Introduction to this report:

The company will hold a shareholders' meeting on September 12, 2024 to vote on matters such as the strategic cooperation framework agreement between the company and Alat, improve the Group's diversification strategy and global manufacturing layout, and accelerate penetration into the Middle East and Africa markets.

Key points of investment:

Profit forecast and investment advice: We are optimistic about Lenovo Group's long-term growth potential and maintain the company's FY2025E/FY2026E operating income of 61.9/63.6 billion US dollars, FY2025E/FY2026E net profit of 1.23/1.62 billion US dollars respectively. We gave Lenovo Group FY2025 Forward P/E 16X, corresponding to a target market value of 18.45 billion US dollars, maintaining a target price of HK$12.4, maintaining the “gain” rating.

A shareholders' meeting will be held on September 12, 2024 to vote on the strategic cooperation framework agreement with Alat.

The company announced the strategic cooperation agreement and share warrant plan in May 2024, and issued an announcement on August 19. The shareholders' meeting will be held on September 12 to vote on the strategic cooperation framework agreement, bond subscription agreement and warrant plan between the company and Alat. Alat is a wholly-owned subsidiary of Saudi Arabia's main sovereign wealth fund, the Public Investment Fund (PIF). The company will issue $2 billion interest-free convertible bonds to Alat, which can be converted into shares after three years of issuance. As part of the agreement, the company will establish its headquarters for the Middle East and Africa region in Riyadh, Saudi Arabia. At the same time, the company plans to issue 1.15 billion warrants, and the initial proceeds will be approximately $0.21 billion. If the amount is exercised, an additional capital of 1.8 billion US dollars will be realized. The company plans to use the proceeds from convertible bonds mainly to refinance existing debts, and the proceeds from issuing warrants will be used for business expansion in the Middle East and Africa region.

Financing costs have been significantly reduced, and management is optimistic about the company's prospects. Alat's $2 billion financing in the form of interest-free convertible bonds will save the company 0.1 billion dollars in interest expenses each year for the next three years, and will better offset the share dilution effects that may result from convertible bonds and warrants after 3 years through increased revenue and profitability. The company's CEO Yang Yuanqing has subscribed to 19.1% of the warrants to show support for the Group's future development prospects.

The endorsement of the Saudi Sovereign Fund helped the company lay out the Middle East and Africa markets. Cooperation with Alat, a subsidiary of the Saudi Sovereign Wealth Fund, can help the company quickly establish connections with clients in the Middle East, particularly companies controlled by the Saudi Sovereign Fund. This will help the company quickly establish a stable supply chain and sales network, and fully grasp the broad development opportunities brought by this in the increasingly prosperous IT and enterprise services markets in the Middle East and Africa. The company's Middle East business is currently about 1 billion US dollars, accounting for about 2% of the company's business. Through a strategic partnership with Alat, we believe the Group is expected to increase its share of the Middle East business to 10% in the future.

Risk warning: Global IT spending is tightening; PCs are being shipped slowly; AI PC shipments are falling short of expectations.