Ladies and gentlemen, good afternoon. Welcome to Lenovo Zoom Call. Before we begin, I would like to announce some housekeeping rules. Participants, please update your names in the webinar to include both your company names and personal names for easier identification. Thank you very much. For this call, we will be accepting both verbal and written questions. You may click the raise hand button, and you will be placed in a queue. When the host announces your name, please state your name, the institution you belong to, and then ask your question. You can also type your questions in the Q&A box, and we will read it out for you later on. Please limit your questions relating to the announcement. Now, we'll turn it over to the Lenovo IR team.
Thank you. Hello, everyone. Welcome to Lenovo's company 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 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 for our shareholders' overwhelming support in the September 2024 EGM. We thank you for your interest 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 $2 billion investment by Alat. Alat is a 100% owned entity by PIF into Lenovo via a three-year zero-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 subscription 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 for our announcement in May, which Alat has committed to subscribe the CB subject to regulatory approval, the CB are subject to dividend adjustment, reflected in the dividends of the final dividend of fiscal year 2023-24, as well as the first half interim dividend 2024-25, 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 the 8th, 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. Thank you, Wai Ming, for the opening remark. We will now open the floor for questions. To submit a question, please click the raise hand button, and you will be placed in a queue. Alternatively, you may type your questions in the Q&A box and press submit. Please limit your questions relating to the announcement. Once again, with all participants, please update your name in the webinar to include both your company name and your personal name for easier identification. If there's any question, please feel free to press the raise hand button. First question 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 it was set 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 2023-24 final dividend, as well as a first half interim dividend.
With those two 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. So these are market terms, and it's unchanged per the original announcement. If you look back at the announcement, that's reflected and captured. Yeah.
Yeah, 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 exactly 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 is 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. It would actually take a little bit longer. And therefore, I think it's actually passed through normally. For example, if Lenovo were to issue a normal CB, a much smaller amount, normally after we announce, we'll get it issued within probably days or weeks.
But this time, we actually need to get shareholders' approval, get all the major government regulatory authorities approved. It takes a little bit longer. And hence, I think that we just follow the common normal market practice of the adjustment. Thank you.
Thank you, Wai Ming and Winston. We got another written question. Let us read it out. Could you please explain the warrant mechanism again and how they could be exercised?
Okay. The warrants were 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 three-year instrument, and so the warrants are also a three-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, Legend has a right after paying HKD 1.43 for the right to acquire the warrants, have a right to subscribe at HKD 12.31 conversion price. So with the effective cost of HKD 13.74, which is a historical high, I think, multi-year high for Lenovo. So this is a very, I guess, long-term and positive view of the share price for warrant subscribers.
There was a conversion limit per year of roughly about 26% of each person's shareholding, each investor's 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. Yeah.
Yeah, again, I put in a layman's sort of understanding, meaning that the investors, of which 47% of the investors are coming out from independent to Lenovo, I think senior management actually subscribe above 47% of the warrants. I think as we actually, I think, describe more detail in the circular back in, I think, September when we have the EGM. Now, meaning that warrant investors generally are very confident that I think share price within the three-year period will be over HKD 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 three-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? Thank you.
Hi, thank you for taking my question. 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 timeline 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 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? Thank you.
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 be 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 number one PC provider globally. And of course, in four of the five major geographies globally, we are number one 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 in other areas that we are not present today. In addition to devices, I think that would be referenced really mostly to our PC.
In terms of our mobile, I think today 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.
Yeah, I think maybe, I think apart from what Winston 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, I think it will actually make Lenovo, I think continue our what we call Global-L ocal strategy.
And we will become, I think, with the factory there, a local player where there are a lot of, I think, incentives from the Saudi government to encourage local players 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 with whatever products that we currently have or what we are going to develop products that actually will, I think, with the market demand in Saudi Arabia. But more equally important is we obviously will have significant cost advantage because being a quote-unquote local player, I think 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, I think to become, I think a local player to actually enjoy the benefit. Again, I just really want to emphasize the importance to point that I think 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, I think this is such a significant, I think investment, and we need all the relevant government approvals.
And therefore, we can see that this groundbreaking, I think, activity that Lenovo is going to start in Saudi Arabia, I think, gets the endorsement of all the necessary government officials or governments around the world. I think this is really significant that we will continue our Global-L ocal strategy, continue to actually have superior growth, I think, in our business.
Thank you.
Thank you, Ms. Ma. And thank you for the answer. We received two 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 these facilities? This is question part one. And part two is the announcement says, the facilities will cater to customers within the region and beyond. Any colors on the geographical mix? Will it export to the US?
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 a 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 efficiencies so that we could drive low cost to our customers and partners. Yeah, 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-$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 could 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.
Yeah, so just to answer the question, probably looking at a longer term perspective, again, I actually mentioned the global-local strategy. We obviously have, I think, our supply chain capability around the world, how best to serve our customers. Now, we are very positive about, I think, looking at the fundamentals of what we see in Saudi Arabia. I think one of the key competitive advantages, I think they probably at the moment have the lower cost of clean energy. Again, as everybody knows, ESG is going to be a major, I think, 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, I think we start, I think 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'll continue to expand. I think what we really want is 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, everybody probably knows that I think we have a very successful business in Japan.
I think, and one of the reasons why the success is Japanese customers like to see some of their product, especially the high-end product made in Japan, and therefore for us to continue our success, I think in the Japan market, we obviously have factories located in Tokyo. Now, which we 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, I think at a price they're willing to pay, so that from a shareholder's perspective, I think we'll be able to continue to grow our business, I think at a very, I think 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 yeah, yeah, that's just in case people catch that. Yeah.
Thank you for the answers. Due to the time constraint, we'll 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 question. Thank you.
Sure. Can you hear me?
Yep. Okay.
Okay, perfect. This is Howard from Morgan Stanley . Happy New Year to you, Wai Ming, Winston, and Jenny. So maybe two 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 $100 million US dollars will kick in for the full quarter starting from this calendar quarter?
I think we're starting to reflect that. I think our treasury team was very much on the money trying to capitalize on 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 zero-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. Yeah.
Got it. Thank you. 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 Alat 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. Thank you.
Yeah, 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 a lot of 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 two parts. One obviously is the manufacturing part, which I think Alat as part of the mandate to want to drive the local manufacturing and the new industry and ecosystem would like to make sure that that happens and Lenovo is successful as part of that, the Kingdom's initiative.
The other part of it, obviously what you produce in the market needs to be sold. And so they would also help us with that. Now that your question directs whether it needs to happen after manufacturing, that the answer is no. We can happen in day one and we intend to happen in day one. And hopefully you will see announcements of successful cases that we can make throughout this year before the plant is actually built. Yeah.
Yeah, 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, I think with the sort of Alat assistance getting us to reach out to various customers, I think 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 a Saudi, I think government policy, but Alat help us to be the first one, I think to start getting those benefits.
So, and therefore, I think it is very, very meaningful for us or give us a lot of confidence that we will be very successful. I think initially, at least initially, I think in the KSA region, and as and when we actually grow, I think it will obviously open opportunity for us, I think to be very efficient and service our customers better in other parts 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 will not just be used to reduce that. I think it will be used for us to grow our business, I think 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, I think, from an interest saving perspective, bearing in mind, I think, the interest rate remains relatively high, I think, 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.