Morgan Stanley released a research report stating that LENOVO GROUP (00992) delivered a first-quarter performance that significantly exceeded expectations. Its ISG (Infrastructure Solutions Group) revenue nearly doubled year-on-year, with operating profit margins expanding further to 9.1%. Management confirmed this is a structural profitability benchmark, not a one-time phenomenon.

The investment bank raised its target price for LENOVO GROUP by 35%, from HK$34 to HK$46, while maintaining an "Overweight" rating. The new target price represents approximately 12.7 times the forecasted price-to-earnings ratio for fiscal year 2028, slightly above the three-year historical average plus one standard deviation of 12.1 times. Morgan Stanley believes that LENOVO GROUP's sustained achievement of its ISG targets will support a valuation re-rating.

Morgan Stanley noted that the market had significant skepticism about its "Street-high" ISG revenue and profit forecasts, but the results provide strong evidence that OEM pricing power is strengthening in the current "chip inflation" environment. LENOVO GROUP's AI server order pipeline grew 157% quarter-on-quarter to US$5.4 billion, with management hoping to convert the pipeline into revenue as soon as possible, though constrained by component supply.

The investment bank raised its fiscal year 2027 ISG revenue forecast by 28% to US$43.7 billion, which is 56% higher than market consensus, and expects ISG operating profit margins to remain around 9%. On the IDG front, Morgan Stanley forecasts revenue to remain stable, with profit margins maintained at approximately 7%. Management expects PC market sales to decline by double digits year-on-year in the second half of the year, but LENOVO GROUP can outperform the market and is confident in profit margin resilience. Morgan Stanley raised its earnings per share forecasts for fiscal years 2027, 2028, and 2029 by 114%, 42%, and 28%, respectively.