The document provides an analysis of Lenovo Group to determine whether the fund should continue holding its equity in the company. It analyzes Lenovo using PEST analysis, Porter's Five Forces model, SWOT analysis, and trend analysis. It also compares Lenovo to competitors and provides technical analysis of Lenovo's stock price. The analysis concludes that Lenovo is a good long-term investment due to its good valuation and corporate fundamentals. The target stock price by the end of 2013 is predicted to be $1.091 based on the PE method and ARIMA model.

1. The 16th
Financial Case
Analysis Contest
Analysis Report
Case Name：
LENOVO GROUP LIMITED – A GOOD
INVESTMENT FOR THE FUND?
Report Title：
Analysis on Whether to Keep Holding
Lenovo's Equity
Team Name：
Hold On
DATE: 2013/11/12

2. Abstract
We analyze Lenovo Group through the following aspects:
1. Fundamental Analysis:
PEST analysis (analyze macro environment)
Porter’s Five Forces model (analyze industry’s appeal)
SWOT analysis (generally evaluate Lenovo Group)
Trend Analysis (mainly focus on profitability & growth)
Comparisons with Competitors (see whether Lenovo outperform its rivals)
2. Technical Analysis:
Hang Seng Index (analysis of K line)
Lenovo Group stock price (analysis of K line)
Intrinsic value of Lenovo (see whether it is overvalued or undervalued)
Stock price prediction (PE method & ARIMA model)
From all the above analysis, we conclude that we should keep holding Lenovo
Group stock for its good valuation from corporate fundamental analysis. And
according to our predictions, our target price is $1.091 by the end of 2013.

3. Contents
1.

4. 1. Introduction:
1.1 Background:
Penhall Investment Funds invested Lenovo stock in June, 2012, a few months
after Lenovo overtook Dell to be the world’s second largest PC manufacturer behind
Hewlett-Packard (HP). So far, the stock was up 7.5% in a year and Grisham, the
portfolio manager, was impressed by the result. But present economical environment
and industry prospects are quite complicated so Grisham is considering whether
Lenovo should continue to be a key holding in the fund.
1.2 Aim:
This is an equity research report of Lenovo stock. This report is mainly composed
of the following two parts.
(a) Fundamental Analysis
In this part, we include macro economy analysis, industry analysis, Lenovo’s
strategy, product line, financial performances, and comparison with main
competitors.
(b) Technical Analysis
This part includes reference to some important economic indicators and K
lines of Lenovo stock. We also use ARIMA model to predict the future figure of
both Hang Seng Index and stock price of Lenovo Group.
Fundamental analysis is more emphasized because this is a long-term investment
rather than short-term speculations. Thus we focus more on company’s profitability
and growth.
1.3 Competitors Selection:
1

5. Here we do some adjustments to the competitors selected. Blackberry and Nokia
is eliminated from our considerations. Blackberry keeps falling in popularity for its
insisting on keyboard and less apps than other mobile phone systems. Nokia keeps
losing money after the attack of Apple’s touch-screen offerings. Nokia’s insisting on
Saipan System makes it lose market share. But we will not neglect the threats of
Lumia Brand. In these years, Nokia cooperates with Microsoft and has launched
Lumia Brand, a smart phone series using Windows mobile phone systems. Although
Lumia Brand is appreciated by the mass, Nokia’s financial performances haven’t
shown positive signs.
2. Analysis of Lenovo Group Limited:
2.1 General Situation:
2.1.1 Company Profile:
Lenovo Group was founded in 1984 in Beijing. It had its initial public offering in
1994 and was listed on the Hong Kong Stock Exchange in 1994. With two
headquarters—one in Beijing and the other in Morrisville, North Carolina— Lenovo
is positioning itself as a global PC company. It sells a wide variety of electronic
devices: PCs, tablet computers, netbooks, smartphones, servers, printers, televisions,
scanners and storage devices.
2.1.2 Idea and Strategy:
Lenovo engages in the development, manufacture and sales of the most reliable,
secure and easy-to-use technology products. It strives for innovation, the lowest total
cost of ownership (TCO) and higher work efficiency, which is its idea.
2

6. Lenovo is a vertically integrated firm, producing half of its products in-house.
Although Lenovo is the second largest global brand in the PC market and PC sales
accounted for 90% of revenues in 2012, the company was looking to diversify its
sources of revenue because the PC market is characterized by a high degree of
competition and slim margins. The company is trying to become a global PC+
innovation leader.
To improve profitability, Lenovo was launching new products such as
smartphones and televisions. Additionally, Lenovo wants to grow its higher margin
server and storage business.
In a word, Lenovo’s strategy is to protect its core markets in China and global
commercial PC sales while attacking to gain share in emerging markets, consumer
sales and mobile internet device sales. It will also keep investing in innovation that
differentiates its products, which pays off both in PCs and in PC+ products.
2.1.3 Major events of Lenovo:
1984 Founded by Lui Chuanzhi, using seed capital from the state-owned
Chinese Academy of Sciences.
1988 Incorporated as Legend Computer Co. Ltd in Hong Kong.
1994 IPO in Hong Kong.
2003 Changing its name to Lenovo.
2005 Acquiring IBM's personal computer business.
2006 Sponsoring the 2006 Winter Olympics in Turin, Italy.
2006 Declaring the implementation of free computer recycling project in
Chinese Mainland.
2008 Introducing the IdeaPad line of consumer-oriented laptop computers and
IdeaCentre.
2008 Expanding focus of “THINK” brand to include workstations, with the
3

7. ThinkStation S10 being the first model released.
2008 Sponsoring the 2008 Summer Olympics in Beijing.
2008 Developing cooperation with McLaren F1.
2009 Oceanwide Holdings Group, a private investment firm based in Beijing,
buying 29% of Legend Holdings, the parent company of Lenovo and becoming the
third largest stockholder.
2009 Liu Chuanzhi being chairman of the board, with Yang Yuanqing being
CEO.
2010 Launching LePhone, Skylight, ideapad U160, etc., strategic products in
China.
2011 Forming a joint venture called Lenovo NEC Holdings B.V. with Japanese
electronics firm NEC. Registered in the Netherlands.
Owning 51% stake, with NEC, 49%.
Exploring cooperation in PC, servers, tablet computers.
2011 Acquiring Medion, a German electronics manufacturing company.
Enjoying 14% of the German computer market.
2011 Forming a joint venture with Compal computer Co., Ltd.
Holding 51% shares.
Specializing in producing lenovo notebook computer products and related
components.
2011 Becoming the world's second-largest supplier of personal computers.
Holding around 13.5% of the worldwide computer market.
2011 Issuing Lepad.
2012 Introduing ideatv K91.
2012 Forming LenovoEMC and offering network attached storage (NAS)
solutions.
2012 Agreeing to acquire Digibras Participacoes SA, Brazil's biggest consumer
electronics maker.
2012 Agreeing to acquire Stoneware, a cloud-computing software company.
2012 Sales volume ranking the first in the world.
4

8. 2013 Included as a constituent stock in the Hang Seng Index.
2013 Declaring the establishment of two new end-to-end business groups:
Lenovo and Think business groups respectively.
2.2 PEST Model:
2.2.1 Political Environment:
Lenovo has broadened its business scale to many different regions around the
world. The whole market can be segmented into three parts according to the political
environments.
First of all, the Chinese market is undoubtedly the primary one for that more than
40 percent of the total revenue of Lenovo is gained in this region [1]. The Chinese
government is now fully supporting a project called Consumer Electronics Subsidy
Program. The program aims to expand the domestic electronics market by offering a
lower selling price to the buyers who lived in the countryside instead of urban areas.
This measure turns out to take effect and the once depressed electronics market was
successfully stimulated. Another important political driver in China is the plan of
further urbanization. Since that the penetration rate of personal computers in Chinese
households is still low, the prospect for Lenovo to increase its sales in mainland China
is really respectable. Furthermore, Chinese government is implementing a hospital
information system domestically. The process of informatization is bound to boost the
sales of the PC manufacturers, which is also an opportunity for Lenovo. However, a
lack of legal protection of property rights in mainland China is definitely a threat for
Lenovo. The company has to take the risk of being plagiarized of its research and
development achievements in its operation there.
Secondly, in India, the government is also supporting Lenovo in its own way. In
the year of 2012, the government of Tamil Nadu ordered a million laptops from
5

9. Lenovo and single-handedly made the firm a market leader. In fact, the Indian
government is still under a course of office-work electronization and the transform
will not be completed till several years later. Recently, there is a saying goes that India
is now the world’s office. Since that personal computer is an essential part in the
office, it can be predicted that the need for personal computers of the Indian market
will keep an upward trend in the future.
Another segment of the global market is the North American, European regions
and Japan. Different from the previous two segments, these three regions have a more
developed and sound political environment. Their government welcomes foreign
companies like Lenovo to establish business in their countries.
2.2.2 Economic Environment:
Economic factors also have inevitable influence on Lenovo’s operating. First,
let’s take a look at mainland China. As the Graph 1 shows, from 2010 to 2013, the
domestic disposable income per capita always rose stably from the quarter to quarter
in every single year [2]. So does the domestic non-productive expenditure per capita.
That means the purchasing power of Chinese is not so badly weakened due to the
financial crisis these years. Hence, the market demand for electronic devices is out of
concern for Lenovo in this aspect.
Nevertheless, Lenovo is facing a problem of increasing product cost in China-
located factories. The fact is, China is no longer the world’s factory it used to be with
a fairly low wage level. Conversely, due to the inflation and appreciation of RMB, the
cost of manufacturing in mainland China has been ascending lately. As a
consequence, Lenovo may have to consider establishing new factories out of
mainland China, for example, countries like Vietnam and Indonesia are becoming
more welcomed for manufacturers because of their cheaper labor force. How to save
6

10. the cost and maintain a good profit margin in mainland China will be a priority in
Lenovo’s future itinerary.
Figure 1: Two Economic Indicators of Mainland China
Indian’s economic condition is not alike that of mainland China. The exchange
rate of Indian rupee against US dollar is constantly dropping according to the statistics
these years (see Graph 2)[3]. Despite of a series of measures taken by the Indian
government and Reserve Bank of India, there still shows no apparent sign of
appreciation in the near future. The depression of the Indian overall economy will
certainly lead to a plunge in the domestic market demand. Lenovo’s sales plan may
need some adjustments as correspondingly.
Figure 2: Exchange Rate of Indian Rupee against US Dollar
7

11. In the rest business regions of Lenovo, the economy is mingled with hope and
fear. As is known to all, North American, European regions and Japan is still under the
shade of the financial crisis started in 2008. Especially in the Europe, nine countries’
credit rating has been degraded by S&P, including one of the largest economies,
France. However, the condition is not totally hopeless. BBC news reported that in
October 2013, Eurozone unemployment falls for first time since early 2011, according
to official data [4]. Meanwhile in the United States, the consumer prices fell 0.1% in
October 2013 as petrol prices dropped, told by the US Labor Department. William
Nicholls of Capital Spreads says: “This is not only good news for consumers, this is
also a welcome development for equity investors, as continuing fiscal stimulus will
keep allowing the companies they are invested in to prosper - the market has rallied as
a result.”[5] All the news above indicates that these countries are undergoing a slow
recovery from the financial crisis, the prospect for Lenovo in these regions are quite
optimistic.
2.2.3 Social Environment:
The social environment is generally the same worldwide. With the pace of life
increasingly quicker, telecommunication devices is becoming more and more
common day by day. Personal computers, which were regarded as luxuries decades
8

12. ago, are now basic appliances in every household. Today, people tend to chase after
other new kinds of electronic devices such as smartphones and tablet pc for that they
provide the users with a distinct feeling and way of entertaining from the traditional
pc. Also, those who own the devices are usually young professionals and they keen on
catching the fashion--- once a new version of the device is released, they will abandon
the old toy and embrace the new one without hesitation, regardless of the high selling
price. This social status is undoubtedly an opportunity for telecommunication
equipment manufacturers like Lenovo.
2.2.4 Technological Environment:
First of all, speaking of technological factors influencing Lenovo, the acquisition
of IBM’s personal computer business in 2005 can’t be paid too much attention to. It
marks Lenovo’s accelerating access to the globe while improving both its branding
and technology. To be more specific, Lenovo benefits from the acquisition mainly in
three ways. It got the ThinkPad brand, IBM's more advanced PC manufacturing
technology and the company's international resources, for example, its global sales
channels and operation teams, which have certainly shored up Lenovo’s sales
revenue. In addition, the entire core technology as well as the research and
development team of IBM enhanced Lenovo’s innovation ability.
Meanwhile, forming joint ventures with Japanese electronics firm NEC facilitates
Lenovo’s further exploring of PC, servers, tablet computers. The cooperation with
Compal computer Co., Ltd enables it to specialize in producing its own notebook
computer products and related components. The newly funded LenovoEMC offers
advanced network attached storage (NAS) solutions. Moreover, acquisition of
Stoneware will improve its cloud-computing business.
Secondly, Lenovo’s investment in and commitment to innovation and technology
9

13. reform is eye-catching. For instance, in 2010, strategic products like LePhone,
Skylight, ideapad U160, were launched in china and met with positive comments.
Generously speaking, the whole world encourages technological development.
Furthermore, as China is the most important market for Lenovo and now it has
been concerning on emerging markets such as India and Brazil, and prospects of its
technological growth are promising. In the field of information application in these
countries, Lenovo has full room for improvement and competition in the markets is
less fierce than in developed countries like the United States.
Last but not least, there is no denying that the dominant position of traditional
super powers in the electronic industry has been trembled. In recent years, with the
prevalence of smartphones and tablets, the rapid rise of the Apple IOS and the
Android systems, the wintel alliance formed by Windows and Intel is confronted with
challenges. The brand-new pattern in the sector is taking shape. Therefore, it makes
sense that Lenovo bought back its smartphone and tablet division in 2009 and makes
great effort in the aspect. Most importantly, the emphasis on property rights protection
nowadays is good to the whole industry.
2.3 Michael Porter's Five Forces Model:
2.3.1 Bargaining Power of Suppliers:
The suppliers’ bargaining power in this market is relatively low because there are
many suppliers and the products that they provide, such as electronic components,
have little differentiation.[6] The fact that Lenovo’s products are not strictly restricted
by suppliers indicates that the suppliers don’t have much power in bargaining. What’s
more, Lenovo itself has several industrial bases so it also has the ability to
manufacture raw material, which means that the constraints on selecting suppliers are
not very large. Lenovo emphasizes on the cost performance, expansion ability and
10

14. service when it is choosing suppliers.
2.3.2 Bargaining Power of Buyers:
With the expansion of the telecommunication and technology industry, now the
supply has excess demand so the position of the buyers is raised. They want lower
prices and higher quality. To buyers from the government, although the quantity of
buyers is small, the purchase quantity is usually very large so that Lenovo should
offer a low price. To buyers like distributers, their bargaining power is also strong
because the quantity of the products they buy is very large. To end-consumers like
families and individuals, they don’t have a strong bargaining power.
2.3.3 Threat of New Entrants:
With the growth of the PC, tablets, phones and TVs market, there are foreseeable
potential entrances in this market. However, the entry barrier is relatively high – the
market is having a higher and higher requirement on technology, scale, brand and
operation. What’s more, the companies in this industry are competing on price to
increase their consumers, which may lower the incentive of new entrants. In a word,
the threat of new entrants to Lenovo is not very large.
2.3.4 Substitutes:
The most probable laptop replacements are tablets and smart phones. People
nowadays pursue the portability of communication and internet tools. Lenovo has
predicted the situation so it has invested much in developing tablets and smart phones.
What’s more, despite the heavy advertisement of these products in the media,
enterprises don’t see them as useful to their organization. These products tend to be
produced as a fashion statement, which get more attention from younger customers.
11

15. As a company with a wide range of customers from individuals to enterprises, the
impact of the shock of new substitutes does not exert a tremendous influence on
Lenovo.
2.3.5 Rivalry:
Currently, there are many rivals in the industry. We analyze Lenovo’s competitors
in terms of its target markets
(1) High-end Market
The typical rival in high-end market is Apple, which is very popular all over the
world. They compete mainly in the area of tablet. Apple was well known for its high
speed, unique style-minimalism, easy to use and high quality. There is no complicated
design and consumers can handle the system even if it is the first time for them to use.
But there are also some disadvantages for Apple products, especially for ipad. Firstly,
it may be not convenient for white-collar workers because for most people, they tend
to do tasks by word, which ipad doesn’t have. In addition, the most import and output
of data has to be operated by computer. So, many people think it is very fussy to
download songs and movies.
Another competitor is Samsung which belongs to all three markets: high-end
market, median-end market and low-end market because its product range is very
wide. Lenovo competes with Samsung mainly in the area of tablet and smart phone.
Recent years, the largest advantage discussed by people is its larger and larger screen
and it is almost as large as ipad Mini. It has almost the same functions as the tablet. In
addition, the price of its smart phone ranges from hundreds to thousands to satisfy
different people. But its battery life is also criticized by people. Even you are not
using your phone or tablet, the power is also used up quickly as long as wifi is open.
12

16. (2) Median-end Market
In the median-end market, the first rival is the largest PC manufacturer: HP in the
world and it indeed has a lot of advantages. For example, it updates products very
fast, which is about half a year. So, it has a lot of series like HP pavilion, Compaq and
r. In addition, most of its products are excellent in quality and appearance. It has
products for different needs whenever customers want products for the youth or
white-color workers. What’s more, its advertising is very well and its logo can be seen
almost everywhere. But it has a lot of BUGs that has been found. For example, there
is the phenomenon of blue screen of death of HP computers for no any reason.
The other rival-ASUS is also very competitive for several reasons. Since ASUS
manufactures CPU and HD by itself and has its own technologies, so, it can controls
price well. Although most of its price is moderate but in 2006, ASUS co-operated with
Lamborghini to release limited edition computer: VX1 to target high-end market,
which was very rare. But it proved to be a great success. Lastly, it pursues high-
quality not to disappoint consumers. But, it is also not perfect since it is criticized by
the quality of its low terminal products: the A and K series and it is relatively
expensive compared to other brands.
(3) Low-end Market
In the low-end market, the most competitive rival is MI Phone, which was very
popular in China and people are even willing to wait several months after ordering
before they get it. In the first quarter of 2013, the market share of MI was 3.66
percent, which was relatively high. The reason of its success is because of hunger
marketing and low price. There are no real stores of MI and customers can only book
online to get one. And for a new series, it is difficult to book one because MI issues
13

17. only thousands of phones every time. In addition, MI’s price is always 2000 and it is
affordable for the majority of people. But on the other side, hunger marketing shows
that MI has no capacity to produce in large quantity.
Huawei is also a local company but its market has been all over the world. It is
reported that Huawei shared the third largest market share: 4.9 percent till 3013.
Huawei’s main advantages are the large screen and cheap price compared to the
quality. Many of its smart phones’ price is lower than 1000. But there are some
common disadvantages of low-end products: low allocation. So, people may suffer
from the inefficiency of heat radiation and other small problems.
2.3.6 Short Summary:
To conclude, in this industry, the bargaining power of suppliers is very low, while
buyers like enterprises and governments have a strong bargaining power because their
purchase quantity is large. Additionally, individual customers have a low bargaining
power. The threat of new entrants and substitutes is small, taking into account the
advantages that Lenovo has had and the wide range of its products. Although there are
many competitors, only few of them such as HP and Huawei have a large impact on
Lenovo considering the target markets.
2.4 SWOT Analysis:
SWOT analysis reflects Lenovo’s competition position in the industry.
2.4.1 Strength:
- Large market share. In China— the largest PC market around the world—
Lenovo has beat many competitors and is in the leadership position. Whether in
the notebook market or the desktop computer market, Lenovo is the firm who
14

18. holds the largest market share. It also takes the first places in global emerging
markets such as India and Russia and has a significantly growing market share in
mature and critical markets, for example, Japan, America and Germany. Lenovo
shows tremendous capability for improvement.
- Competency in mergers and acquisitions. Lenovo has been continuously
acquiring firms to bring patents, new capabilities, assets and skills to the company.
[7] Most importantly, through successful acquisitions and joint ventures, Lenovo
accessed new markets and distribution networks. For example, through the
acquisition of IBM in 2004, Lenovo got some sales channels in the international
market and IBM’s technology, which improved its own brand image. In 2007,
Lenovo announced to stop using the brand “IBM”, only keeping the enterprise
brand “Lenovo” and two product brand “Think” and “Idea”. The double-brand
strategy diversifies Lenovo’s products in the international market.
- Vertical integration. Lenovo’s strategy to vertically integrate let the company to
keep costs low, keep up with the pace, control inventory and rely less on original
equipment manufacturers (OEM). Lenovo manufactures nearly half of its
hardware and has set up production plants in low cost regions such as China,
Brazil and Argentina to benefit from higher margins. It is also able to manufacture
low cost products that are price competitive.
- Understanding of the Chinese market. Lenovo has emerged in China and
continues to be one of the largest players in homeland market. With the experience
of operating more than two decade years in China, Lenovo knows the Chinese
market very much and has the ability to suit Chinese tastes, which results for the
wide acceptance and support for the business' products.
- New idea in employee training. A concept called “Fupan” was emphasized by
15

19. LiuChuanzhi, which means “replacing the chess board”. This new idea can
examine the employees’ every move to improve the next time and entail short
reviews of an incident from that workday or a far more in-depth process.
- Centers of Excellence. Instead of traditional headquarter model, Lenovo manages
3 centers of excellence around the world (US, China and Singapore). The COEs
manage inventory, price products and evaluate performance. They are established
to be closer to consumers and know the consumer demands. COEs help Lenovo to
adapt itself to market changes and new challenges.
2.4.2 Weakness:
- Lack of brand perception in developed countries. Lenovo sells most of its
production in Asia, which is its primary market. The company finds it hard to
access US and Europe markets. Although it acquired IBM in 2004 and took over
its international market, the brand perception in developed markets was not high
because some customers thought that the image of IBM was damaged.
- Low differentiation. Lenovo’s products are little differentiated from that of its
competitors’ such as Samsung and HP. The competition in the markets that
Lenovo involves itself in is very fierce so the low differentiation is a weakness of
Lenovo.
- Low profit margin. The large stream of Lenovo’s revenues comes from
computer, especially laptop, sales, which is a commoditized product with a very
low profit margin.
2.4.3 Opportunity:
16

20. - Emerging markets in developing countries. With the rapid development of
economy, there are many opportunities in emerging markets in developing
countries. For example, India’s smartphone market is developing quickly. In 2003,
India has become one of largest smartphone markets, only after China and US.
Lenovo could easily penetrate India’s market with its already successful low price
LePhone.
- Growth of tablets market. Nowadays the tablets are becoming more and more
popular. It is a very large market which is growing fast Tablets market is expected
to grow in double digits for the next few years. Many companies are trying to gain
a leading position in the tablets market. It is also a good opportunity for Lenovo.
To transfer itself into a PC+ innovation company, Lenovo invests a lot in
developing differentiated products such as Think Tablets. It seizes the opportunity
of the emergence of tablets market.
- Acquisitions. Lenovo can sustain its growth and obtain more patents by acquiring
the firms holding them, just as it did with IBM’s Compaq. Acquisition can also
bring Lenovo many talents and new sales channels.
2.4.4 Threat:
- Declining profit margin on hardware products and low growth rate of the
laptops market. The profit margin in hardware products market is declining
because now the supply in hardware products market excesses the demand. There
are too many competitors in this market. With the rising prices of raw material, the
profit margin will be lower in the future. What’s more, the growth of the laptops
market is slowing so Lenovo must hold market share in emerging markets to gain
profits.
17

21. - Saturated smartphone markets in developed countries. Just like the laptops
market, the smartphone market is very crowded now, especially in developed
countries. Lenovo will have difficulties in growing its smartphone division and
entering developed economies if it wants to compete in these markets.
- Rapid technological development. Now the technology is developing fast. Large
breakthroughs may be made every month so Lenovo is under the pressure to
innovate and release new products in order not to be eliminated from the market.
- Fierce competition. The company faces intense competition in all its business
segments. It competes with many competitors such as Samsung, Apple and HP,
which has been discussed in the five forces model.
2.4.5 Main Product Ranges:
(1) PC
The products of Lenovo are originally famous for its personal computer, so, its
computer definitely has comparative advantages over other computers.
First of all, it is a local company of China- the largest PC market and its computer
has been sold in China for 10 years. So, it knows the taste of local consumers well.
Because China contributes 40 percent of its revenue and 70 percent of its profits, the
market of China is very important. Secondly, after purchasing IBM’s computer
business, its global market share has increased dramatically since it is the brand: IBM
helped Lenovo to open the international market. In 2012, its global market share has
overtaken DELL and become the second largest PC manufacturing, with 15.3 percent.
In addition, Lenovo devotes itself to innovation and diversification. Several series is
18

22. launched like Think, Idea series for different users who want entertainment or office
work and now it has also raised the concept of PC+.
But its PC is also suffering from a lot of difficulties and weaknesses: lack of core
technologies and many competitors. Although in 2004, Lenovo purchased the
computer business of IBM, it still has the disadvantage of technology development.
Its core operating system, CPU and HD are all provided by external supplies, which
makes its price less flexibility and controllable. Besides, Lenovo has many
competitors like HP and ASUS, which will be discussed later.
(2) Smart Phone
In 2005, Lenovo issued its Lephone to launch the market of smart phone. And
now its sales are the second largest in China. To achieve this, it must have a lot of
strong points. First of all, since it is a local company, it knows the needs of customers
well and it can design products that Chinese want mostly. In addition, its quality is of
great excellence with a lot of functions and good quality, and the price is relatively
cheap compared to the quality. Besides, other than China’s market, its smart phone is
also selling in emerging markets like India, Vietnam and Russia. Lenovo tends to
become the leader of global smart phone market.
But Lephone has also shortcomings. Firstly, its experience, research and
development strength and quality are not as good as international phone brands such
as iphone and Samsung. In addition, there is dissatisfaction of Lephone such as the
problem of loudspeaker and the inflexible appearance where local companies such as
vivo and BBK do very well.
(3) Smart TV
19

23. On January 13th
, 2012, Lenovo issued its first smart TV whose price ranging from
6499 to 14999. The TV was famous for its interactive experience between human and
TV, but unfortunately, its sales are not very satisfied. The main reasons are the high
price, lack of advertising and no specific sales channel.
The lowest price of Lenovo’s smart TV is 6499, which is much higher than
traditional TV and is also a little higher than other smart TV. So, people are not
willing to buy it because they don’t think the concept of its smart TV deserve the high
price. Besides, there is not enough advertising for the popularization. When customers
are asked about the smart TV of Lenovo, many of them are ignorant of the products at
all. And when checking the evaluations on the websites of online retailers, few
messages are left, which indicates its poor sales. In addition, there are no specific
channels for its smart TV because it is only sold in several stores instead of special
counters and many salespeople are not able to assist consumers to experience the
system because the complicated system.
(4) Tablet
In 2005, Lenovo issued the tablet called Thinkpad and in 2011 it launched Lepad.
It is reported that it has been the second largest seller of tablet in China. The success
is because of its two characteristics: the differencial price ranging from 1200 to 6800
and the two systems to switch: the OS and windows. Unlike other tablets’ high price,
Lenovo now has tablets of different prices to meet all people’s demands from students
to white-collar workers. People are able to choose the most suitable products. And
since it has both systems of OS and windows, it enables people to switch systems for
different purposes: entertainment and work. When it is used for entertainment, people
can use OS system while they can use windows when work is needed to be done. But
its battery life is criticized by consumers since it can only last about 10 hours before
Lepad is recharged.
20

24. 2.4.6 Short Summary:
By doing the SWOT analysis, we can know that Lenovo has much strength such a
s large market share, vertical integration and advanced company idea. The weakness i
s that its brand perception in developed countries is not very good. What’s more, the c
ompetition is too fierce and some markets, especially those in developed countries, ha
ve even been saturated. However, we also see that there are many opportunities that L
enovo can seize. The emerging markets in developing countries such as India are goo
d chances for Lenovo. It can also obtain further growth by acquiring other companies,
just like what it has done to IBM
3. Financial Statement Analysis:
3.1 Trend Analysis over Past 5 Years:
As the whole world was attacked by US’s Subprime Crisis in 2008 and European
Debts Crisis in 2009, the figures in 2008, 2009 don’t have much referencing value in
analysis. But there exists some other events that affect the changes of Lenovo’s
performances.
3.1.1 Growth and Profitability:
Figure 3 shows all growth and profitability ratios of Lenovo. And each ratio will
be analyzed with display of its trend line.
Figure 3: Ratios about Lenovo’s Growth and Profitability
21

25. Figure 4: The trend line of growth in revenue
Lenovo’s growth in revenue keeps at a high level — higher than 10% — after
2008, and in 2010, 2011 reaches as high as 30%. It indicates that Lenovo’s expansion
strategy is effective and Lenovo’s market share is increasing.
Figure 5: The trend line of gross profit margin
Gross profit margin decreases dramatically after 2009 and keeps at a level around
11%. But we have found out that in 2009 APEC Small and Medium-sized Enterprise
22

26. Summit, Lenovo’s chairman of board of directors said that Lenovo has reduced
product prices six times in order to survive the global financial crisis. This may
explain sudden decrease in gross profit margin.
Here it is worth mentioning that in 2008 Lenovo was the cooperative partner of
the Beijing Olympic Games. Lenovo offered equipments, involving desktop
computers, laptops, servers and printers, as well as technological and capital support.
Thus its profitability in 2008 hadn’t been affected dramatically in spite of decrease in
sales.
Figure 6: The trend line of net profit margin
Net profit margin keeps rising steadily after the financial crisis. The reason of
high net profit margin in 2008 is the same as high gross profit margin in 2008 in
previous section. Compared to the high growth in sales, increase in net profit margin
is relatively low. This indicates that Lenovo is still suffering an embarrassing situation
— high sales volume with relatively low operating income.
Figure 7: The trend line of ROE
23

27. ROE increases sharply from 2008 to 2009 and then increase stably. ROE is the
most important ratio for equity investors. This indicator is influenced by many factors
and this will be discussed in detail later.
From the above 4 ratios, the profitability of Lenovo is good, but Lenovo still has
big challenges to improve its profit margin.
3.1.2 Efficiency:
Figure 8 shows all efficiency indicators of Lenovo. And each ratio will be
analyzed with display of its trend line. Here only the trend will be discussed and the
further evaluation of these indicators will appear in the next part — comparisons with
other competitors.
Figure 8: Ratios about Lenovo’s Efficiency
Figure 9: The trend line of Days sales outstanding
24

28. This indicator represents average period of collecting receivables. This figure
keeps rising and we may infer that Lenovo increases its sales by offering more credit
sales. But too much credit sales will incur risks of bad debts and inconsistency
between cash inflow and revenue, which may influence Lenovo’s liquidity.
Figure 10: The trend line of Days inventory outstanding
This indicator represents the average period of selling all inventories out. It
fluctuates during these years but the general trend is upward. It means that the
liquidation of inventories is slower, namely the management of inventories is less
efficient. This indicator is not quite consistent with huge growth in sales but it
coincides with Lenovo’s principal of keeping as little as 5 weeks’ inventories on hand.
25

29. Figure 11: The trend line of Days payables outstanding
Days payables outstanding represents the average period of making full payments
to its creditors. The indicator fluctuates sharply but show downward trend generally.
Lenovo is rated as AAA by Joint Credit in 2012.[8] For a powerful firm like Lenovo,
the ability to extend payment period is also kind of short-term financing. Thus the
larger this indicator is the better.
Figure 12: The trend analysis of total asset turnover
Although sales increase dramatically, total asset turnover decreases a lot. This
indicates that the production efficiency and usage of assets are not efficient.
Considering that the expansion strategy of Lenovo includes purchasing more assets or
equipments, the decrease is quite acceptable. But Lenovo need to pay more attention
to asset management.
26

30. From the above 4 ratios, Lenovo’s resource management isn’t quite efficient. As
these years Lenovo conducts a lot of merging and acquisitions abroad to expand its
business market, it is still under the stage of global integration. Thus the relatively
inefficient management is reasonable.
3.1.3 Financial Leverage:
Figure 13: Ratios about Lenovo’s Financial Leverage
Long-term debts to total assets ratio always keeps at a very low level. This means
that Lenovo does not use financial leverage to increase its volatility of income. It
won’t bear the burden of regular payments and principal payments during its
operations and thus it won’t meet debt crisis.
Interest coverage is negative in 2008 and this figure has no meaning. This
indicator keeps increase but it reaches an extremely high level in 2012. This mainly
results from increase in Lenovo’s net income and depreciation.
3.2 Main Ratio Analysis of Forecast Balance Sheet & Income Statement:
To further analyze whether Lenovo’s profitability is stable and continuing, we do
the forecast on Lenovo’s balance sheet and income statement in 2013 and 2014 by
sales-percentage method in order to implement DuPont analysis.
27

31. It is clear from see figure 16, Lenovo’s ROE may decline 1% every year,
suggesting its profitability would fall but a small amount. It is not difficult to find that
the profit margin of Lenovo will keep at the same level in the coming two years. But
they will be slightly lower than those in 2011 and 2012, meaning the profit Lenovo
will get out of its revenues may slow down a little bit. Asset turnover will increase
and stand higher than that in the past two years, so Lenovo tends to use its assets more
efficiently. Lenovo may use less financial leverage since the equity multiplier will go
down in 2013 and then remain stable in 2014 and it will have less financial risks.
If we combine these forecasted indicators together, Lenovo will have mildly
reduced but constant profits from revenue, more efficient use of assets and less
financial risks. Hence, the profitability of Lenovo is predicted to be steady and
sustained, so it will possibly have an optimistic prospect and therefore worth
investment.
Figure 14: Forecast of Lenovo’s Balance Sheet in 2013 and 2014
28

32. Figure 15: Forecast of Lenovo’s Income Statement in 2013 and 2014
Figure 16: Forecast of Lenovo’s ROE decomposition in 2013 and 2014
3.3 Comparisons with Competitors according to Financial
29

33. Performances:
3.3.1 Comparisons Based on Financial Statements:
Merely analyzing the financial statements of Lenovo is far from enough to figure
out its true financial position. Hence, it is essential to make comparison with some
other enterprises which are in the same industry. Here, five major competitors are
selected in the comparison, which are Acer, Apple, Dell, HP and Samsung.
3.3.1.1 Analysis of common-sized balance sheets:
Firstly, looking at the cash & marketable securities account, Lenovo is at an
average level of the industry. While in the aspect of the account receivables, Lenovo
seems to have a much higher figure than the other five enterprises except Acer. This is
partly due to the fact that Lenovo tries to boost its revenue and expand its market
share by encouraging credit sales. In addition, it is worth mentioning that Apple’s
account receivables occupy merely 6.2% of its total assets in 2012, which is only one-
third of Lenovo’s figure that year. However, since the sum of the two accounts above
reflects the liquidity of a company, Lenovo has a quite good performance.
Lenovo’s inventories are also higher than its competitors except Acer. While
Apple shows an extremely low storage, namely 0.4% of the total assets in 2012. This
may attributes to their different marketing strategies. Apple is famous for its hunger
marketing, so it is no wonder that it has fewer inventories.
Figure 17:
Lenovo has the fewest fixed assets among all the six enterprises, whereas
30

34. Samsung has the largest amount, which is nearly 40% of the total assets.
Other items of long-term assets of Lenovo remain an ordinary level among the six
except for its intangible assets, which is much higher than Apple, Dell, HP and
Samsung. Also, Apple and HP have total long-term assets which is times as much as
the others’ due to their extremely high long term investments and other assets
respectively.
Figure 18:
Total current liabilities of the six are listed below. Even though Lenovo has a
relatively low amount of short term borrowings, it still has the highest percentage of
total current liabilities.
Figure 19:
In the perspective of long term liabilities, Lenovo shows a middle level judging
from the two years’ data comprehensively.
Figure 20:
Finally comes the equity part. In contrary to the other five companies, Lenovo’s
retained earnings is quite low, ranking the second last. Conversely, Apple, Dell and
Samsung’s retained earnings are fairly remarkable and they are still showing an
upward trend. Moreover, Lenovo has the lowest total equity among the six.
31

35. Figure 21:
3.3.1.2 Analysis of common-sized income statements:
Though Lenovo’s cost of goods sold decreased a bit from 2011 to 2012, it still
remains a quite high level compared with the other competitors’. Selling, general &
administrative as well as other expenses of the company are in the common position,
while Samsung shows relatively higher figures in both aspects and the data are on the
rise from 2011 to 2012.
Operating income of Apple ranks the first among the six enterprises mainly due to
its low cost of goods sold, with Samsung the second. All in all, the same trend can be
seen in the net income, taken interest expense, non-operating income and income tax
into consideration. Specifically, increase of net income occurs in all the six except HP
in 2012, which can be traced to its extremely large figure of other operating expenses
that year, 17.2%.
To conclude, Lenovo maintains stable profitability despite its comparatively
lower net income. Last but not least, Acer has negative net income in both years
discussed.
Figure 22:
32

36. 3.3.1.3 Analysis of statements of cash flows:
To begin with, the amount of Lenovo’s net income is not as large as those of
Apple, Dell and Samsung because of the difference in their company structures and
strategies. However, after adjustments, Lenovo’s net cash flow from operating
activities (CFO) in the year 2012 is only approximately one percent of the previous
year’s data. It deserves attention because the figure is far too small both compared to
its net income and the previous figure mentioned above. Also, though HP and Acer
underwent negative net income in 2012, they seem to have positive and adequate
CFO. Details of the section are listed below.
Figure 23:
Then comes to the cash flow from investing activities (CFI). In this item, Apple
and Samsung show an extremely high level, whereas Lenovo seems to have a much
lower cash outflow. As a matter of fact, many factors could have influence on
Lenovo’s CFO in the two fiscal years.
Figure 24:
Lenovo’s cash outflow from financing activities was also relatively low among
the six. Considering that the retained earnings of Lenovo in 2011 and 2012 are not so
high as the other five, which has been shown previously, the correspondingly lower
dividends paying may be an important reason for such a low cash outflow.
33

37. Figure 25:
3.3.2 Comparisons with Competitors Based on Ratio Analysis:
As Lenovo is best known as a global PC company, we then will compare it with
the companies that have similar major business. After carefully examining the capital
structure and business strategy, we chose Hewlett-Packard, Dell and Acer to do the
ratio analysis, which, in sequential order, is the world’s largest, the third and the
fourth manufacturer of PCs and Lenovo ranks second.
3.3.2.1 Liquidity analysis:
Figure 26: Liquidity ratios of Lenovo, Acer, Dell and Hewlett-Packard
Basically, all these four companies have the same cash and market securities to
total assets. So, this may be the common characteristic of information technology
industry.
The acid-test ratios of Lenovo, not differing much from Hewlett-Packard, are
lower than Acer and Dell. But none of the ratios are greater than 1 time, so the short-
term solvency of Lenovo is acceptable.
The four companies’ current ratios are approximately 1 time, thus the assets
liquidity of Lenovo is at normal level.
34

38. Lenovo has the lowest working capital-to-sales, indicating the firm's ability to
finance additional sales without incurring additional debt is relatively weak and this
could partly explain why Lenovo keeps financing through current liabilities.
It is interesting to notice that HP, as the first PC manufacturer, nearly has the
same liquidity level as Lenovo in years 2011 and 2012. This may present Lenovo with
chance to overtake HP as the largest computer manufacturer in the world. However,
Dell and Acer both are strong in liquidity and this could be a threat to Lenovo.
3.3.2.2 Efficiency analysis:
Figure 27: Efficiency ratios of Lenovo, Acer, Dell and Hewlett-Packard
Although Lenovo had higher days sales outstanding than Dell in 2011, it turns to
be the company that has the lowest index while Acer’s is the highest. Since credit
sales are prevail in today’s transactions, accounts receivables occupy a large part in
most companies’ assets. Theoretically speaking, the lower the days sales outstanding,
the more efficient the company uses its current assets. Lenovo tends to be more risk
averse than other companies since it shortens the collection period of accounts
receivables and tries to avoid the occurrence of bad debts. Though higher days sales
outstanding ratio can indicate a customer with credit problems and/or a company that
is deficient in its collections activity, but a low ratio may indicate the firm's credit
policy is too rigorous, which could hamper sales.
35

39. Lenovo’s and Acer’s days payables outstanding have similar status as their days
sales outstanding. DPO provides one measure of how long a business holds onto its
cash. Theoretically, we expect longer period of days payables outstanding as accounts
payable is a primary way to finance and will be treated as extra working capital as
long as the company doesn’t pay it back. The low days payables outstanding of
Lenovo makes it relies heavily on current liabilities. Moreover, in the same industry,
companies that have high DPO are usually stronger in market position, have huge
purchase quantity and with good reputation. Therefore, Lenovo is relatively passive in
the use of payment for goods while gets worse credit terms from their vendors than its
competitors.
DIO begins when companies acquire inventories and ends until firms selling
them. As can be seen, Lenovo still has minimum days inventory outstanding and Acer
owns the maximum. The inventory turnover rate of Lenovo thus is the fastest,
suggesting Lenovo has an optimistic sales condition. In addition, we can draw the
conclusion that Lenovo has better inventory management strong and marketable
goods, therefore, its inventory liquidating ability is positive.
Another important indicator is cash conversion cycle. Lenovo has the second
shortest cash conversion cycle which is still similar to HP, so it has an efficient use of
capital and positive operating income. Dell’s cash cycle is negative because it
prolongs the days payable outstanding while Acer has the longest cash conversion
cycle due to its loose credit policy and inventory backlogs.
In conclusion, Lenovo, by and large, have the same efficiency level as HP. This
may be a good indication that Lenovo can possibly exceed HP in the future as HP
experienced a series of missteps after 2010. Acer, whereas, is on the whole gaining
more popularity these years, which poses a threat to the growth and expansion of
36

40. Lenovo. Acer has looser credit policy which will surely attract the customers.
Meanwhile, the credit terms given by the suppliers are better than other competitors,
thus it requires less short-term borrowings from banks and will have less financial
risks. Fortunately, Lenovo may have developed and offered more popular goods than
Acer, actually, all other corporations, and this competitive advantage will let Lenovo
go further.
3.3.2.3 Financial leverage analysis:
Figure 28: Financial Leverage Ratios of Lenovo, Acer, Dell and Hewlett-Packard
Lenovo relies slightly on borrowings from banks since it has the lowest debt-to-
total assets ratio. Obviously, a higher debt-to-total assets ratio suggests that a
company has a higher chance of insolvency, or the inability to pay back its debts, than
a lower ratio. So, the higher the ratio, the greater risk will be associated with the firm's
operation. In addition, high debt to assets ratio may indicate low borrowing capacity
of a firm, which in turn will lower the firm's financial flexibility. Hence, Lenovo has
low financial risk. But some debt can be good for Lenovo and can help it generate
more earnings, and Lenovo thus may have weaker ability to boost sales than the
company who employs higher leverage, i.e., Hewlett-Packard and Dell.
37

41. Personal computer companies have a debt/equity of under 0.5[9], then all these
four companies have appropriate debt level. The low debt- and long-term debt-to-
common equity ratios of Lenovo both give us the idea that Lenovo has been
conservative in financing its growth with debts like Acer, compared to the aggressive
borrowing strategy of HP and Dell. As a result, the net profit of Lenovo will not be
influenced so greatly as other competitors’. In fact, if a lot of debt is used to finance
increased operations (high debt to equity), the company could potentially generate
more earnings than it would have. If this were to increase earnings by a greater
amount than the debt cost (interest), then the shareholders benefit as more earnings
are being spread among the same amount of shareholders. However, the cost of this
debt financing may outweigh the return that the company generates on the debt
through investment and business activities and become too much for the company to
handle. This can lead to bankruptcy, which would leave shareholders with nothing.
Consequently, Lenovo could use a little higher financial leverage than what it is now
but such leverage should fall in average industry range.
Furthermore, the amount of required interest expenses from Lenovo is rather
small because of Lenovo’s few borrowings from banks, and therefore Lenovo has the
highest interest coverage rate. Seen from the financial statements, Acer experienced
losses in 2011 and 2012 and HP in 2012, while Lenovo had negative interest expenses
in 2011 and HP in both 2011 and 2012, so sometimes the EBIT/Interest and
EBITDA/Interest is not possible to be calculated.
From the above analysis, we can conclude that Lenovo and Acer have similar
capital structures. They tend to use less bank loans and have low financial leverage
and risks. By contrast, Dell and Hewlett-Packard rely more on borrowings, involving
more risks but higher profit in good economic condition than Lenovo.
38

42. 3.3.2.4 Growth analysis:
Figure 29: Liquidity ratios of Lenovo, Acer, Dell and Hewlett-Packard
Lenovo, though suffered a downward trend in sales growth speed, has an absolute
advantage in sales growth, operating income growth as well as net income growth
over other selected competitors. While it is clear that the sales volume of Acer, Dell
and Hewlett-Packard is declining in recent two years. So, why is the case.
Acer has suffered losses since 2010. Wang Zentang, the chairman of Acer, has
always believed that the importance of P and NB were higher than that of mobile
phone and tablets. He didn’t catch the change trend of market direction, thus resulting
in the poor strain capacity with the rise of Apple and Samsung. Acer then hardly had
competitive products in smartphone and tablet industry. What’s more, Wang insisted
on supporting all products produced by Microsoft only without the expectation that
Android and IOS would beat Microsoft, which turned out to be a rout in almost all
product lines and a disaster to its operation. Fortunately, Acer successively became
one of the top-tier London Olympics sponsors and senior partners of The Olympic
Games in 2012, turning the table and having a slower pace of declines at last.
Dell performed well in 2011 but after missing out the smartphone trend, its
revenue and profit growth slumped dramatically. Dell’s announcement that it doesn’t
want, or can’t get, a slice of the smartphone market[10] stands out as a surprise at that
time since people were being told that the PC market was shrinking, Android’s market
39

43. share was growing, and the smartphone business had the potential to be worth $150
billion by 2014. According to the company’s VP of Global Operations, Jeff Clarke,
Dell had no plans to re-enter the market in the near future either, thinking it needs a
lot of investments to really be successful in smartphone industry. Then in November,
analysts figured its revenues fell by 26-percent and its share of the business dropped
by 6-percent too[10].
HP’s growth declined sharply after a series of missteps since 2010. First, it hasn’t
grown its own leaders, all but Cathie Lesjak, the CFO who filled in as interim CEO,
have come from outside the company. Second, Carly Fiorina attempted to ditch HP’s
stodgy but hardworking and open culture, setting it on the path toward becoming a
slave to the supply chain rather than a company obsessed with invention,”
Businessweek’s reporters write. Meanwhile, the boardroom leaks to reporters became
a massive scandal that showed how dysfunctional HP’s leadership had become. Third,
Hurd’s cost-cutting, even though save the company from heavy loss, became almost
maniacal. He insisted on inexplicable cost-saving measures, like turning the lights off
at 6 p.m. at some facilities to save on electric bills so employees couldn’t work late,
Fortune previously reported. Fourth, Even the President of the United States only gets
four years to do big things.[11] Yet Meg Whitman wants five years but spent her first
year announcing one horrible bit of news after another. Fifth, HP has a mobile
strategy in shambles. Whitman has said that HP needs to create its own smartphone,
but it won’t be happening in 2013 since it can’t lose billions getting into the
business[12].
Lenovo has nearly seized every opportunity in recent years and had comparably
better strategies, so chances are that it be the largest PC manufacturer in the world in
the near future.
40

44. 3.3.2.5 DuPont analysis:
Figure 30: DuPont analysis of Lenovo, Acer, Dell and Hewlett-Packard
Lenovo’s return on equity always keeps at a high level while its competitors’
ROE is decreasing and even becomes negative, so the shareholders equity in Lenovo
is going up. Whereas, the problem is that this number can also rise simply when the
company takes on more debt, so we will use DuPont analysis to make our
examination clearer and more organized.
We have ROE broken down into net profit margin (how much profit the company
gets out of its revenues), asset turnover (how effectively the company makes use of its
assets), and equity multiplier (a measure of how much the company is leveraged).
Lenovo’s ROE goes up due to the increase in net profit margin and asset turnover,
which is a very positive sign for the company. It uses its assets efficiently and makes
more profits. The equity multiplier, i.e., financial leverage goes down, indicating
Lenovo is managing itself better. The equity multiplier, though still the highest among
the four corporations, goes down, indicating Lenovo is managing itself better. ROE of
Acer, Dell and HP all decreased in these two years. Acer has a recovering profit
margin though it remains negative, but this is promising phenomenon to the profit. As
for Dell, profit margin, asset turnover and equity multiplier all decline, so Dell makes
less profit, manages its assets deficiently but lowers its financial risks. Although HP’s
uses its assets a bit more efficiently, the slump in its profitability makes HP’s ROE
41

45. jump sharply and this fall cannot be remedied by the increasing employment of
financial leverage.
So we could have some confidence there to state that Lenovo is performing well
in PC market and growing steadily. Despite HP’s dominant power in computer
industry, Lenovo is on the way to overtake the leadership as the world’s first PC
maker. However, Lenovo should not overlook the growth momentum of Acer, which
is a big challenge for Lenovo.
3.3.2.6 Two nemeses - Apple and Samsung:
As Lenovo it targeted to be a global PC+ innovation leader, it will inevitably
confront Apple and Samsung, two nemeses who are now dominant in smartphone and
tablet market (Blackberry’s and Nokia’s market share is on the decline, so we just not
do the comparison between Lenovo, Blackberry and Nokia). Their sales and net
income grow at a rapid rate, much more than those of Lenovo, thus they both keep a
very high level of CFO and profitability. Since Apple and Samsung have very
different capital structure and operating model from Lenovo, we will mainly focus on
the DuPont analysis of these three corporations.
Figure 31: DuPont analysis of Lenovo, Apple and Samsung
42

46. As shown in the Figure 29, not surprisingly, Apple has the top ROE due to its
unique design, wide popularity and Steve Jobs sharp observations [13]. Apple’s profit
margin, if compared with other seven companies together, is also the top one. Apple is
so profitable that even there is a slight decline in its asset turnover, ROE still keeps
climbing. Apple hardly borrows any loans from banks because its CFO is affluent to
maintain the essential operations and expansions every year, then Apple’s leverage
keeps at a lower level than other competitors and relief itself of the debt crisis. All
these place great pressure on Lenovo
The ROE of Samsung falls below that of Lenovo. This seems to be optimistic for
Lenovo. However, Lenovo’s high ROE is due to its larger debts than Samsung and
Samsung’s profit margin is actually almost 10 times of Lenovo’s, which makes
Lenovo’s way to a leader in PC+ era rather tough. Meanwhile, Samsung’s income
expenses are always negative in 2011 and 2012 and this is a sign for the fast growth of
Samsung.
Faced with the strong advantages of Apple and Samsung and other unknown but
potential competitors, Lenovo therefore has to do more to realize its goal of being a
leader worldwide.
4. Stock Price Analysis & Forecast:
4.1 Hang Seng Index:
Hang Seng Index is the most authentic and representative index of Hong Kong
Stock Market. It is the benchmark of the Hong Kong stock market. What’s more, in
February, 2013, Lenovo was incorporated in the Hang Seng Composite Index.[14]
Thus we start the analysis of Lenovo’s stock price with the research in HSI’s future
43

47. trend.
4.1.1 Recent Decline:
From the May 29th, influenced by huge decline of other Asian stock markets, HSI
dumped. From Figure 30 we can see that HSI took an upstanding start but was pulled
down in the afternoon by Japanese stock market, which dumped by 3.7% on May 30th
.
And the weak trend in Asia has already lasted for consecutive 5 market days till now.
Also from early June, the expectation of American quitting QE becomes stronger,
which increases investors’ anxiety. The bad performances of foreign equity market
and no stimulating information in domestic market make HSI, as well as Shanghai
and Shenzhen Stock Index, declined sharply. But according to mainland China’s
statistics, PMI in June reaches 50.8%, which is higher than expected, we may expect
increases later.
Figure 32: The time series line of HSI on May 30th
4.1.2 Analysis of K Line:
Figure 33: Daily K Line of HSI
44

48. From the K line, it is easy to find out that from May 29th
, the index was below all
the mean lines (10-day mean line, 20-day mean line & 60-day mean line) and the
whole market was in short position. And the two short-term mean lines declined,
intersecting the 60-day. Here the 60-day mean line still shows upward trend.
Considering momentum effect in stock market, the index will continuously drift
downward, change the trend of 60-day mean line and the intersections will become
so-called “death intersections”. By the way, the dealing volume hasn’t shown obvious
decline. Thus in short term, HSI will keep the downward trend.
Figure 34: KDJ & PSY Line
The J line keeps at a very low level, about -6. And PSY line also declines to about
45

49. 30, which is very close to the oversold level, 25. Thus, we think the later decline
won’t matter in the long term for that the market will self-correct and return to its
intrinsic value.
Thus from the above analysis, we conclude that in short term HSI may drift down
by momentum effect, but it will turn upward for that the decline in this period is
mainly affected by foreign stock market.
4.2 Stock Price of Lenovo Group:
4.2.1 Technical Analysis:
Figure 35: Daily K Line of Lenovo Group
From the graph, we can see that stock price of Lenovo soared in the past two
weeks, which is not consistent with the trend of HSI. The huge growth is for that
Lenovo’s estimated earnings for the whole accounting year will increase by about
34%, which is much higher than expected one.
Figure 36: MACD
46

50. From MACD, we can see that stock price of Lenovo Group has kept upward
trend for a certain period. But the spread between the two lines shows sign of decrease
and “death intersection” may come up.
Figure 37: KDJ
All the K line, D line and J line is at a high level, around 88. This means that
Lenovo stock is overbuying in terms of short-term, middle-term and long-term.
Figure 38: PSY
The PSY line is also at a high level.
Thus combining above analysis and bad performances of international stock
market, the upward trend of Lenovo Group may be changed in the near future.
4.2.2 Stock Price Prediction:
4.2.2.1 Intrinsic Value Prediction:
47

51. (1) CAPM
Here we use Capital Asset Pricing Model to calculate the expected return of Lenovo
Group (00992hk).
E(ri): the expected return of Lenovo Group
Rf: risk-free interest rate
βim: sensitivity of Lenovo to systematic risk
E(rm)：expected return of the whole equity market
Here we take Hong Kong’s risk-free interest rate on May 31th, 0.85%. Collecting
monthly stock price of Lenovo Group and Hang Seng Index from June, 2003 to May,
2013, we can calculate E(rm) and β coefficient by adjusting the expected rate of
return to relative return rate based on previous month’s. The detailed calculation
process is displayed in Appendix I. The result is that β equals 1.378, E(ri) equals
13.93% and market risk premium equals 9.49%.
(2) Dividend Discounted Model:
Vp: value of stock right
D: dividend
K: required return
g: growth of dividend
Using the results from CAPM, we assume that after 2012, the company keeps a
stable growth rate at 11.93%, g=ROE*(1- Dividend Payout Ratio).
Figure 39:
48

52. The result is that Vp equals 1.35178, which is higher than 0.91. Under current
exchange rate of 7.763 Hong Kong Dollar/$, the intrinsic value of Lenovo is about
10.49 HKD and this figure is much higher than current price, 7.064 HKD. Thus
according to CAPM, we should hold Lenovo’s stock.
4.2.2.2 PE Ratio Approach:
Figure 40: Predicted Stock Price
E(p)=PE*EPS
All the results are shown in the table and this is lower than the intrinsic value
calculated in previous part. After 2013, the estimated stock price $0.992, which equals
7.701 is higher than present $0.91, namely 7.064. According to PE Ratio Approach,
we should hold Lenovo’s stock.
4.2.2.3 ARIMA Model:
In order to know the probable variation trend of the stock prices of LENOVO
(00922hk) in the future, we analyze its historical data and do some prediction using
ARIMA model.
49

53. (1) Data Collection
We calculate the return rate of Lenovo’s stock from June.200 to May.2013 based
on the stock prices that are collected on sina financial network. Following is the data
we have collected.
50

54. Time Return Rate Time Return Rate Time Return Rate Time Return Rate
2003.0
7
0.1731 2004.0
6
-0.1143 2005.0
5
0.0248 2006.0
4
-0.0169
2003.0
8
0.0984 2004.0
7
-0.0184 2005.0
6
-0.0726 2006.0
5
-0.1897
2003.0
9
-0.0746 2004.0
8
0.1502 2005.0
7
0.1435 2006.0
6
0.0979
2003.1
0
0.2097 2004.0
9
0.0735 2005.0
8
0.2167 2006.0
7
-0.0310
2003.1
1
-0.1067 2004.1
0
0.0646 2005.0
9
0.1719 2006.0
8
0.3000
2003.1
2
-0.0060 2004.1
1
-0.0357 2005.1
0
0.0133 2006.0
9
-0.0585
2004.0
1
0.1261 2004.1
2
-0.1370 2005.1
1
0.0000 2006.1
0
0.0817
2004.0
2
-0.1280 2005.0
1
-0.0987 2005.1
2
-0.0579 2006.1
1
-0.0544
2004.0
3
-0.1346 2005.0
2
0.0619 2006.0
1
-0.1257 2006.1
2
0.0096
2004.0
4
-0.1519 2005.0
3
0.1883 2006.0
2
0.0224 2007.0
1
0.0032
2004.0
5
0.0208 2005.0
4
-0.0868 2006.0
3
-0.0781 2007.0
2
-0.0536
Time Return Rate Time Return Rate Time Return Rate Time Return Rate
2007.0
3
-0.0467 2008.1
0
-0.3224 2010.0
5
-0.1962 2011.1
2
-0.0336
2007.0
4
0.1014 2008.1
1
-0.2115 2010.0
6
-0.0998 2012.0
1
0.1988
2007.0
5
0.2381 2008.1
2
0.1788 2010.0
7
0.1769 2012.0
2
0.1063
2007.0
6
0.1821 2009.0
1
-0.3033 2010.0
8
-0.1062 2012.0
3
0.0175
2007.0
7
0.1410 2009.0
2
-0.0204 2010.0
9
0.0740 2012.0
4
0.0672
2007.0
8
-0.0171 2009.0
3
0.2361 2010.1
0
0.0480 2012.0
5
-0.1153
51

55. （Source:http://stock.sina.com.cn/hkstock/quotes/00992.html)
(2) ACF and PACF
We get the correlogram of the return rate of stock after doing the first-order
difference and deleting the zero data.
- acf - - pacf -
52

56. From the two grams, we can see that there exists an autocorrelation in the data so
then we analyze it using a time series model.
(3) Model Establishment
Akaike information criterion (AIC)
k: number of parameters
L: likelihood function
According to the correlogram, we assume an ARIMA (2, 1, 5) model so R=2 and
M=5. The residuals of this model follow independent normal distribution. We do
some calculation of models whose R and M vary from 0 to 10 through Matlab and
53

57. find that the model ARIMA (2, 1, 5) has the smallest AIC of -108.638746. (See all the
calculation result in the appendix1.) Abided by the Akaike information criterion, we
finally choose the optimal model ARIMA (2, 1, 5).
ARIMA(R, d, M) model:
εt : Independent and identically distributed (i.i.d.) sequence of random variables
Then we establish the model using the ARMAX function of Matlab. R=2, M=5.
Following is the result:
Discrete-time ARIMA model: A(z)y(t) = C(z)e(t)
A(z) = 1 + 0.7767 z^-1 + 0.1653 z^-2
C(z) = 1 - 0.1737 z^-1 - 0.4787 z^-2 - 0.241 z^-3 - 0.09916 z^-4 - 0.007455 z^-5
In conclusion, the ARIMA (2, 1, 5) model that we have established is:
(4) Test for Residual Sequence
The goodness of fit of the model is good.
54

58. The test for the distribution of the residual sequence is passed.
We also do the Chi-square test using chi2gof function of Matlab. Following is the
result:
h =
0
We do not reject the null hypothesis so it follows a chi square distribution.
(5) Prediction
We predict the return rate of the stock of Lenovo in the next twelve months using
the established model and calculate the stock prices. The results are as follows:
55

59. Year/M
onth
Actual
Stock Price
Predict
ed Stock
Price
Predict
ed Return
Rate
Deviati
on Ratio
2013.05 7.99 - - -
2013.06 7.03 8.3639 0.0468 18.9%
2013.07 7.07 8.4551 0.0109 19.5%
2013.08 7.50 8.9421 0.0576 19.2%
2013.09 8.11 8.7436 -0.0222 7.8%
2013.10 8.30 9.1441 0.0458 10.1%
2013.11 9.20 9.1441 0.0000 0.6%
2013.12 - 9.2665 0.0134
2014.01 - 9.5659 0.0323
2014.02 - 9.4023 -0.0171
2014.03 - 9.8828 0.0511
2014.04 - 9.6347 -0.0251
2014.05 - 10.0471 0.0428
56

60. -.03
-.02
-.01
.00
.01
.02
.03
.04
.05
.06
M6 M7 M8 M9 M10 M11 M12 M1 M2 M3 M4 M5
2013 2014
RT
Time Series Plot
As you can see, the deviation ratio (deviation ratio =|1- the actual price /
forecasting stock |) of the predicted stock prices from Jun.2013 to Aug.2013 is a little
large but it declines sharply in September and October, under 10%. The deviation
ratio is only 0.6% in November.
The reason why the deviation ratio is larger than 10% from June to August is that
America exited Quantitative Easing and the stock market in Asia didn’t perform well,
which affected the Hong Kong stock market. It also made the Hang Seng Index
decline greatly in June. We can see that the predicted stock price in November is very
close to the actual one, which is because of the good fit of our model. We think that
the model has some accuracy so, according to the prediction, the Lenovo Group's
stock prices have a rising trend.
5. Conclusion:
57

61. According to PEST analysis, in spite of slow recovery of world economy, the
political, economical and social environments of Lenovo’s main market——
emerging countries, are all very good. In terms of technology, Lenovo still need to
keep pioneer and innovating in case not to be beat by its rivals.
According to Porter’s Five Forces model, bargaining power of suppliers is very
low, while buyers like enterprises and governments have a strong bargaining power
because their purchase quantity is large. Additionally, individual customers have a low
bargaining power. The threat of new entrants and substitutes is small. Thus the
industry is quite attractive.
According to SWOT analysis, Lenovo has much strength such as large market
share, vertical integration and advanced company idea. The weakness is that its brand
perception in developed countries is not very good. What’s more, the competition is
too fierce and some markets, especially those in developed countries, have even been
saturated. However, we also see that there are many opportunities that Lenovo can
seize. The emerging markets in developing countries such as India are good chances
for Lenovo. It can also obtain further growth by acquiring other companies, just like
what it has done to IBM.
According to Lenovo’s Trend Analysis, the profitability of Lenovo is good, but
Lenovo still has big challenges to improve its profit margin. Lenovo’s resource
management isn’t quite efficient. As these years Lenovo conducts a lot of merging and
acquisitions abroad to expand its business market, it is still under the stage of global
integration, the relatively inefficient management is reasonable. Lenovo does not use
financial leverage to increase its volatility of income. It has low probability of
meeting debt crisis. The ratio analysis of forecasted Income Statement & Balance
Sheet also shows quite positive results.
58

62. Compared with traditional PC companies (Acer, Dell, HP), although Lenovo’s
short-term solvency isn’t outstanding, its bank loans is less than the others, which
means lower risk. Its growth in sales is very strong and ROE of Lenovo is the highest.
While compared with Samsung & Apple, Apple has absolute advantages and
Samsung’s brand perception is also much higher than Lenovo. Lenovo still has a long
way to go to realize its PC+ Leader Strategy.
According to Stock Price Analysis, Hang Seng Index although suffer huge decline
now, it is overselling and it will increase later. Lenovo Group stock shows
overbuying. Considering the bad performances of international financial market, we
think Lenovo Group’s stock price will fluctuate and may drop in short-term. And
according to the results of Lenovo Group’s intrinsic value, PE method prediction and
ARIMA model’s prediction, Lenovo Group is undervalued.
From all the above analysis, we conclude that we should keep holding Lenovo
Group stock for its good valuation from corporate fundamental analysis. And
according to our predictions, our target price is $1.091 by the end of 2013.
59

63. 6. Reference:
[1]: Lenovo’s Annual Report 2012/2013
[2]: Macro-economic Database of the People Net
http://hgsj.people.com.cn/index.php?cid=135&tid=62
Accessed on Nov.27, 2013
[3]: Yahoo Finance
http://finance.yahoo.com/q/bc?s=INRUSD=X&t=2y&l=on&z=m&q=l&c
Accessed on Nov.28, 2013
[4]: BBC News: Eurozone unemployment falls for first time since 2011
http://www.bbc.co.uk/news/business-25151974
Accessed on Nov.28,2013
[5]: BBC News: US prices fall 0.1% in October as petrol costs drop
http://www.bbc.co.uk/news/business-25018540
Accessed on Nov.29, 2013
[6]: UKESSAYS.com: Five forces driving competition
http://www.ukessays.com/essays/marketing/five-forces-driving-competition-
marketing-essay.php Accessed on Nov.29, 2013
[7]: Strategic Management Insight: SWOT analysis of Lenovo
60

64. http://www.strategicmanagementinsight.com/swot-analyses/lenovo-swot-
analysis.html Accessed on Nov.29, 2013
[8]: China Economy Network
http://finance.ce.cn/rolling/201211/29/t20121129_17020315.shtml
Accessed on Nov. 30, 2013
[9] Borowsk, A. (2010) Financial Management: The role and importance of
capital markets and EMH
[10] Boxall, A. (2012) Dell says goodbye to both smartphones and Android,
stops international sales
http://www.digitaltrends.com/mobile/dell-says-goodbye-to-both-
smartphones-and-android/ Accessed on November 29, 2013
[11] Fortune (2012) How Hewlett-Packard lost its way
http://tech.fortune.cnn.com/2012/05/08/500-hp-apotheker/
Accessed on November 29, 2013
[12] Bort, J. (2013) THE HP ROLLER COASTER: 5 big mistakes, 5 lucky breaks
in a disastrous decade Published by Business Insider
http://business.financialpost.com/2013/01/12/the-hp-roller-coaster-5-big-
mistakes-5-lucky-breaks-in-a-disastrous-decade/ Accessed on November 28,
2013
[13] Singh, S. (2012) What drives Apple’s success?
http://www.androidauthority.com/what-drives-apples-success-80438/
Accessed on November 29, 2013
[14]: ifeng technology:
61

65. http://tech.ifeng.com/it/detail_2013_02/07/22050641_0.shtml?_from_ralated
Accessed on Nov.29, 2013
7. Appendix:
I. CAPM data:
Calculation of β
Year. Month Lenovo
Group
Rate of Return HSI Market Return
Rate
2003.06 2.60 9677.12
2003.07 3.05 0.173076923 10134.83 0.047298163
2003.08 3.35 0.098360656 10908.99 0.076386086
2003.09 3.10 -0.074626866 11229.87 0.029414272
2003.10 3.75 0.209677419 12190.10 0.085506778
2003.11 3.35 -0.106666667 12317.47 0.010448643
2003.12 3.33 -0.005970149 12575.94 0.020984017
2004.01 3.75 0.126126126 13289.37 0.056729755
2004.02 3.27 -0.128 13907.03 0.046477749
2004.03 2.83 -0.134556575 12681.67 -0.088110833
2004.04 2.40 -0.151943463 11942.96 -0.058250215
2004.05 2.45 0.020833333 12198.24 0.021374936
2004.06 2.17 -0.114285714 12285.75 0.007173986
62

66. 2004.07 2.13 -0.01843318 12238.03 -0.003884175
2004.08 2.45 0.150234742 12850.28 0.050028477
2004.09 2.63 0.073469388 13120.03 0.02099176
2004.10 2.80 0.064638783 13054.66 -0.004982458
2004.11 2.70 -0.035714286 14060.05 0.077013879
2004.12 2.33 -0.137037037 14230.14 0.012097397
2005.01 2.10 -0.098712446 13721.69 -0.035730499
2005.02 2.23 0.061904762 14195.35 0.034519072
2005.03 2.65 0.188340807 13516.88 -0.047795229
2005.04 2.42 -0.086792453 13908.97 0.029007434
2005.05 2.48 0.024793388 13867.07 -0.003012444
2005.06 2.30 -0.072580645 14201.66 0.024128385
2005.07 2.63 0.143478261 14880.98 0.047833845
2005.08 3.20 0.216730038 14903.55 0.001516701
2005.09 3.75 0.171875 15428.52 0.035224493
2005.10 3.80 0.013333333 14386.37 -0.067546984
2005.11 3.80 0 14937.14 0.038284154
2005.12 3.58 -0.057894737 14876.43 -0.004064366
2006.01 3.13 -0.125698324 15753.14 0.058932822
2006.02 3.20 0.022364217 15918.48 0.010495685
2006.03 2.95 -0.078125 15805.04 -0.007126309
2006.04 2.90 -0.016949153 16661.30 0.054176389
63

67. 2006.05 2.35 -0.189655172 15857.89 -0.048220127
2006.06 2.58 0.09787234 16267.62 0.025837611
2006.07 2.50 -0.031007752 16971.34 0.04325894
2006.08 3.25 0.3 17392.27 0.024802402
2006.09 3.06 -0.058461538 17543.05 0.008669369
2006.10 3.31 0.081699346 18324.35 0.044536155
2006.11 3.13 -0.054380665 18960.48 0.03471501
2006.12 3.16 0.009584665 19964.72 0.052964904
2007.01 3.17 0.003164557 20106.42 0.00709752
2007.02 3.00 -0.05362776 19651.51 -0.022625112
2007.03 2.86 -0.046666667 19800.93 0.007603487
2007.04 3.15 0.101398601 20318.98 0.026162913
2007.05 3.90 0.238095238 20634.47 0.015526862
2007.06 4.61 0.182051282 21772.73 0.055163035
2007.07 5.26 0.140997831 23184.94 0.064861411
2007.08 5.17 -0.017110266 23984.14 0.034470652
2007.09 5.96 0.152804642 27142.47 0.131684105
2007.10 8.73 0.464765101 31352.58 0.155111528
2007.11 6.91 -0.208476518 28643.61 -0.086403416
2007.12 7.03 0.017366136 27370.60 -0.044443071
2008.01 5.37 -0.236130868 23455.74 -0.143031574
2008.02 5.40 0.005586592 24331.67 0.037343951
64

68. 2008.03 5.00 -0.074074074 22849.20 -0.060927589
2008.04 5.96 0.192 25755.35 0.12718826
2008.05 5.73 -0.038590604 24533.12 -0.047455383
2008.06 5.28 -0.078534031 22102.01 -0.099095019
2008.07 5.34 0.011363636 22258.00 0.007057729
2008.08 5.30 -0.007490637 21261.89 -0.044752898
2008.09 3.35 -0.367924528 18016.21 -0.152652469
2008.10 2.27 -0.32238806 13968.67 -0.224661014
2008.11 1.79 -0.211453744 13888.24 -0.005757885
2008.12 2.11 0.17877095 14387.48 0.035946959
2009.01 1.47 -0.303317536 13278.21 -0.077099673
2009.02 1.44 -0.020408163 12811.57 -0.035143291
2009.03 1.78 0.236111111 13576.02 0.059668721
2009.04 2.13 0.196629213 15520.99 0.14326511
2009.05 3.10 0.455399061 18171.00 0.170737176
2009.06 2.91 -0.061290323 18378.73 0.011431952
2009.07 3.68 0.264604811 20573.33 0.119409774
2009.08 3.27 -0.111413043 19724.19 -0.041273824
2009.09 3.45 0.055045872 20955.25 0.062413716
2009.10 4.41 0.27826087 21752.87 0.038063015
2009.11 4.47 0.013605442 21821.50 0.003154986
2009.12 4.86 0.087248322 21872.50 0.002337145
65

69. 2010.01 5.37 0.104938272 20121.99 -0.080032461
2010.02 5.05 -0.059590317 20608.70 0.024187966
2010.03 5.36 0.061386139 21239.35 0.030601154
2010.04 5.86 0.093283582 21108.59 -0.006156497
2010.05 4.71 -0.196245734 19765.19 -0.063642337
2010.06 4.24 -0.099787686 20128.99 0.018406097
2010.07 4.99 0.176886792 21029.81 0.04475237
2010.08 4.46 -0.106212425 20536.49 -0.023458129
2010.09 4.79 0.073991031 22358.17 0.088704545
2010.10 5.02 0.048016701 23096.32 0.033014777
2010.11 5.22 0.039840637 23007.99 -0.003824419
2010.12 4.98 -0.045977011 23035.45 0.001193498
2011.01 4.52 -0.092369478 23447.34 0.017880701
2011.02 4.71 0.042035398 23338.02 -0.004662363
2011.03 4.43 -0.059447983 23527.52 0.008119798
2011.04 4.52 0.020316027 23720.81 0.008215486
2011.05 4.58 0.013274336 23684.13 -0.001546322
2011.06 4.45 -0.028384279 22398.10 -0.054299229
2011.07 4.95 0.112359551 22440.25 0.001881856
2011.08 5.22 0.054545455 20534.85 -0.084909927
2011.09 5.29 0.013409962 17592.41 -0.143290065
2011.10 5.31 0.003780718 19864.87 0.129172751
66

70. 2011.11 5.36 0.009416196 17989.35 -0.094413908
2011.12 5.18 -0.03358209 18434.39 0.024739082
2012.01 6.21 0.198841699 20390.49 0.106111458
2012.02 6.87 0.106280193 21680.08 0.063244679
2012.03 6.99 0.017467249 20555.58 -0.05186789
2012.04 7.46 0.067238913 21094.21 0.02620359
2012.05 6.60 -0.115281501 18629.52 -0.116842015
2012.06 6.54 -0.009090909 19441.46 0.043583517
2012.07 5.38 -0.177370031 19796.81 0.018277948
2012.08 6.30 0.171003717 19482.57 -0.015873264
2012.09 6.42 0.019047619 20840.38 0.069693577
2012.10 6.23 -0.029595016 21641.82 0.038456113
2012.11 7.30 0.171749599 22030.39 0.01795459
2012.12 7.02 -0.038356164 22656.92 0.028439351
2013.01 8.07 0.14957265 23729.53 0.047341386
2013.02 8.66 0.073110285 23020.27 -0.02988934
2013.03 7.71 -0.109699769 22299.63 -0.031304585
2013.04 7.09 -0.080415045 22737.01 0.019613778
2013.05 7.99 0.126939351 22406.97 -0.014515541
Rate of Return arithmetic 0.229371508 0.109083549
67

71. mean
geometric
mean
0.132856304 0.097779769
weighted
mean
0.181113906 0.103431659
Market risk
premium
9.49%
Required return
rate
13.93% Β coefficient 1.377552286
II. AIC calculation:
R=0,M=0,AIC=-48.628812,BIC=-43.104464 ； R=0,M=1,AIC=-107.727797,BIC=-99.441275
R=0,M=2,AIC=-105.982614,BIC=-94.933918 ； R=0,M=3,AIC=-107.608079,BIC=-93.797209
R=0,M=4,AIC=-105.622044,BIC=-89.049000 ； R=0,M=5,AIC=-103.856564,BIC=-84.521347
R=0,M=6,AIC=-102.745441,BIC=-80.648049 ； R=0,M=7,AIC=-100.748176,BIC=-75.888610
68

72. R=0,M=8,AIC=-98.834469,BIC=-71.212730 ； R=0,M=9,AIC=-100.115616,BIC=-69.731703
R=0,M=10,AIC=-99.121616,BIC=-65.975529 ； R=1,M=0,AIC=-87.765339,BIC=-79.478817
R=1,M=1,AIC=-106.122950,BIC=-95.074254 ； R=1,M=2,AIC=-104.251349,BIC=-90.440480
R=1,M=3,AIC=-105.630836,BIC=-89.057792 ； R=1,M=4,AIC=-103.906506,BIC=-84.571289
R=1,M=5,AIC=-101.653317,BIC=-79.555926 ； R=1,M=6,AIC=-100.746046,BIC=-75.886480
R=1,M=7,AIC=-98.752510,BIC=-71.130771 ； R=1,M=8,AIC=-96.817717,BIC=-66.433804
R=1,M=9,AIC=-98.394644,BIC=-65.248557 ； R=1,M=10,AIC=-99.154505,BIC=-63.246244
R=2,M=0,AIC=-92.412526,BIC=-81.363830 ； R=2,M=1,AIC=-107.920579,BIC=-94.109710
R=2,M=2,AIC=-105.944891,BIC=-89.371848 ； R=2,M=3,AIC=-103.966591,BIC=-84.631373
R=2,M=4,AIC=-102.008503,BIC=-79.911111 ； R=2,M=5,AIC=-108.638746,BIC=-83.779181
R=2,M=6,AIC=-102.813513,BIC=-75.191774 ； R=2,M=7,AIC=-102.597527,BIC=-72.213614
R=2,M=8,AIC=-100.598970,BIC=-67.452882 ； R=2,M=9,AIC=-99.655497,BIC=-63.747236
R=2,M=10,AIC=-98.005873,BIC=-59.335438 ； R=3,M=0,AIC=-94.546251,BIC=-80.735381
R=3,M=1,AIC=-105.942511,BIC=-89.369468 ； R=3,M=2,AIC=-104.035111,BIC=-84.699893
R=3,M=3,AIC=-107.879994,BIC=-85.782602 ； R=3,M=4,AIC=-101.970793,BIC=-77.111228
R=3,M=5,AIC=-100.241525,BIC=-72.619786 ； R=3,M=6,AIC=-102.452807,BIC=-72.068894
R=3,M=7,AIC=-100.203897,BIC=-67.057809 ； R=3,M=8,AIC=-98.724140,BIC=-62.815879
R=3,M=9,AIC=-97.670533,BIC=-59.000098 ； R=3,M=10,AIC=-97.738535,BIC=-56.305926
R=4,M=0,AIC=-97.117156,BIC=-80.544113 ； R=4,M=1,AIC=-103.958986,BIC=-84.623768
R=4,M=2,AIC=-102.060145,BIC=-79.962753 ； R=4,M=3,AIC=-109.142331,BIC=-84.282766
R=4,M=4,AIC=-100.371239,BIC=-72.749500 ； R=4,M=5,AIC=-101.062339,BIC=-70.678426
R=4,M=6,AIC=-98.906848,BIC=-65.760761 ； R=4,M=7,AIC=-102.797332,BIC=-66.889071
69

73. R=4,M=8,AIC=-103.879395,BIC=-65.208960 ； R=4,M=9,AIC=-92.764662,BIC=-51.332053
R=4,M=10,AIC=-100.231787,BIC=-56.037004 ； R=5,M=0,AIC=-95.611113,BIC=-76.275896
R=5,M=1,AIC=-102.399285,BIC=-80.301893 ； R=5,M=2,AIC=-100.595190,BIC=-75.735625
R=5,M=3,AIC=-107.279597,BIC=-79.657857 ； R=5,M=4,AIC=-100.810303,BIC=-70.426390
R=5,M=5,AIC=-98.817118,BIC=-65.671031 ； R=5,M=6,AIC=-101.782050,BIC=-65.873789
R=5,M=7,AIC=-99.762304,BIC=-61.091869 ； R=5,M=8,AIC=-101.903949,BIC=-60.471340
R=5,M=9,AIC=-101.029272,BIC=-56.834489；R=5,M=10,AIC=-101.284726,BIC=-54.327770
R=6,M=0,AIC=-94.367828,BIC=-72.270436 ； R=6,M=1,AIC=-100.712133,BIC=-75.852568
R=6,M=2,AIC=-98.857432,BIC=-71.235693 ； R=6,M=3,AIC=-100.862896,BIC=-70.478982
R=6,M=4,AIC=-99.488470,BIC=-66.342383 ； R=6,M=5,AIC=-101.686066,BIC=-65.777805
R=6,M=6,AIC=-98.778418,BIC=-60.107983 ； R=6,M=7,AIC=-105.068330,BIC=-63.635721
R=6,M=8,AIC=-103.190710,BIC=-58.995927 ； R=6,M=9,AIC=-101.379638,BIC=-54.422681
R=6,M=10,AIC=-92.104666,BIC=-42.385536 ； R=7,M=0,AIC=-92.699019,BIC=-67.839454
R=7,M=1,AIC=-98.878701,BIC=-71.256962 ； R=7,M=2,AIC=-96.955169,BIC=-66.571256
R=7,M=3,AIC=-95.688260,BIC=-62.542172 ； R=7,M=4,AIC=-98.511186,BIC=-62.602925
R=7,M=5,AIC=-102.817694,BIC=-64.147259 ； R=7,M=6,AIC=-96.797908,BIC=-55.365299
R=7,M=7,AIC=-103.213521,BIC=-59.018738 ； R=7,M=8,AIC=-101.086116,BIC=-54.129159
R=7,M=9,AIC=-101.346594,BIC=-51.627463 ； R=7,M=10,AIC=-99.458581,BIC=-46.977276
R=8,M=0,AIC=-94.383826,BIC=-66.762086 ； R=8,M=1,AIC=-96.361432,BIC=-65.977518
R=8,M=2,AIC=-96.323338,BIC=-63.177251 ； R=8,M=3,AIC=-99.095248,BIC=-63.186986
R=8,M=4,AIC=-95.670369,BIC=-56.999934 ； R=8,M=5,AIC=-95.373239,BIC=-53.940630
R=8,M=6,AIC=-93.484713,BIC=-49.289930 ； R=8,M=7,AIC=-101.524051,BIC=-54.567094
70

74. R=8,M=8,AIC=-99.854655,BIC=-50.135524 ； R=8,M=9,AIC=-100.300268,BIC=-47.818963
R=8,M=10,AIC=-95.522671,BIC=-40.279192 ； R=9,M=0,AIC=-99.973201,BIC=-69.589287
R=9,M=1,AIC=-98.037566,BIC=-64.891478 ； R=9,M=2,AIC=-96.222342,BIC=-60.314080
R=9,M=3,AIC=-95.559710,BIC=-56.889275 ； R=9,M=4,AIC=-93.970411,BIC=-52.537802
R=9,M=5,AIC=-92.408758,BIC=-48.213975 ； R=9,M=6,AIC=-101.303026,BIC=-54.346069
R=9,M=7,AIC=-99.492036,BIC=-49.772905 ； R=9,M=8,AIC=-99.464672,BIC=-46.983368
R=9,M=9,AIC=-96.790605,BIC=-41.547127 ； R=9,M=10,AIC=-96.732433,BIC=-38.726780
R=10,M=0,AIC=-98.041549,BIC=-64.895462 ； R=10,M=1,AIC=-96.077822,BIC=-60.169561
R=10,M=2,AIC=-94.223893,BIC=-55.553457 ； R=10,M=3,AIC=-95.924544,BIC=-54.491935
R=10,M=4,AIC=-95.509210,BIC=-51.314427 ； R=10,M=5,AIC=-91.081705,BIC=-44.124749
R=10,M=6,AIC=-99.308690,BIC=-49.589559；R=10,M=7,AIC=-100.144060,BIC=-47.662755
R=10,M=8,AIC=-95.326595,BIC=-40.083117 ； R=10,M=9,AIC=-98.093842,BIC=-40.088189
R=10,M=10,AIC=-96.309761,BIC=-35.541935
71

75. III. Analysis about residuals and the Chi-square distribution Test
>>rrr = resid(m,z)
>>C = rrr.outputdata’
C =
Columns 1 through 10
-0.0011 -0.0149 -0.0331 -0.0659 -0.0186 0.1138 -0.1433 -0.1638 -0.1365
72

76. 0.0327
Columns 11 through 20
-0.1163 -0.0353 0.1521 0.0538 0.0218 -0.0581 -0.1526 -0.0995 0.0719
0.1800
Columns 21 through 30
-0.1243 -0.0103 -0.0677 0.1306 0.2018 0.1271 -0.0379 -0.0865 -0.1309
0.0245
Columns 31 through 40
-0.0788 -0.0348 -0.1933 0.0958 -0.0260 0.2692 -0.0847 0.0324 -0.0584
-0.0071
Columns 41 through 50
-0.0070 -0.0673 -0.0605 0.0985 0.2240 0.1393 0.0867 -0.0542 0.1289
0.4506
Columns 51 through 60
-0.2663 -0.0497 -0.2046 0.0044 -0.0660 0.1786 -0.0573 -0.1165 0.0096
-0.0063
Columns 61 through 70
-0.3891 -0.3178 -0.1562 0.2103 -0.3142 -0.0529 0.2698 0.1720 0.3872
-0.1152
Columns 71 through 80
0.2005 -0.1163 0.0160 0.2772 -0.0169 0.0286 0.0955 -0.0848 0.0344
0.0897
73

77. Columns 81 through 90
-0.2235 -0.1184 0.2006 -0.1188 0.0315 0.0507 0.0157 -0.0722 -0.1050
0.0404
Columns 91 through 100
-0.0635 -0.0008 0.0064 -0.0453 0.0962 0.0406 -0.0199 -0.0164 -0.0020
-0.0485
Columns 101 through 110
0.1849 0.0875 -0.0305 0.0418 -0.1268 -0.0267 -0.1736 0.1657 0.0178
-0.0721
Columns 111 through 117
0.1569 -0.0496 0.1102 0.0609 -0.1447 -0.0985 0.1387
>> h=chi2gof(C)
h =
0
74