During the pandemic, Lenovo’s business grew by 42% in an environment of massive supply chain disruption, a rapid shift to remote working and an additional US$4bn working capital requirement. Joseph has instigated a centralised cash management approach via a hub model to optimise group liquidity across approximately 300 entities and nine factory plants in five regions. His team of 30, mostly located in Singapore, but also in China, USA, Brazil and Hong Kong, manages relationships with approximately 40 banking partners, with around 1,000 bank accounts in more than 50 currencies.
Financing the business
During the 2021-22 financial year, Lenovo achieved a net cash position of US$602m, the first time for five years, while driving down year-on-year finance costs by US$47m, a reduction of 11%, while revenues increased by 18%.
By prioritising cash optimisation, Joseph and his team has freed up cash to reduce Lenovo’s debt level by US$600m over the last financial year. Strong business performance and the increase in net cash within a disrupted macro environment has enabled Lenovo to obtain investment-grade credit ratings with upgrades from Moody’s to Baa2 and Fitch to BBB. As a result, the company’s current debt as a percentage of total debt has dropped from 48% to 23%.
Lower cost refinancing
Lenovo’s credit rating upgrades have enabled Joseph and his team to negotiate more flexible tenors and additional liquidity at a lower cost. His current focus is the refinancing of the US$1.5bn committed five years revolving credit facility that matures in March 2023.
The deal was completed in July 2022 with an increased size of US$2bn. The final agreed term sheet has a great improvement in pricing with an all-in margin reduced by 35 bps, commitment fee cut by almost half from 62.5 bps to 35 bps, and preferential financial covenants and undertakings.
With net cash generated from operating activities reaching a new record level of US$4.1bn as a result of strong business growth, effective business strategy and prudent working capital management, treasury is supporting this growth through tailored funding programmes. This includes a securitisation and receivables factoring programme which are backed with strong funding support from relationship banks and private equity investors owing to Lenovo’s excellent credit history and upgraded credit rating. On Joseph’s initiative, treasury also set-up a receivables purchase programme to complement the securitisation programme, providing Lenovo with the flexibility to scale up its funding to support the exceptionally strong business growth.
Managing the impact of supply chain disruption and chip shortages
Joseph and his team worked to secure sufficient liquidity to overcome risks associated with component shortages, logistics and supply chain issues. The team worked with its partner banks to set up a US$1.5-2bn buy-ahead programme to ensure the business could buy semiconductor chips during a period of supply shortage and avoid disruption to its business.
Environmental, social and governance (ESG)
Lenovo Group has a net zero target in ten years and is proactively aiming to achieve this within five years. Joseph has a strong personal commitment to aligning treasury’s culture and objectives with the group’s sustainability ambitions, and inspiring change across the business. He is doing this in a variety of ways, including:
- Working with partner banks to evaluate how short- and long term facilities could be linked to ESG projects, ie sustainability linked financing. This approach is also enabling Lenovo to access new sources of financing and a wider investor base, as well as contributing to the ESG agenda.
- Looking at ways to align ESG objectives across the supplier base, including use of renewable electricity and reduction of waste, including sustainable supply chain financing.
Innovative cash flow forecasting
Joseph has instigated a new, comprehensive, weekly rolling short, medium- and long-term cash forecasting model across 20 categories of trade/non trade business flows. The forecast comprises more than three million data points, overlaid with predictive analytics that includes revenue forecast trends and historic customer payment behaviour. As a result, the team now enjoys 95%-100% forecasting accuracy at 30 days, and 92% at 90 days. This has proved instrumental in enabling treasury to make better financing decisions, including precise debt amount and tenor. The forecasting model is further distinguished by a sensitivity model that provides an ‘early warning system’ to anticipate and avoid financing or working capital disruption.
Managing risk
A complex and challenging geopolitical environment, rising commodity prices, fiscal tightening in the US to manage inflationary pressures and ongoing supply chain disruptions have depressed market demand, driven FX volatility and created significant headwinds. Joseph has pushed risk management to the top of the treasury agenda to minimise exposure through a series of risk transfer strategies.
Joseph has expanded treasury’s risk management remit beyond financial risk to an Enterprise Risk Management view.
Joseph has continued to pursue his digitisation strategy relentlessly in order to streamline processes, improve productivity and free-up capacity to support the business in new ways. For example, the team recognised certain intra-company processes were resulting in manual effort for accounting and tax colleagues. Treasury therefore designed an in-house fund transfer platform and integrated it at the front end with supply chain, logistics, accounting and tax teams, and at the back end with the FXall electronic trading platform to create an efficient, end-to-end process flow across 17 types of inter-company cash/non-cash settlements, 30 countries and 400+ bank accounts, so far. With a standardised, automatic process now in place, the accounting team benefits from auto reconciliation and auto posting, therefore reducing its manual workload. The tax team can now optimise transfer pricing mechanisms for timely and accurate tax true-up and a reduction in hedging costs.
Joseph Chua, Executive Director, Treasury comments, “Our digitisation journey continues at pace, including taking our current solutions to the next level, such as through increased use of tokenisation. A lesson of the pandemic has been that as well as supporting suppliers and contract manufacturers, we need to look beyond our direct partners to their sub-contractors that may lack access to funding. Through tokenisation, we can be more precise in targeting financing to the parts of the supply chain where it is needed the most and has the greatest impact in terms of increasing supply chain resilience and bolstering continuity of supply.”
