On Thursday, Morgan Stanley reinstated coverage on Lenovo Group (OTC:LNVGY) Ltd. (992:HK) (OTC: LNVGY), assigning an Equalweight rating with a price target of HK$9.70. The firm anticipates the upcoming analyst meeting on February 22 to potentially serve as a catalyst for the company's share price. The focus will be on Lenovo's financial results for the third fiscal quarter of 2024 and the first calendar quarter of 2023, as well as the full-year 2025 guidance.
The firm models a net profit of approximately $235 million for the fourth fiscal quarter of 2024 and the first calendar quarter of 2023, which is 17% below the consensus. This estimate reflects a downward adjustment due to weakened PC demand observed since November of the previous year.
Additionally, Morgan Stanley foresees potential downside risks to the consensus earnings estimates for fiscal year 2025, attributing this to limited growth in the total addressable market for PCs and low penetration of AI PCs for the year. Consequently, they estimate a net profit of around $1,263 million for FY2025, which is 16% below the consensus.
Morgan Stanley outlines three scenarios regarding Lenovo's forthcoming guidance. In the first scenario, if net profit guidance for the fourth fiscal quarter and first calendar quarter falls between $200 million and $225 million and the full-year 2025 net profit guidance is below Morgan Stanley's estimate, Lenovo's share price could decrease by 5-10%.
The second scenario suggests a guidance range of $225 million to $250 million for net profit, aligning with the firm's expectations for FY2025, which could lead to a 0-5% decline in share price. The third scenario posits a net profit guidance above Morgan Stanley's estimate, between $250 million and $275 million, which could result in a 0-5% increase in Lenovo's share price.
Morgan Stanley has assigned a 60% probability to the second scenario, expecting Lenovo to guide net profit for the fourth fiscal quarter and the first calendar quarter within the $225 million to $250 million range, with FY2025 net profit guidance likely below consensus expectations. The firm's base case reflects a cautious outlook on Lenovo's performance and market conditions for the upcoming year.
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