(Bloomberg) — Shares of Lenovo Group Ltd. may continue to outperform its peers as cheap valuations and growth potential in emerging markets draw investors to the Chinese computer maker.
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The stock is the top performer on Hong Kong’s benchmark Hang Seng Index this month but remains cheap with forward earnings that lag global rivals including Dell Technologies Inc.
New PCs that meet consumer demand to utilize artificial intelligence increase sales, while analysts look for a recovery in markets for their more traditional products. A partnership with Saudi Arabia’s sovereign wealth fund, announced this week, is expected to increase Lenovo’s presence and profits in the Middle East and Africa.
“Lenovo’s fundamental outlook is improving with the recovery of the PC market and incremental demand for PCs and servers driven by AI,” said Vey-Sern Ling, managing director of Union Bancaire Privee. “The new alliance with the Saudis will help the company enter the Middle East market at a time when geopolitical tensions make the US and EU markets less accessible.”
The stock’s 29% gain in May makes it the third-best performer in the Bloomberg Intelligence index of computer hardware and storage companies, behind HP Inc. and Dell. Lenovo’s share price hit a nine-year high on Monday, although it has since lost some momentum. Dell’s disappointing AI server sales after Thursday’s closing bell may dampen some of the sector’s recent recovery.
While the deal to sell $2 billion in convertible bonds to an arm of the Saudi Public Investment Fund has raised near-term concerns about potential dilution for Lenovo, the timing is opportune as it coincides with the call from China’s president , Xi Jinping, for more financial and technological cooperation. with the Arab nations.
The plan should be mutually beneficial, according to Steven Tseng, an analyst at Bloomberg Intellignce. “Saudi Arabia secures the world’s No. 1 PC manufacturer to establish PC/server manufacturing capabilities and R&D centers in the country, while Lenovo secures a substantial capital injection and strategic investor,” he said.
Management expects the company’s annual revenue growth in the Middle East and Africa to accelerate to double digits with the help of the tie-up, compared with 11% last year, according to UOB Kay Hian Holdings Ltd. could also help the protect against US-China tension,” analyst Johnny Yum wrote in a report.
Analysts are extremely positive on Lenovo, with 27 buy ratings versus three holds and no sells. raised its price target for the stock earlier this week to HK$13.98, one of the highest in the market, saying AI PCs will help boost industry average selling prices and gross margins.
Options traders are also bullish on the stock, with volatility skew indicating increased demand for bullish contracts in Lenovo compared to the previous week, Bloomberg data shows. Still, shares remain cheap, with 13 times estimated earnings over the next 12 months, compared with 21 times for Dell.
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