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Rating Action:

Moody's assigns first-time Baa3 rating to Lenovo; outlook stable

 The document has been translated in other languages

14 Oct 2020

Hong Kong, October 14, 2020 -- Moody's Investors Service has assigned a first-time Baa3 issuer rating to Lenovo Group Limited.

The outlook on the rating is stable.

RATINGS RATIONALE

"Lenovo's Baa3 issuer rating reflects the company's position as a leading personal computer provider with a long operating history and track record of both organic and inorganic business growth," says Gerwin Ho, a Moody's Vice President and Senior Credit Officer.

"Lenovo's Baa3 rating also considers the company's diverse and balanced geographic exposure," adds Ho, who is also Moody's Lead Analyst for Lenovo.

On the other hand, the company's rating is constrained by its low profitability and moderate leverage.

Based on industry data published by market data provider International Data Corporation, Lenovo was the world's largest personal computer (PC) provider by unit shipment in 2019[1], a position it first achieved in 2013[2]. The company's unit shipment growth outpaced the overall industry during the past seven years, with its market share growing to 24% in 2019 from 17% in 2013.

Lenovo's leading position in the PC market reflects its strong brand and products and good position in the corporate PC segment, which it gained through the acquisition of International Business Machines Corporation's (IBM, A2 stable) PC business in 2005 and subsequent investments in the PC businesses of NEC Corporation, Medion AG and Fujitsu Limited (A3 negative).

In addition to these PC-related investments, Lenovo has also expanded its revenue scale organically and through investments in other segments, including Google's Motorola smartphone business and IBM's server business in 2014.

As a result, the company's revenue grew to USD51 billion in the fiscal year ended 31 March 2020 (fiscal 2020) from USD17 billion in fiscal 2010. Moody's expects Lenovo's revenue to grow by about 6-8% from the level achieved in fiscal 2020 over the next 24 months, reflecting further gains in its PC market share and growth in its smartphone and server businesses.

Lenovo's revenue generation is diverse and balanced in terms of geography, with Americas, Europe, Middle East and Africa, Asia (excluding China), and China contributing 32%, 25%, 22% and 21% of revenue, respectively, in fiscal 2020.

The company's operations are geographically diverse. It operates in 180 markets and has over 30 manufacturing facilities across the world, in locations including Argentina, Brazil, China, Germany, Hungary, India, Japan and the US. Such operational geographic diversity gives the company greater supply chain flexibility, which in turn helps cushion against operational disruptions.

Lenovo's low profitability results from its high product exposure to the PC market, which is mature in nature and competitive, with limited growth momentum. Its profitability is also hampered by its emerging smartphone and server businesses, which have weaker market positions and profitability than its core PC business.

The company aims to lift profitability in the future through product innovation, improving economies of scale and increasing contributions from higher margin service revenue.

Moody's estimates that Lenovo's adjusted EBITDA margin will improve to about 5.1% in the next 24 months from 4.7% in fiscal 2020, reflecting greater economies of scale and better profitability in its smartphone and server businesses.

However, despite the projected improvement, the company's profitability will remain low for its Baa3 rating.

Lenovo's rating also factors in the company's moderate leverage, as measured by adjusted debt/EBITDA, which reflects its investments and acquisitions to expand its geographic and product exposures, as well as capital expenditures to maintain and expand its global production capacities.

Moody's expects the company's leverage to improve to about 2.9x in the next 12-18 months from 3.8x in fiscal 2020, reflecting higher EBITDA on the back of rising revenue and an improving EBITDA margin, as well as a reduction in its debt, supported by positive free cash flow generation. Moody's calculation of adjusted debt incorporates notes payables net of restricted cash, payables including deferred and contingent considerations and put option liabilities.

Lenovo's liquidity is excellent. Moody's expects that the company's cash balance including bank deposits of USD3.5 billion as of 30 June 2020 and projected operating cash flow over the next 12 months will be sufficient to cover its short-term debt of USD2.3 billion, notes payables, capital spending and dividend payments over the same period.

Lenovo's issuer rating is not affected by subordination to claims at the operating company level, as the company's highly diversified business profile — including its geographically diverse manufacturing facilities around the world -- mitigates structural subordination risk.

The rating also takes into account the following environmental, social and governance (ESG) considerations.

Lenovo's key shareholder Legend Holdings Corporation held a 29.1% stake in the company as of 31 March 2020. The risk associated with Legend's concentrated ownership is mitigated by Lenovo's status as a listed entity with transparent information disclosure, and by the fact that the majority of its board consists of independent directors. In addition, the company's management has a track record of maintaining a prudent financial policy.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

The stable outlook on the rating reflects Moody's expectation that Lenovo will grow its revenue scale and scope while maintaining its profitability, leading position in the PC market and prudent approach to capital spending and investments.

Moody's could upgrade the rating if Lenovo (1) maintains its PC market share and continues to grow its revenue and profitability; (2) maintains its strong liquidity and generates solidly positive free cash flow; and (3) strengthens its credit profile, with adjusted debt/EBITDA at or below 2.0x on a sustained basis.

Moody's could downgrade the rating if (1) the company's position in the PC market weakens while profitability materially declines; (2) it adopts an aggressive debt-funded investment strategy that results in a weakening of its credit metrics, with adjusted debt/EBITDA consistently above 3.0x; or (3) its liquidity weakens, all on a sustained basis.

The principal methodology used in this rating was Diversified Technology published in August 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1130737. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Lenovo Group Limited designs, manufactures and sells personal computers, smart devices, smartphones and servers. The company generated a revenue of USD51 billion in the fiscal year ended 31 March 2020, through operating in 180 markets globally with a team of 63,000 employees. It was listed on the Stock Exchange of Hong Kong in 1994.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

REFERENCES/CITATIONS

[1] Announcement made by International Data Corporation (IDC) 13-Jan-2020

[2] Announcement made by International Data Corporation (IDC) 12-Jan-2015

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Gerwin Ho
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Clement Cheuk Yiu Wong
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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