Incident: On May 29, the company disclosed two announcements, namely “Strategic Cooperation with ALAT and Proposal to Issue Convertible Bonds under Special Authorization” and “Proposed Issuance of Warrants under Special Mandate”. It is expected to enter into a strategic cooperation framework agreement and bond subscription agreement with Alat. At the same time, the company disclosed an announcement on August 19 to hold a shareholders' meeting to review the two proposals. It was determined that the shareholders' meeting date would be September 12 to vote on the strategic cooperation framework agreement and bond subscription agreement between the company and Alat.
Performance has resumed growth, and the smart device business accounts for the majority. FY2024's annual revenue was $56.895 billion, -8.16% YoY; net profit was $1.011 billion, or -37.15% YoY. FY2025Q1's revenue was $15.447 billion, +19.75% YoY; net profit was $0.243 billion, +37.86% YoY. By product split, FY2024 Smart Device Business Group's revenue was 44.599 billion US dollars, accounting for 78.43%, -9.67%; infrastructure solutions revenue was 8.922 billion US dollars, accounting for 15.69%, -8.55% year over year; total solution services revenue was 7.472 billion US dollars, accounting for 13.14%, +12.14% year over year; intersegment offsetting -4.13 billion US dollars.
Alat's unique position (a wholly-owned subsidiary of the sovereign fund Public Investment Fund) will provide the Group with the sovereign wealth resources of the Kingdom of Saudi Arabia. ① Alat is a wholly-owned subsidiary of the Public Investment Fund of the Kingdom of Saudi Arabia. It has an independent investment license. It is a long-term strategic investor with 100 billion US dollars in capital to help invested companies grow globally by using the Kingdom of Saudi Arabia's sovereign wealth resources. ② The company and Alat signed a strategic cooperation framework agreement on May 28, 2024, which forms the basis for strategic cooperation between the company and Alat.
Under the strategic cooperation framework agreement, the company will (among others) establish a new regional headquarters serving the MEA region (Middle East and Africa) in Riyadh, Kingdom of Saudi Arabia, which will include a customer center to create customer needs in the MEA region, as well as an R&D center focused on the MEA region.
③ Alat will provide support and assistance to the company to ensure the smooth implementation of the strategic cooperation, including assisting the company in selecting the location of the regional headquarters in Riyadh and obtaining all permits, licenses and government agency approvals applicable to the regional headquarters in Riyadh. Alat will also deliver the production facility's premises in accordance with the company's requirements for the production facility.
Innovative financing supports bond refinancing and business expansion. ① Lenovo announced the issuance of 0.115 billion warrants, each priced at HK$1.43, and is expected to raise approximately $0.21 billion. ② Lenovo signed a bond subscription agreement with Saudi Alat to issue convertible bonds totaling 2 billion US dollars, or about HK$15.623 billion. ③ Chairman and CEO Mr. Yang Yuanqing will subscribe for about 19.13% of the warrants as the initial warrant subscriber. If management participants do not subscribe enough, he is willing to subscribe for an additional 28.70%. ④ The company plans to use the proceeds from the convertible bonds mainly to refinance existing debts, while the proceeds from issuing the warrants will be used for business expansion in the MEA region. All proceeds from the exercise of the warrants will ensure timely and adequate investment in R&D and hybrid AI.
Overall, strategic business transactions provide an important opportunity for the company's long-term growth in China and the MEA region. ① Introduce long-term strategic partners to internationalize the shareholder base and strategic options, and the long-term strategic partnership with Alat enables the company to obtain potential business opportunities in the Kingdom of Saudi Arabia, the MEA region and the world through investment and contacts with Alat and Public Investment Fund; ② Expanding geographical diversification into the MEA region while providing growth opportunities and impetus to consolidate its position in China. The company will expand its business development and manufacturing layout to enhance market coverage to capture the world, in particular Strong growth momentum in the MEA region; ③ Issuing financing instruments on favorable terms supports a number of strategic initiatives. The company can use the raised funds to refinance existing debt, supplement general working capital, expand and support strategic initiatives in the MEA region, and at the same time, issuing bonds within the first three years will not cause the current shareholders' shareholding ratio to be diluted. If exercised, the warrants will fund the Company at an actual issue price of HK$13.74, which is close to the 20-year high stock price. The company expects to save about 0.11 billion US dollars in interest each year through strategic business transactions, which does not take into account the proceeds from the exercise of the warrants; ④ Financial flexibility helps strategic transformation, additional revenue growth opportunities and the resulting interest savings provide the company with greater financial flexibility to make incremental strategic investments in AI, R&D, and potential non-organic growth opportunities to drive its continuous strategic transformation; ⑤ The management team strongly supports the company with large personal financial commitments, demonstrating confidence in the company's long-term prospects. Confidence in continuous transformation, global market leadership and growth momentum also binds the interests of shareholders and the company's management by enhancing the enthusiasm of the company's management.
Profit forecasts and investment recommendations:
We believe that the company is a global ICT company. Lenovo has the highest PC sales volume in the world, actively promoting the development of “device+cloud” and “infrastructure+cloud”, as well as the implementation of intelligent solutions. As AIPC iterates and accelerates penetration, the PC market recovers, and upstream server GPU supply chain issues are mitigated, the company is expected to begin new growth. We expect FY2025-FY2027, the company's Intelligent Equipment Business Group (IDG) to grow at 8%, 7%, and 7%, and the company's revenue growth rates of 9.56%, 7.03%, and 6.44%, respectively. With the diversification of the product structure and the support of the company's strong operating capacity, gross margin is expected to rise steadily. We expect the overall gross margin of the FY2025-FY2027 company to be 17.74%, 18.24%, and 18.74%.
We expect the company's FY2025-FY2027 revenue to be USD 62.297/66.675/70.966 billion USD, and net profit to mother of USD 1.16/1.611/1.982 billion, respectively, and the corresponding EPS of USD 0.09/0.13/0.16, respectively. Based on the current industry stage and the company's growth rate and barriers, the company was given 18-20 times the FY 2025 dynamic PE. Based on the exchange rate of 1 US dollar = 7.2523 HKD, the 6-month reasonable value range is HK$12.21-13.57, maintaining a “superior to market” rating.
Risk warning: Supply in the industrial chain is limited; AIPC promotion falls short of expectations; PC boom recovery falls short of expectations.