Lenovo Group Limited2003/04 Annual Results Announcement

Results Review

June 2, 2004

2

Market Review

After adjustments in 2002, China IT market entered into a new phase of growth in 2003. Market value grew 11.1% yoy

– In FY2003/04, unit shipment and revenue of China PC market grew 18.3% and 9.8% respectively

– SMEs and local municipal markets expanded significantly– Notebook computer market recorded a significant growth of 77% in unit

shipment, benefiting from price reduction and rapidly increasing market demand

– SARS outbreak in 2003 stimulated short-term consumer PC sales. Consumer notebook computer market emerging

Mobile handset shipment grew about 9.3% in 2003– Promoted by massive launch of new generation handsets and aggressive

marketing of value added digital services by telecommunications providers– Market overall profit level lowered as some manufacturers sought to reduce

the stock of monochrome handsets

3

Business Review

Turnover grew 14.5% in FY2003/04. Operating expenses increased as a result of establishing new businesses and continued investments in R&D, net profit only increased 3.5%

Turnover of core PC business increased 11.7% yoy, higher than market growth of 9.8%. Lenovo PC shipment increased 11.5% in Q4 and 15.1% for the full year. Lenovo accounted for 27.0% of China PC market in CY2003

Steady development of new business– Mobile handset shipment met full year target with a yoy growth of 90%; self-developed

handsets accounted for 64% of the total shipment for the full year– Printer shipment increased 74% yoy– Turnover of IT service business grew 198%

Unit Shipment Growth of Lenovo PC in FY2003/04

Consumer DesktopQ4: 4.0%FY: 15.1%

ServerQ4: 1.1%FY: 13.0%

Commercial DesktopQ4: 12.4%FY: 10.7%

NotebookQ4: 46.7%FY: 51.0%

4

Overview

HK$ 2003/04 2002/03 Change

Turnover 23.175 bil 20.233 bil 14.5%Gross margin 14.6% 14.8% -1.4%EBITDA 1.125 bil 1.175 bil -4.2%Profit attributable to shareholders 1.053 bil 1.017 bil 3.5%ROE 24.7% 25.6% -3.5%Final dividend (per share) 3 cents 3 cents -

5

2003/04 Consolidated Profit & Loss Account

(HK$'000) 2003/04 % of

Turnover

2003/04 Q4 2002/03

% of Turnover

2002/03 Q4

Turnover 23,175,944$ 5,034,523$ 20,233,290$ 4,265,652$

EBITDA 1,125,129$ 4.85% 212,012$ 1,174,720$ 5.81% 245,698$ Depreciation expenses (211,161)$ (62,121)$ (160,304)$ (45,997)$ Amortisation of intangible assets (34,999)$ (9,511)$ (15,246)$ (5,282)$ Gains/(Losses) on disposal of

investments 47,558$ (3,819)$ (26,802)$ (33,089)$ Finance incomes 93,368$ 19,101$ 77,233$ 22,494$

Profit from opertions 1,019,895$ 4.40% 155,662$ 1,049,601$ 5.19% 183,824$ Finance costs (2,881)$ (2,490)$ (20)$ (20)$

1,017,014$ 153,172$ 1,049,581$ 183,804$ Share of losses of jointly

controlled entities (39,053)$ -$ (34,756)$ (979)$ Share of profits/(losses) of

associated companies 16,891$ 580$ 13,826$ (4,369)$

Profit before taxation 994,852$ 4.29% 153,752$ 1,028,651$ 5.08% 178,456$ Taxation 20,150$ 18,403$ (26,018)$ (9,319)$ Profit after taxation 1,015,002$ 172,155$ 1,002,633$ 169,137$ Minority interests 37,883$ 16,161$ 14,519$ 5,956$ Profit attributable to shareholders 1,052,885$ 4.54% 188,316$ 1,017,152$ 5.03% 175,093$ Dividends 373,704$ N/A 747,412$ N/A

Earnings per share (Basic) 14.09 cents 2.52 cents 13.55 cents 2.33 cents

Earnings per share (Fully diluted) 13.99 cents 2.49 cents 13.54 cents 2.33 cents

6

2003/04 Turnover Breakdown

Corporate IT 51.5% (53.4%)

Consumer IT 33.5% (33.7%)

Handheld Device 8.8% (7.1%)

Contract Manufacturing 3.8% (4.9%)

IT Service 2.4% (0.9%)

Note 1: FY2002/03 figures are in brackets.

7

Changes in Turnover Breakdown (Full Year)

(HK$ Million)2003/04

Full Year2002/03

Full Year Change

Corporate IT 11,925$ 10,803$ 10.4%

Consumer IT 7,761$ 6,823$ 13.8%

Sub-total: 19,686$ 17,626$ 11.7%

Handheld Device 2,050$ 1,440$ 42.4%

IT Service 548$ 184$ 198.0%

Contract Manufacturing 892$ 983$ -9.3%

Total 23,176$ 20,233$ 14.5%

8

Changes in Turnover Breakdown (Q4)

(HK$ Million)2003/04

Q42002/03

Q4 Change

Corporate IT 2,369$ 2,092$ 13.3%

Consumer IT 1,692$ 1,525$ 10.9%

Sub-total: 4,061$ 3,617$ 12.3%

Handheld Device 618$ 331$ 86.8%

IT Service 145$ 64$ 127.0%

Contract Manufacturing 211$ 254$ -17.2%

Total 5,035$ 4,266$ 18.0%

9

Changes in Operating Profit Breakdown (Full Year)

Note 2: Operating profit for FY2002/03 and FY2003/04 before amortization of goodwill and gains/(losses) on disposal of subsidiary and investment securities.

(HK$'000)2003/04

Full Year2002/03

Full Year Change

Corporate IT 777,698$ 744,153$ 4.5%

Consumer IT 466,814$ 363,527$ 28.4%

Sub-total: 1,244,512$ 1,107,680$ 12.4%

Handheld Device (74,565)$ 29,017$ N/A

IT Service (58,009)$ (61,405)$ N/A

Contract Manufacturing (95,208)$ 8,554$ N/A

Total (Note 2) 1,016,730$ 1,083,846$ -6.2%

10

Changes in Operating Profit Breakdown (Q4)

Note 2: Operating profit for FY2002/03 and FY2003/04 before amortization of goodwill and gains/(losses) on disposal of subsidiary and investment securities.

(HK$'000)2003/04

Q42002/03

Q4 Change

Corporate IT 158,533$ 144,547$ 9.7%

Consumer IT 107,189$ 102,918$ 4.1%

Sub-total: 265,722$ 247,465$ 7.4%

Handheld Device (12,581)$ 173$ N/A

IT Service (28,799)$ (20,838)$ N/A

Contract Manufacturing (38,208)$ (6,747)$ N/A

Total (Note 2) 186,134$ 220,053$ -15.4%

11

Gross Margin Analysis (Full Year)

14.82%16.20%

13.28%15.21%

28.66%

15.33% 14.62%14.32%13.74%

16.02%

8.04%

38.93%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2002/03 Full Year2003/04 Full Year

Corporate IT Consumer IT Handheld Device

GroupContract Manufacturing

(Note 3)

IT Service

Note 3: Before elimination of inter-company transaction, the gross margin of contract manufacturing business is 5.5% (2002/03: 9.6%)

12

Gross Margin Analysis (Q4)

15.39%13.34%

15.27%

11.94%

28.89%

15.81% 14.73%13.30% 14.23%

20.91%

2.78%

34.80%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2002/03 Q42003/04 Q4

Corporate IT Consumer IT Handheld Device

GroupContract Manufacturing

(Note 3)

IT Service

Note 3: Before elimination of inter-company transaction, the gross margin of contract manufacturing business is 2.0% (2002/03 Q4: 9.7%)

13

Operating Expenses Analysis (Full Year)

(HK$ Million)2003/04

Full Year2002/03 Full Year

Increase/ (Decrease) %

Total operating expenses 2,509 1,999 510 25.5%

Less:R&D expenses 500 314 186 59.2%Expenses on HR restructuring 22 - 22 N/A

Sub-total 1,987 1,685 302 17.9%

(HK$ Million)2003/04

Full Year2002/03 Full Year

Increase/ (Decrease) %

Total Operating Expenses 2,509 1,999 510 25.5%

Including:Corporate & Consumer IT 1,618 1,526 92 5.9%Handheld device 405 208 197 94.7%IT Service 271 116 155 134.5%

14

Consolidated Balance Sheet

(HK$ Million)As at

31/3/2004 As at

31/3/2003

Intangible assets 647$ 121$ Tangible fixed assets 987$ 846$ Construction-in-progress 260$ 174$ Investments 313$ 374$ Deferred tax assets 35$ -$

Current assets 6,100$ 5,241$ Current liabilities 3,297$ 2,507$

Net current assets 2,803$ 2,734$

Total assets less current liabilities 5,045$ 4,249$

Shareholders' funds 4,489$ 4,189$ Minority interests 29$ 60$ Long-term liabilities 527$ 0.3$

5,045$ 4,249$

15

Key Financial Figures

(HK$ Million)2003/04

Full Year2002/03

Full Year

Cast reserves 2,650$ 2,808$

Total bank borrowings -$ -$

Net cash reserves 2,650$ 2,808$

Net tangible assets 3,842$ 4,068$

Capital expenditure 466$ 689$

Current ratio 1.9 x 2.1 x

Days inventory 24.9 days 22.9 days

Days receivable 28.0 days 21.5 days

Days payable 40.0 days 36.4 days

Lenovo Group Limited2003/04 Annual Results Announcement

Prospect

June 2, 2004

17

Our Reform

Focus

Reform on business model

Improve efficiency

18

An Update on Reform Implementation

Non-core business– Adjust or create a new operational system

Core business– Implemented structural adjustments– Strengthen internal coordination– Integrate market resources

19

The Next Step

Reform’s fundamental principle ：– Be closer to customers, win more customers, and

serve customers on a long-term basis

Business model reform ：– Build an effective combined sales model targeting at

different types of customers– Integrate front and back end to create a timely and

countable operational system– Improve compensation system to build an effective

sales team

20

Our aspiration

“A technology driven, service oriented, and international Lenovo”