Lenovo Group Limited (992) Earnings Call Transcript & Summary

Hi, ladies and gentlemen. Welcome, and thank you for joining the Lenovo Group's meeting today. Before we begin, I would like to announce some housekeeping rules. Participants, please update your names in the webinar to include both your company name and your personal names for our easier identification. Thank you. And for this call, we will be accepting both verbal and written questions. [Operator Instructions] Now we will turn it over to the Lenovo IR team, please.

Hello, everyone. Welcome to Lenovo's conference call on our strategic collaboration framework with Alat. This is Sandy Niu, IR Director at Lenovo. With me today are Mr. Wong Wai Ming, our Group CFO; and Mr. Hugh Wu, Head of Lenovo Treasury. We will begin with a slide presentation to elaborate details of the strategic collaboration. And after that, we'll open the call for questions. Now let me turn it over to Wai Ming. Wai Ming, please.

Good afternoon, everybody. Thank you, Sandy. So let me just run through a few slides to give you further details on top of what we announced today. So our strategic collaboration framework agreement with Alat will create a new business growth potential and reduce our financial expense burden with the issuance of a zero coupon convertible bonds. Alat is the strategic investment arm of Saudi Arabia -- Saudi Arabia's Public Investment Fund or commonly known as PIF, one of the largest sovereign wealth fund globally with assets under management in excess of $700 billion. Alat is not just another financial investor, but it is a strategic business partner for us. Alat's Board of Directors is chaired by the Crown Prince and prime ministers of the Kingdom of Saudi Arabia. It offers unparalleled access to the KSA booming economy and technology market. The Board members also consists of ministers, such as minister of investment His Excellency Al-Falih. In fact, Alat plan to invest over USD 100 billion by 2030 in key sectors such as AI, infrastructure, devices, semiconductors, which are also Lenovo's strategic interest. As the largest investment of Alat, Lenovo is primed to capture the high growth in the Middle East to actively engage in the growth opportunities and enhance the already resilient global supply chain with KSA renewable clean energy. In addition, the proposed 3-year warrants issue we announced yesterday, we will enable Lenovo to raise additional funds to support our future growth, while at the same time broadening our capital base and it's a further vote of confidence in the company's ongoing transformation, global market leadership and growth momentum. Warrants are also structured whereby Legend Holdings will have the first right of refusal to buy. This represents the confidence of Legend Holdings in Lenovo by committing a higher price to buy shares in Lenovo in 3 years' time. The group transformation from a device company to a service and solutions company is welcomed by Alat. And along with our global presence and manufacturing footprint, it is fully aligned with Alat's strong strategic growth to improve the region's capabilities in technology and create new growth opportunities. These opportunities are important for Lenovo to further strengthen our growth trajectory, such as the Middle East and African region represent a high-growth market across Lenovo business group. For example, our business shipment increased by 11% in EMEA region year-on-year, last year. KSA plans to invest over $18 billion to construct sizable data center such as -- as well as provide renewable energy to serve the region by 2030. The total addressable market in IT services spending could reach $38 billion by 2027, the region's investment in AI will lead to secular tailwinds and contribute up to triple the $300 billion to the Middle Eastern economy by 2030. Our collaboration will create a new manufacturing facility to serve the regional market. This new facility will extend Lenovo existing global footprint, which already includes more than 30 sites around the world, enhance our global change resilience and flexibility and capitalize the extensive clean energy initiatives from the region. In Saudi Arabia, the capacity to generate renewable electricity is being turbocharged with the country's aiming to produce half of its electricity from renewables by 2030. This alone could provide Lenovo with many ESG opportunities and is perfectly aligned with our commitment to achieve our own net zero target by 2050. As part of the collaboration, Lenovo will issue a $2 billion zero coupon convertible bond to Alat. The convertible bonds are due 3 years after issuance and is convertible to equity immediately prior to maturity. This is a compelling deal for us and represent a strong full of confidence in Lenovo market leadership and future growth potential. Such strategic capital from a significant global investor will help diversify our funding sources and optimize our capital structure. It also provide us with greater financial flexibility to invest in future growth opportunities across our business group and geographies, thus aiding our transformation. Additionally, zero coupon rate can help us to save approximately $100 million interest expenses. Lastly, please refer to the company announcement on the exchange's website for the due terms for the proposed issuance of the convertible bond and warrants. Thank you. We can now take your questions.

[Operator Instructions] The first question comes to [ Jira Dawa ]

This is [ George Dodder ] from [indiscernible] Capital. Actually, a couple of questions, if you don't mind. One is actually related to your existing convertible bonds, the public one. Given that this is a meaningful adjustment given that the transaction you just announced today is a meaningful -- sorry, it's a meaningful dilution. Would there be an adjustment to the conversion ratio or conversion price with the existing bond -- the existing convertible bonds? And the second question is this transaction, the zero coupon you announced today, is there any security over any assets or is it unsecured? And my final one is, I know your stock has rallied significantly over the past few days because of very good results -- because of very good results and solid product line. But obviously, you're issuing this, it's negative well below your current -- the strike is below your current share price. So I do wonder how you're thinking about this.

Okay. I think that I may -- I try to answer the question, but I think that I may miss. I think your third question. So let me just sort of go to, I think maybe more fundamentally, I think, to explain the rationale of this. The discussion of Alat, obviously, is not a -- I think a simple financial investment for them. In fact, this is I would appreciate that the discussion is more on the business collaboration now as well as, I think, from our perspective is they are -- although this is structured in the form of a convertible, but I think starting from the beginning, it was really sort of discussing, I think, as if this is like an equity because they obviously take a very long time of Lenovo. I think from ourselves, what we can do in Saudi Arabia as well as in the global market as well as how they can help us to expect. So the convertible with a zero coupon, in fact, actually started I think our really intensive discussion as to what energy and what strategic value can come up and at that time agreed that we should be looking at I think determining, I think the pricing of the transaction is 30 days. Obviously, I think when you actually look at it, I think our share price for the last 2 weeks probably went up, I would say, by about 15%. And therefore, for the last 30 days, it appears to be that I think the conversion price or the reference price, I think, appear to be, I think, on the discount to the last closing. But we actually have a look at it, I think the board have looked at it, and we also look at, I think the synergy, I think which obviously grew, we disclose a lot more I think in our shareholders' circular, when we actually have the shareholders meeting to accretive transaction. I think you can definitely see that the benefit of Lenovo, I think coming out from this transaction. Now the second one, I think, is whether this issue of convertible will actually result an adjustment of, I think, the existing convertible currently trending in the market. Is that the right -- am I getting the right question?

Yes. Yes, yes, exactly. Because the dilution, as you know, quite significant.

Yes. So we are checking with our financial adviser, Citibank who obviously advise us on the transaction as well as the issuance of the convertible. I think we probably will be making, I think, making the announcement soon. I think if that actually result or informing the investors I think soon if there is any adding adjustment. So the third one -- sorry, can you sort of repeat the question because I probably missed some part of it.

No. The third one was the security. Whether there are any securities or any assets within this convertible. I know you said it's more of an equity than -- it is more of an equity than a bond, but I do wonder whether there are any securities or any assets pledged towards this? It's fully unsecured. So it's basically, yes, in line with your other bonds and convertible bonds.

Maybe I should actually add one final comment because I know that unless I actually do the call otherwise, when you have to look at the transaction, it looks like another sort of financial transaction. But for us, I think clearly, we look at, I think, what businesses they can actually -- well Lenovo can actually secure, I think in definitely Middle East. But over time, because PIF or Alat have abundance of capital and therefore, will allow us more flexibility in both organic as well as inorganic activities. So to us, I think the other reason why we have actually structured as a zero coupon, I think as CFO, I think someone will actually give me the money unless I actually be able to deploy immediately. Otherwise, it's going to be immediately dilutive to our equity shareholders. And therefore, we believe that I think we -- initially, the $2 billion, I think will probably reduce some of our bonds, which were issued about, I think, 1 or 2 years ago, maybe the interest, I think, is relatively high, and this is obviously come at a zero coupon. More importantly, when those capital actually deploy in through inorganic activities, I think the economic benefit probably will come up 1 or 2 years' time. And that probably matches, I think, when the bond converted into equity. So this is another way of thinking. So again, I just want to I think share with you that the thinking of us is rather than thinking, this is another financial instrument for us to raise the capital. I think this is more than that. One is, I think, how much business synergy or how much business benefit that Alat can actually bring to us. In fact Alat I think when we actually thin about Alat, I think you should really think of, I think, the sovereign fund, the PIF, because all they invested in -- or the company they invested. We now obviously be able to have assets as well as the relatively rapid growth in that region. I think if you've been sort of following I think the 5-year plan of the KSA is, again, I think, really driven by, I think, the Crown Price who is the Prime Minister.

The next question, please, may I invite Cherry Ma to start.

This is Cherry Ma from Macquarie. I would like to ask two questions. The first question is compared to what we are doing now in the region in terms of our capital deployment plan? How is Alat able to help us inorganically expand as you have mentioned before in the next 1 to 2 years? What kind of new economic activity are we expecting to see? My second question is just out of curiosity, how long has this deal been brewing in the background? What was the -- how was it originated? Can you give us some ideas?

All right. So I think I probably can say some but will not be able to say whole on the second question. Now I think our business in the Middle East or what we call the EMEA region at the moment is about $1.3 billion, $1.4 billion out of a group revenue of about $60 billion, roughly. So we will expect that, I think Alat will actually help us to bring us to all the major, I think corporates, I think, in the Middle East. I think I named a few of those, for example, one of the largest oil companies Aramco, I think many and then there is also one of the biggest infrastructure project. I think if I will follow it from [indiscernible] city, I think basically building out a new city, I think or you actually call a smart city with a lot of IT infrastructure, I think -- and there are many others. And we -- again, I think rather than I think going through all the projects, I think I would encourage you to look at, I think the KSA plan, the 5-year plan really outlining what Saudi Arabia would want to transform itself, I think from a resource base to a more economy. So for us, it's actually tons of opportunities, especially, I think they have the resources. When I say they have the resources, they have, the overall resources, which they are very, very rich; in turn they are very, very rich in capital and therefore, they are looking for partners how the partners can help them to achieve that objective. And this is when we begin to discuss with, I think with a lot of PIF. Now my initial sort of ambition is we obviously want to, I think, significantly grow our Middle East business -- our EMEA business I think as I said, currently about $1.3 billion, $1.4 billion. I think in a very, very high double-digit number. Now what -- how do we achieve it initially? I think we [indiscernible] well based on our business, I think we also sort of plan. I think with the help from the Saudi government, I think, to build initially a GSC cycle for that, I think, obviously, when we actually have the sort of local manufacturing, it also help us to accelerate our penetration, I think in the local -- to the local market. So medium term, we obviously would want to, I think, continue to expand very, very quickly initially, I think, for the EMEA market and the longer term, we also look at, I think, one of the benefits I think from the region is really very -- relatively low cost of clean energy, knowing the market actually moving more and more towards environmental consideration. I think we potentially can actually, I think, leverage on our success over a much longer period, I think be able to be one of our major hubs or GSC hubs, I think servicing our global -- our customers globally. Now when do we start discussing, I think the very, very first discussion probably start about -- today is May, I think probably, I think, at the end of September or September, October time. And then we have very intensive discussion probably about 2, 3 months ago. And when we actually discuss, I think we discuss I think, what business, I think we can -- what can we do in Saudi Arabia, I think been sort of participating in the -- initially, at least in the sort of 5-year plan, I think what services so on and so forth, our products and then really turn into a more sort of bilateral sort of discussion where they are willing to invest in us. And that's the reason why I said the price is not really with reference to the last trading price or whatever. I think we have started with -- this is a long-term commitment from them, and therefore, we said, look, rather than looking at the short-term volatility. Again, if you actually look at our share price, I think other than the last 2 weeks, it actually went up to $11, $12. I think if you really go back, I think share price actually started off maybe as low as like $8. So it sort of went up by $10 and then come down to $8 and now go to $11. So rather than I think bearing in mind that this is a more long-term partnership going forward. I think we agree that maybe we should -- rather than just looking at pricing and negotiate this is like a financial instrument. We said why don't we actually take the last 30 days, we were, I think, as a reference and that take a 10% conversion premium. So that's really -- I think at least I think initially shared with you how long do we discuss with them. This is, I would say, generally about 6 months. But more intensive discussion probably like sort of 3 months and go into very, very detail. For example, when we actually look at thinking of, I think, establishing one of our global supply chain hub there, I think which city we should be -- is it an economic zone or what. I think we actually spent quite a bit of time trying to make sure that I think the cooperation indeed would generate significant synergy or benefit to Lenovo.

If I may follow-up just quickly. Were there any other contenders in this kind of discussions?

I would say that I think a lot is under PIF. I think they are primary -- they are not in general purpose investment fund. They just invest in smart devices. And when they actually pick us, well, I mean there is no sort of exclusive per se. Clearly, I think with this type of cooperation, especially involving in a very in-depth collaboration. I think -- I wouldn't say that they cannot invest in others because it's up to them to invest, but at the moment I believe I think that we are the only one that have been in the large sort of investment portfolio, we are the only one of -- with activities with sort of the IT services or IT smart devices. Are there any contenders? I think that I will let you ask Alat. We obviously want to -- I think, is needed, maybe after a few weeks' time before we actually have the shareholders' meeting. We probably will do another call, I think, really share with you what's the progress, although this is, I think, still subject to the shareholders' vote, but we already feel that it will be while the value that can generate from this cooperation or collaboration is significant. We just really want to share with you what are the things that we actually start discussing, and you can realize, I think, how valuable this cooperation can be. So you can -- maybe you reserve that question and then ask them.

And we now take the next question is from [indiscernible].

This is Anna from [indiscernible] I have a question on the use of proceeds. I think, I mean, you just mentioned that there might be some liability management incentive is part of the proceeds in debt repayment. So I just want to get more clarity like can you give like rough split, how much of that will be for debt repayment and how much of that will be CapEx? And also, is there any restrictions on the use of proceeds, i.e., like what kind of project or what kind of CapEx you will use the money in? Is it related to the region or any specific business segment? And the second question is kind of related because your current leverage is actually very low, but this instrument is quite significant versus your cap structure. So are you talking to the rating agencies on that?

Okay. Maybe I have the -- the last question would be the easy question. We're actually continuously taking to credit agents because we're actually seeing ourselves making progress, I think you can see that the recovery of our business definitely even when you compare with the challenges in the markets in the second half of last year. Yes, we are continuously talking to agencies and then they will actually evaluate our capital, our operating -- free operating cash flow and then for us, obviously, it is also our objective that we will be able to uplift our credit rating. But at the end of day, I have my colleagues in treasury, who can actually share with you on credit agents. Going to the other question, are there any restrictions on the use of proceeds? No, there is no restriction on the use of proceeds. So how much of those are used for repayment and how much of those are capital investment? Now I mentioned earlier that I think this is a collaboration rather than this is a financial -- a simple financial investment from Alat. Now we actually look at, I think, building up a local global supply chain hub, I think probably involving initially no more than $300 million. And we probably will build, I think, our supply chain there because that will enable us to a few of our competitiveness. I think getting more business, more businesses in the region or in Saudi Arabia. And then for the remaining, I mean, clearly, I think we run our treasury management, I think to the extent that we actually have the cash that we can actually reduce our interest payment, we will use that but after we use that, we obviously will even have a stronger balance sheet now while I would not be able to share with you that I think what exactly the inorganic opportunities, we are looking at, clearly, I think with the availability of capital with a very strong support of a strategic, I think, business partner as well as capital provider, they have pretty much deep pocket. As I said in my beginning, I think PIF obviously, I think has very, very significant, I think, capital. I think currently, they are managing over $700 billion. So as and when there are business opportunities that actually be able to further improve our business. I think I'm 100% sure that PIF or Alat will be willing to support. So in short, I think the amount of capital that we raised, I think at least we are going to put the best use of capital by, I think, reducing some of our high interest financial instrument. And then as and when the opportunity comes, we obviously will have the ability to go to -- if needed either go to debt market or probably I think we'll get the support from PIF or from Alat so that will have the financing -- we have the finance capability to expand our activities inorganically.

Yes, this is Hugh, Corporate Treasurer of Lenovo. There are several points. I just want to echo what Wai Ming just said. Firstly, I truly believe this $2 billion transaction will be a great opportunity for the Lenovo to further optimize our capital structure, more balanced between the debt and equity. Secondly, while if you look at the past trend, Lenovo in the past couple of years, we keep reducing our debt. So I think this is a direction and we will continue to improve our leverage ratio. Thirdly, to echo the question you just raised the rating agency communication. So in the last 3 to 4 years after we got our investment-grade rating, we keep, I think, a very good communication between Lenovo and our rating -- 3 rating agencies. I'm sure some of the analysts from the rating agencies must attend this call as well. So quarterly communication and also time-to-time to talk about our recent strategy as a communication between Lenovo and our rating agencies. And I'm sure we have a view, explain the rationale or background of this transaction clearly to the rating agencies. I'm not rating agency but I hope with all the clarification of this -- rationale of this transaction, rating agency will think a positive of this transaction. Thank you.

Our next questions go to Jason Jiang.

Yes. Okay. This is Jason Jiang. I am from Hong Kong EIP. We are a Greater China Fund. I would like to ask a question regarding the warrants issuance. May I know if this issuance of the warrants will be open for public investors like us? Or is there going to be like possibly a book building or something regarding that?

Yes. I think the warrants -- we actually [indiscernible] upon Citi as our pricing agent. We would -- I think the -- I just really want to highlight that the warrants apart from the [ low-standard ] warrant terms which actually set out. I think the warrants also will give, I think, Legend, the first right of refusal to buy, I think if there were others want to sell. I think we will be working with, I think, Citi as to see, I think the price of the warrants. I think the purpose of that is really -- I think if you really look at the terms, which is very similar to the Alat's convertible bond. I think the purpose is, I think, enable our -- one of our largest shareholders, which is Legend Holdings. I think to show that they have confidence that they have the ability to actually maintain their shareholding over 3 years when Alat actually going to convert the bonds into equity. I would definitely insist with Citi. I think Citi is our pricing agent, and we'll see how best I think we will be able to distribute the warrants.