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.
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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
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am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
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REFERENCES/CITATIONS
[1] Announcement made by International Data Corporation (IDC) 13-Jan-2020
[2] Announcement made by International Data Corporation (IDC) 12-Jan-2015
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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
