Blyth Technology Group Investment Thesis

Blyth Technology Group

Investment Thesis

The market is overly pessimistic on Lenovo’s ability to integrate and profit from their recent acquisitions, Motorola and IBM’s x86 server business, which we believe will prove to be long-term drivers of growth and shield the company from declining PC sales.

Company Overview

Ticker (ADR): LNVGY

Current Price: $20.34

Market Cap: $10.54B

52-week range: 16.55-27.99

Dividend Yield: 2.54%

• Lenovo is the world’s leading personal computer manufacturer, serving customers in more than 160 countries.
• Products: Think-branded commercial PCs, Idea branded consumer PCs, servers, workstations, smartphones, tablets
• Three geographic segments: China, emerging markets (excluding China), and mature markets
• Competitors: Apple, Dell, HP, Acer, and Asus in the PC market; Apple, Samsung, HTC, Blackberry, and Nokia in the smartphone market; and HP, Dell, Fujitsu, and Cisco in the server market.

Recent Financial History

Management Team

• CEO (2009) & Chairman of Board (2011): Yuanqing Yang
• CTO & Head of R&D: Dr. Peter Hortensius
• IBM (17 years) - VP for Products and Offerings
• Executive VP, Enterprise and Americas : Gerry P. Smith
• Ex-GM of notebook development at Dell
• Currently oversees x86, backbone of the Enterprise Unit.
• Executive VP, Mobile Group: Jun LIU
• Currently oversees smartphones, smart TVs, slabs.
• Prior leadership in business group, products group, global supply chain.

Recent Stock Performance

Recent News

• 1/23/14: Acquired IBM’s x86 server business for $2.3B to become 3rd largest server producer
• 1/29/14: Acquired Motorola Mobility from Google for $2.9B to become 3rd largest smartphone manufacturer
• 2/3/14: Announced tentative plans to buy Sony’s Vaio PC business
• 2/14/14: Reported Q3 earnings; massive growth but slowing smartphone sales in China and warning of short-term troubles due to acquisitions

Revenue Breakdown

Lenovo’s Strategy

The PC Market

The PC Market

Server Business

• Recently bought IBM’s x86 server business
• “Low end” servers for use by government institutions and 95% of US corporations (as opposed to research/supercomputing)
• Purchase price was $2.3B, down from $4.5B a year ago
• Acquiring the business for cheap
• Deal involves heavy cooperation between IBM and Lenovo
• IBM will continue to distribute x86 under its own brand in the US for near future and support new and existing users of the technology
• Lenovo will actively push IBM server technology in China

Server Business

• Acquisition makes Lenovo 3rd largest server producer in the world
• Lenovo should be able to cut costs by moving production to China
• Lenovo’s position within China should be able to drive sales growth
• Deal should be approved since Lenovo is well-trusted by now and the deal increases competition
• Further develops relationship between IBM and Lenovo, which has proven to be highly profitable for both companies in the past

Mobile

• Lenovo currently producing smartphones and tablets in its MIDH (Mobile Internet and Digital Home) division
• Fastest growing segment at Lenovo
• Currently 2nd largest smartphone producer in China after Samsung and among the fastest growing
• Recently bought Motorola from Google for $2.9B

Chinese Market

• World’s largest smartphone market, and Lenovo’s current home base
• China Mobile currently rolling out its 4G LTE networks, should be complete by end of 2014
• Currently, only 330 million smartphones in China for population of 1.3 billion
• 25% adoption rate vs. 75% for US
• Growing middle class, ample liquidity should boost demand

Motorola

• Instantly makes Lenovo the 3rd largest smartphone producer in the world after Apple and Samsung
• Google never really focused on running Motorola and was more interested in the patents than the hardware business
• MASSIVE synergies
• Motorola brand awareness gives Lenovo a stronger foothold outside China
• Barclays analyst Kirk Yang estimates that integration could cut 70% of Motorola’s expenses

Shades of 2004

• In 2004, Lenovo bought IBM’s loss-making PC business for $1.75B
• General consensus was “Lenovo Who?”
• Lenovo was still trying to expand outside China
• Concerns about cultural differences between Lenovo and IBM
• People thought PC market was too competitive, HP-Compaq would destroy the young company a la Apple or Samsung

Shades of 2004

Shades of 2004

Comps Model

DCF

Recommendation

• Time horizon: 12-18 months
• Price target: $26.00
• Sell if: No margin improvements for x86 and Motorola by year’s end