JPMorgan released a research report raising the investment rating for LENOVO GROUP (00992) from "Neutral" to "Overweight". The target price has been substantially increased from HKD 20 to HKD 30.

This upgrade is attributed to a notable improvement in profitability within the server business and better-than-expected price elasticity in the Intelligent Devices Group (IDG) business.

The bank's industry research indicates that Lenovo's AI-related customer demand is growing rapidly. The server business is benefiting from a favorable pricing environment, leading to healthy profitability.

Where to Focus

JPMorgan expects the margin of the Infrastructure Solutions Group (ISG) to expand further in the coming quarters, driven by operating leverage effects. The bank estimates that AI-related revenue already accounted for over 30% of ISG revenue in the first fiscal quarter ending June 30. It projects full-year ISG revenue to grow approximately 60% year-over-year, with ISG operating margins improving from 0.4% in fiscal 2026 to 5% in fiscal 2027.

IDG Business Outlook

Regarding the IDG business, JPMorgan anticipates Lenovo will continue to benefit from economies of scale, strict cost control, and supply chain execution capabilities. Quarterly operating profit is expected to remain around the HKD 1 billion to HKD 1.1 billion level. The bank forecasts IDG revenue will grow 10% year-over-year in 2026 and 4% in 2027, with operating margins of 6.9% and 6.8%, respectively.

Rationale for the New Target Price

JPMorgan has raised its adjusted net profit forecasts for fiscal 2027 and 2028 by 22% and 29%, respectively. The new target price is based on a forward 12-month non-HKFRS price-to-earnings ratio of 16 times, up from the previous 14 times.