Lenovo Group Limited (992) Earnings Call Transcript & Summary

Ladies and gentlemen, good afternoon. Welcome to Lenovo Zoom call. Before we begin, I would like to announce some housekeeping rules. [Operator Instructions] Now we'll turn it over to the Lenovo IR team.

Thank you. Hello, everyone. Welcome to Lenovo's conference call. Today, we will provide an update on our strategic collaboration with Alat and discuss the completion of the issuance of our convertible bonds and warrants. I'm Jenny Lai, Vice President of Investor Relations at Lenovo. We are pleased to have with us Mr. Wong Wai Ming, our Group CFO; and Mr. Winston Cheng, our Group Deputy CFO. I will now hand over the call to Wong Wai Ming and Winston for their opening remarks. After that, we will open the floor for questions. Wai Ming and Winston, please go ahead.

Okay. Thank you, Jenny. Hi. Good morning. Good afternoon to everybody, our shareholders, analysts as well as, I think, investors. As you have seen this morning, we announced the completion of the strategic collaboration transaction as we announced in May 2024 and per our shareholders' overwhelming support in the September 2024 EGM. We thank you for entrusting us in this initiative and your overwhelming support and excitement of the strategic collaboration. And it has been some time we would like to give you an update to the investor community and to take the time to answer questions that you may have. This morning, we completed the USD 2 billion investment by Alat. Alat is a 100% owned entity by PIF into Lenovo via a 3-year 0-coupon CB. At the same time, we raised about $211 million via the proposed warrant issues. The professional third-party investor tranche of the warrants were ultimately beyond the original 50% allocated amount with final subsequent at 57% of the total warrants being taken up by independent investors. We also completed our strategic agreement with Alat on the manufacturing plant as well as a sales and distribution partnership in the Kingdom. As part of this plan, we anticipate to break ground in the manufacturing plant in this quarter with production starting in 2026. We intend to leverage our existing strong business in KSA and the local knowledge of Alat to further expand our businesses in the Kingdom and beyond. Given the global investment reach of PIF as well as Lenovo global business, the transaction took a bit longer for global regulatory approvals that ultimately received regulatory approval in all major jurisdictions as required for the completion. As per our announcement in May, which Alat has committed to subscribe the CB, subject to regulatory approval, the CB are subject to dividend adjustment will reflect in the dividends of the final dividend of fiscal year '23-'24 as well as the first half interim dividend '24-'25, resulting in the conversion price of CB being originally at HKD 10.42 to HKD 10.02. The warrant was subscribed and issued on January 8 and any adjustment per the warrant terms will be valid after the date of the issuance. Now all terms for shareholders vote in September 2024. With that, I now open to any questions that you may have. Thank you.

Thank you, Wai Ming, for the opening remarks. We'll now open the floor for questions. [Operator Instructions]. First question, we come -- is about what is the reason behind the lower conversion price for the CB?

As Wai Ming indicated, the conversion price was already set at the time of announcement in May 2024, which I will not go through again in terms of the details of how that was set. But the set is per our announcement. The only reason for the conversion price adjustment is due to the fact that Alat had committed to the subscription at the time of announcement. And similar to market terms of CB instruments that are issued by other public companies as well as Lenovo in the past. There are dividend adjustment mechanisms built into the CB terms. And as such, at the time of announcement and post the announcement and subscription by Alat, there was a fiscal year '23-'24 final dividend as well as a first half interim dividend. And with those 2 being captured and entitled effectively by Alat, there was a -- instead of a dividend distribution, a cash distribution received, that's reflected in the conversion price adjustment. And so these are market terms, and it's not -- it's unchanged per the original announcement. If you look back at the announcement, that's reflected and captured, yes.

Yes. Maybe -- I'll just add maybe exactly the same point as what Winston said. I think this is not special for this issuance of CB to Alat. It is actually the common feature of any CB issuance, I think, in the market. The reason that normally, the market may not actually notice that because normally, the issuance effective very shortly after the announcement. And because this is such a big deal, I think we need to get all the major government and regulatory authorities to actually approve the transaction, would actually take a little bit longer. And therefore, I think it's actually pass-through normally, for example, if Lenovo were to issue a normal CB, a much smaller amount. Normally, after we announce, we will get it issued within probably days or weeks. But this time, we actually need to get shareholders' approval, get all the major government regulatory approvals, authorities approved. It takes a little bit longer. And hence, I think that we'll just follow the common normal market practice of the adjustment. Thank you.

Thank you, Wai Ming and Winston. We got another written questions. Let us read it out. Could you please explain the role -- the warrant mechanism again in how they could be exercised?

Okay. The warrants are issued at the same time as the CB issuance. So per our announcement this morning, today is the issuance date for both instruments. The CB is a 3-year instrument, and so the warrants also a 3-year warrant instrument. The warrant instrument key features is, one, a right of first refusal offered to Legend Holdings, our large shareholder, to have a chance to effectively maintain a shareholding. And so the terms, as you recall, converts -- has the right after paying $1.43 for the right of the -- to acquire the warrants, have a right to subscribe at [ $12.31 ] conversion price. So with the effective cost of [ $13.74 ] which is a historical high -- I think, multiyear high for the Lenovo. So this is a very, I guess, long-term and positive view of the share price for warrant subscribers. And there was a conversion limit per year of roughly about 26% of each person's shareholding -- each investor shareholding, effectively equivalent to about 2% of our total shares outstanding on a per year basis at the time of issuance. I think those should be the key features of the warrant terms, yes.

Yes. Again, I put it in a layman sort of understanding, meaning that the investors of which 57% of the investor coming out from independent to Lenovo. I think, senior management actually subscribed about 47% of the warrants. As we actually describe more detail in the circular back in September when we have the EGM. Now meaning that investor -- warrant investors generally are very confident that I think share price within the 3-year period will be over $13.74, which is the cost of the warrant plus the subscription price, meaning that they are willing to -- they are taking a positive view that the share price over the 3-year period will be over that. And therefore, I think, from an investment point of view that -- for them, that is going to be a good investment.

Thank you, both of you. We now receive the questions from Ms. Cherry Ma. Ms. Ma, we will unmute you and would you also introduce the institutions that you represent before you proceed with your questions?

I'm Cherry from Macquarie. I have several questions on the business opportunities we see in the region. Are we able to share more details on the time line on setting up the manufacturing plant? What are the products we plan to produce locally initially? And would this include AI servers? What products and services do we currently provide in the region versus how we envision ourselves with Alat as a partner in the future? And finally, what is the revenue upside we see in the region working with this partner versus growing organically?

Okay. Maybe just share with you quickly in terms of the manufacturing facility. Obviously, as Wai Ming alluded to earlier, there is a regulatory approval aspect, which in some jurisdictions subject to the regulatory approval. I think a lot of the initiatives cannot be implemented or even discussed in detail because of fear of triggering sort of gun-jumping rules in certain jurisdictions. And so -- but as such, we do not necessarily waste our time. But I think we are ready to immediately deploy our initiative of building the manufacturing facility in KSA. So within this quarter, we will likely have a groundbreaking of the manufacturing plant, which we will happy to share in detail at the time. And I'm sure there will be some press release about that. And the target is to complete the plant in 2025 with production by 2026 and a ramp up hopefully in a significant volume by year 2027, full year. So that's the current plan. We currently -- our business in the region is very strong. As you know, we are the #1 PC provider in globally and of course in -- 4 of the 5 major geographies globally, we are #1 as well. So suffice to say, I think in KSA, we have a very strong market share. But with the Alat partnership, we hope to capture the opportunity with our existing infrastructure there as well as with Alat's local knowledge and the made in KSA devices to continue to penetrate accounts and other areas that we are not presented today. In addition to devices, I think there are -- I think that would be referenced really mostly to the PC. In terms of our mobile, I think today, we are -- it will be effectively a new market entry for us in KSA. And then on the server side, given KSA's initiatives, what they have with Vision 2030 as well as other data center and AI initiatives, we hope that it presents a great opportunity for us, for our ISG business as well in the market. And we also plan to make servers and produce end-to-end production of servers in KSA.

Yes. I think maybe -- again, apart from what Vincent said, I think maybe I would want to complement the answer by -- I think one of the reasons why we feel that this is a great opportunity for Lenovo, not only Alat actually providing the capital for us to support the growth, the mere fact that I think with Alat participating as a -- I think as a partner with us actually building a factory. It will actually make Lenovo continue what we call global local strategy. And we will become, I think, with the factory there become a local player where there are a lot of, I think, incentive from the Saudi government to encourage local player to support the growth of the business opportunities, which in other words, I think from a competition point of view, not only the factory have the ability to enable Lenovo to come up whatever products that we currently have or what we are going to develop products that actually will with the market demand in Saudi Arabia. But more equally important is we obviously will have significant cost advantage because being a "local" player we will enjoy all the support from the Saudi government. Now I just have to say that this is not specific to Lenovo per se, but Lenovo is the first one that actually going to take an action to become a local player to actually enjoy the benefit. Again, I just really want to emphasize the importance of the point that this is obviously a high-growth market in Saudi Arabia because they want to change from an oil-based to a more digitalized or more mature economy. And then we are part of that sort of growth that will require a lot of IT products as well as Lenovo services. Now secondly is -- I think for us is really how we I think getting the business expansion plan, again, as Winston -- as I said earlier, this is such a significant investment, and we need all the relevant government approvals. And therefore, you can see that this groundbreaking activity that Lenovo is going to start in Saudi Arabia, get the endorsement of all the necessary government around the world. I think this is really significant that we will continue our global local strategy, continue to actually have superior growth in our business.

Thank you, Ms. Ma, and thank you for the answer. We received 2 written questions related to the facilities. Let me read it out one by one. How much Lenovo will invest in the manufacturing facilities and how much of Lenovo's total products will be manufactured by this facility? This is question part one. And part 2 is the announcement says, the facilities will cater to customers within the region and beyond. Any colors on the geographical mix? Will it expect to the U.S.?

Maybe I start with the response first. As I indicated in my response to Cherry earlier, the production that we have initially planned is principally for devices, which predominantly would be for PCs. On the server side, we also have plans for production there given the large initiatives that are going there. So we see significant demand in the local KSA market. But I think the MEA market is also a growing region. So I think the KSA manufacturing facilities will not only serve the Kingdom, but also hopefully within the MEA region and maybe longer term, even outside of MEA. But today, I think we already have facilities that serve -- we have a plant in Mexico that we use to service the North American market. So I think today, our supply chain and our manufacturing facilities are very well covered globally with 30 manufacturing sites around the world. So we are quite efficient from the perspective of really servicing the needs of the regions, while utilizing -- driving efficiency so that we could drive low cost to our customers and partners. Yes. So I think that's the key in terms of initiatives from our partnership here. In terms of spend, we have previously indicated roughly around $250 million to $300 million for the plant. I think we're still talking largely around there. Obviously, depending on the adjustments to the volume, if the business we see that significantly to drive higher volume longer term, then, of course, we would plan to install more lines and therefore, require slightly more CapEx. Now as part of the plant investment, we would also correspondingly need to build our regional headquarters in RHQ. So there will be some investments there. And of course, marketing and potentially R&D, which I think our partners there are also very much have initiatives to drive, and we want to be able to leverage the local initiatives as well as talent to drive the R&D effort for the local market and hopefully, maybe even beyond outside of the region as well. So I don't know if you want to add?

Yes. So just to answer the question, probably looking at a longer-term perspective. Again, I actually mentioned the global local strategy. We obviously have our supply chain capability around the world, how best to serve our customers. Now we are very positive about looking at the fundamentals of what we see in Saudi Arabia. I think one of the key competitive advantages they probably, at the moment, have the lower cost of clean energy. Again, as everybody know, ESG is going to be a major competitive advantage. I think in the near -- well, at the moment, it's very important, but going forward, it's even more important. But rather than committing to build a huge plant, we're actually going to do it by stages. As Winston said, initially we start -- in fact, we are probably the global company, the first one, to build a manufacturing capability in Saudi Arabia. So initially, we actually just to cater the Saudi market as well as the Middle East. And proven to be successful, we will continue to expand. I think what we really want is to continue our strategy, which is have the global supply chain capability to serve all our customers. Now we obviously will say, look, whatever supply chain hub will best serve the customers, I think we have the capability. Like what we have today -- for example, now I am Winston, in fact, is actually sitting in Tokyo. Now we are obviously -- you know -- well, everybody probably know that I think we have a very successful business in Japan. And one of the reasons why the success is Japanese customers like to see some of their products, especially the high-end product called made in Japan. And therefore, for us to continue our success in the Japan market, we obviously have factories located in Tokyo, which will obviously be able to satisfy our customers who are willing to pay a significant premium for the products that is made in Japan. So we will continue rather than just looking at the lower cost, I think, globally, we're actually going to be able to service our customers at a price they're willing to pay. So that from a shareholders' perspective, we'll be able to continue to grow our business at a very meaningful margin.

Just a clarification, obviously, I think Wai Ming, we have manufacturing in Japan, but not necessarily in Tokyo. That would be very expensive. But yes, that's -- just in case people catch that. Yes.

Due to the time constraint, we will now take the last questions. The last questions will go to Howard Kao. Howard, we will unmute your line and before you ask the question, please also state the institutions that you represent. Howard, you may now begin your questions. Thank you.

Okay. Perfect. This is Howard from Morgan Stanley. So maybe 2 questions for me. The first, maybe a little bit more housekeeping. First is now that you guys have this capital coming in, is it fair to assume that the interest savings that you previously talked about, I believe, is somewhere around USD 100 million, will kick in for the full quarter starting from this calendar quarter?

I think we would -- starting to reflect that. I think our treasury team was very much on the minute of trying to capitalize this and make sure that, that promise is kept to the existing shareholders. So absolutely, it's a goal that we continue to embark on. But as you are aware of the current interest rate environment and obviously, I think, the 0 coupon potentially actually rates look like might stay higher longer, right? And so maybe I think that's a goal that should be the delta and the differential could be meaningful there, yes.

Got it. And my second question is, obviously, you guys have a lot of potential opportunities in KSA or in the region. I guess my question is whether this has already started now that you guys have been in collaboration with a lot for some time or do we have to wait for the manufacturing plant to come online before we can see upside coming from either KSA or the MEA region? And potentially how big this upside could be?

Yes. No, I think I want to be sure that you caught my earlier comments. Obviously, we have not started collaborating with Alat, right, because we have announced our intent to collaborate. But I think because of regulatory approvals, I think, Alat, the concrete action cannot happen. But now that we have received full approval, the preparation and the intent going into it now can actually take place. So I think we would be looking to capitalize on the market opportunity. The collaboration has 2 parts. One, obviously, is the manufacturing part, which I think Alat as part of the mandate to want to drive the local manufacturing in the new industry and ecosystem would like to make sure that, that happens and the Lenovo is successful as part of that, the Kingdom's initiative. The other part of it, obviously, when you produce in the market needs to be sold, and so they would also help us in that. Now that -- your question directs whether it needs to happen after manufacturing, that the answer is no. We can happen in day 1 and we intend to happen in day 1. And hopefully, you will see announcements of successful cases that we can make throughout this year before the plant is actually built, yes.

Yes. One more point, Howard, to add is I think the full financial benefit obviously will come after the manufacturing plant is built. But initially, I think with our existing products, with the sort of the Alat assistance, getting us to reach out to various customers in a very effective manner, we obviously will see -- begin to see some benefit. As I said I think being a local player, we obviously will have -- again, I just have to stress, this is not just a Lenovo, this is just a Saudi government policy, but Alat help us to be the first one to start getting those benefits. So -- and therefore, it is very, very meaningful for us or give us a lot of confidence that will be very successful initially -- at least initially, I think, in the KSA region. And as and when we actually grow, it will obviously have opportunity for us to be very efficient and service our customers better in other part of the world. Now maybe my final point going back to your first question rather than commenting as to the exact dollar, I mean the $2 billion definitely would not just be used to reduce debt. I think it will be used for us to grow our business, either in manufacturing organic or inorganic. But one thing for sure is bearing in mind the high interest rate environment, I think before the capital is actually deployed, it definitely will benefit from an interest-saving perspective. Bearing in mind, I think, the interest rate remained relatively high in the near future.

So no more questions from Howard. If this is the case, thank you very much to Wai Ming and Winston. This is the end of our call, and thank you to all the participants. Thank you, and we will see you again in the near future. Thank you for joining the call.

Okay. Thank you. Goodbye, everybody.

Happy New Year, everyone.