Highlights

• 1QFY27 revenue rose 43% yoy to US$27b and adjusted net profit surged 176% yoy to US$1.1b, beating our estimate by 77%. 
   
• ISG revenue nearly doubled yoy to US$9b and operating margin swung positive to 9.1%, with the AI server pipeline up 157% qoq to US$54b. 
   
• We raise FY27-29 adjusted net profit by 55-69% and lift our target price to HK$49.00 (19.1x FY27F PE). Maintain BUY.

Analysis

• Significant beat across the board spearheaded by ISG segment. Revenue expanded 43.1% yoy and 24.8% qoq to US$26.9b, beating our/ consensus estimates by 20% on the back of a broad-based outperformance across all segments. Notably, infrastructure service group (ISG) revenue surged 98.4% yoy and 51.0% qoq to US$8.5b, which is 42.7%/36.1% above our/consensus estimates; Intelligent Device Group (IDG) and Solution & Service Group (SSG) had also registered solid growth (27.1% yoy, 17.1% qoq for IDG and 27.7% yoy, 12.5% qoq for SSG) with revenue beating our/consensus forecasts by low-teens %. Core operating margin expanded 2.3ppt yoy and 1.8ppt qoq to 5.7%, primarily bolstered by a 11.1ppt yoy and 5.5ppt qoq margin expansion from ISG. This resulted in an adjusted (non-HKFRS) net profit of US$1.1b, up 176% yoy, beating our bottom line estimate by 77%.
   

• ISG business registered strong growth across both CSPs and ESMBs with revenue growing 98% yoy in both subsegments, mainly driven by surging AI-related servers as well as traditional servers, as reflected in the robust 157% qoq growth in AI server pipeline to US$54.0b during the quarter. Management expects the strong momentum to continue going forward, on the back of mounting AI inferencing and agentic AI demand. 
   
• ISG’s 9.1% operating margin looks sustainable in the near term, underpinned by an improvement in enterprise and small and medium business (ESMB) profitability, significant improvement in scale, as well as the mounting bargaining power given the on-going supply shortages. As such, while management guided for a high single-digit margin % for FY27, we believe risks likely leans on the upside vs FY1Q27’s 9.1%. 
   
• IDG momentum remains solid despite memory cost pressures. Management expects revenue growth to moderate to low double digits in 2QFY27 and single digits for FY27, weighed by cost pressure in both PC and smartphone shipments. Nonetheless, Lenovo maintained a 7% operating margin target for the segment, as premiumisation and economies of scale allow strong pricing power to offset rising component costs and compensate for volume contraction. 
   
• SSG expansion accelerated by cross-group synergies and rapid AI integration. Driven by robust growth in infrastructure as a service and projects and solutions businesses, Lenovo is expecting the SSG business to maintain an elevated 20% yoy growth in FY27, with margins expanding to 22.0%. 
   
• FY27 revenue target of US$100b will be achievable, driven by the robust ISG business. As such, the 3-5-year target revenue is now raised to US$130b, while the 5.0% net margin target remains unchanged.