slowing down and in the near future
the markets will become saturated. It will prove hard for Lenovo to compete in such market
and continue to grow its market share.
Although Lenovo competes in the developed economies with its smartphones it will have
difficulties in growing its smartphone division and entering developed economies later as the
smartphones market there is already saturated.
Appendix C – Financial Ratios Analysis
For the purpose of the ratio analysis, we have decided to compare the ratios of Lenovo to its
main competitors in both the smartphone and PC market. Given that Lenovo has recently
entered the smartphone market, it will want to consolidate its position as the largest vendor in
Mainland china. So ZTE Corporation and Huawei Technologies, being the main competitors
of Lenovo in the smartphone market in china stands as the two most suitable companies to
compare the ratios to as far as the smartphone market is concerned. Similarly, we have
selected Dell and Hewlett-Packard as the main competitors of Lenovo in the PC market
worldwide. HP on the other hand, is the world's leading PC manufacturer and has been since
2007, fending off a challenge by the Chinese manufacturer Lenovo (Gartner, 2013).
Benchmarking Lenovo’s financial position against those 4 companies will provide a better
insight on its financial performance and viability.
(A) Liquidity Ratios:
1. Current ratio:
This expresses the ability of a firm to meet short term obligations as they come due. A higher
ratio means that the firm is solvent enough to pay off their current liabilities. However, an
extreme higher ratio means that the firm is wasting resources. Below is an overview of how
Lenovo performed in relation to the current ratio.
The current ratio of Lenovo has been increasing throughout the comparison years. Lenovo’s
current ratio is more or less to the ideal ratio of one and has been increasing over the years to
reach 1.02 in 2013. One of the main reasons for an increase in the ratio recently, involves
increase in cash flows through greater revenue and sales growth, coupled with no or very low
current borrowing figures. For
instance, for the fiscal year ended
March 31, 2013, the group’s
consolidated revenue increased by
15 percent year-on-year to record-
high US$33,873 million. Based on the current ratio of Lenovo, it should neither be having
any problems to pay the bills on time nor wasting its resources. This pictures a good image of
Lenovo’s liquidity. However, an industry and competitor analysis will provide a better view.
70
60
50 Lenovo
40 Dell
30 HP
ZTE
20
Huawei
10
0
2009 2010 2011 2012 2013
Figure C.1: Chart illustrating all 5 companies
1.6
1.4
1.2
1 Lenovo
0.8 Dell
0.6 HP
0.4 ZTE
0.2
0
2009 2010 2011 2012 2013
Figure C.2: Chart excluding outlier Huawei
Image from Business week
The industry current ratio is the ideal current ratio in this case. A comparison with
competitors shows that Lenovo’s current ratio has always been below its competitors in both
the smartphone and PC market. This can be explained by the consistent level of investments
made by Lenovo in making new acquisitions and setting up new factories, which cause its
cash balances to decrease, thereby making its current ratio to be below competitor levels.
According to the annual reports (2013), Lenovo agreed to acquire the Brazil-based
electronics company Digibras for US$148 million in a combination of stock and cash. Prior
to its acquisition of Digibras, Lenovo already established a $30 million factory in Brazil.
Also, in the same year, Lenovo agreed to acquire the United States-based software company
Stoneware, in its first software acquisition.
This shows that Lenovo utilizes its extraneous cash resources in the most efficient manner,
with the aim of boosting shareholders’ wealth, whilst still maintaining a sound ability to meet
its short-term liquidity requirements. Overall, company has always maintained sufficient
liquidity with liquidity measures in place at all instances to timely meet its obligations with
its available current assets. Also, on the chart, we can see that Lenovo’s current ratio has had
an upward trend over the years whereas there have been some fluctuations in the trend of its
competitors. Furthermore, as we can note on the chart, Huawei is clearly wasting its
resources as its current ratio is way above the ideal ratio of 1.Those cash resources could
have been invested in order to maximize shareholder’s wealth. Given the continuous increase
in company’s customer base and profits, it is postulated that this ratio will certainly become
more favourable in the upcoming fiscal years
2. Acid test ratio:
The quick ratio is just an enhanced version of the current ratio. It measures the ability to meet
the short-term cash needs more rigorously by eliminating inventory. Inventory is excluded
from current assets as they are not that liquid in case of bankruptcy. Lenovo acid test ratio
improved slightly in 2011 before relatively declining again to reach 0.85 in 2013. .This ratio
remained low before due to the same reasons as highlighted before during current ratio’s
analysis. There has also been a decline from in the acid test ratio for the year 2013.This
decline was due to the fact that a significant portion of the current assets actually consisted of
inventories in that year (15.9% compared to 10.3% in 2012). Nevertheless, it can be noted
from the table that 85% of the current liabilities of Lenovo can be covered by its most liquid
assets which is quite good.
60
50
40 Lenovo
Dell
30
HP
20 ZTE
Huawei
10
0
2009 2010 2011 2012 2013
1.6
1.4
1.2
1 Lenovo
0.8 Dell
0.6 HP
ZTE
0.4
0.2
0
2009 2010 2011 2012 2013
Figure C.4: Chart excluding outlier Huawei
Image from business week
As far as the industry comparison is concerned, we can note that despite the fact that Lenovo
has used its idle cash balances into growth possibilities, when the company believed that it
had the most prolific opportunities present, their quick ratio is still above the industry average
which is very good. Furthermore, a comparison of this ratio with current ratio reveals that
Lenovo’s competitors such as HP, ZTE and Huawei have a high level of inventory, which
boosts their current ratios by relatively significant amounts. Since, quick ratio presents a
much more comprehensive position of liquidity; it shows that Lenovo’s liquidity is adequate
when compared to competitors. It only lacks behind Dell and Huawei in terms of liquidity
only due to the reason that it constantly utilizes cash resources to realize innovation and
greater development for future. Despite being greater than Lenovo’s, Huawei quick ratio is
not good as the company is clearly wasting its resources that would otherwise have been used
in value creation. As demonstrated by the chart, Lenovo’s stable ratio over the years is
preferred. In a nutshell, quick ratio has progressed over the years and current prospects of
continued innovation imply that ratios will necessarily increase as a consequence of increased
growth.
(B) Profitability Ratios:
1. Gross profit margin:
The gross profit margin is used to assess a firm's financial health by revealing the proportion
of money left over from revenues after accounting for the cost of goods sold. Gross profit
margin serves as the source for paying additional expenses and future savings. Considering
Lenovo’s past five years gross profit margin, there are relatively small fluctuations and it can
be inferred that Lenovo has been very consistent in terms of its performance, despite the
volatility and riskiness of its industry. There has been a small decline in gross profit margin
in 2010 until reaching 12.03 in 2013.This decline occurred because of the slowdown in the
worldwide PC market which was primarily due to a tightening macro-economic environment,
as many countries sought to curb inflation especially in emerging markets, as well as
softening consumer PC demand and the comparison to relatively high year-on-year growth
rates in certain markets. The Group’s gross profit increased by 18 percent year-on-year to
US$4,074 million in 2013 and gross margin increased from 11.65 percent in the previous
fiscal year to 12.03 percent, driven by effective margin management, scaling benefits from
growth in shipments and stringent cost controls. Lenovo pictures a good financial health and
should be able to pay its operating and other expenses and build for the future.
35
30
25 Lenovo
20 Dell
15 HP
ZTE
10
Huawei
5
0
2009 2010 2011 2012 2013
The average gross profit margin in the industry is 12.15% which is more or less the same to
Lenovo’s gross profit margin. As far as the other competitors of Lenovo are concerned, we
can note that they have a higher gross profit margin than Lenovo. However, as shown on the
chart, Lenovo’s gross margin is more stable than its competitors and is on the upward trend.
This has been due to the effective margin management, scaling benefits from growth in
shipments and stringent cost controls. Further improvements in that area is likely to
strengthen that upward trend and build on it.
2. Net profit margin:
The net profit margin measures how much out of every dollar of sales a company actually
keeps in earnings. A higher profit margin indicates a more profitable company that has better
control over its costs compared to its competitors. The negative NPM in 2009 is explained by
the fact that the PC industry was hard hit by the global economic crisis. Under the
unprecedented circumstances, enterprise customers delayed their purchase and cut down
spending on PCs, leading to a reduction in global commercial PC demand. At the same time,
the growth of the China PC market also slowed down as it was affected by the
macroeconomic conditions. These unfavourable factors impacted Lenovo’s business
performance in 2009 and this has resulted in a negative NPV.As from 2010, the economy
started to show some signs of recovery, this was positive for Lenovo as demonstrated by the
small positive net profit margin. As from that year, there has been clear signs of recovery and
growth, its NPV has been constantly increasing until reaching 1.86 in 2013.Lenovo has
continued to leverage scaling benefits from strong shipment growth, even while continuing to
investment in product innovation, branding, MIDH business and emerging markets, to drive
long term sustainable growth and better profitability This resulted in a flat expenses-to-
revenue ratio compared to last year.
Lenovo has a net income of $0.0186
per dollar of sales which is
relatively good for this type of
technology firm.
A comparative analysis of the latest company’s ratios with its competitors reveals that
Lenovo’s net profit margin has been relatively low compared to its competitors. Results in
2013 show that it only managed to surpass ZTE on the net profit margin.
15
10
5 Lenovo
Dell
0 HP
2009 2010 2011 2012 2013
ZTE
-5
Huawei
-10
-15
Since, net profit is a measure of a company’s efficiency, low margin figures suggest that
Lenovo is less efficient as compared to its sector in restricting costs and squeezing maximum
profits out of revenues. However, as we can note from the chart, Lenovo has been consistent
over the years and is in the upward trend. The leverage scaling benefits from strong shipment
growth combined with the continuing investment in product innovation, branding, MIDH
business and emerging market to drive long term sustainable growth and better profitability is
likely to strengthen that trend. Its margin is expected to grow absolutely, when considering its
continuous present investments that are aimed at achieving strategic excellence and long term
viability.
3. Return on equity:
Return on equity is the amount of net income returned as a percentage of shareholders equity.
It measures a corporation's profitability by revealing how much profit a company generates
with the money shareholders have invested. The negative return on equity in 2009 is
explained by the global economic crisis that hit the PC industry at that time. Lenovo did
make a loss in that year and this resulted in a return on equity of -17.27%.As from the year of
2010, whereby there were some signs of recovery of the economy and demand in general,
return on equity has been constantly increasing to reach a staggering 23.57% in 2013.Lenovo
has been using its shareholders funds to generate greater future return and profits for its
shareholders as demonstrated by the increase in profits over the years.
80
60
40 Lenovo
Dell
20
HP
0
ZTE
2009 2010 2011 2012 2013
-20 Huawei
-40
-60
Lenovo’s return on equity is way behind the industry average in the industry. However, when
comparing Lenovo’s return on equity with its main competitors in the smartphone and PC
market, we can note that their ratio was better than their competitors. We can also see from
the chart that HP and ZTE have witnessed considerable fluctuations in their return on equity
ratio throughout the years and Lenovo on the other hand has been on an increasing trend
since 2010. The record high revenue witnessed by Lenovo US$33,873 million. Combined
with the record-high profit before taxation of US$801 million and profit attributable to equity
holders of the company amounted US$635 million suggests that there is good room for
Lenovo to make its return on equity to grow even further in the following years. By investing
in more innovation and technology and increasing the number of profitable acquisitions, there
is clear evidence that Lenovo will sustain outperforming returns on equity well above its
competitors and investors’ expectations.
4. Total assets turnover:
Total assets turnover is the amount of revenues, the company is generating per dollar of
assets. The higher the ratio, the better it is, since it implies the company is generating more
revenues per dollar of assets. A high ratio also suggests that corporate resources are
effectively being managed. Asset turnover has been more or less constant over the years with
a slight decline being seen in 2010 and 2012.As part of its growth strategy to accelerate
future expansion, Lenovo made several acquisitions including Medion, a German electronics
manufacturing company in 2011 and the Brazil-based electronics company Digibras and
United States-based software company Stoneware in 2012.Lenovo also incurred significant
investment in capital expenditure with US$148 million and US$329 million in 2011 and 2012
respectively. These continuous increases in assets throughout the years have been
accompanied with increases in revenue each year with Lenovo achieving record breaking
revenue US$33,873 million in 2013.Lenovo’s total assets turnover ratio is good in the sense
that it has been able to generate revenues totaling 2.01times the amount invested in total
assets in 2013.
2.5
Lenovo
1.5
Dell
HP
1
ZTE
Huawei
0.5
0
2009 2010 2011 2012 2013
Image from business week
Lenovo’s total assets turnover is also slightly better than the industry average and way better
than its main competitors in the smartphone and PC market. It is good in the sense that
Lenovo is able to generate more revenues from its investments in assets than its competitors.
Furthermore, through its ‘protect and attack’ strategy and its investment in building its core
competencies, product innovation, and branding is going to help Lenovo to capture more
market opportunities and thus further increase its revenues. There is no doubt that firm’s
assets turnover will improve even further in the following years to come.
(C) Leverage ratios:
1. Debt to equity ratio:
Debt to equity ratio is a measure of a company's financial leverage calculated by dividing its
total liabilities to stockholders' equity. It indicates what proportion of equity and debt the
company is using to finance its assets. A high debt/equity ratio generally means that a
company has been aggressive in financing its growth with debt. This can result in volatile
earnings as a result of the
additional interest expense.
Lenovo’s aggressive growth

policy by making smart
investments and acquisitions resulted in a high debt to equity ratio in 2009. The ratio has
decreased over the years showing the firms capability of paying their long term borrowings
from the revenue earned from these investments. The ratio did have a rise in 2013 because of
taking a $ 300 million loan for acquisitions like CCE (Digibras) and Stoneware in US. It is
observed that as their credit default probability is very low, various banks have entered into 5
years loan contracts with Lenovo for mutual interests.
Comparison with its counterparts over the years show Lenovo as a fast growing firm who
take educated risks in the areas of investments and acquisitions. Firms like Dell and HP have
reached their maturity stage in terms of expansion, as a result their debt to equity ratios tend
to be very stable over the years as shown in the table .As for comparisons with ZTE and
Huawei these firms will have a lower debt to equity ratio compared to Lenovo as they deal
with MIDH products which is just a part of Lenovo’s Products segment. Naturally in terms of
manufacturing scale size, Lenovo is way bigger as a firm, thus requiring higher amount of
funds to meet its obligations.
60
50
40 Lenovo
Dell
30
HP
ZTE
20
Huawei
10
0
2009 2010 2011 2012 2013

Workings of Ratios
Appendix D – Statement of Comprehensive Income
The income statements were forecasted using common size statements, meaning that initially
revenue was calculated and was used as a basis for calculating the other figures using similar
trend of historical data available.
For 2014, the values were calculated using the tear sheet. For 2015 and 2016, the predictions
were made based on company’s future prospects as per Lenovo’s vision and expectations.
Figure D.1: Common Size Statements
Note 1 – Revenue:
The revenues of Lenovo were categorized on the basis of their different product sectors; PC,
notebooks and MIDH. Financial data was congregated from Lenovo’s reports till the 3rd
quarter of 2013-14. Forecasts were made for the
subsequent years, till 2015, based on the data
collected and analysed over a period of 6 years.
Since 2010, Lenovo’s dependency on PC’s sales as a

measure of revenue has been gradually decreasing.
In 2010, the PC sector contributed 35% to Lenovo’s
overall revenue, although the growth rate saw a
decrease. The notebook industry saw a large increase
in growth, from a negative 9% to a positive 21% along with an increase in the percentage of
revenue earned from notebook sales. The contribution of MIDH to the revenue was quite
miniscule at 2% although the sector saw an increase of 11%.
It is projected that Lenovo’s revenue dependence will continue to decrease in the PC and
Notebook sectors at 29% and 50% respectively. The shift of focus to MIDH results in an
increased reliance portrayed in an increased revenue dependence of 21%. Laptop and PC
sectors are expected to have lower growth rates than before at 7% and 8% respectively. The
MIDH sector is expected to have a strong growth of 49%. The growth rate is calculated by
estimating the total revenue of Lenovo and the contribution of MIDH in Lenovo’s total
revenue.
For the year 2013-2014, the revenue from the first 3 quarters were analysed along with the
revenues of the fourth quarter of previous years. It was discovered that revenue usually
decreases in the 4th quarter, at the same time it is observed that the 3rd quarter contributes to
an average of 28% of Lenovo’s yearly revenue. Using that data, the total revenue for the year
was calculated and subsequently the revenue for the 4th quarter was calculated, which
follows the trend of previous years.
In the financial year 2014-2015, Lenovo expects its revenue to grow by 14%. The reason for
this constant growth rate is that Lenovo plans to enter new market segments such as Brazil.
In 2015, the revenue is expected to continue its increasing trend and grow by 15%. Lenovo’s
aggressive merger and acquisition strategy along with protect and attack strategy provide
evidence for this fact, as well as their shift in focus on the MIDH industry all attribute to the
assumption of increasing growth rate.
Note 2 - Cost of Sales:
With relation to revenue, Lenovo’s cost of sales show a decreasing trend. This is due to
Lenovo’s strength in supply chain which will improve profitability. The takeover of IBM
Servers will further help Lenovo to leverage their strength in China, where demand for
servers is growing. Lenovo is also expected to drive higher growth with their strong channel
relationships; all leading to an overall lower cost of sales. Lenovo’s low cost innovation and
control over the manufacturing process all ascribe to their decreasing cost of sales in
comparison to revenue.
Note 3 – Other Net Income:
Other net income was maintained at a rate of 0.06% of revenue based on data from Lenovo’s
2012-13 financial report as well as the reports of 3 quarters of 2013-14.
Note 4- Selling & Distribution Expense:
In accordance to the financial tear sheet of Lenovo, selling and distribution costs were kept at
4.9% of revenue and maintained at an average of 5% for 2015 and 2016.
Note 5 – Administrative Expenses:
Administrative expenses were kept at 3.15% for 2013-14. It is forecasted to increase to

3.50% and then 3.65% in 2015 and 2016 respectively. The increase is in lieu with Lenovo’s
aggressive mergers and acquisition strategy as further takeover directly proportionate to an
increase in administrative duties and costs.
Note 6 – Research & Development:
Research and development costs were -1.74% on the basis of revenue as per the tear sheet.
Lenovo’s dedication to low-cost innovation attributes to their R&D expenses being -2% of
their revenue.
Note 7 – Other Operating Income\Expense:
Other operating expenses were kept constant at a rate of -0.11% of revenue.
Note 8 – Finance Costs:
Based on an average of the last 3 years of finance costs, the cost was forecast to be a constant
rate of -0.17% of revenue.
Note 9 – Tax:
Based on financial reports, it is forecasted that Lenovo will keep tax constant at a rate of -
0.05% of revenue.
Note 10 – Dividend:
Dividend pay-out for 2014, 2015 and 2016 are sustained at a rate of 39% per year.
Appendix E – Statement of Financial Position
Data for 2014 was calculated using the tear sheet. For 2015 and 2016, the data was forecast in
accordance the trends. The adjustments for the buying of Motorola and IBM’s Server
Division were made in 2013-14.
Note 1 – Property, Plant & Equipment:
PPE is expected to increase by 15% in 2014 and 2015 in accordance with Lenovo’s merger
and acquisition strategy as well as expansion and setting up of new plants (e.g. Brazil). Since
the revenue is increasing by an average of 15%, PPE is also expected to increase around the
same rate to advocate the increase in revenue.
Note 2 – Prepaid Lease Payment:
The Prepaid lease payments are expected to generally follow an increasing trend.
Note 3 – Construction in Progress:
As Lenovo further expands their operations and as the PPE increases, Lenovo’s construction
in progress increases in tandem.
Note 4 – Intangible Assets:
Intangible assets comprise goodwill and other intangible assets including trademarks and
trade names, and internal use software. The acquisitions of Motorola and IBM’s server
decision resulted in an increase in the intangible assets of Lenovo.
Note 5 - Interest in associates and jointly controlled entities:
As Lenovo sold off two companies and bought Motorola and IBM’s server division the
growth rate sees a decline of -19% in 2013 but then increases and stays constant at a rate of
10%.
Note 6 - Deferred income tax assets:
The growth rates are calculated as per FTS and increase to 18% in 2014 and then stay
constant at a rate of 11%.
Note 7 - Available-for-sale financial assets:
The Available-for-sale financial assets are calculated at a forecasted constant rate of -3%.
Note 8 – Inventories:
Staying in line with business growth and changes with product mix, inventories kept at a
constant growth rate of 10% for 2015 and 2016 after rate of 26% in 2014, as per FTS.
Note 9 – Trade receivables, Notes receivable, Deposits, prepayments and other

receivables:
In lieu with activities around the year, the growth rates are kept constant.
Note 10 – Bank deposits, cash and cash equivalent:
Bank deposits growth rate increases to 68% in 2014 followed by a fall of -46% in 2015 and
then a gradual increase to 10% in 2016. This is in accordance to Lenovo’s tendency of
acquiring and merging companies.
Cash and cash equivalents are kept at a constant growth rate of 5%.
Note 11 – Share Capital:
Share capital is kept at a constant growth rate of 2%

Note 12 – Reserves:
Lenovo’s reserve increase as the business grows at a steady rate. In 2014, the sharp increase
is due to the refund received from Digibras Participações S.A.
Note 13 – Non-controlling interests:
The non-controlling interests do not show a substantial rise in 2014 and the following years
and are forecasted to have a constant growth rate of 10% because of acquisition of IBM
server and Motorola
Note 14 - Put option written on non-controlling interest:
As it is not expected to change anytime soon, these values are kept same from 2014 till 2016.
Note 15 – Bank borrowings (Long Term):
Lenovo is expected to pay off its borrowings in 2014 and are not expected to take any further
long-term bank loans.
Note 16 - Other Non-Current Liabilities:
Other non- current liabilities of 2014 is taken from the financial tear sheet of Lenovo and then
kept at 15% constant growth in lieu with the increase in revenue.
Note 17 – Trade payables (a) and Note payables (b):
The payables are expected to increase at a constant rate 15% as per Lenovo’s continuing
operations
Note 18 – Other payables and accruals and Provisions:
(a) Other payables are expected to grow at a constant rate of 10% in 2015 and 2016
following 15% in 2014.
(b) Provisions are also expected to grow at a sustained rate of 5%.
Note 19 – Bank borrowings (Short Term):
Short term bank borrowings are expected to grow constantly at 5%.

Appendix F – Stock Valuation
(A) Earnings Multiple Model:
Assumptions: The P/E ratio for Lenovo for the past 3 years from 2011 to 2013 has fallen
from 20 to 16 and according to the power trend-line (shown in the graph below as “Power
(P/E)”) the P/E ratio is expected to be 15 by the end of 2016. For the simplicity of the model
the P/E ratio is kept consistent from 2014 to 2016 at 15. Furthermore, according to
Bloomberg the current P/E ratio of Lenovo as at 15th April 2014 is 16.06 and they expect the
P/E to fall to 15.4 supporting our analysis.
The expected earnings of Lenovo are taken from the forecasted financial statement as shown
in Appendix D and Appendix E.
(B) Gordon’s Constant Dividend Model:
The constant growth dividend model helps in measuring the intrinsic value of the stock,
based on a future series of dividends that grow at a constant rate.
Calculation techniques:
The required rate of return for Lenovo is calculated using the CAPM, re= rf +β (rm – rf) where
re is required rate of return, rf is the risk free rate, β is volatility of the asset compared to the
market and rm is the market return.
The market return from Hang Seng index is calculated by the difference in the closing and
opening yearly index and dividing it by the opening index.
The average market return is from 2006 to 2013 is then calculated to be 8.71%. 10 Year
Hong Kong bond’s rate of return, 2.24% is used as the risk-free rate.
The beta is 0.91 according to Reuters while

according to Bloomberg the 5 year dividend
growth is 4.83%. Using these values the required
rate of return is expected to be 8%. The price for
share is then calculated.
Findings:
The expected share price at 31st March 2014 was estimated to be HKD 6.72 according to the
DDM Model. At 31st March 2014, Lenovo’s share was trading at HKD 8.57 which shows
that the share is overvalued. According to dividend growth model, the share price of Lenovo
is expected to be trading at HKD 7.75 at the end of the financial year 2015.
Figure F.1: Line Chart of Dividend Growth Model
Limitations:
For a high growth company like Lenovo, the dividend growth rate exceeds the expected
return rate. This makes the denominator of the dividend growth model negative and hence
making the company’s stock price negative. Upon analysing the previous historical growth of
Lenovo’s it is found that the growth of Lenovo’s dividend is much higher than the expected
return. At the same the dividend growth rate is not constant. All these factors make the
Dividend growth model invalid is the case of Lenovo.
Dividend Discount Valuation Model

Actual
USD000 USD000 USD000 USD000

Year 2010 2011 2012 2013
Dividend Per Share (HKD) 0.055 0.076 0.138 0.185
Growth Rate Dividend 38% 82% 34%
Profit for the year 129,368 273,236 475,416 631,592
Dividend paid 68728 96601 183214 247674
Dividend Pay-out Ratio 53% 35% 39% 39%
(C) Market to book Value Model:
Assumptions: The market to book value is assumed to stay constant with 2013 value of 3.83.
The minimum market to book value if Lenovo decides not to pay dividend is calculated to be
3.50.
Appendix G – Support and Resistance
Support Level: The price level which the stock has difficulty falling below. It is the level at
which the demand for the stock is expected to increase as a lot of buyers tend to buy the
stock.
Resistance Level: The price level in which the stock has difficulty going above.
In the case of Lenovo the resistance level is considered weak and Lenovo’s stock is expected
to break the resistance level. Resistance Level become the support level if the stock breaks
the resistance and has a strong uptrend.
The graph below shows that the Lenovo recent support level is HKD 8.23 and the recent
resistance level is at HKD 9.48. However according to our fundamental analysis we expect
the stock price to rise between HKD 9.80 and HKD 14.52 by 31st March 2015.
Image from Bloomberg

Portfolio Management
Investing through portfolio management will allow Mr. Shahrukh Khan to have a chance to
make a higher profit if the price of the share falls to its support level. If the price of the share
increases to the resistance level then Mr. Shahrukh Khan might make less profit than what he
would have made had he invested 3% at once. This is depends on his investment strategy and
his risk appetite whether he wants to invest 3% at once or through portfolio management.

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Investment Research Report

Company Result 15 April 2014

SHARE PRICE HKD 9.14

Source: World Bank

Source: United Nations

Source: The Economist

Both Gartner and IDC have given

Lately, Lenovo has also proved to be a key

Apple 41.1% DELL 1.9%

**Refer to Appendix A for further information

**Refer to Appendix B for further information

Increasing smartphone strategy:

Aggressive merger and acquisition strategy:

Using “Cost Innovation” strategy:

Protect and Attack strategy:

Lenovo has also decided to keep R&D an important

Earnings Multiple Model

**Refer to Appendix F for assumptions and dividend growth model calculations

Long term Investment proposal

**Refer to Appendix G for assumptions and dividend growth model calculations

CIA. 2014. The World Factbook. [online] Available at:

Cui, X. 2009. In-Depth analysis of PC industry in China. International Journal of Business

Financial Times. 2014. Market data. [Online] Equities. Available at:

IDC. 2014. Holiday PC Shipments on Target as Lenovo Expansion Continues, According to

Purdy, M. 2013. China's Economy, in Six Charts. [Online] Available at:

Shimpee, A. L. 2014. Some Thoughts on Lenovo's Acquisition of Motorola Mobility from

• Financial Ratio Analysis

• Statement of Comprehensive Income

• Statement of Financial Position

• Support and Resistance

Lenovo took the top PC vendor title, continuing its

Jay Chou, Senior Analyst

Digitimes Research (2011) expects demand in the domestic

Lenovo has increased its research

One of the biggest weaknesses of Lenovo is

A major factor behind this poor brand

Also high revenue streams come from

Lenovo has recently restructured its business

(A) Liquidity Ratios:

Figure C.2: Chart excluding outlier Huawei

Image from Business week

2. Acid test ratio:

Figure C.3: Chart illustrating all 5 companies

Figure C.4: Chart excluding outlier Huawei

Image from business week

(B) Profitability Ratios:

1. Gross profit margin:

Figure C.5: Chart illustrating all 5 companies

Image from Business week

2. Net profit margin:

Figure C.6: Chart illustrating all 5 companies

Image from Business week

4. Total assets turnover:

Image from business week

(C) Leverage ratios:

1. Debt to equity ratio:

Lenovo’s aggressive growth

Figure C.9: Chart illustrating all 5 companies

Image from Business week

Figure D.1: Common Size Statements

Since 2010, Lenovo’s dependency on PC’s sales as a

Note 3 – Other Net Income:

Note 4- Selling & Distribution Expense: