Nomura Upgrades Lenovo to Buy, Server Business Drives Profit Improvement

Overview

Nomura Securities issued a rating adjustment report for Lenovo Group, upgrading the rating from Neutral to Buy and significantly raising the target price from HKD 11 to HKD 16. The core logic of the report is that strong demand for general servers will drive significant profit improvement, sufficient to offset market concerns about the weakness in the PC business. Although Lenovo's stock price has rebounded 14% over the past month (while the Hang Seng Index fell 2%), the institution believes the potential for server profit improvement remains undervalued by the market and warrants investor attention.

Core views

The server business has become the core growth engine. The report notes that Lenovo's general server business is performing robustly, primarily driven by demand for AI inference and AI agents. Customers like Microsoft and ByteDance have provided positive server growth outlooks, with order visibility potentially extending to Q4 2026. Despite rising CPU and memory costs, Lenovo can pass these cost increases to customers through higher selling prices, maintaining profitability. The institution expects the server business's operating profit to improve significantly and surpass the 2022 historical high (when the general server market faced strong demand and component shortages). PC business faces pressure but remains resilient. The report previously held a cautious view on Lenovo's PC business, forecasting a 10.3% YoY decline in global PC shipments for FY26, mainly due to higher-than-expected retail price increases and shortages in memory and CPU supply. The decline in PC shipments could be more pronounced in the second half of the year, as the impact of retail price increases on end demand lags. However, benefiting from a shift toward premium PCs and price increases (at least 20%+ in 2H26), global PC market revenue may not decline significantly and could even grow in FY26. For Lenovo, PC shipment declines are expected to be slightly below the industry average, with revenue still achieving single-digit YoY growth due to ASP increases. Significant upward revisions to profit forecasts. Based on the judgment that the server business's strong profitability will largely offset the slowdown in the PC business, Nomura raised Lenovo's FY26-28F profit forecasts by 9-45%. Specifically, FY26F net profit was raised from USD 1.674 billion to USD 1.836 billion (+10%), and FY27F from USD 1.671 billion to USD 2.426 billion (+45%). FY27F EPS was raised from USD 0.14 to USD 0.20, a 45% increase.

Analysis framework

Nomura's analytical approach follows a 'business segment-driven' framework. It first identifies the independent growth trajectories of the company's two core business segments (servers and PCs) and then determines which segment's marginal changes have a greater impact on overall profitability. The report employs an 'offset effect' logic: when the profit improvement of one segment (servers) is sufficiently large, it can offset the weakness of another segment (PCs), driving overall valuation reassessment. On valuation, the report uses the PE multiple method, with the target price of HKD 16 based on 10x FY27F EPS (USD 0.2), assuming an exchange rate of 7.85 HKD/USD. The 10x target PE is at the median of Lenovo's historical trading range (4-12x) since 2018, when the company began generating more stable profits. The current stock price corresponds to 8x FY27F EPS, below the target multiple, implying approximately 25.9% upside potential.

Methodology notes

• Valuation MethodPE/PEG valuation

  PE Valuation

  The report uses the price-to-earnings (PE) valuation method, where target price = target PE multiple × forecast EPS. The 10x PE is at the median of the company's historical trading range, representing a reasonable valuation level for the company's stable profit phase.

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Supply-Demand Analysis

  The report analyzes the supply-demand dynamics of the two major businesses: strong server demand (AI-driven) with cost pass-through capability, and weak PC demand but supported by price increases. The relative strength of supply and demand determines each segment's profit outlook.

• Company Fundamentals and Financial Framework

  Business Segment Offset Effect Analysis

  When a company has diversified businesses, the strong performance of one segment can offset the weakness of another. The report concludes that the server business's profit improvement is sufficient to cover the negative impact of the PC business, driving overall valuation upward.

• Event Game Theory and Behavioral FinanceExpectation Gap/Expectation Management

  Expectation Gap Analysis

  The report points out that the potential for server profit improvement was previously not factored into forecasts, and the market's understanding of this is insufficient, creating an expectation gap. Despite the 14% stock price rebound, the institution believes this improvement remains undervalued, constituting a buy rationale.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Lenovo Group (0992.HK)

  Direct Beneficiary: Strong server demand drives profit improvement, offsetting PC business weakness

  Strengths

  General server business robust, driven by AI inference and AI agent demand; ability to pass cost increases to customers; order visibility extending to Q4 2026

  Weaknesses

  PC business faces shipment decline pressure; rising memory and CPU costs; 2H26 PC demand may weaken further

  Comparison

  The report does not include horizontal comparisons with peers

  Risks

  PC demand deterioration, IC and component supply shortages, weaker-than-expected server demand, lack of M&A driving inorganic growth, US-China geopolitical tensions

Key data

• Target PriceHKD 16Based on 10x FY27F EPS of USD 0.2, up from HKD 11 previously
• Current PriceHKD 12.71As of May 19, 2026
• Implied Upside+25.9%Based on target price and current price
• FY27F EPS ForecastUSD 0.20Up from USD 0.14 previously, a 45% increase
• FY26-28F Profit Forecast Increase Range9-45%Reflecting the server business's strong profitability
• FY27F Current PE8xBelow the target 10x PE
• Target PE Multiple Historical Range4-12xLenovo's trading range since 2018 in the stable profit phase
• One-Month Stock Price Performance+14%Hang Seng Index fell 2% over the same period
• FY26 Global PC Shipment Forecast-10.3% YoYDue to retail price increases and component shortages
• 2H26 PC Price IncreaseAt least 20%+Supporting PC business revenue growth

Impact & implications

For Lenovo Group, the strong performance of the server business will reshape the market's perception of the company's profit structure. Previously, the market overly focused on the weakness of the PC business while overlooking the growth potential of the server business. The report believes that as demand for AI inference and AI agents continues to emerge, the server business could become a new profit growth driver, driving a re-rating from a PC hardware company to a data center infrastructure provider. For the industry, the report reflects the improving sentiment in the general server market amid the AI wave. As one of the world's major CPU server suppliers, Lenovo's order visibility extending to Q4 2026 indirectly confirms the sustainability of data center infrastructure investments. Positive outlooks from major customers like Microsoft and ByteDance reinforce this view.

Risks

• PC Demand Deterioration
• IC and Component Supply Shortages
• Weaker-Than-Expected Server Demand
• Lack of Market Consolidation or M&A to Drive Inorganic Sales and Profit Growth
• Escalating US-China Geopolitical Tensions

What to watch

• Whether server business order visibility extends to Q4 2026
• Whether PC shipment declines are below the industry average
• Whether CPU and memory cost increases can continue to be passed to customers
• Whether server business operating profit exceeds the 2022 historical high