Lenovo Group Ltd. (0992.HK / 992 HK) Soon to be number one

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1 Asia Pacific/Hong Kong Equity Research IT Hardware Rating OUTPERFORM* Price (16 Aug 12, HK$) 6.60 Target price (HK$) (from 7.70) 7.50¹ Upside/downside (%) 13.6 Mkt cap (HK$ mn) 67,861 (US$ 8,748) Enterprise value (US$ mn) 3,838 Number of shares (mn) 10, Free float (%) week price range ADTO - 6M (US$ mn) 32.8 *Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. Share price performance Research Analysts Thompson Wu thompson.wu@credit-suisse.com 10 Price (LHS) Rebased Rel (RHS) Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr The price relative chart measures performance against the HANG SENG INDEX which closed at on 16/08/12 On 16/08/12 the spot exchange rate was HK$7.76/US$1 Performance Over 1M 3M 12M Absolute (%) Relative (%) (0992.HK / 992 HK) DECREASE TARGET PRICE Soon to be number one Lenovo Thursday reported in-line 1Q FY13 revenue of US$8.0 bn, but better gross margins of 12.0%, and opex control yielded 6.2% net income upside. In this report, we review its execution on its business strategy, perform a deep dive of its June-12 PC results based on Gartner PC data released last week, and update our views on its PC and non-pc businesses. Based on our analysis, we lower FY13/14E EPS by 11.6/12.0% on recent pricing trends, higher opex in PC (i.e., Brazil facility and Win 8) and MIDH (i.e. Wuhan facility), and fine-tune our tax rate assumption. As a result, we lower our 12M target price to HK$7.50 on 15x NTM earnings. After a solid year of results, our thesis remains intact: i.e., as Lenovo consolidates PC share, it improves its scale, lifting margins to the highest levels. Overall, we expect Lenovo to continue to deliver solid performance as it (1) capitalises on its China brand and distribution advantages; (2) drives continued PC scale benefits evidenced by greater profitability; (3) diversifies into smartphones, tablet and smart TVs ( PC Plus era ); and (4) evolves into an enterprise solutions provider. Inching to number one. It gained 188 bp to reach 14.9% share in 2Q12. Only 274,000 units separate it from HP, the global PC leader. Its pricing trends were worse than peers and need to be monitored to determine if it may erode scale benefits from share gains. For now, because of its 5.5% ASP premium to the market, we believe it can afford to do so and balance global share. Without China, its 2Q12 PC share was 9.4% vs. 7.1% in Valuation. We lower our 12M target price to HK$7.50 based on 15x NTM earnings. Despite slowing China PC growth, it has shown it can achieve similar profitability in the region, and deserves to trade at a historical 15x. Further, its profitability in regions outside China grows strong as it scales up. Financial and valuation metrics Year 3/12A 3/13E 3/14E 3/15E Revenue (US$ mn) 29, , , ,653.3 EBITDA (US$ mn) ,108.9 EBIT (US$ mn) ,107.9 Net profit (US$ mn) EPS (CS adj.) (US$) Change from previous EPS (%) n.a Consensus EPS (US$) n.a EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) net cash net cash net cash net cash Source: Company data, Thomson Reuters, Credit Suisse estimates. DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION Client-Driven Solutions, Insights, and Access

2 Focus tables and charts Figure 1: Lenovo Group 1Q FY3/13 June quarter results summary (US$ mn, unless otherwise stated) Actual CS Est. +/- (%) Cons. +/- (%) Notebook revenues 4,333 4, Desktop revenues 2,545 2, MIDH revenues Other revenues Revenues 8,010 7, , YoY% 35.3% 34.0% 37.2% QoQ% 6.8% 5.8% 8.4% Operating profits Pre-tax income Net income GAAP EPS (US$) $0.013 $ $ Gross margin% 12.0% 11.1% 11.4% Opex/Sales% 9.7% 9.2% 9.4% Operating margin% 2.3% 2.0% 2.0% Net margin% 1.8% 1.4% 1.6% Source: Company data, Credit Suisse estimates, Bloomberg Figure 2: Its global share climbs to 14.9%; rest of world ex. China rises to 9.4% YoY% PC shipment change % % % 55.2% 42.9% 47.9% 49.5% 22.3% 30.7% 33.5% 41.8% 33.6% 46.3% 22.6% 21.0% 17.2% 22.6% 26.5% 28.4% 16.6% 22.6% 16.1% 13.7% 36.7% 66.6% 22.7% 43.2% 44.1% 1 Lenovo global PC Lenovo China PC Lenovo rest of world ex. China PC 24.6% Figure 3: Without Lenovo, the overall China market would have declined 12% YoY. It drives rural China demand YoY% China PC shipment change % 50.7% 42.9% 49.3% 25.3% 29.8% 22.3% 7.2% 10.9% 13.7% 16.1% 9.2% 22.6% 2.7% 7.1% 8.5% -1.5% 26.5% 12.5% 11.1% 5.4% 28.4% 8.0% 14.2% 22.7% -1.1% 4.8% % Lenovo China China PC ex. Lenovo China PC market -5.4% Figure 4: Lenovo Group estimate revisions summary (US$ mn, unless otherwise stated) F2Q13E (Sept-12) F2013E (Mar-13) F2014E (Mar-14) CS New CS +/- (%) CS New CS +/- (%) CS New CS +/- (%) Revenue 8,435 8, ,653 34, ,979 38, YoY% 8.3% 10.7% 17.2% 17.4% 9.6% 11.6% QoQ% 5.3% 8.6% Operating profits , Pre-tax income ,017 1, Net income GAAP EPS (US$) $0.014 $ $0.057 $ $0.071 $ Gross margin% 11.9% 11.4% 11.9% 12.0% 12.0% 12.2% Opex/sales% 9.9% 9.4% 9.7% 9.6% 9.5% 9.3% Operating margin% 2.1% 2.0% 2.2% 2.5% 2.6% 2.8% Net margin% 1.7% 1.6% 1.8% 2.0% 2.1% 2.3% Source: Company data, Credit Suisse estimate (0992.HK / 992 HK) 2

3 Soon to be number one Event: Lenovo Thursday reported in-line 1Q FY13 revenue of US$8.0 bn, but better gross margins of 12.0%, and opex control yielded 6.2% net income upside to consensus estimate. In this report, we review execution of its business strategy, perform a deep dive of its June-12 PC results based on Gartner PC data released last week, and update our views on its PC and non-pc businesses. Based on our analysis, we lower FY13/14E EPS by 11.6%/12.0% on recent pricing trends, higher opex in PC (i.e. Brazil facility and Win 8) and MIDH (i.e. Wuhan facility), and fine-tune our tax rate assumption. As a result, we lower our 12M target price to HK$7.50 on 15x NTM earnings. Investment case: After a solid year of results, our thesis remains intact i.e., as Lenovo consolidates PC share, it improves its scale, lifting margins to the highest levels. Overall, we expect Lenovo to continue to deliver solid performance as it (1) capitalises on its China brand and distribution advantages; (2) drives continued PC scale benefits evidenced by greater profitability; (3) diversifies into smartphones, tablet and smart TVs ( PC Plus era ); and (4) evolves into an enterprise solutions provider. Inching to number one: Lenovo s share gained 188 bp to reach 14.9% in 2Q12. Only 274,000 units separate it from HP, the global PC leader. Its pricing trends were worse than its peers and need to be monitored to determine if it may erode scale benefits from share gains. For now, because of its 5.5% ASP premium to the market, we believe it can afford to do so and balance global share. Without China, its 2Q12 PC share was 9.4% vs. 7.1% in Catalysts: These will include Acer, Asustek, HP and Dell results over the next two weeks; Lenovo s attendance at our Asian Technology conference on 5-7 September 2012; Windows 8 launch on 26 October; and improving macro trends/sentiment on China. Valuation: We lower our 12M target price to HK$7.50 based on 15x NTM earnings. Despite slowing China PC growth, it has shown it can achieve similar profitability in the region, and deserves to trade at a historical 15x. Further, its profitability in regions outside China grows strong as it scales up. Key events announced during results: (1) Lenovo adjusted its organisation structure including China, Asia-Pacific-Latin America, Europe/MEA, and North America. (2) In July Lenovo began building a new manufacturing and distribution centre in Itu, Sao Paulo, Brazil to product a full range of commercial and consumer PCs. The facility will begin operations in December (3) Its joint R&D and manufacturing facility with Compal comes online in December (4) Lenovo announced a new industrial base in Wuhan, China, which will focus on R&D, and mobile internet and digit home product lines. The facility is expected to open in October (5) Lenovo said newly launched EMC partnership will not be material to its earnings this fiscal year. 1Q FY3/13 results review and 2Q FY3/13 expectations In-line revenues, was cautious on demand for macro reason, but expects outpace. Lenovo reported June revenue of US$8.0 bn, an increase of 6.8% QoQ and 35.3% YoY, in line with our estimate of US$7.9 bn. Its PC revenue at US$6.9 bn increased 23.7% YoY. Its PC shipment growth has continued to outpace that of the industry for the 13th consecutive quarter, with balanced growth across all regions and products. Further, its MIDH revenue improved 173% YoY to US$587 mn. Lenovo was cautious regarding PC demand in the September quarter largely due to macro-related headwinds. However, it remains confident that it will continue to outgrow the PC market with across-the-board balanced and profitable growth. Management expects the China PC market to not be worse than in the June quarter, and on flat sequentially shipments, it implies China PC shipments in the September quarter would decline 11.1% YoY vs. the 5.4% YoY decline in the June quarter. (0992.HK / 992 HK) 3

4 Gross margin slightly ahead of expectation. Gross margin of 12.0% improved from 10.7% last quarter due to the product mix and scaling benefits, and was ahead of our estimate of 11.1%. We expect gross margins to decline sequentially primarily from a higher consumer mix. Consumer PCs typically have lower PC ASPs on an absolute basis and lower margins. We forecast a 11.9% gross margin in the September quarter. Opex/sales higher than expected. The opex/sales ratio of 9.7% in the quarter increased from 9.4% last quarter and was higher than our estimate of 9.2% due to higher branding and promotional expenses on new products. We expect opex/sales to increase to the 9.9% level in the September quarter as it prepares for the launch of Windows 8 on 26 October incurring R&D and marketing-related costs, and its Brazil manufacturing and Compal joint-facility will come online only in the December quarter. Operating margin ahead of expectation. Operating margin of 2.3% improved from 1.4% last quarter and was above our estimate of 2.0%. Overall, Lenovo remains focused on profitable growth and clearly executed on this strategy in the June quarter. We expect operating margins to decline to 2.1% in the September quarter as higher revenues could be offset by lower gross margins and higher opex. Net income ahead on better gross margins. Net income of US$141 mn was 25.7% ahead of our estimate, and 6.2% ahead of consensus. Overall, 1Q FY13 GAAP EPS increased 23.1% YoY to US$0.013, ahead of CS s and in line with consensus estimates. Figure 5: Lenovo Group 1Q FY13 June quarter results summary (US$ mn, unless otherwise stated) Actual CS est. +/- (%) Cons. +/- (%) Notebook revenues 4,333 4, Desktop revenues 2,545 2, MIDH revenues Other revenues Revenues 8,010 7, , YoY% 35.3% 34.0% 37.2% QoQ% 6.8% 5.8% 8.4% Operating profits Pre-tax income Net income GAAP EPS (US$) $0.013 $ $ Gross margin% 12.0% 11.1% 11.4% Opex/Sales% 9.7% 9.2% 9.4% Operating margin% 2.3% 2.0% 2.0% Net margin% 1.8% 1.4% 1.6% Source: Company data, Credit Suisse estimates, Bloomberg Segment review core PC business in line; MIDH revenues explode 173% YoY from smartphones Lenovo reported June revenue of US$8.0 bn, an increase of 35.3% YoY. Overall, we highlight the following by the product segment. Note: the following figures on shipments and revenue growth are provided by the company. Notebook shipments increased 27% YoY. Notebook revenue increased 23% YoY to US$4.3 bn, or 54.1% of revenues vs. 59.7% of revenues in the year ago quarter. Lenovo regained market shares and became the largest commercial PC notebook vendor, and moved to become the world s second-largest notebook vendor tying with HP at 15.3%. Acer moved into number one position this quarter with a 15.4% share. (0992.HK / 992 HK) 4

5 Desktop shipments increased 21% YoY. Desktop revenues increased 26%YoY to US$2.5 bn, or 31.8% of revenues vs. 34.2% of revenues in the year ago quarter. Lenovo became the largest consumer desktop PC notebook vendor, and moved to become the world s second-largest desktop vendor with a 14.5% market share. HP remains number one with a 15.3% share. MIDH sales increased 173% YoY. This business includes handset, smartphone, tablet and TV businesses. Smartphone shipments grew 37x faster than the market and Lenovo said it was the second-largest brand in China. Tablet shipments increased 1.2x in China and 2.8x worldwide. Overall, MIDH revenues contributed to 7.3% of revenues vs. 3.6% in the year ago quarter. Other business revenues increased 275% YoY. This business includes servers, services, software and Medion s non-pc business. According to Gartner, Lenovo s server shipments increased 44.7% YoY and server revenue at US$110 mn increased 86.9% YoY, representing 20% of other business revenues vs. 41% in the year ago quarter. Figure 6: MIDH leads growth; other business drives revenue upside to CS estimates % 3.6% 3.6% 5.4% 5.1% 5.4% 3.6% 6.8% 5.6% 7.3% 34.2% 34.1% 33.3% 32.2% 31.8% % 57.5% 52.2% 54.9% 52.7% 1Q12 2Q12 3Q12 4Q12 1Q13 Notebooks Desktop Mobile Internet Digital Home Server Other businesses Source: Company data, Credit Suisse. Inching its way to number #1 PC (86% of revenues) Lenovo delivered another solid quarter of PC results, holding to its Protect (China) and Attack (rest of world) PC strategy. Lenovo global PC shipments tempered to 24.6% YoY on difficult compares in the year-ago quarter of 22.6% YoY. Nonetheless, its growth markedly outpaced the global PC market, which declined 2.5% YoY. Its China shipments increased 10% YoY, while PC shipments to the rest of the world increased over 44% YoY. Lenovo gained 188 bp in the sequential market share to 14.9% and is closing the gap with the global PC leader HP. Roughly 274,000 units separate the two. Its PC share in the rest of world ex China market share climbed 45 bp to an all-time high of 9.4%. Reaching 10% is a critical milestone as this is the target Lenovo has used to support its scale argument, though it does vary by country. In China, despite its strategy to protect its market share, it gained 656 bp in sequential share and ended 2Q12 at 35.6%, driven by its strong execution in China s consumer PC market. (0992.HK / 992 HK) 5

6 Figure 7: Lenovo s PC growth tempered but still outpaced the global market in mn, unless otherwise stated % 47.9% 43.2% % 21.7% 33.5% 8.9% 21.0% 3.5% 16.6% 0.2% 22.6% 2.9% 33.6% 5.2% 36.7% -0.4% 2.2% 24.6% -2.5% -1 Global PC shipments Lenovo PC shipments Figure 8: Its global share climbed to 14.9%; rest of world ex. China rose to 9.4% YoY % PC shipment change % % 55.4% 55.2% 42.9% 47.9% 49.5% 22.3% 30.7% 33.5% 13.7% 33.6% 21.0% 17.2% 22.6% 26.5% 28.4% 16.6% 22.6% 16.1% 22.6% 41.8% 46.3% 36.7% 66.6% 22.7% 43.2% 44.1% 1 Lenovo global PC Lenovo China PC Lenovo rest of world ex. China PC Figure 9: Early stage volume gains in Europe (+69% YoY PC shipments), still work to be done in Latin America (-3% YoY PC shipments) 000s PC shipments 14,000 12,000 10,000 8,000 6,000 4,000 2, % 0 North America Western Europe Eastern Europe China Asia-Pacific ex. China Middle East & Africa Japan Latin America (0992.HK / 992 HK) 6

7 China outperformance led by consumer (China: 50% of 2Q12 shipments) For the first time since we began tracking the China PC market, demand moved into negative territory in 2Q12 to the tune of a 5% YoY decline. Lenovo s growth slowed as it was not immune to the market slowdown. Nonetheless, it continued to outpace the market by increasing 10% YoY. Illustrating its strength in China is Figure 10: below, where excluding Lenovo, the overall China PC market would have declined over 12%. In 2Q12 Lenovo did very well in consumer, large enterprise and SMB segments and drove over 656 bp in sequential China market share with 35.6% at quarter-end. Figure 10: Without Lenovo, the overall China market would have declined 12% YoY. Including Lenovo, its declines to 5% % % 42.9% 49.3% 26.5% 28.4% 29.8% 22.3% 22.6% 22.7% 16.1% 25.3% 13.7% 10.9% 12.5% 9.2% 11.1% 14.2% 1 7.2% 2.7% 7.1% 8.5% 4.8% 8.0% 5.4% -1.5% -1.1% -5.4% -12.2% Lenovo China China PC ex. Lenovo China PC market Indeed, China PC demand slowed and Lenovo felt similar sluggishness in its PC business. Factors we believe drove soft demand included macro growth temperament, soft consumer confidence, push-out and pause of IT budget spending ahead of China s political power change in October 2012, and seasonal factors such as preparations for college entrance exams. As a result, four out of the five end-markets including SMB, large enterprise, government and education moved into negative territory in 2Q12. In Lenovo s case, growth slowed, but it still found growth in each of end-markets led by consumer. Figure 11: All end-markets except China consumer moved into negative territory in 2Q12 YoY % China PC shipments Figure 12: Lenovo s growth slowed but remained in positive territory unlike the rest of the market in mn, unless otherwise stated Large Enterprise SMB Education Government Home Large Enterprise SMB Education Government Home (0992.HK / 992 HK) 7

8 Flexing its distribution advantages in consumer China (China consumer 20% of PC shipments) The strength of Lenovo s distribution and early mover advantage in China was particularly evidenced in its China consumer PC business. China consumer spending on PCs slowed, but much of this came from high penetration rates in Tier 1-3 cities. In Tier 4-6 cities, and particularly rural China, penetration remains in the single-digit range. Here is where we believe Lenovo is essentially creating PC demand via its extensive distribution network. In these areas, we believe the rest of the PC vendors are having issues in tapping demand. These vendors have very different economics because of their scale disadvantages as well. Hence, Lenovo grew its China consumer PC shipments by 23% YoY in 2Q12, while the rest of China consumer PC market declined 5.7%YoY. Figure 13: Lenovo s China consumer PC shipments still grew 23% YoY, while the rest of China consumer PC market (ex. Lenovo) declined 5.7%YoY YoY % China PC shipments % % 54.3% 59.2% 56.7% % 28.6% 2.3% 15.0% -5.4% 12.8% -2.3% 19.2% 2.7% 38.2% 10.2% 13.9% 9.1% 23.2% -5.7% -1 Lenovo China consumer Rest of China consumer PC OEMs Corporate outperforming, but need to watch out for a further slowdown (China corporate: 30% of shipments) China s corporate PC market (large enterprise and SMB) makes up for about 35-40% of China PC shipments, and 40-45% of Lenovo s quarterly China PC volumes. On a unit basis, it is evident how important this segment is to Lenovo. It becomes even more so when factoring in the higher ASP in the market, where Lenovo has commanded a 14% premium over the last three years, and a 13% premium to its own consumer PC ASPs. Corporate PC demand has slowed in recent quarters. For the rest of the market ex Lenovo, demand has moved into negative territory. Lenovo s growth remains positive, but slowed compared to prior quarters. In 2Q12 we believe a key factor in play was the delay of IT budgets being finalised that typically conclude alongside the March fiscal year-end of many China corporations. In corporate environments, when budgets are not finalised, spending is massively impacted. We believe China s National Congress in autumn 2012 pushed out the finalisation of IT budgets because of potential policy changes. We believe companies began finalising IT budgets towards the end of June and into July. As a result, we are optimistic that corporate IT spending on PCs will improve in 2H12 and invigorate Lenovo s corporate PC business in China. (0992.HK / 992 HK) 8

9 Figure 14: Outpacing in large enterprise, but slowing YoY% China large enterprise PC shipment change % 41.6% 34.1% 11.9% 21.6% 5.1% 12.3% -7.1% 27.7% 40.8% 8.7% 8.4% 28.7% -12.7% 22.8% -5.6% 10.5% -25.4% -30.5% 5.3% Figure 15: Outpacing in SMB, but slowing as well YoY% China SMB PC shipment change % 49.5% 36.5% 29.1% 19.5% 15.5% 11.1% 3.8% 24.6% 31.9% 16.9% 15.7% 29.9% 1.6% 14.0% 3.7% 4.2% -3.4% -13.3% 2.2% Lenovo China Large enterprise Rest of China Large Enteperise PC OEMs Lenovo China SMB Rest of China SMB PC OEMs Share gains in Europe, albeit with some pricing pressure (14% of 2Q shipments) Europe has become the second-most important region for Lenovo, contributing 14.1% of its 2Q12 PC shipments versus 13.3% in Lenovo Europe growth has accelerated since 2Q11 and share gains have come at the expense of Acer s inventory issues that persisted through the year and HP s announcement and redaction to exit the PC business last year. In addition, its market share was also driven by the acquisition of Medion in 4Q11. Former Acer CEO, Gianfranco Lanci, took the reins in March 2012, and we expect further growth to come from channel expansion and in consumer PC markets. Unfortunately, much of the share gains have come from price erosion. While the decline was partly attributable, we do believe Mr. Lanci is pushing for both product portfolio and channel expansion. Indeed, this is a concern we share with the market along with concerns about how aggressive Mr. Lanci will take consumer pricing, and of how aggressive will it look to expand the channel. Nonetheless, Lenovo does enjoy a premium ASP in the European market. We believe the firm s commercial presence at a 21% market share and 65% of it Europe PC shipments afford it a premium ASP. We need to closely watch how fast this premium narrows. Figure 16: Share gains in Europe driven by the acquisition of Medion and at the expense of price erosion YoY % Europe PC shipment and ASP change % -21.5% 78.4% -0.2% 63.7% 27.2% 11.5% 10.8% 5.9% 16.3% -4.1% 4.8% 10.5% 0.1% 45.2% -8.0% 81.5% 69.4% -14.9% -17.6% Figure 17: Lenovo s PC prices are at an average 27% premium to Europe due to its corporate positioning US$ Europe PC ASP $1,050 $950 $850 $750 $650 $550 $450 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 Lenovo Europe PC shipments Lenovo Europe PC ASP Europe PC ASP Hewlett-Packard Acer Group Dell Inc ASUS Lenovo (0992.HK / 992 HK) 9

10 Holds premium ASP but will need to monitor as consumer PC rises Its PC ASPs fell to a historical low of US$663, measuring in a decline of 3.5% YoY, though the annual decline was relatively in line with the global PC market. We believe Lenovo s ASP declined to lows because of its push into the consumer market. This market is now generating nearly 39% of its quarterly shipments, from 34% last year. Importantly, the drop in ASP is a product of its expanding consumer product portfolio (i.e., product mix) rather than through aggressive pricing as we show below. Further, its premium commercial ThinkPad brand also optically makes the decline in its global PC ASP appear much worse than it actually is. Overall, we need to monitor consumer PC ASPs closely to determine if price declines negate the positive impact of scale. Figure 18: Lenovo s ASP declined to its historical lows because of its push into the consumer market, which also has lower ASPs compared to its commercial ASPs US$ PC ASP $740 $720 $700 $701 $686 $710 $704 $720 $696 $723 $727 $707 $680 $660 $679 $669 $682 $684 $675 $672 $665 $680 $668 $663 $640 $651 $620 Global PC ASP Lenovo PC ASP Figure 19: Lenovo has been working to build up the scale of its consumer PC business peaking in 2Q12 at nearly 39% of mix; unfortunately this driving negative PC trends % of Lenovo s PC shipments Figure 20: Lenovo s consumer PC were priced (18%) much lower to its commercial PCs because of the ThinkPad brand; globally the gap is about 3% US$ ASP 100% $800 90% 80% $750 70% 60% $700 50% $650 40% 30% $600 20% 10% $550 0% $500 Lenovo consumer ASP Lenovo commercial ASP Consumer PC shipments Commercial PC shipments Global commercial ASP Global consumer ASP.. (0992.HK / 992 HK) 10

11 Figure 21: That said, annual changes in Lenovo consumer PC ASPs have been trending in positive territory, unlike the rest of the global consumer market, suggesting more of its ASP declines are coming from product portfolio expansion YoY % change in consumer PC ASP 15.0% 1 5.0% -5.0% % Lenovo Consumer ASP Global Consumer ASP. Good growth and exposure at mainstream and highend, making it a possible Ultrabook contender Consumer PC shipments peaked in 2Q12 at 39% of its total PC shipments. Of these volumes, consumer notebook PCs are now 27% of its annual PC volumes and over 70% of its consumer PC shipments. Much of this growth came from Lenovo US$ , US$ , and US$ consumer notebooks, which together make up for over 75% of its quarterly consumer notebook shipments. At the high-end of the price band in its consumer notebooks, its US$1,000-1,199 and US$1,200-1,499 saw good demand traction, posting 108% and 67% YoY growth in 2Q12, respectively. That being said, these are small contributors to volumes, 15.7% combined, and likely benefit from the mix-shift down by consumers from US$2,000 and above price band. That said, it has good brand awareness at high-end price points, making it a potential Ultrabook contender with a fairly competitive portfolio as shown in Figure 22 below. Figure 22: US$ generate 75% plus of its quarterly consumer notebook shipments 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 $0-$299 $300-$499 $500-$799 $800-$999 $1,000-$1,199 $1,200-$1,499 $1,500-$1,999 $2,000-$2,499 (0992.HK / 992 HK) 11

12 Figure 23: Lenovo Ultrabook/thin-light notebook portfolio Manufacturer Lenovo Lenovo Lenovo Lenovo Lenovo Model IdeaPad U300s IdeaPad U300e IdeaPad U310 IdeaPad U410 IdeaPad Yoga Announce date IFA 2011 CES 2012 CES 2012 CES 2012 Ship date 4Q11 Jun-12 Jun-12 NA Form factor: Display size (in) Resolution 1366 x 768 1,366 x 768 1,366 x 768 1,366 x x 900 Size Height 216 mm 216 mm 225 mm 235 mm NA Width 324 mm 324 mm 333 mm 344 mm NA Depth 14.9 mm 18.3 mm 18 mm 21 mm 16.9 mm Weight 1.32 kg 1.58 kg 1.68 kg 1.85 kg <1.5 kg Core internals Processor Chipset Up to Intel Core i7 Intel Sandy Bridge Core i5,i3 Intel 2nd/3rd gen Core i series Intel 2nd/3rd gen Core i series Intel 3rd gen Core i series Speed (Ghz) NA NA 1.7 NA Cache (MB) NA NA NA NA Memory Up to 4GB Up to 6GB DDR3 Up to 4GB DDR3 Up to 8GB DDR3 8GB Operating system Windows 7 Windows 7 Windows 7 Windows 7 Windows 8 Storage type/capacity (GB) Up to 256 GB SSD Up to 1TB HDD+32GB SSD Up to 500GB HDD+32GB SSD Up to 1TB HDD+32GB SSD 256 GB SSD Retail Price ($USD) $1,199 $ $ $ NA Source: Company data, Credit Suisse Smartphones explode MIDH growth (7% of revenues) Lenovo s Mobile Internet Digital Home (MIDH) business includes handset, smartphone, tablet and TV businesses. Its MIDH revenue improved 173% YoY to US$587 mn in the quarter, particularly driven by the robust growth in smartphones. It shipped nearly 5.0 mn smartphones in the June quarter versus 2.4 mn last quarter. Indeed, its smartphone business progressed well with shipments growing 37x faster than the market, and Lenovo said it has become the second largest smartphone brand in China. In time, we expect to see better leverage from this unit as scale improves, and offer the following conclusions: Open channels delivered volumes and have higher margins. Lenovo has strong relationships with channels and has ~10,000 storefronts selling its mobile handsets. The company believes open channels will dominate the China mobile phone market ultimately, and indicated that margins of selling smartphones through open channels could be 3-4x more than through telecom operators. Herein Lenovo enjoys distribution advantage over competing brands. Overall, we believe it will continue to expand its coverage in open channels in China, which could support good momentums in its smartphone business with improving profitability overtime. Designing and manufacturing in-house drives R&D and helps control costs. In May 2012 Lenovo announced it will build an industrial base in Wuhan, China, for R&D, production and sales of mobile Internet products. This facility drives forward its strategy to expand the MIDH business by optimising its supply chain and bringing products such as smartphones, tablets and other mobile devices faster to the market. It plans to invest ~US$800 mn over the next five years, and to start facility operations in October Once operational, Lenovo expects total sales from the Wuhan industrial base to increase to ~US$1.6 bn by 2014, and increase to ~US$8.0 bn within the next five years. We believe the Wuhan facility is an important next step in bringing this business up to scale and drive future growth, but will incur costs up front. Overall, its burgeoning MIDH business remains in operating loss. Its 4.0% operating loss in the quarter improved from 5.2% operating loss in the March quarter. We believe with (0992.HK / 992 HK) 12

13 increased scale in this business, Lenovo could gradually improve its profitability and we expect this to happen in the next fiscal year. Eyes on the enterprise starting with servers, and then storage (~1.5% of revenues) Lenovo s server business is often overlooked because of its strength in PC. That said, the firm has been working hard to expand this business. It refreshed its ThinkServers earlier this year, created an Enterprise Systems Group, decided to push into the US channel with its servers, and announced a multi-faceted deal with EMC (covered by Kulbinder Garcha). According to Gartner, Lenovo shipped 52,409 servers, an increase of 44.7% YoY. With an ASP of US$2,108, it suggests Lenovo generated US$110 mn in server revenues in the June quarter and equates to 1.4% of its quarterly revenues. Roughly 85% of its quarterly server shipments are to Asia-Pac. We expect its partnership with EMC to diversify Lenovo s server business into the US market in time. Earlier this month, it announced a partnership with EMC focused on three areas: (1) expanding Lenovo s server capabilities and delivery through EMC storage systems; (2) an OEM and reseller agreement for Lenovo to offer EMC s networked storage solutions in China initially; and (3) a JV with Lenovo and EMC s Iomega business for NAS systems. The partnership with EMC will accelerate Lenovo s server technology and portfolio in the x86 server market. In time, selected EMC storage solutions will be embedded with Lenovo servers. According to Gartner, the company s position in the x86 server market was ~1%. This segment of the server market is dominated by HP, Dell and IBM. Nonetheless, it is a large opportunity valued at US$35.5 bn, and Lenovo s benefit has been about 1% of its annual revenues. Further, we expect EMC s large enterprise relationships, particularly in the US, to offer Lenovo opportunities to do more PC business. Lenovo s PCs are #1 in global large enterprise with a 25.7% share last year, but in the US, it is a distant #3 with a 18.6% share vs. Dell at 35.9% and HP at 35.6%. Figure 24: China enterprise storage leads the growth in total enterprise IT spending in mn, unless otherwise stated End-market E 2013E 2014E 2015E 2016E CAGR Servers 5,131 6,439 7,179 7,784 8,401 9,028 9, % Storage 1,287 1,583 1,798 2,104 2,501 3,056 3, % Printers/Copiers/MFPs 2,580 3,256 3,441 3,459 3,401 3,403 3, % PC 20,696 22,949 23,980 27,302 30,224 32,831 36, % Enterprise Comm. Equipment 2,319 2,651 3,096 3,562 3,983 4,327 4, % Mobile Devices 3,115 3,620 4,815 5,246 5,656 5,436 5, % Enterprise hardware 35,129 40,497 44,309 49,456 54,167 58,082 62, % YoY% change 15.3% 9.4% 11.6% 9.5% 7.2% 8.2% % of China enterprise IT 69.1% 68.0% 66.8% 66.0% 64.8% 63.2% 62.0% Source: Gartner, Forecast: Enterprise IT Spending by Vertical Industry Market, Worldwide, Credit Suisse New business units shed new light on profitability As announced earlier this year, Lenovo reorganised its business structure into four new stronger, faster, and more focused geographic regions: China, Asia Pacific/Latin America (APLA), North America and Europe-Middle East-Africa (EMEA). Previously, Lenovo s organisation structure included three regions: Mature Markets, Emerging Markets and China. Additionally, Lenovo will allocate share expenses/costs based on actual usage and revenue contribution, from using a flat rate basis with reference to revenue contribution. Overall, we offer the following conclusions: Delivering stable China profits despite pricing pressure. Lenovo s China business generates the lion s share of its total operating profits. Its China PC business alone contributed US$ 170 mn in operating profits, or 71.2% of total geographic operating (0992.HK / 992 HK) 13

14 profits. It delivered a 6.5% operating margin in the quarter despite the weak China macroeconomic environment, which suggests it had optimised its model while experiencing pricing pressure. It leveraged this economic advantage because it controls 35.6% of the China PC market. MIDH lost US$22 mn in the quarter versus the US$27 mn loss in the year ago quarter evidencing that with greater volume, particularly from smartphones, it can glean scale benefits. China contributed to 50% of its June quarter PC shipments vs. 53% in Asia-Pacific/Latin American losses narrowing: Over the past six quarter and based on restatements made by the company, this segment s losses have reached breakeven this quarter. Over this period, its market share for these combined regions increased from 5.7% to 10.7% in the June quarter. Brazil is a key region which is still losing money and the cause for its recent investment to build a PC manufacturing facility in the country. In Brazil its market share languished at 4.2% in the June quarter versus 4.4% in These regions contributed to 21% of its June quarter PC shipments vs. 19% in North American margins stabilising. Over the past six quarters, its North America business has stabilised at 3-4% operating margins with an 8.7% market share in the June quarter. We believe there is further scaling benefits to be gleaned in time and particularly as it gains commercial PC market share. In this segment, it has a 8.7% market share, behind HP s 25.6% and Dell s 22.0%. The North American region contributed to 11% of its June quarter PC shipments vs. 12% in Europe-MEA margins stabilising too. Over the past six quarters, the Europe-MEA business has stabilised at 1-1.5% operating margins with a 8.5% market share in the June quarter. We believe Europe is a key region of focus for the company. Unfortunately, not only is Europe macro a big overhang, but the market is highly competitive. We believe scale benefits may be more difficult to come by as Lenovo drives growth through the usage of the channel. That said, we believe with its current share, it can continue to operate in the 1-1.5% margin range. These regions contributed to 17% of its June quarter PC shipments vs. 16% in Figure 25: Lenovo s revenue by geography in US$ mn, unless otherwise stated $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 Figure 26: Lenovo s operating income by geography in US$ mn, unless otherwise stated $300 $250 $200 $150 $100 $50 $0 $0 F1Q12 F2Q12 FQ12A 4Q12 F1Q12 -$50 F1Q12 F2Q12 FQ12A 4Q12 F1Q12 China - PC China - MIDH Asia-Pacific/Latin America Europe-Middle East-Africa North America China - PC China - MIDH Asia-Pacific/Latin America Europe-Middle East-Africa North America Source: Company data, Credit Suisse Source: Company data, Credit Suisse Balance sheet sitting on 40% of its market cap in cash Lenovo ended the quarter with US$3.8 bn in cash and marketable securities, which decreased from US$4.2 bn last quarter-end. It generated a negative free cash flow of US$401 mn. Overall, Lenovo was in a net cash position with US$0.33 net cash per share, or roughly 40% of its market capitalisation as of 16 August closing price. The cash conversion cycle increased 7.3 days to -2.7 days in the June quarter from days last quarter, and increased 9.2 days from the year ago quarter at days. The (0992.HK / 992 HK) 14

15 sequential increase in CCC was driven by a 2.9-day increase in inventory days to 19.5 days, and a 4.5-day decrease in days of payables to 50.7 days. The YoY deterioration in CCC was driven by a 2.8-day increase in days of sales, a 3.1-day increase in inventory days, and a 3.4-day decrease in days of payables. We believe increases in inventory days were driven by expanding businesses in emerging markets excluding the China and consumer businesses, while changes in days of payables were due mainly to changes in contract terms with suppliers. Further, over the past three years, its June quarter inventories have seasonally increased 21% on average. Overall, we believe Lenovo maintains healthy inventory levels across all regions and the company remains vigilant in tracking it as well. Lowering FY13E/FY14E by 11.6%/12.0% Despite the 23% upside in net income this quarter, we lower our FY13E and FY14E EPS by 11.6% and 12.0%, respectively. We make the following key changes: PC business. We keep our FY13E PC shipments unchanged at 14.3% YoY, and finetune FY14E down 3.3% to 11.2% YoY growth primarily reflecting lower PC demand from China. With the mix, we increase our consumer PC volumes and lower commercial. Indeed, consumer PC has lower ASPs and margins to commercial PCs. Hence, we lift our ASP declines. We forecast annual notebook ASP shipments to decline 5%/4% YoY in FY13E/14E and desktop ASPs to increase 1%/decrease 1% YoY, respectively. Smartphones business: We raise our FY13E smartphone shipments by 46% to 17.5 mn from 12.0 mn previously to reflect stronger June quarter results and product portfolio expansion. We raise FY14E by 63% to 22.5 mn, from 13.8 mn previously. Gross margins: We lower our gross margins primarily to reflect higher consumer PC ASPs which have lower gross margins. We now forecast FY13E/14E gross margins of 11.9% and 12.0%, from 12.0% and 12.2% previously, respectively. Operating expenses: We lift our opex/sales assumptions to 9.7% and 9.5% in FY13E and FY14E, from 9.6% and 9.3% previously, respectively. Driving our assumption changes here are investments we expect Lenovo to make in R&D and marketing ahead of Window 8 launch and the related products, for its Brazil manufacturing facility for PCs, which comes online in December 2013, and for its Wuhan R&D and manufacturing facilities for smartphones which comes online in October Tax rate: We raise our tax rate for FY13E/14E to 22.0% and 22%, respectively, to not just reflect the June quarter s run rate, but also to reflect higher tax rates as it drives greater profitability from regions outside of China. (0992.HK / 992 HK) 15

16 Figure 27: Lenovo Group estimate revisions summary (US$ mn, unless otherwise stated) F2Q13E (Sept-12) F2013E (Mar-13) F2014E (Mar-14) CS New CS +/- (%) CS New CS +/- (%) CS New CS +/- (%) Total PC units ('000) 13,400 13, ,807 54, ,835 61, Notebook units 8,075 8, ,284 34, ,696 41, Desktop units 5,325 4, ,523 19, ,139 20, Revenues Notebook 4,701 5, ,787 20, ,058 23, Desktop 2,765 2, ,863 9, ,068 9, MIDH ,830 2, ,303 2, Others ,173 2, ,550 2, Revenue 8,435 8, ,653 34, ,979 38, YoY% 8.3% 10.7% 17.2% 17.4% 9.6% 11.6% QoQ% 5.3% 8.6% Operating profits , Pre-tax income ,017 1, Net income GAAP EPS (US$) $0.014 $ $0.057 $ $0.071 $ Gross margin% 11.9% 11.4% 11.9% 12.0% 12.0% 12.2% Opex/Sales% 9.9% 9.4% 9.7% 9.6% 9.5% 9.3% Operating margin% 2.1% 2.0% 2.2% 2.5% 2.6% 2.8% Net margin% 1.7% 1.6% 1.8% 2.0% 2.1% 2.3% Source: Company data, Credit Suisse estimates Valuation Despite slowing China PC growth, it has shown it can still achieve similar profitability in the region, and should trade at a historical 15x. Further, its profitability in regions outside China grows strong as it scales up. Excluding its cash balance, Lenovo is trading at 8x of our NTM EPS. Figure 28: Asia hardware valuation compares (NT$, Lenovo share price in HK$) Asian Hardware CS Market Cap Price CS 12m % up/ 52 Week Dividend Price-CY12-earnings Price-2012-book value Rating (US$ mn) 8/16 TP dow n low - high Yield CS Consen. 08-Avg TP Mult ROE CS 5 Yr Avg TAIEX 7, x 10.1x OEM Asustek Computer OP 7, % % 10.5x 11.0x 7.6x 11.9x 17% 1.7x 1.0x Acer Inc. UP 2, % x 20.8x 10.4x 22.2x 4% 0.9x 1.5x Lenovo OP 9, % % 17.0x 15.8x 13.2x 19.3x 25% 3.3x 2.4x Average 17.4x 15.8x 10.4x 17.8x 15% 2.0x 1.7x EM S/ODM Hon Hai Group N 32, % % 11.7x 12.4x 15.2x 12.1x 13% 1.5x 2.2x Quanta Computer N 9, % % 12.1x 11.8x 8.6x 12.4x 18% 2.2x 1.4x Compal Electronics N 4, % % 9.1x 9.7x 8.0x 10.0x 11% 1.0x 1.1x Pegatron Corp OP 3, % x 12.4x NA 16.7x 7% 0.9x 0.8x Wistron OP 2, % % 9.0x 8.6x 7.8x 10.3x 12% 1.1x 1.2x Average 11.0x 11.0x 9.9x 12.3x 12% 1.3x 1.4x Source: Company data, Credit Suisse estimates (0992.HK / 992 HK) 16

17 (0992.HK / 992 HK) 17 Figure 29: Lenovo consolidated income statement (US$ mn, unless otherwise stated) March fiscal year-end 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13A 2Q13E 3Q13E 4Q13E E 2014E Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Consolidated revenues 5,147 5,760 5,808 4,879 5,920 7,786 8,372 7,496 8,010 8,435 9,458 8,750 29,574 34,653 37,979 Y/Y% change 49.6% 40.9% 22.0% 13.0% 15.0% 35.2% 44.1% 53.6% 35.3% 8.3% 13.0% 16.7% 37.0% 17.2% 9.6% Q/Q % change 19.2% 11.9% 0.8% -16.0% 21.3% 31.5% 7.5% -10.5% 6.8% 5.3% 12.1% -7.5% Cost of goods sold 4,624 5,167 5,160 4,280 5,181 6,839 7,418 6,691 7,051 7,429 8,343 7,718 26,128 30,541 33,403 Gross profit ,006 1,114 1,033 3,446 4,112 4,576 Gross margin 10.2% 10.3% 11.2% 12.3% 12.5% 12.2% 11.4% 10.7% 12.0% 11.9% 11.8% 11.8% 11.7% 11.9% 12.0% Selling and marketing ,691 1,975 2,108 % of revenues 4.3% 4.2% 5.0% 5.8% 5.9% 5.9% 5.7% 5.7% 5.6% 5.8% 5.7% 5.8% 5.7% 5.7% 5.6% General and administrative % of revenues 3.0% 3.1% 3.0% 4.3% 3.2% 2.5% 2.0% 2.5% 2.4% 2.4% 2.4% 2.6% 2.5% 2.5% 2.4% Research and development % of revenues 1.5% 1.3% 1.3% 1.5% 1.3% 1.5% 1.4% 1.9% 1.7% 1.7% 1.4% 1.5% 1.5% 1.6% 1.5% Research and development Operating expense ,862 3,361 3,589 % of revenues 8.6% 8.4% 9.0% 10.9% 10.4% 1 9.1% 9.4% 9.7% 9.9% 9.4% 9.9% 9.7% 9.7% 9.5% Operating income Operating margin 1.6% 1.9% 2.1% 1.4% 2.1% 2.1% 2.3% 1.4% 2.3% 2.1% 2.4% 1.9% 2.0% 2.2% 2.6% Other income and expense Pre-tax income ,017 Pre-tax margins 1.5% 1.8% 2.1% 1.2% 2.1% 2.1% 2.3% 1.4% 2.3% 2.2% 2.4% 2.1% 2.0% 2.3% 2.7% Tax expense Tax rate 26.7% 24.2% 17.4% 29.8% 11.9% 12.2% 19.7% 33.6% 22.0% 22.0% 22.0% 22.2% 18.4% 22.0% 22.0% Net income Net income margin 1.1% 1.4% 1.7% 0.9% 1.8% 1.8% 1.8% 0.9% 1.8% 1.7% 1.9% 1.6% 1.6% 1.8% 2.1% GAAP EPS $0.005 $0.008 $0.010 $0.004 $0.011 $0.014 $0.015 $0.006 $0.013 $0.014 $0.017 $0.013 $0.046 $0.057 $0.071 Share outstanding 10,542 10,330 10,258 10,148 10,050 10,461 10,515 10,341 10,606 10,606 10,606 10,606 10,341 10,606 11,136 Source: Company data, Credit Suisse estimates 17 August 2012

18 (0992.HK / 992 HK) 18 Figure 30: Lenovo consolidate revenue drivers (US$ mn, unless otherwise stated) March fiscal year-end 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13A 2Q13E 3Q13E 4Q13E E 2014E Shipments Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Notebook 4,817 5,440 5,248 4,716 5,893 7,179 7,377 6,783 7,533 8,075 8,500 8,177 26,983 32,284 37,696 Desktop 3,533 3,733 4,199 3,418 4,344 5,072 5,538 4,870 5,223 5,325 5,760 5,215 19,824 21,523 22,139 Tablets , ,750 4,813 QoQ % change Notebook 18.9% 13.0% -3.5% -10.1% 24.9% 13.2% -0.3% -8.1% 11.0% 7.2% 5.3% -3.8% Desktop 20.7% 5.7% 12.5% -18.6% 27.1% 11.2% 7.7% -12.1% 7.2% 2.0% 8.2% -9.5% Tablets NA NA NA NA 1500% 100% 41% 113% -6% 33% 67% -3 YoY % change Notebook 61% 41% 18% 16% 22% 32% 41% 44% 28% 12% 15% 21% 33% 20% 17% Desktop 33% 24% 25% 17% 23% 36% 32% 42% 20% 5% 4% 7% 33% 9% 3% Tablets NA NA NA NA NA NA NA 9500% 463% 275% 344% 46% 18800% 191% 75% ASPs Notebook $646 $638 $653 $634 $600 $624 $605 $622 $575 $570 $605 $575 $619 $582 $559 Desktop $484 $506 $477 $486 $466 $523 $503 $496 $487 $502 $500 $530 $498 $505 $500 Tablets $450 $450 $500 $131 $225 $225 $275 $271 $300 $255 $230 Revenues Notebook 3,114 3,473 3,427 2,989 3,537 4,477 4,462 4,220 4,333 4,607 5,146 4,701 16,696 18,787 21,058 Desktop 1,709 1,889 2,004 1,661 2,023 2,655 2,788 2,414 2,545 2,673 2,880 2,765 9,880 10,863 11,068 Tablet ,104 MIDH ,201 2,129 2,199 Server Other businesses ,203 1,805 2,166 Total revenues $5,147 $5,760 $5,808 $4,879 $5,920 $7,786 $8,372 $7,496 $8,010 $8,435 $9,458 $8,750 $29,574 $34,653 $37,979 YoY % change Notebook 50.3% 43.3% 17.8% 12.2% 13.6% 28.9% 30.2% 41.2% 22.5% 2.9% 15.3% 11.4% 28.4% 12.5% 12.1% Desktop 34.6% 33.6% 23.8% 12.2% 18.4% 40.5% 39.1% 45.3% 25.8% 0.7% 3.3% 14.5% 36.0% 1 1.9% Tablet NA NA NA NA NA NA NA NA NA 87.5% 144.4% 201.6% NA 147.4% 57.5% MIDH NA 62.9% 93.2% 107.2% -0.5% -2.3% 107.0% 89.9% 171.3% 139.8% 23.1% 62.8% 49.8% 77.3% 3.3% Server 23.1% 28.5% 12.0% 9.6% 58.8% 136.8% 102.1% 84.4% 86.9% 6.1% 19.2% -31.0% 96.7% 18.4% 4.5% Other businesses 53.7% 64.7% 43.3% -83.5% -19.5% 93.7% 320.5% % 403.7% 5 5.0% 23.8% 226.2% 5 2 Total revenues 49.6% 40.9% 22.0% 13.0% 15.0% 35.2% 44.1% 53.6% 35.3% 8.3% 13.0% 16.7% 37.0% 17.2% 9.6% Source: Company data, Credit Suisse estimates 17 August 2012

19 (0992.HK / 992 HK) 19 Figure 31: Lenovo consolidated balance sheet (US$ mn, unless otherwise stated) March year-end 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13A 2Q13E 3Q13E 4Q13E E 2014E Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Cash and cash equivalents 2,715 2,696 3,428 2,997 3,899 4,223 4,122 4,171 3,766 3,588 4,375 5,155 4,171 5,155 6,004 Accounts receivables 1,344 1,662 1,605 1,369 1,668 2,357 2,473 2,355 2,504 2,327 2,441 2,188 2,355 2,188 2,619 Inventories 1, ,306 1,252 1,218 1,510 1,238 1,335 1,403 1,218 1,403 1,392 Other current assets 2,488 3,001 2,690 2,767 3,058 3,885 3,665 4,076 3,998 4,043 4,210 3,759 4,076 3,759 4,408 Current assets 7,644 8,342 8,540 7,936 9,561 11,771 11,512 11,820 11,778 11,196 12,360 12,505 11,820 12,505 14,423 Long-term investments Property, plant and equipment, net Goodwill and intangible, net 2,080 2,063 2,048 2,134 2,142 2,751 2,835 3,091 3,039 3,039 3,039 3,039 3,091 3,039 3,039 Other non-current assets Total assets 10,327 11,015 11,205 10,706 12,358 15,578 15,467 15,861 15,788 15,234 16,428 16,597 15,861 16,597 18,642 Short-term debt Current portion of long-term debt Notes and accounts 3,210 3,066 2,820 2,180 3,071 4,276 3,766 4,050 3,920 4,245 4,768 4,410 4,050 4,410 4,772 payables Other current liabilities 4,044 4,943 5,314 5,332 5,928 6,821 7,110 7,696 7,510 6,917 7,377 7,875 7,696 7,875 8,631 Current liabilities 7,730 8,425 8,456 8,033 9,522 11,636 11,448 11,810 11,471 11,203 12,186 12,327 11,810 12,327 13,445 Long-term debt Other non-current liabilities ,602 1,579 1,603 1,849 1,417 1,513 1,400 1,603 1,400 1,534 Shareholder equity 1,630 1,567 1,772 1,835 1,961 2,340 2,440 2,448 2,468 2,614 2,729 2,870 2,448 2,870 3,663 Total equity & liabilities 10,327 11,015 11,205 10,706 12,358 15,578 15,467 15,861 15,788 15,234 16,428 16,597 15,861 16,597 18,642 Balance analysis A/R turnover 15.3x 13.9x 14.5x 14.3x 14.2x 13.2x 13.5x 12.7x 12.8x 14.5x 15.5x 16.0x 12.6x 15.8x 14.5x Inventory turnover 16.9x 21.0x 25.2x 21.3x 22.2x 21.0x 23.7x 22.0x 18.7x 24.0x 25.0x 22.0x 21.4x 21.8x 24.0x A/P turnover 5.8x 6.7x 7.3x 7.9x 6.7x 6.4x 7.9x 6.6x 7.2x 7.0x 7.0x 7.0x 6.5x 6.9x 7.0x ROE 13.8% 19.9% 22.7% 9.2% 22.2% 24.6% 25.2% 10.9% 22.9% 22.3% 25.8% 19.6% 19% 21% 22% ROS 4.4% 5.4% 6.9% 3.5% 7.4% 7.4% 7.3% 3.6% 7.1% 6.9% 7.4% 6.4% 2% 2% 2% ROA 2.2% 2.8% 3.6% 1.6% 3.5% 3.7% 4.0% 1.7% 3.6% 3.8% 4.3% 3.4% 3% 4% 4% Book value per share Source: Company data, Credit Suisse estimates 17 August 2012