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Lenovo 2025 Is The Best Bond In PC Hardware Universe And Could Diversify Your Fixed Income Portfolio (OTCMKTS:LNVGY) | #corporatesecurity | #businesssecurity | #


On 17 April, Lenovo Group Ltd. (OTCPK:LNVGY) (OTCPK:LNVGF) joined the few debt issuers in the Asian market. The new 5-year, 5.75% bond issue of $650 million will be used for debt refinancing as well as for general purposes. Lenovo already had 3 bullet (2 USD denominated and 1 CNY denominated) and 1 convertible bond that mature between 2020 (to be matured) and 2024. USD-denominated bonds trade between 3.5% and 4.8% depending on maturity.

There are several reasons why a fixed income investor should consider Lenovo 2025 bonds for their portfolio.

1. Compared with other hardware manufacturers, Lenovo bonds have very attractive risk/return profile (see table below):

With net debt of around 1x, YTM/YTW for new 2025 bonds is currently around 5.8%. Compare this with leverage at Dell (NYSE:DELL) and Western Digital (NASDAQ:WDC) which yield around 4% and have debt of 3.9 and 4.7, respectively.

  • Another important factor for tech and especially hardware investments is business growth. Bloomberg consensus for Lenovo gives the company a bold 25% EBITDA growth over next 3 years, while many peers are expected to lag behind: Dell, Seagate (NASDAQ:STX) and HP (NYSE:HPQ) are all behind. Western Digital only has high growth related to low base, as its 2019 FY sales went down 20% compared to 2018 FY (EBITDA decreased more than twice).
  • Rating: This is what differentiates Lenovo from other major hardware manufacturers, as it has no rating from any established credit rating agency. On the other hand, this is one of the things that possibly makes Lenovo underpriced and not included in major credit ETFs.
  • In terms of short-term liquidity: All companies below have more or less adequate liquidity compared with their short-term financial obligations. Given their mostly investment grade ratings, the access to funding will be possible even in conditions of financial stress.

Recently issued Lenovo 2025 bonds have great characteristics compared to other global computer hardware producers:

Company

YTW / Mod. Duration

Ratings (M / S / F)

ST debt (incl leases) / cash

Net Debt / EBITDA LTM

Expected EBITDA growth 2019-2022 (Bloomberg Consensus)

Lenovo 5.75% 04/24/2025

5.8% / 4.2

No rating

65%*

0.9x

25%

Dell 5.85%

07/15/2025

3.9% / 4.4

Baa3 / BBB- / BBB-

91%

3.9x

1%

Western Digital 4.75% 02/15/2026

4.3% / 4.8

Baa3 / BB+ / BB+

10%

4.7x

102%

Seagate 4.75% 01/01/2025S

4.2% / 4.1

Baa3 / BB+ / BB+

1%

1.5x

9%

HPQ 6% 09/15/2041

5.0% / 12.5

Baa2 / BBB+ / BBB

26%

0.4x

-5%

Jabil 3.95% 01/12/2028

4.1% / 6.5

Baa3 / BBB- / BBB-

107%

1.6x

26%

Source: Bloomberg

* 77% based on reporting as of 31 December 2019. 65% when adjusted for new bond issuance

Note: Some bonds are excluded as their YTW is too low or they have different industrial focus. The numbers are screened using Bloomberg adjusted figures. Some adjustments may be or may not be justifiable.

2. Lenovo’s business continues its growth trajectory

The company engaged in diversification in order to capture growing niches, although not always successfully. Lenovo has been the leader in desktop/laptop markets for many years.

  • Over last three calendar years, Lenovo revenue rose by 22% and now stands at around $52 billion. In two years – by financial year 2022 (ending in March 2022) – analysts expect Lenovo to grow its topline by further 4%.
  • Lenovo’s recent growth was primarily related to significant growth in PC and smart devices group that increased from $30 billion to $40 billion for 3 years. The company’s mobile business was diminishing since its peak in 2015. Data Centers Group became another important contributor to growth: it rose from $4.5 to $6 billion, while decelerating to $5.5 billion over the last 12 months.
  • Lenovo has become the global PC market leader with a share of 16.7% back in 2013, outpacing HP with its share of 15.9%. But it later lost this role in 2016-17. Over last decade, market leaders became stronger, while laggards became weaker: Lenovo, HP and Dell continued to grow their shares over most of the years, while Acer, Asus, Toshiba (OTCPK:TOSBF) (OTCPK:TOSYY), Fujitsu (OTCPK:FJTSF) (OTCPK:FJTSY) and Samsung (OTC:SSNLF) retreated. (Apple (NASDAQ:AAPL) stands separately due to its premium market segment).

Source: Bloomberg

  • Over early 2010s, the market decreased fast; however, by mid-2010s it flattened: it decreased from 360 million units in 2011 to its around 260 million units in 2016, and continued nearly flat for a couple of years and grew to 267 million in 2019. This year, devices spending is expected to decline by 8.8%, according to IDC, mainly due to coronavirus pandemic.
  • Lenovo’s strength is partially based on its success with the corporate segment which is built on its ThinkPad line, initially developed by IBM (NYSE:IBM). With many corporations focusing more on mobility, investors may expect that this segment will remain a significant driving force of Lenovo sales in the coming years.

Source: flickr.com

3. Lenovo is a globally diversified company

Based on 3Q TTM figures, Lenovo’s key regions by revenue are Americas (32%), EMEA (24%), China (22%) and Asia Pacific (22%). Importantly, over the last 4 years, Chinese revenue decreased from 33% to 22%, while Asia Pacific rose from 15% to 22%. Strong diversification with evenly distributed revenues is advantageous. On one hand, Lenovo depends little on regional fluctuations of demand. On the other hand, a large share of developed markets with hard currencies serve as a natural FX hedge for the company. Also, significant exposure to China and Asia Pacific serve as further room for growth.

4. Lenovo bonds possess defensive characteristics and may be used to diversify a fixed income portfolio

Typically, EM eurobonds are more volatile than comparable DM peers. However, the recent relatively limited volatility of Lenovo is a good indicator of its defensive/diversifiable characteristics (see graphs below for YTD price performance of Lenovo and major ETFs):

  • Take a look at Lenovo 2024 (orange) bond’s relative strength in relation to HYG (the iShares iBoxx $ High Yield Corporate Bond ETF, yellow): At the lowest point in mid-March, Lenovo 2024 was at -10%, while HYG was at -30% level. HYG is still below Lenovo in terms of performance YTD.
  • Lenovo was even better than LQD (the iShares iBoxx $ Investment Grade Corporate Bond ETF, blue) which saw a decline of up to 18% before being saved by the Federal Reserve’s greatest stimulus ever.
  • When compared with HYEM (the VanEck Vectors Emerging Markets High Yield Bond ETF, purple) – Lenovo performed much better.
  • Lenovo’s relative strength is related to its high credit quality, little cyclicity, as well as little or no passive money, which helps to decrease volatility.

Source: Bloomberg

Risks:

Key risk for Lenovo besides industry-related and overall market risks is geopolitical/security/sanctions risk. With US-China relations stagnating, Huawei serves an example of potential risks that can face a Chinese tech company operating in US/developed countries. While Lenovo is not much involved in productions of components where exposure to security/privacy issues occurs, one cannot fully exclude a situation where Lenovo may become somehow involved directly or indirectly through its supply chain to new security/privacy/spy-related concerns/restrictions/sanctions, etc. Also, Lenovo’s largest shareholder (31%) is Legend Holdings, a public company listed on the Hong Kong Stock Exchange. Legend Holdings is 29% controlled by the wholly state-owned Chinese Academy of Science, which makes the perception of a potential case of ‘China government influence’ more solid. Still, at the moment, there are no signs that the risk described has started to realize. Even if this risk realizes, Lenovo is likely diversified enough to withstand a potential shock from potential sanctions; however, this may negatively affect company’s shares and bonds.

Disclosure: I am/we are long LNVGY, LNVGF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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