Hong Kong, March 02, 2022 -- Moody's Investors Service has upgraded to Baa2 from Baa3 the issuer rating
and senior unsecured rating of Lenovo Group Limited, and has revised
the outlook to stable from positive.
"The rating upgrade reflects Lenovo's improved credit profile in
terms of leverage, driven by debt reduction and a higher level of
EBITDA. We believe the company will sustain its improved credit
profile through maintaining its leading market position in personal computers
(PCs), supported by steady global demand for PCs," says Gerwin
Ho, a Moody's Vice President and Senior Credit Officer.
"In addition, we expect the company's continued disciplined financial
management will help it to maintain its excellent liquidity and improved
debt leverage, which is strong for its rating category," adds
Ho.
RATINGS RATIONALE
Lenovo's Baa2 issuer rating reflects the company's long operating history
and track record of organic and inorganic business growth; leading
position as a PC provider; and diverse geographic exposure in terms
of revenue generation and operations.
On the other hand, the company's rating is constrained by its low
profitability due to competition and investments related to its in-house
production capability.
Based on industry data published by market data provider International
Data Corporation, Lenovo was the world's largest PC provider by
unit shipment in 2021[1], a position it first achieved in 2013[2].
Its unit shipment growth outpaced the overall industry's during this period,
when its market share grew to 23.5% in 2021 from 17.1%
in 2013.
The company's revenue grew to USD55 billion in the nine months ended 31
December 2021 (9MFY2022) from USD45 billion in the nine months ended 31
December 2020 (9MFY2021), supported by a recovery in demand for
PCs and mobile phones. Moody's expects Lenovo's revenue over the
next 12-18 months to grow slightly higher than about USD70 billion,
which is the level the rating agency expects the company to achieve in
the fiscal year ending 31 March 2022 (FY2022). This revenue projection
reflects Lenovo's steady market share in a stable PC market and
growth in its smartphone, server and solution and services businesses.
Lenovo's revenue generation remains diverse and balanced in terms of geography,
with the Americas, China, Europe, Middle East and Africa
(EMEA), and Asia (excluding China) contributing 32%,
27%, 25% and 16% of revenue, respectively,
in 9MFY2022.
Moody's forecasts Lenovo's adjusted EBITDA margin will be steady at about
5.8%-6.0% over the next 12-18
months compared with about 6.0%-6.2%,
which is the level the rating agency expects the company to achieve in
FY2022. This EBITDA margin projection reflects greater economies
of scale and increased contribution from higher margin solution and services
business that will partially offset greater competition in a steady PC
market.
Lenovo's leverage for the past 12 months ended 31 December 2021 improved
to about 1.2x from 1.7x in FY2021. The improvement
reflects higher EBITDA on the back of rising revenue and expanding EBITDA
margins, as well as debt reduction that was supported by positive
free cash flow generation.
Moody's expects the company to sustain this improved leverage level,
as measured by adjusted debt/EBTDA, at below 1.5x over the
next 12-18 months, which is strong for its rating category.
Moody's calculation of adjusted debt incorporates 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 USD3.8 billion as
of 31 December 2021 and projected operating cash flow over the next 12
months, will be sufficient to cover its short-term debt of
USD434 million, 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.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Lenovo's exposure to moderately negative environmental and social
risks reflects the nature of its business, which is predominately
driven by technology hardware.
Lenovo's governance risks are also moderately negative, reflecting
the company's high ownership of voting shares by its controlling
shareholder that is partially offset by the company's conservative
financial strategy and strong management track record.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
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.
Upgrade pressure could emerge if Lenovo maintains its PC market share
and continues to grow its revenue and profitability; maintains its
strong liquidity and generates solidly positive free cash flow; and
strengthens its credit profile, with adjusted debt/EBITDA below
1.0x on a sustained basis.
Moody's could downgrade Lenovo's rating if the company's position
in the PC market weakens while profitability significantly declines;
the company adopts an aggressive debt-funded investment strategy
that worsens its credit metrics, with adjusted debt/EBITDA above
2.0x-2.2x; or its liquidity weakens, all
on a sustained basis.
The principal methodology used in these ratings was Diversified Technology
published in February 2022 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1278817.
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
revenue of USD61 billion in the fiscal year ended 31 March 2021,
through operating in 180 markets globally with a team of about 71,500
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
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3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
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The Global Scale Credit Rating on this Credit Rating Announcement was
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REFERENCES/CITATIONS
[1] Announcement made by International Data Corporation (IDC) 12-Jan-2022
[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
