technology - pitch

Technology - Pitch

Company, Strategy and

Products

Market Outlook

Sustainability Analysis

Risk & Ratio Analysis

Valuation

Final Recommendation

Company Overview

▪ Investment holding company in technology products and services

▪ Founded 1984 and headquartered in Beijing

▪ Main products are portable PCs and server computer systems

▪ Currently market leader in sales of portable PC systems, short term aim is to expand

▪ Long term strategy aims to transform to a technology leader in global devices + solutions

▪ Aims net-zero emission by 2050

Profile Strategy

As a market leader, Lenovo aims to leverage its position for horizontal integration

06.09.2021Lenovo Stock Pitch || Technology

3

$ 14.15 bn

Market Cap

1.13

52 Week Beta

3.7%

Dividend Yield

8.9

P/E Ratio

Products and Services

2020 Revenue by Segment


4

While most sales are generated in developed, there is great potential in emerging markets

89.6%

10.4%

Portable computerSystems

Server ComputerSystems

2020 Revenue by Region

22.9%

10.4%

20.0%

3.9%3.7%3.6%

2.5%

2.5%

30.5%

Mainland ChinaUnited StatesJapanBrazilIndiaCanadaMexicoGermanyRest

44.5%

43.4%

DevelopedMarkets

Emerging Markets


Products

Market Outlook



Valuation



6

Compared to its competitors Lenovo has by far the worst net margin. However, they offer a stable dividend yield and growing revenues

Market Outlook

Market Cap. (bn $) 14.15 30.2 74.2 2,551 374.8 3

Revenue (bn $) 50.71 57 94 274 211 8.47

Net Profit Margin 2.22% 6.56% 4.23% 22.72% 14.84% 3.9%

Dividend Yield 3.7% 2.6% 0.0% 0.6% 1.9% 5.9%

Employees 57,000 53,000 165,000 147,000 267,000 7,240


7

Strengthened by their successful PC Business, Lenovo can become a leading player in the rising data centre market as well as in other future orientated technical operations & products.

SWOT Analysis

S W

TO

▪ Strong financial performance

across the group

▪ Global leader in traditional

PC market

▪ Diversified revenue mix

▪ Transformation into complete

portfolio data center org

▪ Growing global smart home

market

▪ Data center market India

▪ Strong market potential in

IoT business

▪ Weak smartphone business

compared to competitors

▪ Cyber-attacks

▪ Data breaches

▪ Trade war and distrust

against Chinese companies

▪ Financial risk due to global

scale of operations

▪ Disruption in supply chain


Products

Market Outlook



Valuation



9

Sustainability AnalysisThe general overview shows us strong performance in ESG

▪ Data Security

▪ Employee Engagement, Diversity & Inclusion

▪ Product Design & Lifecycle Management

▪ Supply Chain Management

▪ Materials Sourcing & Efficiency

Material Issues

Exposure Management


10

Reporting on material ESG issues


Data Security:

Detailed descriptive disclosure; No metrics

Employee Engagement, Diversity & Inclusion:

Detailed descriptive disclosure; Multiple integrated metrics

Product Design & Lifecycle Management:

Detailed descriptive disclosure; Slight greenwashing attempt with non-relevant eco-labels; No metrics

Supply Chain Management:

Detailed descriptive disclosure; Multiple integrated metrics

Materials Sourcing & Efficiency:

Detailed descriptive disclosure; No metrics

Environmental, Social and Governance

Report 2020/21


Products

Market Outlook



Valuation


Risk Analysis


13

Lenovo’s correlation to existing portfolio

Correlation Analysis


Products

Market Outlook



Valuation


Ratio Analysis


16

Overview

Ratio Analysis

Good sales growth Problems with operations?

Ratio Analysis

Short-term liquidity Long-term liquidity


17

Liquidity

Ratio Analysis

Similar Net-Margins Revenue growth translates


18

Promising EBIT growth in 2020

4%7% 6%

24%

15%

3%

EBIT margin [2020]

50%

1%

64%

3%28%

202%

EBIT growth [2020]

Lenovo Stock Pitch || Technology19

Ratio AnalysisCompeting with “old” techs

▪ Ratio Analysis

Traditional tech-stock

06.09.2021


Products

Market Outlook



Valuation


Multiple Valuation

Multiple Valuation

P/E Ratio P/BV Ratio


22

P/E and P/BV Ratios

8.9 9.3

20.1

30.2

16.2

7.7

15.4

3.20.0

15.4

39.7

1.9 1.3

10.2

Multiple Valuation

EV/EBITDA Multiple


23

EV/EBITDA Multiple

3.996.42

9.56

22.10

5.593.38

8.51

DCF Valuation


25

Free Cash Flow Projection

in millions, fiscal year ending March 31

Year 2019 2020 2021 2022 2023 2024 2025 2026

Revenue 51.038 50.716 60.742 61.532 62.332 63.142 63.963 64.795

Growth rate (%) 13% -1% 20% 1,3% 1,3% 1,3% 1,3% 1,3%

COGS 43.520 42.207 50.776 51.704 52.376 53.057 53.747 54.446

COGS % of Sales -85% -83% -84% -84% -84% -84% -84% -84%

Gross profit 7.518 8.509 9.967 9.828 9.956 10.085 10.216 10.349

Gross margin (%) 15% 17% 16% 16% 16% 16% 16% 16%

SG&A 5.473 6.017 6.622 6.869 6.958 7.049 7.140 7.233

SG&A % of sales -11% -12% -11% -11% -11% -11% -11% -11%

Other operating (expense) income 0 0 0 0 0 0 0 0

Other operating (expense) income % of sales 0,00% 0,00% 0,00% 0% 0% 0% 0% 0%

EBITDA 2.045 2.492 3.345 2.959 2.997 3.036 3.076 3.116

Adjustments (If so, find in Annual Report)

clean EBITDA 2.045 2.492 3.345 2.959 2.997 3.036 3.076 3.116

EBITDA margin (%) 4% 5% 6% 5% 5% 5% 5% 5%

Depreciation & Amortization 799 967 1.060 1.070 1.084 1.098 1.112 1.127

D&A % of revenue -2% -2% -2% -2% -2% -2% -2% -2%

EBIT 1.246 1.524 2.285 1.889 1.913 1.938 1.963 1.989

EBIT margin (%) 2% 3% 4% 3% 3% 3% 3% 3%

Taxes (312) (381) (571) (472) (478) (485) (491) (497)

EBIAT (Earnings before interest after tax) 935 1.143 1.713 1.417 1.435 1.454 1.473 1.492

Plus: Depreciation & amortization 799 967 1.060 1.070 1.084 1.098 1.112 1.127

Less: Capital expenditures (701) (953) (844) (952) (964) (977) (990) (1.002)

Less: Short term leases and Interest*

Less: Change in net working capital (1.155) 950 3.043 (725) 226 128 130 132

Unlevered Free Cash Flow (122) 2.108 4.973 809 1.781 1.703 1.725 1.748

FCF to sales (%) 0% 4% 8% 1% 3% 3% 3% 3%

WACC 8,30%

Discount period 0,5 1,5 2,5 3,5 4,5

Discount factor 0,96 0,89 0,82 0,76 0,70

Present Value of Free Cash Flow 778 1.580 1.395 1.305 1.221

Projection periodHistorical period


26

WACC Analysis

Total capitalization Total debt (M) 4.465

Shareholder equity (Market Cap) (M) 14.171

Total capitalization (M) 18.636

Target Capital structure Debt-to-total capitalization 23,96%

Equity-to-total capitalization 76,04%

Cost of debt Implied Interest rate 8,56%

Tax rate 25,00%

After-tax cost of debt 6,42%

Cost of equityRisk free rate 2,85%

Market risk premium 5,40%

Levered beta 1,12

Size premium 0,00%

Cost of Equity 8,90%

WACC 8,30%

Comparable Companies

Unlevered Beta

Predicted Debt/ Marginal Unlevered

Company

Levered

Beta Equity Tax Rate Beta

HP 1,19 20,1% 21,0% 1,03

Dell 1,30 64,4% 21,0% 0,86

Apple 1,19 4,8% 21,0% 1,15

Samsung 0,99 4,7% 25,0% 0,96

Acer 0,57 8,3% 20,0% 0,53

Mean 20,4% 0,91

Median 8,3% 0,96

Company Relevered

Beta

Mean Target Target

Unlevered Debt/ Marginal Relevered

Beta Equity Tax rate Beta

Relevered Beta 0,91 31,5% 25,0% 1,12


27

Share Price Valuation

Terminal value (TV) 24.171,31

Terminal growth rate 1,00%

TV discount factor 0,70

Present value TV 16.882

Present value Free cash flow projection 6.279

TV % Total value 73%

Enterprise value 23.160

Less: Total debt - 4.465

Less: Capital Leases -

Plus: Cash and Cash equivalents 3.115

Less: Noncontrolling interest - 51

Less: Preferred securities

Plus: LT Investments 955

Less: Pensions -

Equity value 22.714

Shares outstanding 13.244

Implied share price 1,72

Current share price 1,07

Implied upside 60%

Implied EV/EBITDA

Enterprise value 23.160

EBITDA (LTM) 2.492

EV/EBITDA 9,30x

EV sensitivity

Share price sensitivity

Terminal growth rate

23.160 0,6% 0,8% 1,0% 1,2% 1,4%

7,3% 25.545 26.172 26.839 27.550 28.309

7,8% 23.772 24.305 24.869 25.468 26.104

8,3% 22.229 22.687 23.170 23.680 24.220

8,8% 20.875 21.271 21.688 22.127 22.590

9,3% 19.676 20.022 20.385 20.766 21.166

WA

CC

Terminal growth rate

2 0,6% 0,8% 1,0% 1,2% 1,4%

7,3% 1,90 1,94 1,99 2,05 2,10

7,8% 1,76 1,80 1,84 1,89 1,94

8,3% 1,64 1,68 1,72 1,75 1,80

8,8% 1,54 1,57 1,60 1,64 1,67

9,3% 1,45 1,48 1,51 1,53 1,56

WA

CC


Products

Market Outlook



Valuation



▪ Implied Upside of 60%

Summary Sentence Share price development

Apart from a political risk component, our analysis suggests an underpricing with high growth potential

Valuation

Business

Strategy

Peer Group

Risks

▪ Protection of leading position

▪ Expansion in emerging markets

▪ Horizontal integration

▪ DCF valuation implies upside

▪ In line with most analysts

▪ Conservative estimates

▪ Political Risk

▪ Supply-Chain disruptions

▪ Inflation and market recession

▪ Strong footing in EM

▪ Global market leader

▪ Difficult to penetrate market


29

Voting round

Sigma Investments

Sigma Investments

@sigma_investments

sigma-investments.com

[email protected]

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technology - pitch

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