Lenovo – Cash Call

Lenovo offers far more value than Xiaomi.

• Following the acquisition of Motorola Mobility from Google, it looks very much as if Lenovo has realised that to get a thriving handset business one needs vast investment.
• Lenovo has announced that is considering a public listing of its mobile device business at some point in the future.
• Lenovo plans to make this business more than just handsets by expanding into smart home and other types of connected devices.
• The aim here is to have this financed by money from the public markets not just from Lenovo.
• I think that the reality is a little more straight forward
• In order to develop its mobile device business, significant investment is needed and Lenovo simply does not have the money.  
• Following the acquisition from Motorola and the server business from IBM, Lenovo has spent almost its entire war chest and there is very little left for further investment.
• The PC business is faring reasonably well but it continues to exist on wafer thin margins meaning that there is no real cash cow from which to source investment into something new.
• Consequently, funds need to come from outside in order to invest in the consolidation and development of the mobile device business.
• The valuation of the business is expected to be a couple of billion dollars at IPO which comes as a great surprise.
• Lenovo (including Motorola) shipped 25.2m units in Q3 14A and 28.1m units in Q4 14E.
• This is somewhat ahead of Xiaomi on 18.0m and 17.4m respectively.
• This represents smartphone share of 7.8% and 7.9% respectively giving Lenovo 3^rd position in the global smartphone market.
• Upon these devices it was probably slightly loss making with the losses of Motorola Mobility added in for those quarters.
• Xiaomi ships fewer devices than Lenovo, has only slightly higher margins but somehow commands a valuation more than 20x that of Lenovo.
• To me this is more a reflection of how crazy the $45bn valuation of Xiaomi is rather than Lenovo selling itself short.
• Xiaomi has the potential to reap big rewards from developing its own ecosystem but at $45bn a huge amount of success in this regard is already being priced in leaving very little upside.
• Furthermore in the Chinese market Xiaomi will have to contend with the ambitions of Tencent, Alibaba and Baidu all of whom are working on their own ecosystems and have far more money to invest.
• With a valuation of a couple of billion and a solid strategy to develop a wider range of devices even commodity margins could lead to significant upside for investors.
• I would regard an IPO of this business at the discussed valuation as extremely interesting and worthy of further investigation.