Action
Today, we downgraded our rating of Lenovo to HOLDand cut its TP by 34% to HK$8.6 to reflect our concernsover Xiaomi’s move into the PC market. We use thesum-of-the-parts (SOTP) valuation method to estimate LegendHoldings’ forward NAV: as it holds a 30.55% equity interest inLenovo, we downgrade Legend from a BUY to HOLDrating and cut its TP by 18% to HK$37.
Reasoning
We cut Lenovo’s TP by 34% to HK$8.6 as: 1) its mobilebusiness still faces headwinds. Its restructuring plan willhelp to reduce its future expenses; however, we are concernedover how its mobile’s topline growth will be impacted by theintense competition and the tough market environment. And,2) Xiaomi’s push into the PC market will change thecompetitive landscape, forcing Lenovo to squeeze its PCmargins in order to protect its China market.
We modify Hony Capital’s and Legend Capital’s LP valuesbased on end-2014 fair value. We previously calculated theirLP values based on their fair value at end-June, 2015 – when themarket was at its peak. As the stock market has declined greatlysince then, we adjust the fair value as of end-2014, based on theaverage IRR of PE/VC funds. We take 20% IRR to calculate thefair value of Hony Capital and Legend Capital.
Earnings forecast and valuation
Total GAV attributable to Legend is Rmb94.2bn. We give thecompany a 15% conglomerate discount and subtract net debt(including shareholder loans) of Rmb10.5bn, and derive Legend’sNAV at Rmb69.6bn. We downgrade our rating for Legendfrom BUY to HOLD and revise down our TP by 18% toHK$37, representing 25x/12x 2015e/16e P/E.
Risks
Failure to invest in valuable projects; soft economic growth.