Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement.

Lenovo Group Limited 聯想集團有限公司

(Incorporated in Hong Kong with limited liability)

(Stock Code: 992)

FY2019/20 INTERIM RESULTS ANNOUNCEMENT

INTERIM RESULTS

The board of directors (the "Board") of Lenovo Group Limited (the "Company") announces the unaudited results of the Company and its subsidiaries (the "Group") for the three and six months ended September 30, 2019 together with comparative figures for the corresponding period of last year, as follows:

FINANCIAL HIGHLIGHTS

  • Pre-taxprofit increased 69 percent year-on-year in 1HFY20; revenue growth was modest at 3 percent as slowdown of datacenter revenue dampened overall growth
  • PC and Smart Device (PCSD) Business continued to leverage high-growth and premium segments in driving market share gains and delivering record shipments in PC, with a growth of 8-percentage points premium to market
  • Mobile Business Group (MBG) further improved profitability for the 4th consecutive quarter, led by solid performance in core markets
  • Data Center Group (DCG) narrowed its losses, with strong growth in storage and Software Defined Infrastructure (SDI) businesses
  • Software and Services grew at a strong double-digit rate year-on-year on the back of rising attach rates and robust demand for Premium Services
  • Net cash generated from operating activities was US$1.2 billion in 1HFY20

3 months ended

6 months ended

3 months ended

6 months ended

Year-on-year change

September 30,

September 30,

September 30,

September 30,

3 months

6 months

2019

2019

2018

2018

ended

ended

(unaudited)

(unaudited)

(unaudited)

(unaudited)

September 30

September 30

US$ million

US$ million

US$ million

US$ million

Revenue

13,522

26,034

13,380

25,293

1%

3%

Gross profit

2,183

4,231

1,794

3,426

22%

24%

Gross profit margin

16.1%

16.3%

13.4%

13.5%

2.7 pts

2.8 pts

Operating expenses

(1,741)

(3,447)

(1,504)

(2,956)

16%

17%

Operating profit

442

784

290

470

53%

67%

Other non-operating expenses - net

(132)

(234)

(77)

(144)

73%

63%

Profit before taxation

310

550

213

326

45%

69%

Profit for the period

244

436

173

259

40%

68%

Profit attributable to equity

holders of the Company

202

364

168

245

20%

48%

Earnings per share attributable to

equity holders of the Company

Basic

US 1.69 cents

US 3.06 cents

US 1.41 cents

US 2.06 cents

US 0.28 cents

US 1.00 cents

Diluted

US 1.62 cents

US 2.94 cents

US 1.40 cents

US 2.06 cents

US 0.22 cents

US 0.88 cents

1

INTERIM DIVIDEND

The Board has declared an interim dividend of HK6.3 cents (2018/19: HK6.0 cents) per share for the six months ended September 30, 2019, absorbing an aggregate amount of approximately HK$756.9 million (approximately US$96.6 million) (2018/19: approximately HK$720.9 million (approximately US$92.1 million)), to shareholders whose names appear on the register of members of the Company on Friday, November 29, 2019. The interim dividend will be paid on Friday, December 6, 2019.

CLOSURE OF REGISTER OF MEMBERS

The register of members of the Company will be closed on Friday, November 29, 2019, during which no transfer of shares will be registered. In order to qualify for the interim dividend, all properly completed transfer documents accompanied by the relevant share certificates must be lodged for registration with the Company's share registrar, Tricor Abacus Limited, at Level 54, Hopewell Centre, 183 Queen's Road East, Hong Kong no later than 4:30 p.m. on Thursday, November 28, 2019. Shares of the Company will be traded ex-dividend as from Wednesday, November 27, 2019.

BUSINESS REVIEW AND OUTLOOK

Highlights

During the six months ended September 30, 2019, Lenovo (the Group) delivered strong profitable growth with its pre-tax profit increasing by almost seventy percent over the same period of last fiscal year. Not only did the Group consistently achieve year-on-year revenue growth, but also the three primary business groups under operation each delivered profit improvement or narrowed their losses, despite the component supply constraint and on-going geopolitical uncertainties.

In the PC and Smart Device (PCSD) Business, the market share gains in high-growth and premium segments were an important driver for revenue growth and better profitability. PCSD enjoyed double- digit revenue and shipment growth across the Workstation, Thin and Light, Visual, and Gaming PC segments. In the Data Center Group (DCG), despite the challenges in the hyperscale segment, the rest of the business achieved strong double-digit revenue growth in key segments such as storage and Software Defined Infrastructure (SDI), demonstrating an encouraging long-term growth trend.

The Group also made steady progress in developing future growth businesses. One such growth opportunity is in the software and services business. The Group's 3S (Smart IoT, Smart Verticals, and Smart Infrastructure) strategy was designed to accelerate its Intelligent Transformation and to pave a new path towards delivering sustainable, long-term growth. As part of this strategic investment, the software and services invoiced revenue grew at strong double-digit rate compared to the same period of last fiscal year and contributed more than 6 percent of the Group's overall revenue thanks to strong performance in Premium Services.

Net cash generated from operating activities was US$1.2 billion in 1HFY20. The strong cashflow generation reflects the Group's efforts in improving operating profit and working capital management.

Financial Performance

For the six months ended September 30, 2019, the Group's pre-tax profit increased 69 percent year-on- year to reach US$550 million, while its profit attributable to equity holders rose by 48 percent to US$364 million. These exceptional figures of profit growth outpaced the Group's revenue growth of 3 percent year-on-year to US$26,034 million in the period under review.

The significant profit improvement was partly driven by a year-on-year gross margin expansion of 2.8 percentage points to 16.3 percent, thanks to favorable sales mix shift in the PCSD Business and the Mobile Business Group (MBG) turning to profitability. The Group's gross profit surged by 24 percent year-on-year to US$4,231 million.

2

The operating expenses rose by 17 percent year-on-year while expense-to-revenue ratio increased by 1.6 percentage points to 13.2 percent due to rising investments in sales, marketing and promotion, as well as higher bonuses to reward strong profit performance.

Among the three business groups, the PCSD business remained the world's market leader in the period under review with industry-leading profitability. Despite subdued demand in their respective sectors, the MBG and DCG businesses managed to enhance their profitability year-on-year.

Performance by Product Business Group

Intelligent Devices Group (IDG)

During the six months ended September 30, 2019, the revenue of Intelligent Devices Group (IDG) - consisting of the PCSD and MBG businesses - grew 6 percent year-on-year to US$23,347 million while its pre-tax profit improved 45 percent year-on-year to reach US$1,149 million. Market share gain especially in the high-growth and premium PC segments were the key growth catalyst for IDG's revenue performance. This favorable mix shift towards high-growth and premium segments, coupled with the ongoing commercial refresh cycle, enabled the PC business to grow its market share by 0.8 percentage point year-on-year to 24.4 percent of the global market in fiscal quarter two. This sales mix change underscored the record pre-tax profit margin of 4.9 percent achieved by IDG during the period under review. MBG, another key business part of the IDG, also made a turnaround on pre-tax margin from previous losses and contributed to the improved profitability of IDG.

Intelligent Devices Group - PC and Smart Device (PCSD) Business

During the period under review, the PCSD business was not only the largest PC brand in the world by market share but also continued its share gain trajectory. The PC business delivered record shipments and its year-on-year shipment growth outperformed a growing market by 8 percentage points. The PC business is also becoming more balanced, with a stronghold in the commercial segment and further penetration in the consumer segment with its segment share reaching 20.4 percent in fiscal quarter two.

The success of the business is partly rooted in its strategy of investing in high-growth and premium segments, which represented more than 50 percent of PCSD's revenue for the six months period under review. The business achieved double-digit revenue growth and double-digit shipment growth across Workstation, Thin & Light, Visual, and Gaming PC. The business reported an 8 percent year-on-year growth in revenue to US$20,287 million, representing 78 percent of the Group's total revenue, for the six months ended September 30, 2019.

Leveraging a well-executed strategy in driving more profitable product mix and a higher attach rate for software and services, the business further expanded its industry-leading profitability to set a new record. PCSD's pre-tax profit increased 21 percent year-on-year to US$1,135 million and its pre-tax profit margin expanded 0.6 percentage points from the same period last fiscal year to a record 5.6 percent in the six month period under review.

Intelligent Devices Group - Mobile Business Group (MBG)

The Group's mobile business has delivered on its promise to maintain profitability for four quarters and continued to expand its profitability on a year-on-year basis. The primary driver for this success is its focused strategy to invest and develop in regions and/or countries where it has notable competitive advantages. As a result, its profitability continued to advance year-on-year in core markets including Latin and North America for the period under review. With better portfolio efficiency and margin expansion in its core regions, the MBG's pre-tax profit increased by US$160 million from the same period last fiscal year.

3

The strategy to target investments in countries with potential for profitable growth inevitably resulted in smaller operating scale and thus a decline in revenue of 7 percent to US$3,012 million for the MBG business for the six months ended September 30, 2019.

This business group will refine and apply its focused strategy to additional markets in Europe where its competitiveness is enhanced by a host of factors including new carrier relationships and expanded product pipeline. The Group's well-established PC brand and its historically strong performance in the region will also help drive the cross-selling of its mobile products.

The business continued to deliver innovative products across the portfolio recently announcing the newly introduced Moto G8 family, Motorola One Macro and Moto E6 play. Given that its most important core markets are profitable across the board, an increase of contribution from these core markets is likely to further boost MBG's long-term profitability.

Data Center Group (DCG)

During the six months under review, the primary challenge to the DCG business was in the hyperscale segment where the commodity price correction has negatively impacted average selling prices (ASP). There was also softness in demand from its hyperscale customers. The business delivered revenue of US$2,687 million for the period under review, representing a 15 percent year-on-year decline and contributing to 10 percent of the Group's total revenue.

Despite challenges in the hyperscale segment, the business achieved notable success in multiple product segments including storage, Software Defined Infrastructure (SDI) and High Performance Computing (HPC) businesses. Storage revenue grew at a strong, double digit rate during the period under review as the value of DCG's expanded portfolio earned market recognition. SDI sales also increased at a strong double-digit rate year-on-year as its product performance helped win market share. HPC revenue also grew at a robust double-digit rate during fiscal quarter two thanks to new project wins. The Data Center Infrastructure (DCI) business also started to resume growth year-on-year in fiscal quarter two as the DCG operation in China seized opportunities to broaden its sales coverage and expanded product portfolio.

The strategy to focus on profitability protection continued to pay off for the DCG business, allowing it to balance between return on investment and the need to build a sustainable and profitable business model via additional investments. Losses from DCG narrowed by US$20 million year-on-year to US$103 million for the period under review.

Outlook

Looking ahead, the global demand for technology products is expected to remain volatile amid a complex macro environment. However, going forward, Lenovo is well positioned to manage complex and dynamic market conditions, while continuing to deliver sustainable long-term results.

The Group will continue to target premium-to-market revenue growth with industry-leading profitability in its PCSD business through further expansion in the high-growth and premium segments. Building capabilities to drive sales growth in software and services will remain a focus. For its Mobile business, the Group will continue to strengthen its competitiveness in target markets to sustain profitable growth while extending its technology leadership.

4

Despite a cyclical setback in the hyperscale industry since the latter part of last fiscal year, the trend of data growth is expected to accelerate and fuel a subsequent recovery in sales for DCG business with the debut of more products and applications featuring new technologies including 5G. Lenovo will tap into this opportunity to drive premium-to-market growth and to build its DCG business as a full stack industry leader through the introduction of solution capabilities and a reliable end-to-end product portfolio. Moving forward, Lenovo will continue to drive growth in enterprise server, Software Defined Infrastructure, HPC, storage, and services and software. For hyperscale business, the Group will leverage its differentiated in-house design and manufacturing capability to drive large-scale applications, and broaden its customer base to build a profitable business model in the future.

Strategic Highlights

The Group continues to execute its strategy to be the leader and the enabler of Intelligent Transformation. Lenovo has the vision of bringing smarter technology to all - through Smart Infrastructure, Smart Verticals and Smart IoT. This 3S strategy, in parallel with its customer-centric positioning, has led to a higher software and services attach rate. During fiscal quarter two, the software and services invoiced revenue grew at a strong double-digit rate year-on-year, not only contributing over 6 percent of the Group revenue but also carrying one of the highest margin profiles among all of the Group's products. The software and services business is considered a strong, long-term growth catalyst.

Smart Infrastructure provides the computing, storage and networking power to support smart devices, which will more than double in number in 2020 from 2017 creating an enormous amount of data. Lenovo launched its next-generation data center solutions in SDI and expects it to remain a future growth catalyst. These new solutions, which include collaboration with several partners based on the ThinkAgile platform, have grown significantly during fiscal quarter two.

Smart Verticals combine big data generated by smart devices and the computing power of smart infrastructure in order to provide more insights and improve processes for customers. The Data Intelligence Business Group (DIBG) has expanded its footprint to win projects in the energy and manufacturing industry during fiscal quarter two. Its healthcare and education virtual reality solutions also gained strong momentum in driving revenue growth.

The Group will continue to invest in Smart IoT, consisting of a network of many touchpoints for the connected world we live in. Specifically, the Group's investments will accelerate in the area of edge computing, cloud, big data and artificial intelligence (AI) in vertical industries to deepen its strategic transformation and further accentuate its core competence. These investments aim to strengthen Lenovo's capability as a competitive end-to-end solution provider in the era of Intelligent Transformation.

5

FINANCIAL REVIEW

Results for the six months ended September 30, 2019

6 months

6 months

ended

ended

September 30,

September 30,

Year-on-year

2019

2018

change

(unaudited)

(unaudited)

US$ million

US$ million

Revenue

26,034

25,293

3%

Gross profit

4,231

3,426

24%

Gross profit margin

16.3%

13.5%

2.8 pts

Operating expenses

(3,447)

(2,956)

17%

Operating profit

784

470

67%

Other non-operating expenses - net

(234)

(144)

63%

Profit before taxation

550

326

69%

Profit for the period

436

259

68%

Profit attributable to equity holders of the

Company

364

245

48%

Earnings per share attributable to equity

holders of the Company

Basic

US 3.06 cents

US 2.06 cents

US 1.00 cents

Diluted

US 2.94 cents

US 2.06 cents

US 0.88 cents

For the six months ended September 30, 2019, the Group achieved total sales of approximately US$26,034 million. Compared to the corresponding period of last year, profit attributable to equity holders for the period surged by US$119 million to approximately US$364 million. In the same reporting timeframe, gross profit margin for the period advanced by 2.8 percentage points from 13.5 percent, while basic and diluted earnings per share were US3.06 cents and US2.94 cents respectively, representing an increase of US1.00 cents and US0.88 cents.

Further analyses of sales by segment are set out in Business Review and Outlook.

Analysis of operating expenses by function for the six months ended September 30, 2019 and 2018 is as follows:

6 months

6 months

ended

ended

September 30,

September 30,

2019

2018

US$'000

US$'000

Selling and distribution expenses

(1,541,133)

(1,308,943)

Administrative expenses

(1,195,250)

(1,000,134)

Research and development expenses

(647,343)

(622,236)

Other operating expenses - net

(62,818)

(24,543)

(3,446,544)

(2,955,856)

6

Operating expenses for the period were 17 percent over that of the corresponding period of last year. Employee benefit costs increased by US$199 million mainly due to higher bonus and sales commission accruals and long-term incentive awards. The Group also raised advertising and promotional expenses by US$114 million, and recorded a net loss on fair valuation of certain financial assets and a financial liability of US$3 million (2018/19: net gain of US$104 million). The overall increase was partially offset by the reduction in the net foreign exchange loss to US$48 million (2018/19: US$59 million) and the gain on disposal of subsidiaries of US$13 million.

During the period, the Group adopted the new accounting standard, HKFRS 16, Leases. As a result, depreciation of right-of-use assets was reported and payments made under operating leases were no longer recorded as rental expenses unless under exemption. Please refer to Note 1 of the Financial Information for details on the adoption on HKFRS 16.

Key expenses by nature comprise:

6 months

6 months

ended

ended

September 30,

September 30,

2019

2018

US$'000

US$'000

Depreciation of property, plant and equipment and

amortization of prepaid lease payments

(79,860)

(85,632)

Depreciation of right-of-use assets

(40,919)

-

Amortization of intangible assets

(259,572)

(228,545)

Employee benefit costs, including

(1,881,027)

(1,681,729)

-long-term incentive awards

(123,697)

(99,626)

Rental expenses under operating leases

(5,756)

(63,311)

Net foreign exchange loss

(48,451)

(59,320)

Advertising and promotional expenses

(472,222)

(358,617)

Loss on disposal of property, plant and equipment

(706)

(2,456)

Fair value (loss)/gain on financial assets at fair

value through profit or loss

(108)

104,407

Fair value loss on a financial liability at fair value

through profit or loss

(3,000)

-

Gain on disposal of subsidiaries

12,844

-

Dilution gain on interest in an associate

-

18,121

Others

(667,767)

(598,774)

(3,446,544)

(2,955,856)

Other non-operating expenses (net) for the six months ended September 30, 2019 and 2018 comprise:

6 months

6 months

ended

ended

September 30,

September 30,

2019

2018

US$'000

US$'000

Finance income

24,474

11,474

Finance costs

(251,240)

(153,580)

Share of losses of associates and joint ventures

(7,448)

(1,721)

(234,214)

(143,827)

Finance income mainly represents interest on bank deposits.

Finance costs for the period increased by 64 percent as compared to the corresponding period of last year. The change is a combined effect of the increase in factoring costs of US$72 million, interest on convertible bonds of US$20 million, interest on contingent considerations and written put option liabilities of US$10 million and interest on lease liabilities of US$8 million, offset by the decrease in interest on notes of US$13 million.

Share of losses of associates and joint ventures represents operating losses arising from principal business activities of respective associates and joint ventures.

7

The Group adopts segments by business group as the reporting format. Segments by business group comprise Intelligent Devices Group ("IDG") and Data Center Group ("DCG"). Segment revenue and pre- tax income/(loss) for reportable segments are as follows:

6 months ended

6 months ended

September 30, 2019

September 30, 2018

Revenue

Revenue

from

Pre-tax

from

Pre-tax

external

income/

external

income/

customers

(loss)

customers

(loss)

US$'000

US$'000

US$'000

US$'000

IDG

23,347,543

1,148,786

22,119,735

793,992

DCG

2,686,599

(103,171)

3,172,799

(123,457)

Segment total

26,034,142

1,045,615

25,292,534

670,535

Unallocated:

Headquarters and corporate (expenses)/income - net

(272,320)

(342,103)

Depreciation and amortization

(76,832)

(62,972)

Finance income

12,940

1,285

Finance costs

(148,084)

(60,792)

Share of losses of associates and joint ventures

(7,448)

(1,721)

Loss on disposal of property, plant and equipment

(582)

(667)

Fair value (loss)/gain on financial assets at fair value

through profit or loss

(108)

104,407

Fair value loss on a financial liability at fair value

through profit or loss

(3,000)

-

Dilution gain on interest in an associate

-

18,121

Consolidated profit before taxation

550,181

326,093

Headquarters and corporate (expenses)/income for the period comprise various expenses, after appropriate allocation to business groups, which are attributable to headquarters and corporate of US$272 million (2018/19: US$342 million) such as employee benefit costs, legal and professional fees, and research and technology expenses. The decrease is mainly due to fair value gain on bonus warrants of US$16 million during the period (2018/19: fair value loss of US$7 million), and decrease in one-time charges associated with the execution of previously announced resource actions at the corporate level. These one-time charges include the disposal of certain inventories of US$6 million (2018/19: US$46 million) caused by product portfolio simplification, and onerous lease contracts and claims of US$3 million (2018/19: US$24 million).

8

Second Quarter 2019/20 compared to Second Quarter 2018/19

3 months

3 months

ended

ended

September 30,

September 30,

Year-on-year

2019

2018

change

(unaudited)

(unaudited)

US$ million

US$ million

Revenue

13,522

13,380

1%

Gross profit

2,183

1,794

22%

Gross profit margin

16.1%

13.4%

2.7 pts

Operating expenses

(1,741)

(1,504)

16%

Operating profit

442

290

53%

Other non-operating expenses - net

(132)

(77)

73%

Profit before taxation

310

213

45%

Profit for the period

244

173

40%

Profit attributable to equity holders of the

Company

202

168

20%

Earnings per share attributable to equity

holders of the Company

Basic

US 1.69 cents

US 1.41 cents

US 0.28 cents

Diluted

US 1.62 cents

US 1.40 cents

US 0.22 cents

For the three months ended September 30, 2019, the Group achieved total sales of approximately US$13,522 million. Compared to the corresponding period of last year, profit attributable to equity holders for the period increased by US$34 million to approximately US$202 million. In the same reporting timeframe, gross profit margin for the period advanced by 2.7 percentage points from 13.4 percent, while basic and diluted earnings per share were US1.69 cents and US1.62 cents respectively, representing an increase of US0.28 cents and US0.22 cents.

Analysis of operating expenses by function for the three months ended September 30, 2019 and 2018 is as follows:

3 months

3 months

ended

ended

September 30,

September 30,

2019

2018

US$'000

US$'000

Selling and distribution expenses

(777,804)

(654,739)

Administrative expenses

(584,534)

(514,955)

Research and development expenses

(318,028)

(312,341)

Other operating expenses - net

(60,438)

(22,522)

(1,740,804)

(1,504,557)

9

Operating expenses for the period were 16 percent over that of the corresponding period of last year. Employee benefit costs increased by US$102 million mainly due to higher bonus and sales commission accruals and long-term incentive awards. The Group also raised advertising and promotional expenses by US$34 million, and recorded a net gain on fair valuation of certain financial assets and a financial liability of US$6 million (2018/19: US$43 million). The impact of currency fluctuations during the period presented a challenge to the Group resulting in a net exchange loss of US$36 million (2018/19: US$36 million).

During the period, the Group adopted the new accounting standard, HKFRS 16, Leases. As a result, depreciation of right-of-use assets was reported and payments made under operating leases were no longer recorded as rental expenses unless under exemption. Please refer to Note 1 of the Financial Information for details of the adoption on HKFRS 16.

Key expenses by nature comprise:

3 months

3 months

ended

ended

September 30,

September 30,

2019

2018

US$'000

US$'000

Depreciation of property, plant and equipment and

amortization of prepaid lease payments

(39,729)

(48,654)

Depreciation of right-of-use assets

(25,458)

-

Amortization of intangible assets

(135,582)

(117,141)

Employee benefit costs, including

(916,195)

(814,471)

- long-term incentive awards

(65,004)

(52,811)

Rental expenses under operating leases

(1,823)

(31,725)

Net foreign exchange loss

(35,936)

(36,204)

Advertising and promotional expenses

(223,983)

(190,378)

Gain/(loss) on disposal of property, plant and

1,769

(1,523)

equipment

Fair value gain on financial assets at fair value

through profit or loss

8,848

43,214

Fair value loss on a financial liability at fair value

through profit or loss

(3,000)

-

Dilution gain on interest in an associate

-

18,121

Others

(369,715)

(325,796)

(1,740,804)

(1,504,557)

Other non-operating expenses (net) for the three months ended September 30, 2019 and 2018 comprise:

3 months

3 months

ended

ended

September 30,

September 30,

2019

2018

US$'000

US$'000

Finance income

10,602

6,176

Finance costs

(136,218)

(81,732)

Share of losses of associates and joint ventures

(6,072)

(694)

(131,688)

(76,250)

Finance income mainly represents interest on bank deposits.

Finance costs for the period increased by 67 percent as compared to the corresponding period of last year. The change is a combined effect of the increase in factoring costs of US$43 million, interest on convertible bonds of US$10 million, interest on contingent considerations and written put option liabilities of US$5 million and interest on lease liabilities of US$4 million, offset by the decrease in interest on notes of US$8 million.

Share of losses of associates and joint ventures represents operating losses arising from principal business activities of respective associates and joint ventures.

10

The Group adopts segments by business group as the reporting format. Segments by business group comprise IDG and DCG. Segment revenue and pre-tax income/(loss) for reportable segments are as follows:

3 months ended

3 months ended

September 30, 2019

September 30, 2018

Revenue

Revenue

from

Pre-tax

from

Pre-tax

external

income/

external

income/

customers

(loss)

customers

(loss)

US$'000

US$'000

US$'000

US$'000

IDG

12,191,310

620,022

11,835,883

466,144

DCG

1,330,679

(51,503)

1,543,926

(60,459)

Segment total

13,521,989

568,519

13,379,809

405,685

Unallocated:

Headquarters and corporate (expenses)/income - net

(140,984)

(186,443)

Depreciation and amortization

(42,299)

(37,428)

Finance income

4,534

445

Finance costs

(81,565)

(28,718)

Share of losses of associates and joint ventures

(6,072)

(694)

Gain/(loss) on disposal of property, plant and

equipment

2,075

(885)

Fair value gain on financial assets at fair value

through profit or loss

8,848

43,214

Fair value loss on a financial liability at fair value

through profit or loss

(3,000)

-

Dilution gain on interest in an associate

-

18,121

Consolidated profit before taxation

310,056

213,297

Headquarters and corporate (expenses)/income for the period comprise various expenses, after appropriate allocation to business groups, which are attributable to headquarters and corporate of US$141 million (2018/19: US$186 million) such as employee benefit costs, legal and professional fees, and research and technology expenses. The decrease is mainly due to fair value gain on bonus warrants of US$6 million during the period (2018/19: fair value loss of US$7 million), and decrease in one-time charges associated with the execution of previously announced resource actions at the corporate level. There is no one-time charges for the period while for the corresponding period of last year, these charges included the disposal of certain inventories of US$39 million caused by product portfolio simplification, and onerous lease contracts and claims of US$11 million.

11

Capital Expenditure

The Group incurred capital expenditure of US$474 million (2018/19: US$276 million) during the six months ended September 30, 2019, mainly for the acquisition of property, plant and equipment and additions in construction-in-progress and intangible assets.

Liquidity and Financial Resources

At September 30, 2019, total assets of the Group amounted to US$33,389 million (March 31, 2019: US$29,988 million), which were financed by equity attributable to owners of the Company of US$3,249 million (March 31, 2019: US$3,396 million), perpetual securities of US$994 million (March 31, 2019: US$994 million) and negative balance of other non-controlling interests (net of put option written on non-controlling interests) of US$228 million (March 31, 2019: US$293 million), and total liabilities of US$29,374 million (March 31, 2019: US$25,891 million). At September 30, 2019, the current ratio of the Group was 0.84 (March 31, 2019: 0.82).

At September 30, 2019, bank deposits and cash and cash equivalents totaled US$3,376 million (March 31, 2019: US$2,733 million) analyzed by major currency are as follows:

September 30, 2019

March 31, 2019

%

%

US dollar

43.7

41.1

Renminbi

28.4

32.0

Japanese Yen

6.3

6.8

Euro

4.9

5.4

Other currencies

16.7

14.7

Total

100.0

100.0

The Group adopts a conservative policy to invest the surplus cash generated from operations. At September 30, 2019, 82.8 (March 31, 2019: 78.6) percent of cash are bank deposits, and 17.2 (March 31, 2019: 21.4) percent are investments in liquid money market funds of investment grade.

Although the Group has consistently maintained a very liquid position, banking facilities have nevertheless been put in place to meet inter-quarter funding requirements and the Group has entered into factoring arrangements in the ordinary course of business.

The Group has the following banking facilities:

Utilization amount at

Type

Date of agreement

Principal amount

Term

September 30, 2019

March 31, 2019

US$ million

US$ million

US$ million

Loan facility

May 26, 2015

300

5 years

300

300

Revolving loan

facility

March 28, 2018

1,500

5 years

1,500

825

12

Notes, perpetual securities, convertible bonds and convertible preferred shares issued by the Group and outstanding as at September 30, 2019 are as follows:

Interest /

Principal

dividend rate

Issue date

amount

Term

per annum

Due date

Use of proceeds

2020 Note

June 10, 2015

RMB4 billion

5 years

4.95%

June 2020

For general corporate

purposes including working

capital and acquisition

activities

2022 Note

March 16, 2017

US$500 million

5 years

3.875%

March 2022

For repayment of the

Perpetual securities

March 16, 2017

US$850 million

N/A

5.375%

N/A

outstanding amount under

April 6, 2017

US$150 million

N/A

5.375%

N/A

the promissory note issued

to Google Inc. and general

corporate purposes

2023 Note

March 29, 2018

US$750 million

5 years

4.75%

March 2023

For repayment of previous

Note and general corporate

purposes

Convertible bonds

January 24, 2019

US$675 million

5 years

3.375%

January 2024

For repayment of previous

Note and general corporate

purposes

Convertible

June 21, 2019

US$300 million

N/A

4%

N/A

For general corporate

preferred shares

funding and capital

expenditure

The Group has also arranged other short-term credit facilities as follows:

Total facilities amount at

Drawn down amount at

Credit facilities

September 30, 2019

March 31, 2019

September 30, 2019

March 31, 2019

US$ million

US$ million

US$ million

US$ million

Trade lines

2,461

2,195

1,844

1,637

Short-term and revolving

money market facilities

851

701

301

56

Forward foreign exchange

contracts

10,776

9,525

10,776

9,525

Net debt position and gearing ratio of the Group as at September 30 and March 31, 2019 are as follows:

September 30, 2019

March 31, 2019

US$ million

US$ million

Bank deposits and cash and cash equivalents

3,376

2,733

Borrowings

- Short-term bank loans

2,089

1,167

- Notes

1,802

2,622

- Convertible bonds

599

591

- Convertible preferred shares

300

-

Net debt position

(1,414)

(1,647)

Total equity

4,015

4,097

Gearing ratio (Borrowings divided by total equity)

1.19

1.07

The Group is confident that all the facilities on hand can meet the funding requirements of the Group's operations and business development.

The Group adopts a consistent hedging policy for business transactions to reduce the risk of currency fluctuation arising from daily operations. At September 30, 2019, the Group had commitments in respect of outstanding forward foreign exchange contracts amounting to US$10,776 million (March 31, 2019: US$9,525 million). The Group's forward foreign exchange contracts are either used to hedge a percentage of future transactions which are highly probable, or used as fair value hedges for identified assets and liabilities.

13

Contingent Liabilities

The Group, in the ordinary course of its business, is involved in various claims, suits, investigations, and legal proceedings that arise from time to time. Although the Group does not expect that the outcome in any of these legal proceedings, individually or collectively, will have a material adverse effect on its financial position or results of operations, litigation is inherently unpredictable. Therefore, the Group could incur judgments or enter into settlements of claims that could adversely affect its operating results or cash flows in a particular period.

14

FINANCIAL INFORMATION

CONSOLIDATED INCOME STATEMENT

3 months ended

6 months ended

3 months ended

6 months ended

September 30,

September 30,

September 30,

September 30,

2019

2019

2018

2018

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Note

US$'000

US$'000

US$'000

US$'000

Revenue

2

13,521,989

26,034,142

13,379,809

25,292,534

Cost of sales

(11,339,441)

(21,803,203)

(11,585,705)

(21,866,758)

Gross profit

2,182,548

4,230,939

1,794,104

3,425,776

Selling and distribution expenses

(777,804)

(1,541,133)

(654,739)

(1,308,943)

Administrative expenses

(584,534)

(1,195,250)

(514,955)

(1,000,134)

Research and development expenses

(318,028)

(647,343)

(312,341)

(622,236)

Other operating expenses - net

(60,438)

(62,818)

(22,522)

(24,543)

Operating profit

3

441,744

784,395

289,547

469,920

Finance income

4(a)

10,602

24,474

6,176

11,474

Finance costs

4(b)

(136,218)

(251,240)

(81,732)

(153,580)

Share of losses of associates and joint ventures

(6,072)

(7,448)

(694)

(1,721)

Profit before taxation

310,056

550,181

213,297

326,093

Taxation

5

(66,417)

(114,600)

(39,815)

(67,291)

Profit for the period

243,639

435,581

173,482

258,802

Profit/(loss) attributable to:

Equity holders of the Company

202,194

364,421

168,403

245,447

Perpetual securities holders

13,440

26,880

13,440

26,880

Other non-controlling interests

28,005

44,280

(8,361)

(13,525)

243,639

435,581

173,482

258,802

Earnings per share attributable to equity holders

of the Company

Basic

6(a)

US 1.69 cents

US 3.06 cents

US 1.41 cents

US 2.06 cents

Diluted

6(b)

US 1.62 cents

US 2.94 cents

US 1.40 cents

US 2.06 cents

Dividend

7

96,640

92,071

15

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

3 months ended

6 months ended

3 months ended

6 months ended

September 30,

September 30,

September 30,

September 30,

2019

2019

2018

2018

(unaudited)

(unaudited)

(unaudited)

(unaudited)

US$'000

US$'000

US$'000

US$'000

Profit for the period

243,639

435,581

173,482

258,802

Other comprehensive income/(loss):

Item that will not be reclassified to profit or loss

Remeasurements of post-employment benefit

-

-

obligations, net of taxes

-

380

Fair value change on financial assets at fair value

through other comprehensive income, net of taxes

(414)

(3,458)

1,504

(3,784)

Items that have been reclassified or may be

subsequently reclassified to profit or loss

Fair value change on cash flow hedges from foreign

exchange forward contracts, net of taxes

- Fair value gain, net of taxes

121,486

97,611

32,911

224,158

- Reclassified to consolidated income statement

(46,779)

(64,888)

(78,085)

(171,455)

Currency translation differences

(234,636)

(240,519)

(178,881)

(550,973)

Other comprehensive loss for the period

(160,343)

(210,874)

(222,551)

(502,054)

Total comprehensive income/(loss) for the period

83,296

224,707

(49,069)

(243,252)

Total comprehensive income/(loss) attributable to:

Equity holders of the Company

42,326

149,835

(54,148)

(256,607)

Perpetual securities holders

13,440

26,880

13,440

26,880

Other non-controlling interests

27,530

47,992

(8,361)

(13,525)

83,296

224,707

(49,069)

(243,252)

16

CONSOLIDATED BALANCE SHEET

September 30, 2019

March 31, 2019

(unaudited)

(audited)

Note

US$'000

US$'000

Non-current assets

Property, plant and equipment

1,683,495

1,430,817

Prepaid lease payments

431,503

463,996

Construction-in-progress

254,424

232,097

Intangible assets

8,196,730

8,324,575

Interests in associates and joint ventures

73,229

79,061

Deferred income tax assets

1,961,594

1,862,902

Financial assets at fair value through profit or loss

416,563

449,363

Financial assets at fair value through other

comprehensive income

66,551

71,486

Other non-current assets

188,606

187,985

13,272,695

13,102,282

Current assets

Inventories

3,816,910

3,434,660

Trade receivables

8(a)

8,253,337

6,661,484

Notes receivable

55,834

46,454

Derivative financial assets

90,017

70,972

Deposits, prepayments and other receivables

9

4,316,133

3,753,926

Income tax recoverable

208,355

185,643

Bank deposits

65,227

70,210

Cash and cash equivalents

3,310,940

2,662,854

20,116,753

16,886,203

Total assets

33,389,448

29,988,485

17

CONSOLIDATED BALANCE SHEET (CONTINUED)

September 30, 2019

March 31, 2019

(unaudited)

(audited)

Note

US$'000

US$'000

Share capital

13

3,185,923

3,185,923

Reserves

62,721

210,530

Equity attributable to owners of the Company

3,248,644

3,396,453

Perpetual securities

993,670

993,670

Other non-controlling interests

538,435

473,178

Put option written on non-controlling interests

11(b)

(766,238)

(766,238)

Total equity

4,014,511

4,097,063

Non-current liabilities

Borrowings

12

2,141,383

2,426,770

Warranty provision

10(b)

254,769

254,601

Deferred revenue

784,061

678,137

Retirement benefit obligations

424,934

434,246

Deferred income tax liabilities

355,037

359,679

Other non-current liabilities

11

1,375,067

1,247,646

5,335,251

5,401,079

Current liabilities

Trade payables

8(b)

7,857,686

6,429,835

Notes payable

1,253,503

1,272,840

Derivative financial liabilities

37,345

74,426

Other payables and accruals

10(a)

10,428,998

8,942,336

Provisions

10(b)

715,332

738,688

Deferred revenue

770,229

780,951

Income tax payable

328,442

298,224

Borrowings

12

2,648,151

1,953,043

24,039,686

20,490,343

Total liabilities

29,374,937

25,891,422

Total equity and liabilities

33,389,448

29,988,485

18

CONSOLIDATED CASH FLOW STATEMENT

6 months ended

6 months ended

September 30, 2019

September 30, 2018

(unaudited)

(unaudited)

Note

US$'000

US$'000

Cash flows from operating activities

Net cash generated from operations

15

1,700,743

659,597

Interest paid

(264,028)

(152,167)

Tax paid

(196,715)

(104,354)

Net cash generated from operating activities

1,240,000

403,076

Cash flows from investing activities

Purchase of property, plant and equipment

(106,153)

(72,116)

Sale of property, plant and equipment

6,352

90,523

Acquisition of subsidiaries, net of cash acquired

-

(107,002)

Disposal of subsidiaries, net of cash disposed

(18,155)

-

Interest acquired in a joint venture

(1,616)

-

Payment for construction-in-progress

(201,867)

(119,769)

Payment for intangible assets

(165,697)

(83,730)

Purchase of financial assets at fair value through profit or

loss

(27,450)

(24,919)

Purchase of financial assets at fair value through other

comprehensive income

-

(1,744)

Loan to a joint venture

(72,603)

-

Net proceeds from sale of financial assets at fair value

through profit or loss

51,540

33,996

Decrease/(increase) in bank deposits

4,983

(27,997)

Dividends received

2,390

163

Interest received

24,474

11,474

Net cash used in investing activities

(503,802)

(301,121)

Cash flows from financing activities

Capital contribution from other non-controlling interests

17,638

32,485

Contribution to employee share trusts

(34,361)

(18,823)

Issue of convertible preferred shares

300,000

-

Repayment of a note

(786,244)

-

Principal elements of lease payments

(67,219)

-

Dividends paid

(334,775)

(312,980)

Distribution to perpetual securities holders

(26,880)

(26,880)

Proceeds from borrowings

2,320,000

3,390,000

Repayments of borrowings

(1,400,000)

(2,690,000)

Net cash (used in)/generated from financing activities

(11,841)

373,802

Increase in cash and cash equivalents

724,357

475,757

Effect of foreign exchange rate changes

(76,271)

(111,242)

Cash and cash equivalents at the beginning of the period

2,662,854

1,848,017

Cash and cash equivalents at the end of the period

3,310,940

2,212,532

19

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Attributable to equity holders of the Company

Put option

written on

Investment

Share-based

Other non-

non-

revaluation

Employee

compensation

Hedging

Exchange

Other

Retained

Perpetual

controlling

controlling

Share capital

reserve

share trusts

reserve

reserve

reserve

reserve

earnings

securities

interests

interests

Total

(unaudited)

(unaudited)

(unaudited)

(unaudited)

(unaudited)

(unaudited)

(unaudited)

(unaudited)

(unaudited)

(unaudited)

(unaudited)

(unaudited)

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

At April 1, 2019

3,185,923

(36,095)

(140,209)

311,540

23,240

(1,371,932)

163,241

1,260,745

993,670

473,178

(766,238)

4,097,063

Profit for the period

-

-

-

-

-

-

-

364,421

26,880

44,280

-

435,581

Other comprehensive (loss)/income

-

(3,458)

-

-

32,723

(244,231)

-

380

-

3,712

-

(210,874)

Total comprehensive (loss)/income for the period

-

(3,458)

-

-

32,723

(244,231)

-

364,801

26,880

47,992

-

224,707

Transfer to statutory reserve

-

-

-

-

-

-

11,995

(11,995)

-

-

-

-

Transfer of loss on disposal of a financial asset at fair value

through other comprehensive income to retained earnings

-

894

-

-

-

-

-

(894)

-

-

-

-

Vesting of shares under long-term incentive program

-

-

148,459

(195,771)

-

-

-

-

-

-

-

(47,312)

Deferred tax charge in relation to long-term incentive

program

-

-

-

(4,999)

-

-

-

-

-

-

-

(4,999)

Disposal of subsidiaries

-

-

-

-

-

-

(267)

-

-

-

-

(267)

Share-based compensation

-

-

-

123,697

-

-

-

-

-

-

-

123,697

Contribution to employee share trusts

-

-

(34,361)

-

-

-

-

-

-

-

-

(34,361)

Dividends paid

-

-

-

-

-

-

-

(334,775)

-

-

-

(334,775)

Capital contribution from other non-controlling interests

-

-

-

-

-

-

-

-

-

17,638

-

17,638

Change of ownership of subsidiaries without loss of control

-

-

-

-

-

-

373

-

-

(373)

-

-

Distribution to perpetual securities holders

-

-

-

-

-

-

-

-

(26,880)

-

-

(26,880)

At September 30, 2019

3,185,923

(38,659)

(26,111)

234,467

55,963

(1,616,163)

175,342

1,277,882

993,670

538,435

(766,238)

4,014,511

At April 1, 2018

3,185,923

(2,741)

(101,702)

231,857

(16,906)

(937,907)

71,449

1,088,647

993,670

246,598

(212,900)

4,545,988

Change in accounting policy

-

(17,376)

-

-

-

-

-

5,746

-

-

-

(11,630)

Restated total equity

3,185,923

(20,117)

(101,702)

231,857

(16,906)

(937,907)

71,449

1,094,393

993,670

246,598

(212,900)

4,534,358

Profit/(loss) for the period

-

-

-

-

-

-

-

245,447

26,880

(13,525)

-

258,802

Other comprehensive (loss)/income

-

(3,784)

-

-

52,703

(550,973)

-

-

-

-

-

(502,054)

Total comprehensive (loss)/income for the period

-

(3,784)

-

-

52,703

(550,973)

-

245,447

26,880

(13,525)

-

(243,252)

Acquisition of subsidiaries

-

-

-

-

-

-

-

-

-

115,443

-

115,443

Vesting of shares under long-term incentive program

-

-

86,321

(95,142)

-

-

-

-

-

-

-

(8,821)

Share-based compensation

-

-

-

99,626

-

-

-

-

-

-

-

99,626

Termination of put option written on non-controlling interests

-

-

-

-

-

-

11,913

-

-

-

212,900

224,813

Put option written on non-controlling interests

-

-

-

-

-

-

-

-

-

-

(442,657)

(442,657)

Contribution to employee share trusts

-

-

(18,823)

-

-

-

-

-

-

-

-

(18,823)

Dividends paid

-

-

-

-

-

-

-

(312,980)

-

-

-

(312,980)

Capital contribution from other non-controlling interests

-

-

-

-

-

-

-

-

-

32,485

-

32,485

Distribution to perpetual securities holders

-

-

-

-

-

-

-

-

(26,880)

-

-

(26,880)

At September 30, 2018

3,185,923

(23,901)

(34,204)

236,341

35,797

(1,488,880)

83,362

1,026,860

993,670

381,001

(442,657)

3,953,312

20

Notes

1 General information and basis of preparation

The financial information relating to the year ended March 31, 2019 included in the FY2019/20 interim results announcement as comparative information does not constitute the Company's statutory annual consolidated financial statements for that year but is derived from those financial statements. Further information relating to these statutory financial statements required to be disclosed in accordance with section 436 of the Hong Kong Companies Ordinance is as follows:

The Company has delivered the consolidated financial statements for the year ended March 31, 2019 to the Registrar of Companies as required by section 662(3) of, and Part 3 of Schedule 6 to, the Hong Kong Companies Ordinance.

The Company's auditor has reported on those consolidated financial statements of the Group. The auditor's report was unqualified; did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying its report; and did not contain a statement under sections 406(2), 407(2) or (3) of the Hong Kong Companies Ordinance.

Basis of preparation

The financial information presented above and notes thereto are extracted from the Group's consolidated financial statements and presented in accordance with Appendix 16 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.

The Board is responsible for the preparation of the Group's consolidated financial statements. The consolidated financial statements have been prepared in accordance with Hong Kong Financial Reporting Standards. The consolidated financial statements have been prepared under the historical cost convention except that certain financial assets and financial liabilities are stated at fair values.

The Group has adopted the following new standard, interpretation and amendments to existing standards that are mandatory for the year ending March 31, 2020 which the Group considers is appropriate and relevant to its operations:

  • HKFRS 16, Leases
  • HK (IFRIC) - Int 23, Uncertainty over income tax treatments
  • Amendments to HKFRS 9, Prepayment features with negative compensation
  • Amendments to HKAS 28, Long-term interests in associates and joint ventures
  • Amendments to HKAS 19, Plan amendment, curtailment or settlement
  • Annual improvements to HKFRS Standards 2015-2017 Cycle - various standards

Except for HKFRS 16, Leases, none of the developments have had a material effect on how the Group's results and financial position for the current or prior periods have been prepared or presented.

The Group has initially applied HKFRS 16 as from April 1, 2019. The Group has elected to use the simplified transition approach and therefore comparative information has not been restated and continues to be reported under HKAS 17, Leases. The reclassifications and the adjustments arising from the new leasing standard are recognized in the opening balance sheet on April 1, 2019.

21

HKFRS 16 requires almost all leases of lessees to be recognized on the balance sheet, as the distinction between operating and finance leases is removed. The accounting for lessors will not significantly change. Under the new leasing standard, the right to use the leased item and the obligation to pay rent are recognized as an asset and a financial liability respectively. The only exceptions are short-term and low-value leases. The standard affects primarily the accounting for operating leases of the Group.

Adjustments recognized on adoption on HKFRS 16

On adoption on HKFRS 16, the Group recognized lease liabilities in relation to leases which had previously been classified as operating leases under the principles of HKAS 17. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee incremental borrowing rate as of April 1, 2019. Different lessee incremental borrowing rates were applied to the lease liabilities based on the geographical location, from 1% to 11%.

The following table reconciles the operating lease commitments as at March 31, 2019, as disclosed in Note 32(b) in the Group's 2018/19 Annual Report, to the opening balance for lease liabilities recognized as at April 1, 2019:

April 1, 2019

US$'000

Operating lease commitments at March 31, 2019

473,188

Discounted using the lessee incremental borrowing rate at April 1, 2019

(62,487)

Less: low-value leases recognized on a straight-line basis as expense

(1,357)

Lease liabilities recognized at April 1, 2019

409,344

Classified as:

Current lease liabilities

77,903

Non-current lease liabilities

331,441

409,344

The associated right-of-use assets were measured at the amount equal to the lease liabilities, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognized in the consolidated balance sheet as at March 31, 2019. As at September 30, 2019, the recognized right-of-use assets of the Group are solely related to properties and amounted to US$298,027,000 (April 1, 2019: US$320,174,000).

The Group presents right-of-use assets within "property, plant and equipment" and presents lease liabilities within "other payables and accruals" (for current portion) and "other non-current liabilities" (for non-current portion) in the consolidated balance sheet.

The change in accounting policy affected the following items in the consolidated balance sheet on April 1, 2019:

  • property, plant and equipment - increased by US$320,174,000
  • lease liabilities - increased by US$409,344,000
  • deferred rent liabilities - decreased by US$89,170,000

Segment assets and segment liabilities as at September 30, 2019 increased as a result of the change in accounting policy.

22

In applying HKFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard:

  • the use of a single discount rate to a portfolio of leases with reasonably similar characteristics
  • reliance on previous assessment on whether leases are onerous
  • the exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application, and
  • the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease.

The Group's leasing activities and how these are accounted for

Rental contracts of the Group are typically made for fixed periods of 1 to 9 years. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants, but leased assets may not be used as security for borrowing purposes.

Until March 31, 2019, all leases of property, plant and equipment of the Group were operating leases. Payments made under operating leases (net of any incentives received from the lessor) were charged to profit or loss on a straight-line basis over the period of the lease.

From April 1, 2019, leases are recognized as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis.

Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments:

  • fixed payments (including in-substance fixed payments), less any lease incentives receivable
  • variable lease payment that are based on an index or a rate
  • amounts expected to be payable by the lessee under residual value guarantees
  • the exercise price of a purchase option if the lessee is reasonably certain to exercise that option, and
  • payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option.

The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the lessee's incremental borrowing rate is used, being the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions.

Some property leases contain variable payment terms that are linked to sales generated from a store. There is a wide range of sales percentages applied. Variable payment terms are used for a variety of reasons, including minimising the fixed costs base for newly established stores. Variable lease payments that depend on sales are recognized in profit or loss in the period in which the condition that triggers those payments occurs.

Right-of-use assets are measured at cost comprising the following:

  • the amount of the initial measurement of lease liabilities
  • any lease payments made at or before the commencement date less any lease incentives received
  • any initial direct costs, and
  • restoration costs.

23

Payments associated with short-term leases and leases of low-value assets are recognized on a straight-line basis as an expense in the profit or loss account. Short-term leases are leases with a lease term of 12 months or less. Low-value assets comprise IT equipment and small items of office furniture.

New amendments to existing standards not yet effective

The following new amendments to existing standards, which are considered appropriate and relevant to the Group's operations, have been issued but are not effective for the year ending March 31, 2020 and have not been early adopted:

Effective for annual periods

beginning on or after

Amendments to HKFRS 3, Definition of a business

January 1, 2020

Amendments to HKAS 1 and HKAS 8, Definition of

material

January 1, 2020

Amendments to HKFRS 10 and HKAS 28, Consolidated

financial statements and investments in associates

Date to be determined

The Group is in the process of making an assessment of what the impact of these developments is expected to be in the period of initial application. So far it has concluded that their adoption is unlikely to have a significant impact on the consolidated financial statements of the Group.

2 Segment information

Management has determined the operating segments based on the reports reviewed by the Lenovo Executive Committee ("LEC"), the chief operating decision-maker, that are used to make strategic decisions.

The LEC assesses the performance of the operating segments based on a measure of pre-tax income/(loss). This measurement basis excludes the effects of non-recurring expenses such as restructuring costs from the operating segments. The measurement basis also excludes the effects of certain income and expenses such as fair value change of financial instruments and disposal gain/(loss) of fixed assets that are from activities driven by headquarters and centralized functions. Certain finance income and costs are not allocated to segments when these types of activities are driven by the central treasury function which manages the cash position of the Group.

Supplementary information on segment assets and liabilities presented below is primarily based on the business group of the entities or operations which carry the assets and liabilities, except for entities performing centralized functions for the Group the assets and liabilities of which are not allocated to any segment.

24

  1. Segment revenue and pre-tax income/(loss) for reportable segments

6 months ended

6 months ended

September 30, 2019

September 30, 2018

Revenue

Revenue

from

Pre-tax

from

Pre-tax

external

income/

external

income/

customers

(loss)

customers

(loss)

US$'000

US$'000

US$'000

US$'000

IDG

23,347,543

1,148,786

22,119,735

793,992

DCG

2,686,599

(103,171)

3,172,799

(123,457)

Segment total

26,034,142

1,045,615

25,292,534

670,535

Unallocated:

Headquarters and corporate (expenses)/

(272,320)

(342,103)

income - net

Depreciation and amortization

(76,832)

(62,972)

Finance income

12,940

1,285

Finance costs

(148,084)

(60,792)

Share of losses of associates and joint ventures

(7,448)

(1,721)

Loss on disposal of property, plant and

equipment

(582)

(667)

Fair value (loss)/gain on financial assets at fair

value through profit or loss

(108)

104,407

Fair value loss on a financial liability at fair

value through profit or loss

(3,000)

-

Dilution gain on interest in an associate

-

18,121

Consolidated profit before taxation

550,181

326,093

(b)

Segment assets for reportable segments

September 30, 2019

March 31, 2019

US$'000

US$'000

IDG

22,022,141

19,797,625

DCG

4,455,980

4,094,194

Segment assets for reportable segments

26,478,121

23,891,819

Unallocated:

Deferred income tax assets

1,961,594

1,862,902

Financial assets at fair value through profit or loss

416,563

449,363

Financial assets at fair value through other

comprehensive income

66,551

71,486

Derivative financial assets

90,017

70,972

Interests in associates and joint ventures

73,229

79,061

Bank deposits and cash and cash equivalents

3,376,167

2,733,064

Unallocated deposits, prepayments and other

receivables

296,987

166,874

Income tax recoverable

208,355

185,643

Other unallocated assets

421,864

477,301

Total assets per consolidated balance sheet

33,389,448

29,988,485

25

  1. Segment liabilities for reportable segments

September 30, 2019

March 31, 2019

US$'000

US$'000

IDG

21,655,514

19,045,230

DCG

1,736,427

1,456,268

Segment liabilities for reportable segments

23,391,941

20,501,498

Unallocated:

Deferred income tax liabilities

355,037

359,679

Derivative financial liabilities

37,345

74,426

Borrowings

4,789,534

4,379,813

Unallocated other payables and accruals

441,358

246,467

Unallocated provisions

-

1,336

Unallocated other non-current liabilities

31,280

29,979

Income tax payable

328,442

298,224

Total liabilities per consolidated balance sheet

29,374,937

25,891,422

  1. Analysis of revenue by geography

6 months ended

6 months ended

September 30,

September 30,

2019

2018

US$'000

US$'000

China

5,507,563

6,268,642

AP

6,013,844

4,726,400

EMEA

5,890,192

6,074,567

AG

8,622,543

8,222,925

26,034,142

25,292,534

  1. Analysis of revenue by timing of revenue recognition

6 months ended

6 months ended

September 30,

September 30,

2019

2018

US$'000

US$'000

Point in time

25,433,884

24,826,983

Over time

600,258

465,551

26,034,142

25,292,534

26

(f)

Other segment information

IDG

DCG

Total

2019

2018

2019

2018

2019

2018

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

For the six months ended September 30

Depreciation and amortization

258,842

228,961

116,345

102,790

375,187

331,751

Finance income

10,296

10,093

1,238

96

11,534

10,189

Finance costs

95,280

83,871

7,876

8,917

103,156

92,788

Additions to non-current assets (Note)

344,076

484,027

171,656

48,488

515,732

532,515

Note: Excluding other non-current assets and including non-current assets acquired through acquisition of subsidiaries.

  1. Included in segment assets for reportable segments are goodwill and trademarks and trade names with indefinite useful lives with an aggregate amount of US$6,098 million (March 31, 2019: US$6,211 million). The carrying amounts of goodwill and trademarks and trade names with indefinite useful lives are presented below:
    At September 30, 2019

Mature

Emerging

China

AP

EMEA

AG

Market

Market

Total

US$ million

US$ million

US$ million

US$ million

US$ million

US$ million

US$ million

Goodwill

- PCSD

997

693

211

317

-

-

2,218

- MBG

-

-

-

-

665

888

1,553

- DCG

469

160

80

350

-

-

1,059

Trademarks and trade names

- PCSD

209

59

103

67

-

-

438

- MBG

-

-

-

-

197

263

460

- DCG

162

54

31

123

-

-

370

At March 31, 2019

Mature

Emerging

China

AP

EMEA

AG

Market

Market

Total

US$ million

US$ million

US$ million

US$ million

US$ million

US$ million

US$ million

Goodwill

- PCSD

1,051

679

221

320

-

-

2,271

- MBG

-

-

-

-

679

905

1,584

- DCG

490

158

88

351

-

-

1,087

Trademarks and trade names

- PCSD

209

59

104

67

-

-

439

- MBG

-

-

-

-

197

263

460

- DCG

162

54

31

123

-

-

370

The directors are of the view that there was no impairment of goodwill and trademarks and trade names based on impairment tests performed as at September 30, 2019 (March 31, 2019: Nil).

27

3 Operating profit

Operating profit is stated after charging/(crediting) the following:

3 months ended

6 months ended

3 months ended

6 months ended

September 30,

September 30,

September 30,

September 30,

2019

2019

2018

2018

US$'000

US$'000

US$'000

US$'000

Depreciation of property, plant and

equipment and amortization of prepaid

lease payments

68,959

137,901

78,496

144,256

Depreciation of right-of-use assets

25,460

49,045

-

-

Amortization of intangible assets

138,308

265,073

128,275

250,467

Employee benefit costs, including

1,060,388

2,162,982

945,813

1,946,453

- long-term incentive awards

65,004

123,697

52,811

99,626

Rental expenses under operating leases

1,823

8,039

35,798

71,774

(Gain)/loss on disposal of property,

plant and equipment

(1,769)

706

1,523

2,456

(Gain)/loss on disposal of intangible

assets

(773)

1,016

-

-

Fair value (gain)/loss on financial assets

at fair value through profit or loss

(8,848)

108

(43,214)

(104,407)

Fair value loss on a financial liability at

fair value through profit or loss

3,000

3,000

-

-

Dilution gain on interest in an associate

-

-

(18,121)

(18,121)

Gain on disposal of subsidiaries

-

(12,844)

-

-

4

Finance income and costs

(a)

Finance income

3 months ended

6 months ended

3 months ended

6 months ended

September 30,

September 30,

September 30,

September 30,

2019

2019

2018

2018

US$'000

US$'000

US$'000

US$'000

Interest on bank deposits

9,432

19,769

5,666

10,752

Interest on money market funds

1,170

4,705

510

722

10,602

24,474

6,176

11,474

(b)

Finance costs

3 months ended

6 months ended

3 months ended

6 months ended

September 30,

September 30,

September 30,

September 30,

2019

2019

2018

2018

US$'000

US$'000

US$'000

US$'000

Interest on bank loans and

overdrafts

23,810

47,612

23,148

46,884

Interest on convertible bonds

9,893

19,720

-

-

Interest on notes

21,527

47,208

29,658

59,797

Interest on lease liabilities

3,858

7,962

-

-

Factoring costs

69,807

114,151

26,961

42,627

Interest on contingent

considerations and written put

option liabilities

6,608

13,264

1,357

3,025

Others

715

1,323

608

1,247

136,218

251,240

81,732

153,580

28

5 Taxation

The amount of taxation in the consolidated income statement represents:

3 months ended

6 months ended

3 months ended

6 months ended

September 30,

September 30,

September 30,

September 30,

2019

2019

2018

2018

US$'000

US$'000

US$'000

US$'000

Current tax

Hong Kong profits tax

23,298

30,984

2,040

8,766

Taxation outside Hong Kong

140,482

204,359

99,586

175,776

Deferred tax

Credit for the period

(97,363)

(120,743)

(61,811)

(117,251)

66,417

114,600

39,815

67,291

Hong Kong profits tax has been provided for at the rate of 16.5% (2018/19: 16.5%) on the estimated assessable profit for the period. Taxation outside Hong Kong represents income and irrecoverable withholding taxes of subsidiaries operating in the Chinese Mainland and overseas, calculated at rates applicable in the respective jurisdictions.

6 Earnings per share

  1. Basic
    Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the period after adjusting shares held by employee share trusts for the purposes of awarding shares to eligible employees under the long term incentive program.

3 months ended

6 months ended

3 months ended

6 months ended

September 30,

September 30,

September 30,

September 30,

2019

2019

2018

2018

Weighted average number

of ordinary shares in issue

12,014,791,614

12,014,791,614

12,014,791,614

12,014,791,614

Adjustment for shares held

by employee share trusts

(21,900,919)

(107,502,874)

(50,086,866)

(122,719,181)

Weighted average number

of ordinary shares in issue

for calculation of basic

earnings per share

11,992,890,695

11,907,288,740

11,964,704,748

11,892,072,433

US$'000

US$'000

US$'000

US$'000

Profit attributable to equity

holders of the Company

202,194

364,421

168,403

245,447

29

  1. Diluted
    Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding due to the effect of all dilutive potential ordinary shares. The Company has three (2018/19: two) categories of dilutive potential ordinary shares, namely long-term incentive awards, bonus warrants and convertible bonds (2018/19: long-term incentive awards and bonus warrants). Long-term incentive awards were dilutive for the three months and six months ended September 30, 2019 and 2018. Bonus warrants were dilutive for the three months and six months ended September 30, 2019 and anti-dilutive for the three months and six months ended September 30, 2018. Convertible bonds were dilutive for the three months and six months ended September 30, 2019.

3 months ended

6 months ended

3 months ended

6 months ended

September 30,

September 30,

September 30,

September 30,

2019

2019

2018

2018

Weighted average number of

ordinary shares in issue for

calculation of basic earnings

per share

11,992,890,695

11,907,288,740

11,964,704,748

11,892,072,433

Adjustment for long-term

incentive awards

278,360,312

355,504,784

43,153,981

17,668,381

Adjustment for bonus warrants

9,305,137

13,646,640

-

-

Adjustment for convertible

bonds

686,600,195

686,600,195

-

-

Weighted average number of

ordinary shares in issue for

calculation of diluted earnings

per share

12,967,156,339

12,963,040,359

12,007,858,729

11,909,740,814

US$'000

US$'000

US$'000

US$'000

Profit attributable to equity

holders of the Company

used to determine basic

earnings per share

202,194

364,421

168,403

245,447

Adjustment for interest on

convertible bonds, net of tax

8,261

16,466

-

-

Profit attributable to equity

holders of the Company

used to determine diluted

earnings per share

210,455

380,887

168,403

245,447

The calculation of the diluted earnings per share amount is based on the profit attributable to ordinary equity holders of the Company, adjusted to reflect the impact from any dilutive potential ordinary shares, as appropriate. The weighted average number of ordinary shares used in the calculation is the number of ordinary shares in issue during the period, as used in the basic earnings per share calculation, and the weighted average number of ordinary shares assumed to have been issued at no consideration on the deemed exercise or conversion of all dilutive potential ordinary shares into ordinary shares.

30

7

Dividend

6 months ended

6 months ended

September 30,

September 30,

2019

2018

US$'000

US$'000

Interim dividend, declared after period end - HK6.3 cents

(2018/19: HK6.0 cents) per ordinary share

96,640

92,071

8 Ageing analysis

  1. Customers are generally granted credit term ranging from 0 to 120 days. Ageing analysis of trade receivables of the Group at the balance sheet date, based on invoice date, is as follows:

September 30, 2019

March 31, 2019

US$'000

US$'000

0 - 30 days

6,073,110

4,560,771

31 - 60 days

1,382,310

1,332,471

61 - 90 days

349,413

430,207

Over 90 days

556,781

438,377

8,361,614

6,761,826

Less: loss allowance

(108,277)

(100,342)

Trade receivables - net

8,253,337

6,661,484

  1. Ageing analysis of trade payables of the Group at the balance sheet date, based on invoice date, is as follows:

September 30, 2019

March 31, 2019

US$'000

US$'000

0 - 30 days

5,132,492

4,279,000

31 - 60 days

1,601,719

1,046,525

61 - 90 days

768,623

757,718

Over 90 days

354,852

346,592

7,857,686

6,429,835

31

9 Deposits, prepayments and other receivables

Details of deposits, prepayments and other receivables are as follows:

September 30, 2019

US$'000

Deposits

14,025

Other receivables

3,130,504

Prepayments

1,171,604

4,316,133

March 31, 2019

US$'000

14,632

2,587,439

1,151,855

3,753,926

Other receivables mainly comprise amounts due from subcontractors for components sold in the ordinary course of business. As at September 30, 2019, loan to a joint venture of US$73 million is included in other receivables (March 31, 2019: Nil).

10 Provisions, other payables and accruals

(a) Details of other payables and accruals are as follows:

September 30, 2019

March 31, 2019

US$'000

US$'000

Accruals

1,962,647

1,969,914

Allowance for billing adjustments (i)

1,769,566

1,650,226

Contingent consideration (Note 11(a))

117,204

-

Other payables (ii)

6,579,581

5,322,196

10,428,998

8,942,336

Notes:

  1. Allowance for billing adjustments relates primarily to allowances for future volume discounts, price protection, rebates, and customer sales returns.
  2. Majority of other payables are obligations to pay for finished goods that have been acquired in the ordinary course of business from subcontractors.
  3. The carrying amounts of other payables and accruals approximate their fair values.

32

  1. The components of provisions are as follows:

Environmental

Warranty

restoration

Restructuring

Total

US$'000

US$'000

US$'000

US$'000

Year ended March 31, 2019

At the beginning of the year

1,081,218

8,919

54,053

1,144,190

Exchange adjustment

(37,163)

(274)

(1,991)

(39,428)

Provisions made

807,636

14,545

-

822,181

Amounts utilized

(875,413)

(14,403)

(36,576)

(926,392)

Acquisition of subsidiaries

-

24,510

-

24,510

976,278

33,297

15,486

1,025,061

Long-term portion classified as

non-current liabilities

(254,601)

(31,772)

-

(286,373)

At the end of the year

721,677

1,525

15,486

738,688

Period ended September 30, 2019

At the beginning of the period

976,278

33,297

15,486

1,025,061

Exchange adjustment

(16,863)

831

(91)

(16,123)

Provisions made

398,897

9,910

-

408,807

Amounts utilized

(390,848)

(8,621)

(15,395)

(414,864)

967,464

35,417

-

1,002,881

Long-term portion classified as non-

current liabilities

(254,769)

(32,780)

-

(287,549)

At the end of the period

712,695

2,637

-

715,332

The Group records its warranty liability at the time of sales based on estimated costs. Warranty claims are reasonably predictable based on historical failure rate information. The warranty accrual is reviewed quarterly to verify it properly reflects the outstanding obligation over the warranty period. Certain of these costs are reimbursable from the suppliers in accordance with the terms of relevant arrangements with them.

The Group records its environmental restoration provision at the time of sales based on estimated costs of environmentally-sound disposal of waste electrical and electronic equipment upon return from end-customers and with reference to the historical or projected future return rate. The environmental restoration provision is reviewed at least annually to assess its adequacy to meet the Group's obligation.

Restructuring costs provision mainly comprises lease termination obligations and employee termination payments, arising from a series of restructuring actions to reduce costs and enhance operational efficiency. The Group records its restructuring costs provision when it has a present legal or constructive obligation as a result of restructuring actions.

33

11 Other non-current liabilities

Details of other non-current liabilities are as follows:

September 30, 2019

March 31, 2019

US$'000

US$'000

Contingent consideration (a)

-

113,283

Deferred consideration (a)

25,072

25,072

Written put option liabilities (b)

791,454

783,505

Lease liabilities

311,459

-

Environmental restoration (Note 10(b))

32,780

31,772

Government incentives and grants received in advance (c)

48,969

50,087

Deferred rent liabilities

-

83,977

Others

165,333

159,950

1,375,067

1,247,646

  1. Pursuant to the completion of business combinations, the Group is required to pay in cash to the then respective sellers' contingent consideration with reference to certain performance indicators as written in the respective agreements with the sellers; and deferred consideration. Accordingly, current and non-current liabilities in respect of the fair value of contingent consideration and present value of deferred consideration have been recognized. The contingent consideration is subsequently re-measured at its fair values as a result of change in the expected performance at each balance sheet date, with any resulting gain or loss recognized in the consolidated income statement. Deferred consideration is subsequently carried at amortized cost.
    During the period, the contingent consideration to Fujitsu Limited ("Fujitsu") has been reclassified to current liabilities as it will fall due in May 2020. As at September 30, 2019, the potential undiscounted amounts of future payments in respect of the contingent and deferred considerations that the Group could be required to make to the then respective sellers under such arrangements are as follows:

Joint venture with NEC Corporation

US$25 million

Fujitsu

JPY2.55 billion to JPY12.75 billion

  1. (i) Pursuant to the joint venture agreement entered into between the Company and Fujitsu, the Company and Fujitsu are respectively granted call and put options which entitle the Company to purchase from Fujitsu and Development Bank of
    Japan ("DBJ"), or Fujitsu and DBJ to sell to the Company, the 49% interest in Fujitsu Client Computing Limited and its subsidiary, Shimane Fujitsu Limited (together "FCCL"). Both options will be exercisable following the fifth anniversary of the date of completion. The exercise price for the call and put options will be determined based on the fair value of the 49% interest as of the day of exercising the option. FCCL will pay to its shareholders by way of dividends in their respective shareholding proportion in a range of FCCL's profits available for distribution under applicable law in respect of each financial year during the term of the joint venture agreement, after making transfers to reserves and provisions.

34

  1. During the year ended March 31, 2019, Hefei Zhi Ju Sheng Bao Equity

Investment Co., Ltd ("ZJSB") acquired the 49% interest in a joint venture company ("JV Co") from Compal Electronics, Inc. The Company and ZJSB respectively own 51% and 49% of the interest in the JV Co. Pursuant to the option agreement entered into between a wholly owned subsidiary of the Group and Hefei Yuan Jia Start-up Investment LLP ("Yuan Jia"), which holds 99.31% interest in ZJSB, the Group and Yuan Jia are respectively granted call and put options which entitle the Group to purchase from Yuan Jia, or Yuan Jia to sell to the Group, the 99.31% interest in ZJSB. The call and put options will be exercisable at any time after August 31, 2022 and August 31, 2021 respectively. The exercise price for the call and put options will be determined in accordance with the joint venture agreement, and up to a maximum of RMB2,300 million (approximately US$322 million).

The financial liability that may become payable under the put option and dividend requirement is initially recognized at present value of redemption amount within other non-current liabilities with a corresponding charge directly to equity, as a put option written on non-controlling interest.

The put option liability shall be re-measured as a result of the change in the expected performance at each balance sheet date, with any resulting gain or loss recognized in the consolidated income statement. In the event that the put option lapses unexercised, the liability will be derecognized with a corresponding adjustment to equity.

  1. Government incentives and grants received in advance by certain group companies included in other non-current liabilities are mainly related to research and development projects and construction of property, plant and equipment. These Group companies are obliged to fulfill certain conditions under the terms of the government incentives and grants. The government incentive and grants are credited to the income statement upon fulfillment of those conditions and on a straight line basis over the expected life of the related assets respectively.

12

Borrowings

September 30, 2019

March 31, 2019

US$'000

US$'000

Current liabilities

Short-term loans (i)

2,088,739

1,166,907

Note (ii)

559,412

786,136

2,648,151

1,953,043

Non-current liabilities

Notes (ii)

1,242,603

1,836,264

Convertible bonds (iii)

598,780

590,506

Convertible preferred shares (iv)

300,000

-

2,141,383

2,426,770

4,789,534

4,379,813

  1. The short-term bank loans are all denominated in United States dollars. As at September 30, 2019, the Group has total revolving and short-term loan facilities of US$2,651 million (March 31, 2019: US$2,501 million) which has been utilized to the extent of US$2,101 million (March 31, 2019: US$1,181 million).

35

(ii)

Interest rate

September 30, 2019

March 31, 2019

Issue date

Principal amount

Term

per annum

Due date

US$'000

US$'000

May 8, 2014

US$786 million

5 years

4.7%

May 2019

-

786,136

June 10, 2015

RMB4 billion

5 years

4.95%

June 2020

559,412

594,747

March 16, 2017

US$500 million

5 years

3.875%

March 2022

497,803

497,391

March 29, 2018

US$750 million

5 years

4.75%

March 2023

744,800

744,126

1,802,015

2,622,400

  1. On January 24, 2019, the Company completed the issuance of 5-Year US$675 million convertible bonds bearing annual interest at 3.375% due in January 2024 ("the Bonds") to third party professional investors ("the bondholders"). The bondholders have the right, at any time on or after 41 days after the date of issue up to the 10th day prior to the maturity date, to convert part or all of the outstanding principal amount of the Bonds into ordinary shares of the Company at a conversion price of HK$7.99 per share, subject to adjustments. The conversion price was adjusted from HK$7.99 per share to HK$7.71 per share effective on July 16, 2019.
    The outstanding principal amount of the Bonds is repayable by the Company upon the maturity of the Bonds on January 24, 2024, if not previously redeemed, converted or purchased and cancelled. The proceeds would be used to repay previous notes and for general corporate purposes. Assuming full conversion of the Bonds at the adjusted conversion price of HK$7.71 per share, the Bonds will be convertible into 686,600,195 shares. The Group expects that it will be able to meet its redemption obligations based on the financial position of the Group.
    The initial fair value of the liability portion of the bond was determined using a market interest rate for an equivalent non-convertible bond at the issue date. The liability is subsequently recognized on an amortized cost basis until extinguished on conversion or maturity of the bonds. The remainder of the proceeds is allocated to the conversion option and recognized in shareholders' equity, net of income tax, and not subsequently remeasured.
  2. On June 21, 2019, the Group completed the issuance of 2,054,791 convertible preferred shares through its wholly owned subsidiary, Lenovo Enterprise Technology Company
    Limited ("LETCL").
    The convertible preferred shares are convertible to 20% of the enlarged issued ordinary share capital of LETCL on an as-converted and fully-diluted basis. The holders of the convertible preferred shares will be entitled cash dividends of 4% per annum payable semi-annually on the original subscription price until December 31, 2023. Upon the occurrence of certain specified conditions, the holders of convertible preferred shares will have the right to require LETCL to redeem or the Company to purchase all of their convertible preferred shares at the predetermined consideration. Accordingly, the convertible preferred shares are classified as a financial liability.
    The aggregated subscription price of convertible preferred shares is approximately US$300 million. The net proceeds from the issuance will be used by LETCL and its subsidiaries towards general corporate funding and capital expenditure of LETCL and its subsidiaries.
    The Group expects that it will be able to meet its redemption obligations based on the financial position of the Group.

36

The exposure of all the borrowings of the Group to interest rate changes and the contractual repricing dates as at September 30, 2019 and March 31, 2019 are as follows:

September 30, 2019

March 31, 2019

US$'000

US$'000

Within 1 year

2,648,151

1,953,043

Over 1 to 3 years

497,803

1,092,138

Over 3 to 5 years

1,643,580

1,334,632

4,789,534

4,379,813

13

Share capital

September 30, 2019

March 31, 2019

Number of

US$'000

Number of

US$'000

Shares

shares

Issued and fully paid:

Voting ordinary shares:

At the beginning and end of the

period/year

12,014,791,614

3,185,923

12,014,791,614

3,185,923

14 Perpetual securities

In March 2017, the Group issued a total of US$850 million perpetual securities through its wholly owned subsidiary, Lenovo Perpetual Securities Limited ("the issuer"). The net proceeds amounted to approximately US$842 million. The securities are perpetual, non-callable in the first 5 years and entitle the holders to receive distributions at a distribution rate of 5.375% per annum in the first 5 years, floating thereafter and with a fixed step up margin, payable semi- annually in arrears, cumulative and compounding. As the perpetual securities do not contain any contractual obligation to pay cash or other financial assets pursuant to the terms and conditions of the issue; in accordance with HKAS 32, they are classified as equity and for accounting purpose regarded as part of non-controlling interests.

In April 2017, the Group issued an additional US$150 million perpetual securities under the same terms, which are fungible with and form a single series with the aforementioned US$850 million perpetual securities.

37

15 Reconciliation of profit before taxation to net cash generated from operations

6 months ended

6 months ended

September 30,

September 30,

2019

2018

US$'000

US$'000

Profit before taxation

550,181

326,093

Share of losses of associates and joint ventures

7,448

1,721

Finance income

(24,474)

(11,474)

Finance costs

251,240

153,580

Depreciation of property, plant and equipment and amortization

of prepaid lease payments

137,901

144,256

Depreciation of right-of-use assets

49,045

-

Amortization of intangible assets

265,073

250,467

Share-based compensation

123,697

99,626

Loss on disposal of property, plant and equipment

706

2,456

Loss on disposal of intangible assets

1,016

-

Gain on disposal of subsidiaries

(12,844)

-

Dilution gain on interest in an associate

-

(18,121)

Fair value change on bonus warrants

(15,562)

6,683

Fair value change on financial instruments

(7,841)

(32,937)

Fair value change on financial assets at fair value through profit

or loss

108

(104,407)

Fair value change on a financial liability at fair value through

profit or loss

3,000

-

Dividend income

(2,390)

(163)

Increase in inventories

(396,127)

(349,565)

Increase in trade receivables, notes receivable, deposits,

prepayments and other receivables

(2,092,949)

(1,208,265)

Increase in trade payables, notes payable, provisions,

other payables and accruals

2,765,202

1,323,480

Effect of foreign exchange rate changes

98,313

76,167

───────────

Net cash generated from operations

1,700,743

659,597

Reconciliation of financing liabilities

This section sets out an analysis of financing liabilities and the movements in financing liabilities for the period presented.

September 30, 2019

March 31, 2019

Financing liabilities

US$'000

US$'000

Short-term loans - current

2,088,739

1,166,907

Note - current

559,412

786,136

Notes - non-current

1,242,603

1,836,264

Convertible bonds - non-current

598,780

590,506

Convertible preferred shares - non-current

300,000

-

Lease liabilities - current

76,503

-

Lease liabilities - non-current

311,459

-

──────────────

───────────

5,177,496

4,379,813

Short-term loans - variable interest rates

2,088,739

1,166,907

Notes - fixed interest rates

1,802,015

2,622,400

Convertible bonds - fixed interest rates

598,780

590,506

Convertible preferred shares - fair value

300,000

-

Lease liabilities - fixed interest rates

387,962

-

──────────────

───────────

5,177,496

4,379,813

38

Convertible

Short-

Convertible

preferred

Lease

term

Notes

bonds

shares

Lease

liabilities

loans

Note

non-

non-

non-

liabilities

non-

current

current

current

current

current

current

current

Total

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

Financing liabilities as at

April 1, 2018

1,166,692

-

2,648,725

-

-

-

-

3,815,417

Proceeds from borrowings

5,700,215

-

-

-

-

-

-

5,700,215

Repayments of borrowings

(5,700,000)

-

-

-

-

-

-

(5,700,000)

Transfer

-

774,341

(774,341)

-

-

-

-

-

Issue of convertible bonds

-

-

-

675,000

-

-

-

675,000

Issuing cost of convertible

bonds

-

-

-

(10,107)

-

-

-

(10,107)

Foreign exchange

adjustments

-

-

(41,014)

-

-

-

-

(41,014)

Other non-cash movements

-

11,795

2,894

(74,387)

-

-

-

(59,698)

Financing liabilities as at

March 31, 2019

1,166,907

786,136

1,836,264

590,506

-

-

-

4,379,813

Financing liabilities as at

April 1, 2019

1,166,907

786,136

1,836,264

590,506

-

-

-

4,379,813

Change in accounting

policy

-

-

-

-

-

77,903

331,441

409,344

Proceeds from borrowings

2,320,000

-

-

-

-

-

-

2,320,000

Repayments of borrowings

(1,400,000)

(786,244)

-

-

-

-

-

(2,186,244)

Transfer

-

581,389

(581,389)

-

-

29,601

(29,601)

-

Issue of convertible

preferred shares

-

-

-

-

300,000

-

-

300,000

Principal elements of lease

payments

-

-

-

-

-

(67,219)

-

(67,219)

Foreign exchange

adjustments

-

(22,226)

(13,548)

-

-

-

-

(35,774)

Other non-cash movements

1,832

357

1,276

8,274

-

36,218

9,619

57,576

Financing liabilities as at

September 30, 2019

2,088,739

559,412

1,242,603

598,780

300,000

76,503

311,459

5,177,496

PURCHASE, SALE OR REDEMPTION OF THE COMPANY'S LISTED SECURITIES

During the six months ended September 30, 2019, neither the Company nor any of its subsidiaries purchased, sold or redeemed any of the Company's listed securities, except that the respective trustee of the long-term incentive program and the employee share purchase plan of the Company purchased a total of 43,408,229 shares from the market for award to employees upon vesting. Details of these program and plan are set out in the 2018/19 annual report of the Company.

REVIEW BY AUDIT COMMITTEE

The Audit Committee of the Company has been established since 1999 with the responsibility to assist the Board in providing an independent review of the financial statements, risk management and internal control systems. It acts in accordance with its terms of reference which clearly deal with its membership, authority, duties and frequency of meetings. Currently, the Audit Committee is chaired by an independent non-executive director, Mr. Nicholas C. Allen, and comprises four members including Mr. Nicholas C. Allen and other three independent non-executive directors, Mr. William Tudor Brown, Mr. Gordon Robert Halyburton Orr and Mr. Woo Chin Wan Raymond.

The Audit Committee of the Company has reviewed the unaudited interim results of the Group for the six months ended September 30, 2019. It meets regularly with the management, the external auditor and the internal audit personnel to discuss the accounting principles and practices adopted by the Group and internal control and financial reporting matters.

39

COMPLIANCE WITH CORPORATE GOVERNANCE CODE

None of the directors of the Company is aware of any information that would reasonably indicate that the Company is not, or was not during the six months ended September 30, 2019, in compliance with the code provisions of the Corporate Governance Code and Corporate Governance Report (the "CG Code") as set out in Appendix 14 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, with the exception that the roles of the chairman of the Board (the "Chairman") and the chief executive officer of the Company (the "CEO") have not been segregated as required by code provision A.2.1 of the CG Code.

The Board has reviewed the organization human resources planning of the Company and is of the opinion that it is appropriate and in the best interests of the Company at the present stage for Mr. Yang Yuanqing ("Mr. Yang") to continue to hold both the positions as it would help to maintain the continuity of the strategy execution and stability of the operations of the Company. The Board comprising a vast majority of independent non-executive directors meets regularly on a quarterly basis to review the operations of the Company led by Mr. Yang.

The Board also appointed Mr. William O. Grabe as the lead independent director (the "Lead Independent Director") with broad authority and responsibility. Among other responsibilities, the Lead Independent Director serves as Chair of the Nomination and Governance Committee meeting and/or Board meeting whenever the Committee and/or Board is considering (i) the combined roles of Chairman and CEO; and

  1. assessment of the performance of Chairman and/or CEO. The Lead Independent Director also calls and chairs meeting(s) with all independent non-executive directors without management and executive director present at least once a year on such matters as are deemed appropriate. Accordingly, the Board believes that the current Board structure with combined roles of Chairman and CEO, the appointment of Lead Independent Director and a vast majority of independent non-executive directors provide an effective balance on power and authorizations between the Board and the management of the Company.

By Order of the Board

Yang Yuanqing

Chairman and

Chief Executive Officer

November 7, 2019

As at the date of this announcement, the executive director is Mr. Yang Yuanqing; the non-executive directors are Mr. Zhu Linan and Mr. Zhao John Huan; and the independent non-executive directors are Mr. Nicholas C. Allen, Mr. Nobuyuki Idei, Mr. William O. Grabe, Mr. William Tudor Brown, Mr. Yang Chih-Yuan Jerry, Mr. Gordon Robert Halyburton Orr and Mr. Woo Chin Wan Raymond.

40

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Lenovo Group Limited published this content on 07 November 2019 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 07 November 2019 08:44:16 UTC