Lenovo fell into the ‘Thucydides Trap’ between established and emerging powers.

Greek historian Thucydides once noted that “the rise of Athens and the fear it instilled in Sparta made war between the two historical rivals inevitable.”

That means carrying About 2,000 years later, as the competition between the United States and China intensified, a new resonance occurred, and some American scholars predicted that war was likely to break out as the status of a great power was threatened by a new emerging power, giving rise to the term ‘Thucydides’ Trap’. It came out. ”

The constant tug-of-war between China and the United States has yet to trigger an actual war. However, the United States has struck one after another under various pretexts, inflicting a heavy blow on China’s technology sector, and each time it has received great opposition from China. And concerns about this are growing. lenovo Group Ltd.. (0992.HK, OTCPK:LNVGY, OTCPK:LNVGF) is one of China’s biggest high-tech success stories and could soon become its latest target after an alarming article was recently published in Newsweek magazine.

The PC giant’s shares were one of the few stocks that defied gravity and held on as Hong Kong markets fell into free fall last year. This has helped stabilize the Hang Seng Index, rising an astonishing 81% in 2023, even as other blue-chip stocks tumbled.

Big potential for AI on PC

As artificial intelligence (AI) shows signs of potentially revolutionizing the world and virtually every sector, integrating this technology into PCs has taken on new urgency. As one of the world’s leading PC manufacturers, Lenovo has been working hard to show that it’s up to the challenge. Last year, at the Consumer Electronics Show (CES), about 40 types of AI devices and solutions were introduced, including 12 PCs equipped with AI functions.

Investors were impressed, which helped fuel a strong rise in the company’s shares last year even as the rest of the Hong Kong market faltered.

Investors were quick to overlook the company’s disappointing financial performance during the first half of its most recent fiscal year, which began last April. In the six months to September, sales fell 19.8% year over year to $27.3 billion, while profits fell nearly 60% to $426 million. The company blamed the big profit decline on clearing out smart device inventory that had built up during the pandemic. And in the first half of the fiscal year, sales in the second quarter of the fiscal year showed a 12% improvement compared to the previous quarter.

Investment banks were optimistic about the outlook. Goldman Sachs notes that its computer sales are at a tipping point where they could surge as a new product cycle begins. We increased our exposure to the stock and raised our target price by 14.6% to HK$13.51 per share. HSBC also maintained its ‘overweight’ investment opinion, raising the target stock price from HK$9.90 to HK$11.40 as it believed that new purchases by the company this year would contribute to the company’s growth.

But just when Lenovo was revitalizing the investment world, the company’s stock price fell nearly 10% in one day after an article was published that shocked investors. And with that development, the market suddenly became aware of key risks associated with stocks that it had conveniently overlooked in the past.

political risk

The article that sparked the sell-off was published in Newsweek magazine and cited a survey conducted by the China Tech Threat (CTT) organization that highlighted the risks posed by electronic espionage. The report likened the U.S. government’s use of Lenovo computers to the “spy balloon incident” that occurred in Montana last year and said the use of such PCs has serious implications for U.S. national security. This implied that such computers could send American data to the Chinese government and recommended that they be banned.

The article made investors realize that Lenovo could easily become the next target of U.S. sanctions, potentially cutting it off from the lucrative North American market, which accounts for 36% of its sales.

The emergence of chip giants has deepened investor concerns. intel (INTC) expected to report revenue of about $12.7 billion in the first quarter, up from the same period last year but below market expectations. Investors are beginning to speculate that the weakness may reflect weaker-than-expected PC demand. And Lenovo, one of the world’s leading manufacturers, was automatically seen as a potential victim of a potential slowdown.

Lenovo Chairman Yang Yuanqing sold 32 million shares of the company’s stock at HK$9.65 to HK$9.79 between November 28 and December 1, earning a profit of US$310 million ($40 million). Independent non-executive director William O. Grabe sold 420,000 shares at HK$8.59 per share in October, cashing out HK$3.61 million. Although these sales are relatively common, they can nonetheless surprise investors.

A rival plot?

It’s too early to tell how Lenovo’s AI bet will play out, but the threat of potential U.S. sanctions is a much more immediate concern for the company. The United States has so far continued its attacks on Chinese technology companies, mainly targeting AI and chip companies. But even if it doesn’t attack today, there’s no guarantee it won’t target Lenovo in the future due to its status as a leading technology company in China. The political risks are too great to ignore. This is especially true when so many stakeholders are involved.

CTT, the organization cited in the Newsweek article, has always had a dark view of Lenovo. In other words, Lenovo’s computers were viewed by the Chinese government as tools for Internet espionage. However, the American PC giant dell (DELL) is one of Lenovo’s main competitors and an important financial supporter of CTT.

Although CTT may appear to be an independent entity, it is actually a project managed by DCI Group, a public affairs consulting firm whose clients include Dell and US chip giant Micron (MU).

Some people may believe that Dell is behind the Newsweek article, which was simply written with the intent to harm its competitors and does not represent U.S. government policy. But even if it’s true, the article could still influence government thinking and lead U.S. politicians to take a new interest in and express concern about Lenovo.

After all, political risk was always present. Previously, most people simply ignored it. But now a Newsweek article has put the issue out in the open. If such political factors act as risks, analysis based on fundamentals can quickly lose its validity. At least from now on, these risks are something investors will have to consider when considering Lenovo.

expose: doesn’t exist.

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