On Wednesday, June 3, Jonathan Burgos of?Bloomberg reported that bullish options bets on Lenovo Group Ltd.?signal that the world?s largest personal computer maker will?recover from the steepest monthly slide in more than a year as?it diversifies into servers and smartphones.
Calls that pay should Hong Kong-listed Lenovo gain 10?percent cost 5.5 points more than bets on an equivalent drop on?Monday, the widest gap in three-month options data compiled by?Bloomberg since August 2013. The shares slumped 8.2 percent in?May, retreating from a 15-year high after quarterly revenue fell?short of estimates.
?The share-price weakness will be temporary,? Alex Ng, an?analyst at China Merchants Securities Co. in Hong Kong, said by?phone. ?The PC business will remain a cash cow that should?support the development of their smartphone and server?businesses. The future revenue growth driver will be servers on?strong demand from China.?
With global PC shipments expected to keep dwindling amid?competition from tablets and smartphones, Lenovo spent about $5?billion on acquisitions last year that included Motorola?Mobility and IBM Corp.?s x86 server division. Even as sales in?the three months through March disappointed analysts, profit?exceeded estimates on improving margins.
The company generated 72 percent of its $46.3 billion?revenue in the year ended March 31 from PCs, with smartphone?sales increasing 62 percent to $9.1 billion in the period, data?compiled by Bloomberg showed. Spokesman Brion Tingler said?Lenovo did not comment on share prices or options trading.
Server Growth
In contrast to PC sales, server revenue grew 17 percent?worldwide in the first quarter, according to technology advisory?IDC. Citigroup Inc. expects Lenovo?s x86 business to start?gaining share in China from this quarter, and Bloomberg?Intelligence sees the company as a viable supplier to cloud-computing vendors Facebook Inc. and Amazon.com Inc. based on its?server design and competitive manufacturing.
While potential contributions from acquisitions helped?boost Lenovo shares 19 percent this year through yesterday, such?deals are unlikely to show significant benefits in the short?term, according to Daiwa Capital Markets. The stock gained 0.3?percent at today?s close in Hong Kong.
?Lenovo?s financial performance may not improve much in?the first quarter,? Steven Tseng, a Daiwa analyst in Taipei,?wrote in a note dated May 26. ?PC demand could remain weak?before the launch of Windows 10 in late July. Uncertainty in its?smartphone business may continue.?
Microsoft Corp. is preparing to release Windows 10 on July?29 in a bid to boost the ailing PC market and make the operating?system more relevant for mobile devices.
Custom Smartphones
To help close the gap with mobile rivals Samsung?Electronics Co. and Apple Inc., Lenovo will offer customers in?China the opportunity to customize Moto X brand handsets. Users?can choose the colors, memory size and materials including?leather and wood for smartphones starting at 2,799 yuan ($451).
The HSI Volatility Index, which tracks the cost of options?on Hong Kong?s benchmark Hang Seng Index, was unchanged on?Wednesday after falling 1 percent to 18.49 on Tuesday. The?Chicago Board Options Exchange Volatility Index, or the VIX,
added 1.9 percent to 14.24 yesterday.
Implied volatility, used to gauge the cost of options, for?three-month contracts with an exercise price 10 percent above?Lenovo?s shares was 36.2 on Monday, compared with 30.7 for puts?10 percent below, according to data compiled by Bloomberg. The?gap narrowed to 4.2 points Tuesday.
Lenovo traded at 17.5 times estimated earnings today,?according to data compiled by Bloomberg. That compares with?competitor ZTE Corp.?s multiple of 21.8 times and Coolpad Group?Ltd.?s 25.4 times.
?The company will continue to show good growth in the?longer term,? Stephen Yang, an analyst at brokerage Sun Hung?Kai Financial Ltd. in Hong Kong, said by phone. ?That?s why I?don?t think valuations are stretched even with the rally we?ve?seen so far.?