China’s status as a global manufacturing powerhouse for consumer electronics is well-known, serving as a production ground for an extensive range of gadgets and devices.
While many of the most prominent and influential electronics brands, such as Apple and Dell, are based in the United States and have a significant presence in the global market, the PC industry includes a noteworthy outlier. Lenovo Group Ltd, a company listed on the Hong Kong Stock Exchange (HKEX: 992), stands apart as the world’s leading PC manufacturer when it comes to market share.
Lenovo has successfully extended its influence beyond the traditional realm of personal computing. The company is actively involved in developing and providing digital infrastructure technologies, including services for both public and private cloud computing, as well as edge computing solutions. These ventures represent Lenovo’s strategic move into areas of technology that support the growing demand for data management and storage solutions.
But how did Lenovo – which sells the iconic ThinkPad PCs – become the giant that it is today?
The Early Days Of Lenovo
Lenovo was originally founded as “Legend Holdings” back in 1984 by a group of 11 computer engineers – led by Liu Chuanzhi – in Beijing, China.
The company started by distributing computer parts and equipment imported into the Chinese market. It soon carved out a niche position in the market by developing a specialised interface that facilitated the use of Chinese characters on IBM PCs.
In 1996, Legend released its own branded PC and by 1999 had risen to become the top PC manufacturer in the Asia Pacific region. In 2003, the company rebranded itself as Lenovo, combining “Le” from its original name, Legend, with “novo,” a Latin word suggesting newness and innovation.
The company’s growth was further accelerated by a series of acquisitions, notably the strategic purchase of IBM’s substantial PC division in 2005, which included the prestigious ThinkPad laptop series. Prior to this, Lenovo had already gone public, debuting on the Hong Kong Stock Exchange in 1994. Additionally, the company’s shares experienced a 4-for-1 stock split in 2000, making the stock more accessible to a broader range of investors.
As of today, its shares are trading at approximately HK$10.30. This represents an impressive increase for investors who initially engaged with the company at its 1994 IPO price of HK$1.33, with an approximate thirty-two-fold gain when adjusted for the stock split. This growth reflects Lenovo’s successful expansion and its established presence in the global PC market.
Growing Lenovo Beyond Just PC
Lenovo’s core business has traditionally been its robust PC division, which has been the primary driver of its revenue and market presence. However, the company has strategically expanded into new growth sectors, notably in digital infrastructure.
The digital infrastructure arm of Lenovo, known as the Infrastructure Solutions Group (ISG), provides Infrastructure-as-a-Service (IaaS) solutions. These services are increasingly in demand as businesses and consumers alike look for flexible, scalable, and efficient ways to manage and process data. Lenovo’s ISG taps into this need by offering services that leverage edge computing—which processes data closer to its source rather than in a centralised location—and cloud computing, which allows for data storage and access over the internet.
The company sets itself apart in this competitive landscape by controlling its end-to-end manufacturing process. This vertical integration means that Lenovo oversees the entire supply chain for the products it creates, from initial design to final delivery. This level of control can lead to cost savings, increased efficiency, and potentially higher quality assurance throughout the production process, providing a significant edge over competitors who outsource portions of their supply chain.
Despite the PC market being somewhat saturated, with relatively limited avenues for growth due to intense competition and market maturity, Lenovo’s foray into digital infrastructure appears to be a well-calculated strategy and is showing some promising results.
For the 2Q2024, Lenovo reported increased revenue from its “non-PC” segments. These areas of the business grew to account for 40% of the company’s total revenue, up from 37% in the same period of the previous year. This growth suggests that the company’s investment in areas beyond its traditional PC stronghold is beginning to bear fruit, signaling a successful strategic move that could support the company’s future growth.
Source: Lenovo Group Q2 FY2024 earnings presentation
While Lenovo did experience a decrease in overall revenue in the second quarter of the fiscal year 2024, with earnings dropping by 16% year-on-year to $14.4 billion, there was an uptick in revenue when compared sequentially to the previous quarters, marking the second consecutive quarter of sequential growth.
This trend indicates that the decline in global PC market demand, which Lenovo predominantly caters to, might be stabilizing or reaching a lower threshold, a point beyond which it may not significantly fall, often referred to as “bottoming out.”
It’s important to remember the context of the recent surge in PC demand. During the COVID-19 pandemic, there was an unprecedented rush to purchase PCs. This surge was a direct response to the mass transition to remote work, as people needed to equip their home offices to maintain productivity away from traditional office environments. However, this “pandemic boom” for PCs began to wane in 2022 as markets adjusted to new norms, and the immediate need for home office equipment reduced, or the people who have bought computers for their homes have already done so.
Despite this downturn in the broader PC market, Lenovo successfully increased its market share in four of its five geographic regions. This suggests that the company has effectively managed to capture a larger slice of the market, even as the overall demand for PCs has softened.
In the meantime, Lenovo’s Infrastructure Solutions Group (ISG), which focuses on digital infrastructure including edge computing, continued to perform robustly. The company reported record-breaking revenue in edge computing for the quarter and celebrated a milestone of ten consecutive quarters of year-over-year growth in this segment. This sustained expansion within the ISG signifies Lenovo’s growing presence and success in the digital infrastructure sector, becoming an increasingly important part of the company’s revenue stream as the PC market changes.
Lenovo – An Unexpected Dividend Player
It might surprise some investors that Lenovo, primarily known as a technology firm, distributes dividends. Dividends are often associated with more traditional, mature industries rather than the fast-paced tech sector where companies typically reinvest profits back into the business for growth.
However, Lenovo stands out in this regard. Due to its substantial market share in the PC industry, Lenovo has achieved consistent profitability. This financial success has allowed Lenovo to share profits with its shareholders through dividends.
Over the past 12 years, the company has provided dividends and increased the amount it pays out per share. The company’s dividend per share (DPS) has grown at a compound annual growth rate (CAGR) of approximately 14%. This growth rate indicates that Lenovo has been able to incrementally increase its dividend payouts at a relatively robust pace year over year.
Source: Lenovo
Lenovo’s stock currently offers a 12-month trailing dividend yield of 3.7%. This yield can be an attractive feature for investors seeking regular income from their investments and potential stock price appreciation.
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