0992.HK
Lenovo makes critical calculation with Middle East pivot

The PC giant’s new tie-up with the Alat unit of Saudi Arabia’s sovereign wealth fund will give it access to new funds and help it establish a regional headquarters in Riyadh

Key Takeaways:

  • Saudi Arabia’s Alat subscribed to $2 billion worth convertible bonds from Lenovo, which the PC giant will use to help strengthen its financial position
  • Lenovo is stepping up its development efforts in the Middle East and Africa to reduce its exposure to the U.S. 

By Lau Chi Hang

Hong Kong is a favorite destination for Saudi princes, who have traditionally descended on the Asian city as a relatively safe financial haven for opening family trusts. But a major new tie-up between Hong Kong-listed PC giant Lenovo Group Ltd.(0992.HK) and a unit of Saudi Arabia’s sovereign wealth fund breaks that mold, and instead looks more like a joining-of-giants with their own bigger agendas.

Foreign investors have been scaling back or leaving China outright these last few years as tensions mount between Beijing and Washington. Data from the Institute of International Finance shows foreigners withdrew a total of $82.2 billion from Chinese equity markets in 2023 alone. But that Western flight has been partly offset by rising inflows of Middle Eastern money, bringing with it some new life and vitality for China’s financial markets and companies.

In the latest inflow from that tide, Lenovo recently announced a major new strategic cooperation agreement with Alat, an entity managed under Saudi Arabia’s Public Investment Fund. With a mouth-watering $100 billion in funds to invest, Alat has been tasked with transforming Saudi Arabia into a global hub for electronics and other advanced industries. 

Under their agreement, Lenovo will set up a regional headquarters for the Middle East and Africa in the Saudi capital of Riyadh, consisting of region-facing client and research centers. At the same time, the company plans to build a PC and server manufacturing base in the country to expand its global footprint. Alat will assist Levono to ensure the strategic tie-up’s smooth implementation.

Alat also purchased $2 billion worth of Lenovo three-year zero coupon convertible bonds. Those can be exchanged later for about 1.5 billion Lenovo shares at a conversion price of HK$10.42 per share, which would equal about 10.8% of Lenovo’s enlarged share capital if Alat makes the conversion. The conversion price represented a 10% premium to Lenovo’s average share price in the 30 days before the announcement.

Separately, Lenovo’s board also approved another major new fundraising with the issue of 1.15 billion three-year warrants at an issue price of HK$1.43, which could raise up to HK$1.64 billion ($210 million). The exercise price of the warrants is HK$12.31 per share, representing a 5.9% premium to the closing price on the day before the announcement.

Muted market reaction

“Through this strong strategic partnership, Lenovo Group will have more resources and greater financial flexibility to further accelerate its transformation and expand its business to capture the tremendous growth opportunities in the Middle East and Africa region,” Chairman and CEO Yang Yuanqing said in a statement with the Saudia Arabia announcement. 

Lenovo shares rallied sharply just before the announcement, suggesting rumors of the tie-up were already in the market. That may at least partly explain the muted reception by investors the day of the actual news, when Lenovo’s shares fell by nearly 1% to close at HK$11.52. More broadly, Lenovo’s shares have performed quite well so far this year, rising from a low of HK$7.80 in February to their latest close of HK$10.64 last Friday, representing a gain of 36%.

The company’s latest quarterly report for the three months to March shows its revenue and profit increased by 9% and 118% year-on-year, respectively, though they fell by 12% and 26% quarter-on-quarter, and were also down 4% and 0.4% from the quarter before that. Most investment banks currently have price targets for the company between HK$12 and HK$14, which is close to the current price. Any potential for price target upgrades will depend on the company’s business trends over the next two quarters, which will present a clearer picture of where it’s heading in a global PC market with limited growth potential.

Killing many birds with one stone 

Against that backdrop of limited potential, the Alat partnership could provide some new excitement for Lenovo shareholders by plotting out a future path for stronger growth and a hedge against risk. 

One of the biggest risks for Lenovo is rising tensions between China and the West, reflected by recent voices in the U.S. arguing for a ban on the use of Lenovo PCs in government offices. That threat has yet to result in any definitive actions, though uncertainties continue to persist. At a time when China is facing growing sanctions and restrictions from European and U.S. governments in sectors as varied as semiconductors, solar panels, pharmaceuticals and electric vehicles, the possibility of Lenovo becoming the next target can’t be ruled out. 

With that in mind, Lenovo’s Middle Eastern expansion with the setting up of a major new regional base will help to reduce its geopolitical risk. Its products made locally in the region and exported to the West will be less likely to get scrutinized by U.S. and European governments, which have becoming increasingly sensitive to the country of origin for products sold by Chinese companies.

The Americas is currently Lenovo’s biggest market by revenue, accounting for 34% of the total in its latest fiscal year. Europe, the Middle East and Africa accounted for 28% last year, though Lenovo did not break out data for just the Middle East and Africa. 

We should note that the Middle East has been trying to develop its science and technology sectors in recent years in a bid to diversify beyond its reliance on oil. At the same time, African economies have also been advancing, making this broader region a promising market. A report by the Economist Intelligence Unit projected Africa’s growth rate would rise from 2.6% in 2023 to 3.2% in 2024, making it the world’s second fastest-growing region. Thus, Lenovo’s new partnership with Saudi Arabia could position it well to benefit from the region’s future development.

Strategic cooperation aside, the partnership will also provide Lenovo with a $2 billion cash infusion to replenish its coffers. The company said it will use the funds to pay off existing debt, and to support its other general business activities. According to its latest annual financial report, the company will have nearly $3.6 billion worth of bonds coming due this fiscal year, which its cash on hand can comfortably cover. But funds from the new convertible bond issue could also provide additional funding for its future expansion and R&D efforts, in addition to their use for debt servicing. 

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