PAX Global Installation Growth Chipped Away Shipment Growth Likely to Disappoint We Are Initiating on PAX Global with Underperform and a TP of HK$6.30 (11X 2017E PER)

GLOBAL PAX Global Installation Growth Chipped Away Shipment Growth Likely to Disappoint We are initiating on PAX Global with Underperform and a TP of HK$6.30 (11x 2017E PER). We are concerned that the point-of-sales (POS) upgrade demand to accommodate chip-embedded bank cards has ended in China, while its overseas distributors face FX risks and end-demand slowdown as well as slower growth. We see 10-17% downside to consensus 2016-17E earnings; our TP implies 12% downside, and on bear case multiple, we see 60% downside.

327 HK Underperform Weaker China after Upgrades; Limited Gains from Mobile POS terminal demand in China accounted for ~50% of its sales in FY15, and we Price (at 07:59, 15 Apr 2016 GMT) HK$7.18

argue incremental China POS unit installation growth has been stagnant since Valuation HK$ 6.30 mid-2014. This suggests equipment vendors, after one-off upgrade demand to - PER 12-month target HK$ 6.30 support chip-based bank cards, will face weaker growth in 2016E. While there is Upside/Downside % -12.3 room for the installed base to upgrade and address mobile usage (i.e. ApplePay, 12-month TSR % -11.6 Alipay, WeChat, etc), incremental spend for QR readers or NFC scanners is Volatility Index Very High limited, and we argue PAX, which focuses on terminals, will see China growth GICS sector slow to 10% YoY in 2016E. Technology Hardware & Equipment Market cap HK$m 7,984 Slowing Growth in PAX’s Key Overseas Market Market cap US$m 1,029 47% of PAX’s FY15 revenue is from overseas, and we see risk of order cuts in Free float % 66 FY16E. PAX has relied on Brazil mPOS (mobile POS) demand, which accounts 30-day avg turnover US$m 5.9 for 21-23% of its total sales. Cielo and Rede are two key POS customers in Number shares on issue m 1,112 Brazil. After aggressive POS placements ahead of major sporting events (World Investment fundamentals Cup and Olympics), Cielo is seeing growth decelerate after loss of some clients, Year end 31 Dec 2015A 2016E 2017E 2018E and Rede saw YoY transactions decline in 4Q15. In our sensitivity table on P.4, Revenue m 2,870.8 3,198.5 3,604.1 4,016.3 EBIT m 548.7 573.5 637.2 700.9 we see a 16% drop in our 2016 earnings forecast if Brazil sales fall by 50%, as EBIT growth % 39.7 4.5 11.1 10.0 currency depreciation raises risks for the economy. We also expect PAX to face Reported profit m 620.3 587.6 643.6 705.2 tough competition in the US and European markets. We argue PAX’s market Adjusted profit m 620.3 587.6 643.6 705.2 EPS rep ¢ 55.5 52.5 57.2 62.7 share will be 11% globally in FY16 (up 60bps YoY), with only 10% YoY growth EPS rep growth % 55.8 -5.3 8.9 9.6 overseas (vs. ~20% by street consensus). EPS adj ¢ 55.5 52.5 57.2 62.7 EPS adj growth % 55.8 -5.4 9.0 9.6 PER rep x 12.9 13.7 12.6 11.5 Visa, Global Payments Better Play on Payments PER adj x 12.9 13.7 12.6 11.5 Total DPS ¢ 4.0 4.4 4.9 5.5 We see the winners of cashless payment as those linked to the payment Total div yield % 0.6 0.6 0.7 0.8 ROA % 14.8 13.1 12.6 12.0 processors (EMV, UnionPay) and less so to the infrastructure. Our US TMT ROE % 22.1 17.5 16.4 15.5 Analyst Kevin McVeigh is positive on the processors; he has Visa (V US, EV/EBITDA x 10.5 10.2 9.2 8.4 Net debt/equity % -69.7 -65.8 -67.8 -69.2 US$80.33, OP, TP US$85) on the MQ Marquee list and rates Global Payments P/BV x 2.6 2.2 1.9 1.7 (GPN US, US$75.30, OP, TP US$77) as Outperform. HK-listed ChinaSoft (354

HK, HK3.02, OP, TP HK$3.85) plays a role in Unionpay transactions, while card Source: FactSet, Macquarie Research, April 2016 (all figures in HKD unless noted) producer GoldPac (3315 HK, NR), which we profiled in a MacVisit note, is riding

Analyst(s) on rising credit card demand in China’s Tier-1 cities. Macquarie Capital Limited Timothy Lam Risks to our Underperform +852 3922 1086 [email protected] nd Jake Lynch PAX is ranked in the 2 Quartile on Macquarie’s MGRS. We are the only +852 3922 3583 [email protected] Underperform on the street - the street consensus has 15 Buys and 1 Hold. Erin Lin +86 21 2412 9028 [email protected] What could potentially change our view? 1) Better-than-expected sell-through for Macquarie Capital (USA) Inc. its overseas segment, if the company can rapidly penetrate new markets; 2) Kevin McVeigh Development of breakthrough payment POS products; 3) New regulatory efforts +1 212 231 6191 [email protected] to limit competition for payment equipment and services in China; and 4) Faster 18 April 2016 than expected revenue ramp of its payment services.

Please refer to page 24 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

Macquarie Research PAX Global

Inside Company Profile

. PAX Global is an international supplier of secure electronic payment terminal Installation Growth Chipped Away 3 hardware and transactional software services. China New POS Terminals Slow 6 . Its core business segments include sale of point-of-sale (POS) systems, Overseas Market Turns Volatile 7 software development and support services. Services Growth to Take Time 8 . PAX Global has sold more than 10 million units in over 100 countries Competition to Squeeze Margins 9 worldwide. PAX Supports Wide Range of Merchants13 . Founded in 2000, the company was listed on the HK Exchange in 2010, and Financial Analysis 15 is one of the top 3 global payment terminal solution suppliers. Valuation 17 . Shareholding: Hi Sun Technology (33%), Management (10% including stock Upside Risks 19 options), Public (57%). Corporate Governance and Risk Score 20 Appendices 21 Fig 2 Slower YoY Growth for PAX Terminals Overseas Macquarie Quant View 22 % of Total Revenue (by Region) 2014 2015 2016E 2017E 2018E

China market 58% 53% 54% 54% 53% Fig 1 327 HK rel HSI performance Overseas market 42% 47% 46% 46% 47% --Asia ex China 14% 9% 8% 8% 9% --EMEA 10% 12% 12% 12% 12% --LACIS 16% 23% 21% 19% 18% --US 2% 3% 5% 7% 8% YoY Growth (by Region) China market 32% 10% 13% 13% 9% Overseas market 132% 36% 10% 13% 14% --Asia ex China 58% -24% 2% 13% 25% --EMEA 169% 45% 11% 13% 11% --LACIS 221% 76% 2% 2% 6% --US 222% 81% 86% 58% 27% Source: PAX Global, Macquarie Research, April 2016 Source: FactSet, Macquarie Research, April 2016

PAX Global – Sales by Region (2015)

Fig 3 PAX Product Lines by PCI Merchant Levels (Defined by Visa) US/CAD 3%

LACIS 23% China EMEA 53% 12% Asia ex China 9%

Source: Macquarie Research, April 2016

Source: PAX Global, Macquarie Research, April 2016

18 April 2016 2

Macquarie Research PAX Global

Installation Growth Chipped Away Chip-based card Replacement Continues; Equipment Growth Slows

Growth in China saw significant point-of-sale (POS) terminal growth in the past two years, driven by transactions adoption of more electronic payment services and upgrade demand to meet the chip-based continues, but POS authentication requirements for bank cards. We believe equipment vendors, after one-off growth has slowed upgrade demand to support chip-based bank cards, will face weaker growth in 2016E. While PBOC sees continued growth in POS terminals, growth in the absolute number of POS units has been stagnant since 2014. Based on Wind data, since 2014, new installations reached ~5million units for a rolling 12-months, which we expect to remain unchanged in 2016E. The slowdown is likely tied to levelling off of bank card penetration, which became stagnant from 2H13. As the overall number of bank cards rises, issued bank card per POS fell from nearly 500 in 2012 to less than 300 in 2H15.

Fig 4 China’s New POS Adds has Slowed Down… Fig 5 … As Bank Card Penetration Rate Levels Off

millions 6.00 60.00

5.00 50.00

4.00 40.00

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1.00 10.00

0.00 0.00

2008 2010 2011 2012 2014 2015 2009 2013

2009 2010 2011 2013 2014 2008 2012 2015

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2008 2009 2011 2012 2013 2014 2010

2013 2014 2014 2015 2013

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Rolling 4 Qtr Unit Growth bank card penetration rate

Source: China Wind, Macquarie Research, April 2016 Source: China Wind, Macquarie Research, April 2016

We see little change in this trend in the coming 12-24 months, and expect it will negatively affect PAX’s Global domestic growth. Although retailers are tapping into incremental solutions such as QR and NFC readers for online payment (i.e. ApplePay, Alipay, Wechat Payment, etc), incremental unit growth for POS terminals is unlikely to rise sharply. While PAX Global does not have its own manufacturing capability, slowdown in unit shipments could put pressure on pricing and margins as competitors could turn more aggressive over grabbing market share. Move to Mid-to-Low End to Affect Margins PAX’s products have shifted their focus from high-end solutions to development of the mid-to- low end China domestic market in 2015. We believe this strategic shift is a sign of the high penetration rate in the high-end market, i.e. in 5-star hotels, major restaurants, where PAX has built a significant presence, and the replacement cycle could take up to five years. However, we note competition in the mid to low end market has been price focused, and may cap room for PAX’s margin improvement in the domestic market in FY16.

Fig 6 PAX Global – POS Sales (in Millions) by Market Type and YoY Growth Sales by Market Type (millions) 2014 2015 2016E 2017E 2018E

- Traditional (mid to high end) 2.2 2.5 2.6 2.8 3.0 - mPOS (low end) 0.5 1.2 1.0 1.1 1.3 - Other (low end) 0.2 0.3 0.6 0.7 0.8 Sales by Market Type (%) - Traditional (mid to high end) 77% 63% 62% 61% 59% - mPOS (low end) 16% 30% 24% 24% 25% - Other (low end) 7% 8% 14% 15% 16% Source: Macquarie Research, April 2016

18 April 2016 3 Macquarie Research PAX Global

Consensus Overly Optimistic on Overseas Growth The main bullish argument for PAX is its ability to expand overseas, especially in emerging markets. However, we believe sell-side consensus is too optimistic, as 1) its key market, Brazil (40-50% of its exports), faces slower growth and ASP pressure in 2016E, after weakening of the currency and sharp rise in the installed base; 2) while the US/Canada could achieve high growth, it only comprised 3-5% of total sales in FY15, and we believe the US/Canada growth is unable to fully offset weakness in other markets. Our conservative view is due to the latest developments in Brazil, which was a key growth market for PAX in the past two years. We looked at results from Cielo and Rede, two major Brazil payment providers and end customers of mobile POS (mPOS) terminals. Based on Cielo’s (CIEL3 BZ) 2015 financials, transacted volume growth was only 5.9% in 2015, far short of mid-double-digit growth achieved two years ago. After a strong push into channels in 2015, likely ahead of the Summer Olympics in 2016, Cielo is seeing growth deceleration, and Rede’s (under Itau Unibanco, ITUB US) 4Q15 transactions fell YoY, after POS reached 1.9m. We forecast PAX’s orders to slow down in 1H16, and with a lower GPM. What about the US and European markets? We believe PAX faces tough competition over share, as incumbent firms such as Verifone are developing solutions to meet demand to support UnionPay cards. We argue PAX’s market share could reach 11% globally in FY16 (up 60bps YoY), with only 10% YoY growth overseas in FY16 (vs. ~20% by consensus).

Fig 7 PAX Global – Growth and GPM Assumptions by Region % of Total Revenue (by Region) 2014 2015 2016E 2017E 2018E China market 58% 53% 54% 54% 53% Overseas market 42% 47% 46% 46% 47% --Asia ex China 14% 9% 8% 8% 9% --EMEA 10% 12% 12% 12% 12% --LACIS 16% 23% 21% 19% 18% --US 2% 3% 5% 7% 8% YoY Growth (by Region) China market 32% 10% 13% 13% 9% Overseas market 132% 36% 10% 13% 14% --Asia ex China 58% -24% 2% 13% 25% --EMEA 169% 45% 11% 13% 11% --LACIS 221% 76% 2% 2% 6% --US 222% 81% 86% 58% 27% GPM Assumption (by Region) China 35% 34% 34% 34% 34% US/Canada 40% 42% 42% 42% 42% EMEA 38% 38% 38% 38% 38% LATAM 45% 50% 45% 44% 43% APAC 31% 31% 31% 31% 31% Source: PAX Global, Macquarie Research, April 2016

Fig 8 Sensitivity Analysis – Impact to NP on Fall in Brazil (LACIS) 2016E 2016E Revenue Net Profit YoY 2016E LACIS Revenue +2% (Base Case) 3,199 588 N/A 2016E LACIS Revenue -20% 3,055 549 -7% 2016E LACIS Revenue -50% 2,857 496 -16% Source: Macquarie Research, April 2016

Downside to Consensus Earnings While PAX’s valuation is not excessive relative to its global peers such as Verifone and Ingenico, we see downside risk to consensus earnings once we factor in slower overseas growth. Our 2016E and 2017E earnings are 10% and 17% below consensus.

18 April 2016 4 Macquarie Research PAX Global

Fig 9 Valuation Comparison – PAX Global and its Global Peers Company Ticker Price Mkt Cap ADTV PER EV/EBITDA P/Bk ROE EPS Growth (LCY) US$m US$m CY15 CY16E CY17E CY16E CY17E CY16E CY15E CY16E CY17E CY16E CY17E PAX Global 327 HK 7.18 1,029 8 13.0 13.8 12.6 10.2 9.2 2.2 22.1 17.5 16.4 (5.5) 9.5 PAX Global at TP 6.30 914 11.4 12.1 11.0 9.0 8.1 1.9

Peer Comps Verifone PAY US 28.37 3,126 35 15.2 12.4 11.0 9.6 N/A 3.8 10.7 23.8 26.8 22.7 12.8 Ingenico ING FP 100.05 6,874 33 26.6 20.9 18.1 12.1 10.8 4.1 17.9 17.7 18.0 27.3 15.5 Newland 000997 CH 16.97 2,457 58 45.9 34.8 27.4 27.0 23.1 7.4 16.6 19.2 19.6 31.6 27.3 Xinguodu 300130 CH 31.92 1,125 43 91.2 63.8 49.1 N/A N/A 6.1 7.0 8.8 10.4 42.9 30.0 Average 44.7 33.0 26.4 16.2 17.0 5.3 13.0 17.4 18.7 31.1 21.4 Source: Macquarie Research, Bloomberg (for non rated stocks), Priced as of April 15, 2016

We value the stock on a PER basis, and our target price of HK$6.30 equates to 11x 2017E PER and 8.1x 2017E EV/EBITDA. As an equipment vendor with access to merchant customers, we argue the stock can trade at a higher multiple than traditional industrial companies. We expect ROE to fall to 18% in 2016E, after an exceptional year in FY15 of 22%, while its 5-year historical average was 14%. The stock is currently trading at 2.2x 2016E P/Bk, which appears demanding if growth slows down. In our sensitivity analysis, we look at three alternative scenarios for valuing PAX. In all three cases, we use our earnings forecasts, which we argue better reflect PAX’s fundamental developments: 1) valuing it at 14x 2017E PER, which is in-line with its global peers and would put its valuation at HK$8.00, or 11% upside; 2) trough valuation multiple of 5x, which could be reached if earnings declined YoY, and suggests 60% downside to HK$2.86; 3) historic average forward multiple of 12x, and would value the stock at HK$6.86, or 4% downside.

Fig 10 Pax Global – Bull and Bear Case Valuation Multiples

(HK$) 18.00 Bull 14X 17E PER (Case 1) 16.00 Bear 5X 17E PER (Case 2) 14.00 Hist. Avg. 12X 17E PER (Case 3) 25x TP 11X 17E PER 12.00 20x 10.00 15x 8.00

6.00 10x 4.00 5x 2.00 0.00 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Source: Bloomberg, Macquarie Research, April 2016

Upside Risks Despite our concerns on margin pressure in the domestic market and weaker order flow overseas, PAX Global is admittedly one of the leading POS producers globally, and the company has developed brand recognition in the payment services sector. As cashless payment continues to grow (see Appendix), the sector could still see sustainable growth potential, regardless of weakness in underlying economic conditions. However, we argue that the direct beneficiaries in the payment sector will be the payment processors, such as Visa and Global Payments. Our US analyst Kevin McVeigh, who covers payments processors, has Visa on the Marquee Buy list and an Outperform on Global Payments. We believe these two stocks are more direct plays on the rise in cashless payments. In China, UnionPay, established in 2002, remains the dominant processor of payments under the approval of the State Council and the People’s Bank of China.

18 April 2016 5 Macquarie Research PAX Global

China New POS Terminals Slow As China moves towards cashless spending, many investors argue that China’s point-of- sales (POS) terminal growth will remain unchanged, after rising in recent years on the back of the push by UnionPay to expand its network to increase coverage. However, we see slowing shipments of China’s POS equipment, after merchants with existing POS equipment already upgraded their equipment to reach the new chip-based card standards in the past 24 months. While there is room for upgrade in the installed base, especially for on-line payment, we argue that the annual growth rate will slow down from >30% in the past 3 years to 10-20% in FY16. We see terminal solutions as less sensitive to transaction volumes, while transaction processor and related service companies will be better proxies to play the rise in use of card payments.

Fig 11 Number of POS Terminals in China (Millions)

40.00 70% 35.00 60% 30.00 50% 25.00 40% 20.00 30% 15.00 10.00 20% 5.00 10%

0.00 0%

2013 2014 2015 2016 2011 2012 2017 2018

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Mar Mar Mar Mar Mar Mar Mar Mar

POS Terminals (million units) QoQ Growth YoY Growth

Source: Wind Info, Macquarie Research, April 2016

We are more conservative on the growth because net new installations have slowed since mid-2014 on a YoY basis, which we attribute to slowdown in bankcard penetration (see Fig 5) and as merchants upgrade to accept chip-based cards. In terms of shipments (POS terminals on a 12-month window), units shipped have slowed in 2015 to around 5m units. With flattish growth in card penetration, we believe the slowdown will become more apparent in 2016E, which would affect the shipment growth rate of the sector. We argue that YoY growth could fall from 43% in 2015 to 20% in 2016, as the penetration rate per 100,000, especially in urban areas, reaches closer to the levels of the UK and the US markets.

Fig 12 China Connected POS Terminals – 2010-2018E (in Millions) 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E

# of POS terminals (million) 3.33 4.83 7.12 10.63 15.94 22.82 27.39 31.49 36.22 YoY growth 38% 45% 47% 49% 50% 43% 20% 15% 15% Source: Wind Info, Macquarie Research, April 2016

China has a significant number of small and medium merchants, which may driver a higher ratio of POS terminals per capita as card payment could provide cashless convenience for consumers. However, as the growth rate slows down equipment makers could face more competition and this affect their ability to maintain their GPM.

18 April 2016 6 Macquarie Research PAX Global

Overseas Market Turns Volatile More Challenging Markets Abroad While the overseas market has provided PAX with a good opportunity to push its new product lines in the past two years, and it has enjoyed a higher than average GPM, we believe the export segment will see more challenges in the coming 12-24 months. Our conservative view is due to the latest developments in Brazil, which was a key growth market for PAX in the past two years. Looking at results from Cielo and Rede, two major local payment providers in Brazil, and we believe the market is overly optimistic on the shipments and margins for this market. Based on Cielo’s 2015 financials, transacted volume growth was only 5.9% in 2015, far short of mid-double-digit growth two years ago. After a strong push into distributor channels in 2015, likely ahead of the Summer Olympics in 2016, Rede reported YoY POS decline in Dec and Cielo saw deceleration. We forecast PAX’s orders to slow down in 1H16, and GPM to decline. During the Cielo 4Q15 analyst call, many analysts questioned the cost impact of the terminals (billed in USD) to these payment vendors, and how the company could offset the cost pressure. We believe the company will seek equipment vendors to adjust prices to reflect challenges due to currency depreciation. In Brazil, PAX collect in USD terms with its local distributors. This is a change in direction compared to the rapid growth PAX and other players enjoyed in past years. With LACIS (Latin America and the Commonwealth of Independent States) slowing, PAX’s local distributors will likely face pressure to slow down payments and reduce inventory build, which could have a magnified impact on PAX. In 2015, the company completed the acquisition of the Italian distributor as its subsidiary, which handles POS terminals and other consumer electronics. As PAX expands downstream, it will likely face pressure to manage working capital requirements and ensure it can sell- through to its customers, especially when the market turns challenging. US/Canada Strength Insufficient While PAX is actively expanding its offerings in the US/Canada market, we are concerned that the growth is not sufficient to offset challenges in other regions. In FY15, the US and Canada accounted for ~3% of total sales. While we forecast 86% growth in this segment YoY in FY16E, we forecast PAX’s total overseas sales to rise only 10% YoY, as we factor in slower growth in other overseas markets.

Fig 13 PAX Global – Slower YoY Growth for Overseas Market % of Total Revenue (by Region) 2014 2015 2016E 2017E 2018E

China market 58% 53% 54% 54% 53% Overseas market 42% 47% 46% 46% 47% --Asia ex China 14% 9% 8% 8% 9% --EMEA 10% 12% 12% 12% 12% --LACIS 16% 23% 21% 19% 18% --US 2% 3% 5% 7% 8% YoY Growth (by Region) China market 32% 10% 13% 13% 9% Overseas market 132% 36% 10% 13% 14% --Asia ex China 58% -24% 2% 13% 25% --EMEA 169% 45% 11% 13% 11% --LACIS 221% 76% 2% 2% 6% --US 222% 81% 86% 58% 27% Source: PAX Global, Macquarie Research, April 2016

18 April 2016 7 Macquarie Research PAX Global

Services Growth to Take Time New Sales Ramp with Payment as a Service Payment as a POS equipment makers are developing additional features, in order to raise their value-add to Service is driving customers. One of the drivers is payment as a service, which bundles hardware and services, growth in ASP and connects them to a single platform. This includes integrating various features such as a QR code, gift card, loyalty services into online transactions. Verifone sees payment service has a total addressable market (TAM) of US$10bn, compared to US$4bn for traditional terminal solutions, according to its 4Q15 presentation material. This will require the POS terminal to be supportive of displaying and analysing data, such as what was purchased, what the potential products are to advertise, and analytics. This will allow the equipment players to engage in service bundling, and merchants can receive the services for a fixed monthly fee. PAX is developing new POS terminals which can incorporate an application platform, which allows third-party apps across devices and is developing solutions that allow merchants to offer specialized offers and rewards to its customers. While this is a segment that should allow for more sustainable revenue and an additional income stream, services accounted for only 1% of its revenue in FY15, and we this segment having limited impact on PAX’s overall revenue and profitability in the next 12 months. In order to achieve success, its customers would need to be willing to collect and analyse non-payment data, with the aim of improving customer experience and feeding transaction analytics across different sales channels. Some of the new POS terminals can provide one-on-one interactive digital screens in captive environments, where consumers can see advertisements after they use the POS equipment. As PAX expands in the global markets, and develops its multi-lane product (see Fig 17), it may also develop new products to address its growing list of customers.

Fig 14 Global Client Base of PAX Global

Source: PAX Global, April 2016

18 April 2016 8 Macquarie Research PAX Global

Competition to Squeeze Margins Competition in mid While PAX was able to lead high-end market in China, we argue that rising competition will to low end to affect put significant pressure on its margins, as the company faces more price-driven competition PAX’s margins in the low-end market. According to a “2015-2018 China and Global Financial POS Terminals Industry Studies Report” by PBOC, at the end of 2014 there were accumulatively 15.9 million POS terminals in connection, an increase of 49.9% YoY, of which 5.3 million units were added in the year, up by 50.9% YoY. And based on the “China Payment System Development Report”, published by PBOC, the total number of bank cards in distribution reached 4.9 billion in 2014, representing 17% growth YoY and 15% CAGR over 2010-2014. The bank card penetration rate increased from ~32% in 2010 to almost 50% in 2015, and the number of bank cards corresponding to each POS has decreased from ~600 to ~260 per machine now, implying a greater accessibility to POS machines. On average, each Chinese person holds ~3.54 bank cards.

Fig 15 China Connected POS terminals 2010-2014 Fig 16 Bank card distribution and growth 2010-2014

18 60% 6 25% 22% 49% 50% 16 47% 20% 45% 50% 5 19% 20% 14 17% 38% 16% 12 40% 4 15% 10 30% 3 8 10% 6 20% 2

4 5% 10% 1 2

0 0% 0 0% 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014

# of POS terminals (million) YoY growth # of Bank Cards Distributed (billion) YoY growth

Source: China Wind, Macquarie Research, April 2016 Source: China Wind, Macquarie Research, April 2016

Although the growth trend was solid in past years, we see a slowdown in installations as new card issuance slows down. Taking into account 50% bank card penetration (~700m), the same level of penetration as the US would bring the installed based to 25m, which suggests the penetration rate is already high vs. a typical mature market. This suggests the connected POS will grow at a more moderate pace, which we factor to be in the 10%-20% range (see Fig 12). Competition for the Global and China markets The global market is dominated by the top three industry players: Ingenico, Verifone and PAX, followed by some smaller suppliers from China, Korea, and Taiwan. According to a Nilson report, by 2014 the top three suppliers comprised ~58% global market share. Geographically, 53% of the world’s POS terminal shipments were to the Asia Pacific region in 2014. China’s local POS market has numerous players including Landi (unlisted), PAX (327 HK), Newland (000997 CH, NR), Xinguodu (300130 CH, NR) and Verifone (PAY US, NR). While each player has its niche segment, Newland is the leader in the mPOS market with ~80% (2014) local market share according to the company, and Xinguodu is leading in the UnionPay POS system, and has ~20% (2014) market share in the local POS market. PAX’s product and offerings by its competitors are highlighted in Fig 17.

18 April 2016 9 Macquarie Research PAX Global

Fig 17 Different Types of POS Terminals – PAX’s Offerings vs. Peers

Source: PAX Global, Macquarie Research, April 2016

18 April 2016 10 Macquarie Research PAX Global

Fig 18 World POS Market Share (2014) Fig 19 Global Shipment of POS by Region (2014)

Source: Nilson Report, Macquarie Research, April 2016 Source: Nilson Report, Macquarie Research, April 2016

Transaction Volume to Grow; Equipment to Enjoy Limited Benefit As the system ramps up, we expect transaction volume will continue to increase, at a higher magnitude than the payment equipment. According to the Nilson Report, which tracks industry developments in card and payment solutions, UnionPay may see transactions rise in Asia Pacific from 20billion a year in 2014 to 60billion by 2019E, or an increase of 203%. This growth rate is significantly higher than Visa, MasterCard or JCB. In particular this will support the processors and acquirers, who are responsible for handling the payment with card issuers (typically banks) and whose revenue models are based on transactions. On the other hand, terminal servicing companies will charge a monthly fee, regardless of the amount of transaction volume while hardware vendors will only collect one- off revenue from the sale of POS and related equipment, with a ~5 year replacement cycle.

Fig 20 Payment Value Chain

Source: PAX Global, April 2016

18 April 2016 11 Macquarie Research PAX Global

New POS Require Integration with NFC/QR Code NFC and QR Code Payment are two fast growing areas in electronic payment, which can complement existing card reading POS. NFC (near-field communication), allows two devices to exchange data without contact, within a close distance. By waving the bank card or an NFC-enabled smartphone across the NFC reader, payment is completed in seconds without the card changing hands. This can reduce the need to read the magnetic strip or IC card, as customers can simply “tap-and-go”, making the transaction quicker. For POS terminal makers, this is becoming a terminal requirement, rather than a volume driver. As reported by Berg Insight, shipments of NFC-enabled POS terminals reached ~9.5 million in 2014, and among the total POS terminals shipped, 80% and 75% were with the NFC feature to Europe and North America respectively. On a global basis, two out of every five POS terminals shipped in 2014 were NFC-featured. Key advantages are: . The traditional magnetic stripe card is easy to copy and forge. With NFC-POS, the bank card is in the customer’s own hands during the payment process, avoiding the risk of duplicating the card identity. . Many smartphones have built-in mobile wallet features, such as Apple Pay, Good Wallet, Android Pay, etc. Debit/credit cards as well as loyalty cards can be stored in the mobile wallet. When making payments, customers can hold their mobile phone close to the POS machine, and the card reader will authenticate and approve the transaction. Another layer of security is added by the secure element (SE) installation in the phone. The SE generates a random code each time a transaction is made; therefore, it is not the actual card identity but a one-off code that is exchanged with the POS machine.

Fig 21 NFC Payment Equipment Fig 22 QR Code Payment Equipment

Source: Macquarie Research, April 2016 Source: Macquarie Research, April 2016

QR code payment is also getting increasing traction today with the growing popularity of Alipay and Wechat payment. The QR code works by installing a scanner with the payment terminal to read the barcode, which will authenticate the payment. This is gaining traction because 1) QR code payment only requires a QR code scanner to be installed at the cashier, which is cheaper than the NFC feature on the POS machine; 2) Alipay and Wechat payment can be installed in different kinds of smartphones, while NFC payment requires the phone to have an NFC chip installed. Sensing the threat from the growing trend in QR code payment, China UnionPay has been subsidizing the NFC payment modification on POS terminals since 2014 to promote its “QuickPass” (闪付, the Chinese utilization of NFC). At the end of 2015, UnionPay also formed a cooperation with Apple Pay before its entry into the Chinese market in February 2016. ApplePay will benefit from UnionPay’s dominant position in China’s banking industry, while UnionPay is able to count on Apple’s popularity in China to further promote its “QuickPass” on NFC.

18 April 2016 12 Macquarie Research PAX Global

PAX Supports Wide Range of Merchants PAX has developed a variety of products to address the various markets, which allow merchants to reach different types of customers. PAX is best known for the wireless POS, which allow merchant service agents to authenticate sales and pin verification, while its mPOS solution is used by merchants, who can carry it in an open setting. Its latest products are the multi-lane solutions that target large scale merchants. These all-in- one machines provide a variety of payment options, have a larger screen for advertising, and can also handle customer loyalty programs.

Fig 23 PAX Product Lines by PCI Merchant Levels (Defined by Visa)

Source: PAX Global, April 2016

The terminal serves as a part of the transaction flow for a typical electronic fund transfer transaction.

Fig 24 Typical Transaction Flow through E-payment Terminal

Source: PAX Global, April 2016

18 April 2016 13 Macquarie Research PAX Global

Customers of PAX (Merchant) will acquire the payment information from the payment card, relay the information to the Card Association (processor) who will verify it with the financial institutions (card issuer). Once verified, the processor will grant authorization for payment, and the information will feed back to the terminal and for the merchant to print out the receipt. As PAX develops more products for the micro merchant market, it would be directed at a larger volume but in a very competitive market. This could provide room for the company to raise shipments, but will pose a risk to its margins, in our view. While its top-of-the-line multi- lane products will allow PAX will compete head-to-head with market leaders, we believe penetration into the high end will be difficult, and it will take time to reach mass volume. SWOT Analysis on PAX Global PAX Global has a strong position in payment services, and is well recognized in the industry for its ability to deliver the latest POS terminals and meet demand from high-volume retailers. Its products are also recognized for covering the high to low end segments, with the ability to handle cloud based applications. While POS equipment has to follow similar authentication and communication standards, reliability and software capabilities often become differentiating factors between POS vendors. This requires in-depth knowledge of their customers and the ability to produce reports that meet customer requirements. Competitors in the space have a variety of product offerings and also targeted different market segments in the past. We believe PAX has been able to expand by consistently upgrading its software to meet the growing market requirements, and as one of the earliest players to target the export market.

Fig 25 SWOT Analysis of PAX Global

Strengths Weakness . Established POS vendor in China . Limited exposure in higher value payment services . Strong brand quality and expanding into overseas markets . Lack of clarity on order sell-through to its related parties . Mobile POS gaining share in market . Entry into low-end market could pose risk to margins Opportunities Threats . Incremental growth in software services demand for POS systems . Competition from domestic peers as company moves to mid-to-low end . Payment services could see rising demand . Incumbents such as Verifone signed contracts with Unionpay to deploy . Opportunity to compete in the US and European markets their products to meet multiple card standards . New regulations may affect PAX’s ability to compete in certain markets Source: Macquarie Research, April 2016

18 April 2016 14 Macquarie Research PAX Global

Financial Analysis PAX was able to grow its top-line revenue by 61% and 21% in the past two years, as the company increased its export volumes and developed sales channel in new markets. However, we believe its distributors will be more cautious on inventory build in 2016E, and we forecast revenue to be up 11% in 2016 and 13% in 2017E, which is sharply lower than the 21% growth in 2015. We forecast PAX Global’s margins to fall from 38.1% in FY15 to 36.9% in FY16E, driven by increased competition in the mid-to low end market and more challenging market conditions overseas, especially in the LACIS region. Income Statement We model PAX’s revenue to rise 11% and 13% in 2016E and 2017E, respectively, on continued revenue ramp from its sales in new markets. However, PAX will have difficult YoY comps for operating profits as we expect gross margins for its overseas business to normalize. We also assume other income to be slightly lower in FY16 after factoring in lower VAT refunds.

Fig 26 PAX Global – Expect Revenue and NP Growth to Continue Profit & Loss Ratios 2014 2015 2016E 2017E 2018E Revenue Growth 61% 21% 11% 13% 11% EBITDA Growth 81% 40% 5% 11% 10% EBIT Growth 82% 40% 5% 11% 10% Gross Profit Margin 36% 38% 37% 37% 36% EBITDA Margin 17% 19% 18% 18% 18% EBIT Margin 17% 19% 18% 18% 17% Net Profit Margin 17% 22% 18% 18% 18% Source: Company data, Macquarie Research, April 2016

Fig 27 PAX Global - Income Statement (2014-2018E, Rmb m) Profit And Loss 2014A 2015A 2016E 2017E 2018E Sales Revenue 2,373 2,871 3,199 3,604 4,016 Gross Profit 865 1,092 1,179 1,320 1,462 COGS 1,508 1,778 2,019 2,284 2,555 EBITDA 397 554 579 643 708 Depreciation 4 5 5 6 6 Amortisation - Intangibles 0 0 0 0 0 Other Amortisation 0 0 0 1 1 Total EBIT 393 549 573 637 701 Other pre-tax income 70 109 96 105 116 Pre-Tax Profit 463 658 669 742 817 Tax Expense 71 38 82 98 112 Net Profit After Tax 392 620 588 644 705 Minority Interest 0 0 0 0 0

Reported Earnings 392 620 588 644 705 Adjusted Earnings 392 620 588 644 705 Source: Company data, Macquarie Research, April 2016

Balance Sheet PAX Global utilizes distributors in most markets, except Hong Kong, Macau, the US and Italy. This has helped the company to maintain a healthy balance sheet. Its overseas sales are based in USD and the company reports in HKD. While the company currently has no debt on its balance sheet, we believe its trading partners will provide payment terms for customers, especially small and medium enterprises.

18 April 2016 15 Macquarie Research PAX Global

Fig 28 PAX Global – Working Capital Rising on Longer A/R Days 2014 2015 2016E 2017E 2018E Inventory days 115 115 120 120 120 A/R days 138 160 165 165 165 AP days 192 213 193 193 193 Total WC days 62 63 93 93 93 Source: Company data, Macquarie Research, April 2016

Fig 29 PAX Global - Balance Sheet (2014-2018E, Rmb m) Balance Sheet 2014A 2015A 2016E 2017E 2018E Cash 1,935 2,153 2,391 2,866 3,378 Total Receivables 898 1,261 1,486 1,674 1,865 Inventories 475 562 683 773 864 Fixed Assets 12 12 15 17 19 Goodwill 0 0 0 0 0 Other 14 92 92 92 92 Total Assets 3,334 4,080 4,666 5,421 6,218 Trade Payables 424 711 1,030 1,191 1,336 Short term Debt 0 0 0 0 0 Long Term Debt 0 0 0 0 0 Provisions 0 0 0 0 0 Other Liabilities 362 279 2 2 2 Total Liabilities 786 990 1,032 1,193 1,338 Shareholders Fund 2,548 3,078 3,621 4,216 4,866 Minority Interest 0 13 13 13 13 Total S/H Equity 2,548 3,091 3,634 4,229 4,879 Total Liab & S/H Fund 3,334 4,080 4,666 5,421 6,218 Source: Company data, Macquarie Research, April 2016

Cash Flow PAX Global should maintain positive operating cash flow, assuming it is able to manage its increase in working capital as sales rise, especially after the company’s acquisition of overseas distributors. As the company does not operate any manufacturing facilities, we do not anticipate meaningful capex in the coming two years.

Fig 30 PAX Global - Cashflow Statement (2014-2018E, Rmb m) Cashflow Analysis 2014A 2015A 2016E 2017E 2018E EBITDA 397 554 579 643 708 Tax Paid -18 -69 -82 -98 -112 Change in Working Capital -320 -315 -303 -117 -137 Net Interest Paid 0 0 0 0 0 Others 95 147 74 -103 88 Operating Cashflow 154 317 269 509 546 Acquisitions 0 -1 0 0 0 Capex -7 -5 -8 -8 -8 Asset sales 0 0 0 0 0 Others 24 -3 22 24 29 Investing Cashflow 16 -8 14 16 21 Dividends 0 22 44 50 55 Others 74 18 0 0 0 Financing Cashflow 74 -4 -44 -50 -55

Net Chg in Cash/debt 220 226 238 475 512 Free Cash Flow 147 312 261 501 538 Source: Company data, Macquarie Research, April 2016

18 April 2016 16 Macquarie Research PAX Global

Valuation We value PAX Our target price for PAX Global is HK$6.30, which equates to 11x 2017E PER and 8.1x Global on a PER 2017E EV/EBITDA. While the stock has traded at higher multiples in the past 12-18 months, basis, as company we believe slower growth will affect its valuation, and warrants a discount to its 5-year 12x is focused on sales forward earnings. The market leaders in POS terminals, Verifone and Ingenico, are trading at revenue from POS. 11x and 18x 2017E PER. We expect ROE to fall to 18% in 2016E, after an exceptional year in FY15 with 22%, while its 5-year historic average was 14%. Currently the stock is trading at 2.3x 2016E P/Bk, which would appear demanding if growth slows down. Although PAX Global benefited from rapid growth in the past two years, we believe the company will find it difficult to sustain its ROE metric (22%) achieved in 2015. Its ROE has been driven by its early entry into emerging markets, and it also benefited from more favourable tax treatment, as it changed its tax classification from completed goods to component knock down (CKD) sales for the LACIS market. We believe slower growth and more competition could drive down pricing for its emerging market sales, once its peers obtain the required certification.

Fig 31 Valuation Comparison – PAX Global and its Global Peers Company Ticker Price Mkt Cap ADTV PER EV/EBITDA P/Bk ROE EPS Growth (LCY) US$m US$m CY15 CY16E CY17E CY16E CY17E CY16E CY15E CY16E CY17E CY16E CY17E PAX Global 327 HK 7.18 1,029 8 13.0 13.8 12.6 10.2 9.2 2.2 22.1 17.5 16.4 (5.5) 9.5 PAX Global at TP 6.30 914 11.4 12.1 11.0 9.0 8.1 1.9

Card Comps Goldpac 3315 HK 3.20 344 1 9.2 8.4 7.6 3.4 3.1 1.2 14.1 14.3 14.6 8.9 11.4 Hengbao 002104 CH 18.21 2,003 87 34.7 25.3 21.4 N/A N/A 9.1 23.8 24.4 24.2 37.1 18.1 Dongsheun 002017 CH 15.09 807 18 N/A N/A N/A N/A N/A 6.6 N/A N/A N/A N/A N/A Average 21.9 16.9 14.5 3.4 3.1 5.6 19.0 19.3 19.4 23.0 14.7 Source: Macquarie Research, Bloomberg (for non rated stocks), Priced as of April 15, 2016

On our DCF model to 2025E, we have an equity value per share of HK$6.30, based on WACC of 14.8% (15.8% cost of equity, 7.5% cost of debt, and target debt weight of 10%). Terminal growth is assumed to be 2.5% and terminal value is 37% of total equity value. The high WACC number is because the company is in a net cash position and we assume a low debt weight. Fig 32 DCF Valuation Table (HKD m) HKD millions 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

Revenue 2,373 2,871 3,199 3,604 4,016 4,438 4,832 5,227 5,621 6,061 6,558 7,120 ... Growth 61% 21% 11% 13% 11% 11% 9% 8% 8% 8% 8% 9% Gross Profit 865 1,092 1,179 1,320 1,462 1,606 1,738 1,873 2,013 2,169 2,345 2,546 ... GP Margin 36% 38% 37% 37% 36% 36% 36% 36% 36% 36% 36% 36% Opex 472 544 606 683 761 841 915 990 1,065 1,148 1,242 1,349 … Opex Ratio 20% 19% 19% 19% 19% 19% 19% 19% 19% 19% 19% 19% EBIT 393 549 573 637 701 765 823 883 948 1,021 1,103 1,197 Add: Amortisation 4 5 5 6 6 7 8 8 9 10 10 11 Add: Depreciation 0 0 0 1 1 1 1 1 1 1 1 1 EBITDA 397 554 579 643 708 773 831 892 958 1,032 1,114 1,210 … Margin 17% 19% 18% 18% 18% 17% 17% 17% 17% 17% 17% 17% Less: Tax 18 69 82 98 112 123 132 142 153 164 177 193 Less: Minority Interests Less: Change in WC 320 315 303 117 137 141 126 130 130 152 172 294 Less: Capex 7 5 8 8 8 8 8 8 8 8 8 8 ... Capex: Depreciation 1.9x 1.2x 1.6x 1.4x 1.3x 1.1x 1.0x 1.0x 0.9x 0.8x 0.8x 0.7x Free Cash Flow 147 312 261 501 538 597 665 718 778 823 879 845 ... FCF Growth -49% 112% -16% 92% 8% 11% 11% 8% 8% 6% 7% -4% PV of FCF 235 391 365 351 339 317 298 273 253 221 Source: Company data, Macquarie Research, April 2016

18 April 2016 17 Macquarie Research PAX Global

Fig 33 DCF Valuation Table – Per Share Calculation HKD million

Sum of PV of FCF 3,103 Terminal Growth 2.5% PV of Terminal Value 1,836 Enterprise Value (HKD m) 4,938 add Net Cash (FY15) -2,144 Market Capitalization Value (HKD m) 7,083 Terminal as % total 37% Per Share HK$ 6.30 Source: Macquarie Research, April 2016

Compared to its historic forward PER valuation band, PAX Global is now trading at a 10% premium to its average PER of 12x, after share price correction in the past 6 months. The share price has been volatile in the past 12 months, with a BETA of 1.40.

Fig 34 PAX Global Forward PER – 2011-2017E, 5x Trough and 25x Peak

(HK$) 18.00 16.00 25x 14.00 20x 12.00

10.00 15x 8.00 6.00 10x 4.00 5x 2.00 0.00 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17

Source: Bloomberg, Macquarie Research, April 2016

Fig 35 PAX Global – POS Shipment Growth to Slow in 2016E

Source: PAX Global, Macquarie Research, April 2016

18 April 2016 18 Macquarie Research PAX Global

Upside Risks . Faster than expected ramp in its new markets such as the US and Canada, where incumbents (Verifone) have a dominant market share and track record in POS solutions. . PAX’s ability to complete additional accretive acquisitions, such as developments in the payment services sector. . Better than expected demand growth in China, if card penetration rises unexpectedly due to changes in government regulations. . More favourable pricing environment for its core components and its mobile payment solutions. . In Sep 2014, PAX’s majority shareholder Hi-Sun Technology sold 80m shares but remains a major shareholder of the company, and the major shareholder may consider buying back shares to support its share price.

Fig 36 PAX Global – Volatile Share Price Movement in 2015

Shareholder Hi-Sun sold 80m shares Upgrade demand for China IC chip card Mgmt communicated more focus for mid to low-end market

Rise in sale of mPOS

Expectation on strong Brazil, start of SZ-HK Connect

Source: Company data, Macquarie Research, April 2016

18 April 2016 19 Macquarie Research PAX Global

Corporate Governance and Risk Score Our proprietary Macquarie Governance and Risk Score places PAX Global in the second quartile in Asia. PwC has been PAX’s auditor since 2010. PAX’s management PAX’s Chairman Mr. Guoming Nie has been with the company since 2000, with over twenty team is sales-driven years’ experience in the card payment industry. He was the vice president of Pax Technology and is experienced from 2000 to 2001 and the president of Pax Technology from 2001 to 2010, and was in POS systems appointed as the chairman in 2010. Other key members of the management team include Mr. Jie Lu, who is the CEO and ED of the company, Mr. Wenjin Li, who is the ED of the firm, responsible for risk management and treasury management, and Mr. Chris Lee, who is the CFO and Joint Company Secretary of the firm. Hi-Sun Technology holds 33% of the outstanding shares. Positive highlights

. Management team has good experience in the payment systems, with a CEO that has over 15 years’ experience in sales and marketing in the electronic payment industry . Technology stack, patents, and copyrights are entry barriers, especially since payment industries require certification and transaction reliability. . PAX has built a high quality client base, in both the domestic and overseas markets. Negative highlights . Main shareholder (Hi-Sun) has a mixed execution track record since listing, and PAX sold HKD149m of electronic payment products to Hi-Sun’s subsidiary, or 5% of total sales. . PAX does not have all members of the audit committee with a finance background . PAX has higher margins than its domestic and international peers. . Top customer represent 17% of revenue, and top 5 customers 44% of total. . Overseas orders via distributors are difficult to audit, especially after company acquired one of its distributors in Italy.

Fig 37 Corporate Governance Score – PAX’s Position By Quartile

Q1 Q2 Q3 Q4

Overall Score ● Corporate Governance ● History ● Shareholding ● Access ● Board & Mgmt ● Compensation ● Balance Sheet Mgmt ● Risk ● Accounting & Audit ● Visibility of Growth ● Earnings Quality and Risk ● True BS Strength ● Misc Risks ● Source: Macquarie Research, April 2016

18 April 2016 20 Macquarie Research PAX Global

Appendices Cashless Payment According to a report by MasterCard Advisors in 2013, 85% of all retail payment transactions are done with cash, which equates to 60% of retail transaction value. The report studied consumer payment patterns in 33 countries from five regions, which represented more than 85% of global GDP. The report suggests that there are four distinct stages of evolution: 1) nearly cashless; 2) tipping point; 3) transitioning; 4) inception, which indicates the percentage of transactions in non-cash payments. In terms of trajectory, China is ranked the highest among the 33 countries, in moving from the transition stage to the tipping point, suggesting that there is strong inclination to move away from cash-based payment. The increase in readiness can be driven by government and innovation. For example, recent promotion programs by Internet companies to use mobile payment have helped to sharply increase readiness of mobile payment, and increased the readiness of society to embrace cashless payment.

Fig 38 Percentage of Non-Cash Payment and Trajectory % Of Non-Cash Payment Stage of Non-Cash Trajectory Score (Change in Share (Total Value) of Consumer Payment for Cash)

Belgium 93 Nearly Cashless 10 France 92 Nearly Cashless 14 Canada 90 Nearly Cashless 16 UK 89 Nearly Cashless 15 Sweden 89 Nearly Cashless 13 Australia 86 Nearly Cashless 10 Netherlands 85 Nearly Cashless 20 United States 80 Tipping Point 12 Germany 76 Tipping Point 10 Korea 70 Tipping Point 21 Singapore 69 Tipping Point 39 Japan 62 Tipping Point 12 Brazil 57 Transitioning 30 China 55 Transitioning 100 Spain 54 Transitioning 13 Mexico 53 Transitioning 19 Malaysia 45 Transitioning 10 Italy 44 Transitioning 12 Greece 44 Transitioning 13 Taiwan 43 Transitioning 16 South Africa 43 Transitioning 53 Poland 41 Transitioning 55 Thailand 41 Transitioning 19 India 32 Inception 11 Russia 31 Inception 22 Indonesia 31 Inception 23 Kenya 27 Inception 51 Arab Emirates 26 Inception 65 Colombia 23 Inception 16 Peru 21 Inception 28 Saudi Arabia 19 Inception 30 Nigeria 10 Inception 12 Egypt 7 Inception 19 Source: MasterCard Advisors (Sep 2013), Macquarie Research, April 2016

According to the report by CGAP, China has been moving rapidly to provide third-party payment to engage in digital payment. Branchless banking allows UnionPay to link up 400 domestic and overseas member banks. As the only interbank network in China, it is utilizing its network of POS terminals to support payments. In order to broaden the penetration rate, very low-cost mobile POS devices have been developed, most noticeably Lakala which can utilize mobile phones for payment. Payment by phone has been expanding, and this segment will likely see continued changes as new payment methods are being adopted to improve ease of use and provide security to end- users.

18 April 2016 21 Macquarie Research PAX Global Macquarie Quant View

The quant model currently holds a reasonably positive view on PAX Attractive Displays where the Global. The strongest style exposure is Earnings Momentum, indicating company’s ranked based on this stock has received earnings upgrades and is well liked by sell side s

l the fundamental consensus a analysts. The weakest style exposure is Valuations, indicating this stock is t

n Price Target and over-priced in the market relative to its peers. e

Macquarie’s Quantitative m

a Alpha model.

181/519 d n

u Two rankings: Local market Global rank in F (Hong Kong) and Global Technology Hardware & Equipment sector (Technology % of BUY recommendations 93% (13/14) Quant Hardware & Equipment) Local market rank Global sector rank Number of Price Target downgrades 3 Number of Price Target upgrades 2

Macquarie Alpha Model ranking Factors driving the Alpha Model A list of comparable companies and their Macquarie Alpha model score For the comparable firms this chart shows the key underlying styles and their (higher is better). contribution to the current overall Alpha score.

Tongda Group 1.1 Tongda Group

PAX Global 0.6 PAX Global

BYD Electronic 0.2 BYD Electronic

GCL New Energy 0.0 GCL New Energy

Coolpad Group -0.1 Coolpad Group

Millennium Pac -0.9 Millennium Pac

-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 Valuations Growth Profitability Earnings Price Quality Momentum Momentum

Macquarie Earnings Sentiment Indicator Drivers of Stock Return The Macquarie Sentiment Indicator is an enhanced earnings revisions Breakdown of 1 year total return (local currency) into returns from dividends, changes signal that favours analysts who have more timely and higher conviction in forward earnings estimates and the resulting change in earnings multiple. revisions. Current score shown below.

Tongda Group Tongda Group 1.2 PAX Global PAX Global 0.0 BYD Electronic BYD Electronic -0.1 GCL New Energy GCL New Energy 0.9 Coolpad Group Coolpad Group -0.4

Millennium Pac NaN Millennium Pac

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 -70% -50% -30% -10% 10% 30% 50% 70% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return

What drove this Company in the last 5 years How it looks on the Alpha model Which factor score has had the greatest correlation with the company’s A more granular view of the underlying style scores that drive the alpha (higher is returns over the last 5 years. better) and the percentile rank relative to the sector and market. ⇐ Negatives Positives ⇒ Normalized Percentile relative Percentile relative Price to Book LTM 39% Score to sector(/519) to market(/563) Alpha Model Score 0.56 Price to Book FY1 38% Valuation -0.49 Price to Book NTM 35% Growth 0.09 Sales to EV FY0 22% Profitability -0.05 Earnings Momentum 0.25 ROIC FY0 -37% Price Momentum -0.02 Net Income Margin FY0 -37% Quality -0.30 Capital & Funding 0.03 Return on Equity FY0 -37% Liquidity -1.08 Change in PPE FY0 -38% Risk 0.02 Technicals & Trading 0.50 -40% -20% 0% 20% 40% 0 50 100 0 50 100 0 0 1 1

Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group ([email protected])

18 April 2016 22 Macquarie Research PAX Global

PAX Global (327 HK, Underperform, Target Price: HK$6.30) Interim Results 2H/15A 1H/16E 2H/16E 1H/17E Profit & Loss 2015A 2016E 2017E 2018E

Revenue m 1,763 1,343 1,855 1,514 Revenue m 2,871 3,199 3,604 4,016 Gross Profit m 633 495 684 554 Gross Profit m 1,092 1,179 1,320 1,462 Cost of Goods Sold m 1,130 848 1,171 959 Cost of Goods Sold m 1,778 2,019 2,284 2,555 EBITDA m 299 243 336 270 EBITDA m 554 579 643 708 Depreciation m 3 2 3 2 Depreciation m 5 5 6 6 Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0 Other Amortisation m 0 0 0 0 Other Amortisation m 0 0 1 1 EBIT m 296 241 333 268 EBIT m 549 573 637 701 Net Interest Income m 0 0 0 0 Net Interest Income m 0 0 0 0 Associates m 0 0 0 0 Associates m 0 0 0 0 Exceptionals m 0 0 0 0 Exceptionals m 0 0 0 0 Forex Gains / Losses m 0 0 0 0 Forex Gains / Losses m 0 0 0 0 Other Pre-Tax Income m 64 40 56 44 Other Pre-Tax Income m 109 96 105 116 Pre-Tax Profit m 360 281 388 312 Pre-Tax Profit m 658 669 742 817 Tax Expense m -49 -34 -47 -41 Tax Expense m -38 -82 -98 -112 Net Profit m 311 247 341 270 Net Profit m 620 588 644 705 Minority Interests m 0 0 0 0 Minority Interests m 0 0 0 0

Reported Earnings m 311 247 341 270 Reported Earnings m 620 588 644 705 Adjusted Earnings m 311 247 341 270 Adjusted Earnings m 620 588 644 705

EPS (rep) ¢ 28.0 22.2 30.3 24.0 EPS (rep) ¢ 55.5 52.5 57.2 62.7 EPS (adj) ¢ 28.0 22.2 30.3 24.0 EPS (adj) ¢ 55.5 52.5 57.2 62.7 EPS Growth yoy (adj) % 59.2 -19.2 8.2 8.2 EPS Growth (adj) % 55.8 -5.4 9.0 9.6 PE (rep) x 12.9 13.7 12.6 11.5 PE (adj) x 12.9 13.7 12.6 11.5

EBITDA Margin % 17.0 18.1 18.1 17.9 Total DPS ¢ 4.0 4.4 4.9 5.5 EBIT Margin % 16.8 17.9 17.9 17.7 Total Div Yield % 0.6 0.6 0.7 0.8 Earnings Split % 50.2 42.0 58.0 42.0 Basic Shares Outstanding m 1,112 1,125 1,125 1,125 Revenue Growth % 28.9 21.3 5.2 12.7 Diluted Shares Outstanding m 1,118 1,118 1,125 1,125 EBIT Growth % 41.5 -4.7 12.4 11.1

Profit and Loss Ratios 2015A 2016E 2017E 2018E Cashflow Analysis 2015A 2016E 2017E 2018E

Revenue Growth % 21.0 11.4 12.7 11.4 EBITDA m 554 579 643 708 EBITDA Growth % 39.6 4.6 11.1 10.0 Tax Paid m -69 -82 -98 -112 EBIT Growth % 39.7 4.5 11.1 10.0 Chgs in Working Cap m -315 -303 -117 -137 Gross Profit Margin % 38.1 36.9 36.6 36.4 Net Interest Paid m 0 0 0 0 EBITDA Margin % 19.3 18.1 17.9 17.6 Other m 147 74 81 88 EBIT Margin % 19.1 17.9 17.7 17.5 Operating Cashflow m 317 269 509 546 Net Profit Margin % 21.6 18.4 17.9 17.6 Acquisitions m -1 0 0 0 Payout Ratio % 7.2 8.5 8.6 8.8 Capex m -5 -8 -8 -8 EV/EBITDA x 10.5 10.2 9.2 8.4 Asset Sales m 0 0 0 0 EV/EBIT x 10.6 10.3 9.3 8.5 Other m -1 22 24 29 Investing Cashflow m -8 14 16 21 Balance Sheet Ratios Dividend (Ordinary) m -22 -44 -50 -55 ROE % 22.1 17.5 16.4 15.5 Equity Raised m 0 0 0 0 ROA % 14.8 13.1 12.6 12.0 Debt Movements m 0 0 0 0 ROIC % 84.3 53.7 44.5 44.4 Other m 18 0 0 0 Net Debt/Equity % -69.7 -65.8 -67.8 -69.2 Financing Cashflow m -4 -44 -50 -55 Interest Cover x nmf nmf nmf nmf Price/Book x 2.6 2.2 1.9 1.7 Net Chg in Cash/Debt m 226 238 475 512 Book Value per Share 2.8 3.2 3.7 4.3 Free Cashflow m 312 261 501 538

Balance Sheet 2015A 2016E 2017E 2018E

Cash m 2,153 2,391 2,866 3,378 Receivables m 1,261 1,486 1,674 1,865 Inventories m 562 683 773 864 Investments m 0 0 0 0 Fixed Assets m 12 15 17 19 Intangibles m 0 0 0 0 Other Assets m 92 92 92 92 Total Assets m 4,080 4,666 5,421 6,218 Payables m 711 1,030 1,191 1,336 Short Term Debt m 0 0 0 0 Long Term Debt m 0 0 0 0 Provisions m 0 0 0 0 Other Liabilities m 279 2 2 2 Total Liabilities m 990 1,032 1,193 1,338 Shareholders' Funds m 3,078 3,621 4,216 4,866 Minority Interests m 13 13 13 13 Other m 0 0 0 0 Total S/H Equity m 3,091 3,634 4,229 4,879 Total Liab & S/H Funds m 4,080 4,666 5,421 6,218

All figures in HKD unless noted. Source: Company data, Macquarie Research, April 2016

18 April 2016 23 Macquarie Research PAX Global Important disclosures: Recommendation definitions Volatility index definition* Financial definitions Macquarie - Australia/New Zealand This is calculated from the volatility of historical All "Adjusted" data items have had the following Outperform – return >3% in excess of benchmark return price movements. adjustments made: Neutral – return within 3% of benchmark return Added back: goodwill amortisation, provision for Underperform – return >3% below benchmark return Very high–highest risk – Stock should be catastrophe reserves, IFRS derivatives & hedging, expected to move up or down 60–100% in a year IFRS impairments & IFRS interest expense Benchmark return is determined by long term nominal – investors should be aware this stock is highly Excluded: non recurring items, asset revals, property GDP growth plus 12 month forward market dividend speculative. revals, appraisal value uplift, preference dividends & yield minority interests Macquarie – Asia/Europe High – stock should be expected to move up or Outperform – expected return >+10% down at least 40–60% in a year – investors should EPS = adjusted net profit / efpowa* Neutral – expected return from -10% to +10% be aware this stock could be speculative. ROA = adjusted ebit / average total assets Underperform – expected return <-10% ROA Banks/Insurance = adjusted net profit /average Medium – stock should be expected to move up total assets Macquarie – South Africa or down at least 30–40% in a year. ROE = adjusted net profit / average shareholders funds Outperform – expected return >+10% Gross cashflow = adjusted net profit + depreciation Neutral – expected return from -10% to +10% Low–medium – stock should be expected to *equivalent fully paid ordinary weighted average Underperform – expected return <-10% move up or down at least 25–30% in a year. number of shares Macquarie - Canada Outperform – return >5% in excess of benchmark return Low – stock should be expected to move up or All Reported numbers for Australian/NZ listed stocks Neutral – return within 5% of benchmark return down at least 15–25% in a year. are modelled under IFRS (International Financial Underperform – return >5% below benchmark return * Applicable to Asia/Australian/NZ/Canada stocks Reporting Standards). only Macquarie - USA Outperform (Buy) – return >5% in excess of Russell Recommendations – 12 months 3000 index return Note: Quant recommendations may differ from Neutral (Hold) – return within 5% of Russell 3000 index Fundamental Analyst recommendations return Underperform (Sell)– return >5% below Russell 3000 index return

Recommendation proportions – For quarter ending 31 December 2015 AU/NZ Asia RSA USA CA EUR Outperform 50.68% 61.04% 53.16% 47.90% 65.22% 43.59% (for global coverage by Macquarie, 5.33% of stocks followed are investment banking clients) Neutral 31.51% 24.66% 34.18% 47.70% 29.71% 34.62% (for global coverage by Macquarie, 5.02% of stocks followed are investment banking clients) Underperform 17.81% 14.30% 12.66% 4.39% 5.07% 21.79% (for global coverage by Macquarie, 3.78% of stocks followed are investment banking clients)

327 HK vs HSI, & rec history V US vs S&P 500, & rec history GPN US vs S&P 500, & rec history

(all figures in HKD currency unless noted) (all figures in USD currency unless noted) (all figures in USD currency unless noted)

354 HK vs HSI, & rec history

(all figures in HKD currency unless noted)

Note: Recommendation timeline – if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, April 2016

12-month target price methodology 327 HK: HK$6.30 based on a PER methodology V US: US$85.00 based on a DCF methodology GPN US: US$77.00 based on a DCF methodology 354 HK: HK$3.85 based on a PER methodology

Company-specific disclosures: V US: Macquarie Group Limited together with its affiliates, beneficially owns 1% or more of a class of common equity securities of Visa Inc. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures.

Date Stock Code (BBG code) Recommendation Target Price

18 April 2016 24 Macquarie Research PAX Global Target price risk disclosures: 327 HK: Challenges in its expansion in the emerging markets will affect its ability to grow its POS business. In addition, we are concerened that company may face slower growth on its home market, after sharp rise in POS penetration in the past few years. The results of operations may be materially affected by global economic conditions generally, including conditions in the financial markets, as well as rise in global competition for its products. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices V US: Adverse legislative and regulatory developments pose the greatest risk to our rating. GPN US: The loss of key bank referral relationships. Execution risk with regards to the implementation of its system conversion efforts. 354 HK: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures.

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18 April 2016 26

Asia Research Head of Equity Research Software and Internet Transport & Infrastructure Peter Redhead (Global – Head) (852) 3922 4836 Wendy Huang (Asia) (852) 3922 3378 Janet Lewis (Asia) (852) 3922 5417 Matt Nacard (Asia – Head) (852) 3922 1362 David Gibson (Asia) (813) 3512 7880 Azita Nazrene (ASEAN) (603) 2059 8980 Hillman Chan (China, Hong Kong) (852) 3922 3716 Corinne Jian (Taiwan) (8862) 2734 7522 Automobiles/Auto Parts Nitin Mohta (India) (9122) 6720 4090 Utilities & Renewables Janet Lewis (China) (852) 3922 5417 Nathan Ramler (Japan) (813) 3512 7875 Zhixuan Lin (China) (8621) 2412 9006 Prem Jearajasingam (Malaysia) (603) 2059 8989 Alan Hon (Hong Kong) (852) 3922 3589 Amit Mishra (India) (9122) 6720 4084 Oil, Gas and Petrochemicals Inderjeetsingh Bhatia (India) (9122) 6720 4087 Lyall Taylor (Indonesia) (6221) 2598 8489 Prem Jearajasingam (Malaysia) (603) 2059 8989 Takuo Katayama (Japan) (813) 3512 7856 James Hubbard (Asia) (852) 3922 1226 Karisa Magpayo (Philippines) (632) 857 0899 James Hong (Korea) (822) 3705 8661 Aditya Suresh (Asia) (852) 3922 1265 Duke Suttikulpanich (ASEAN) (65) 6601 0148 Commodities Banks and Non-Bank Financials Abhishek Agarwal (India) (9122) 6720 4079 Colin Hamilton (Global) (4420) 3037 4061 Matthew Smith (China) (8621) 2412 9022 Polina Diyachkina (Japan) (813) 3512 7886 Ian Roper (65) 6601 0698 Suresh Ganapathy (India) (9122) 6720 4078 Anna Park (Korea) (822) 3705 8669 Jim Lennon (4420) 3037 4271 Lyall Taylor (Indonesia) (6221) 2598 8489 Isaac Chow (Malaysia) (603) 2059 8982 Lynn Zhao (8621) 2412 9035 Keisuke Moriyama (Japan) (813) 3512 7476 Pharmaceuticals and Healthcare Matthew Turner (4420) 3037 4340 Leo Nakada (Japan) (813) 3512 6050 Rakesh Arora (9122) 6720 4093 Chan Hwang (Korea) (822) 3705 8643 Abhishek Singhal (India) (9122) 6720 4086 Gilbert Lopez (Philippines) (632) 857 0892 David Lee (Korea) (822) 3705 8686 Economics Thomas Stoegner (Singapore) (65) 6601 0854 Property Peter Eadon-Clarke (Global) (813) 3512 7850 Dexter Hsu (Taiwan) (8862) 2734 7530 Larry Hu (China, Hong Kong) (852) 3922 3778 Passakorn Linmaneechote (Thailand) (662) 694 7728 Tuck Yin Soong (Asia, Singapore) (65) 6601 0838 Tanvee Gupta Jain (India) (9122) 6720 4355 Conglomerates David Ng (China, Hong Kong) (852) 3922 1291 Kai Tan (China, Hong Kong) (852) 3922 3720 Quantitative / CPG Gilbert Lopez (Philippines) (632) 857 0892 Raymond Liu (China, Hong Kong) (852) 3922 3629 Gurvinder Brar (Global) (4420) 3037 4036 Wilson Ho (China) (852) 3922 3248 Consumer and Gaming Woei Chan (Asia) (852) 3922 1421 Abhishek Bhandari (India) (9122) 6720 4088 Anthony Ng (Asia) (852) 3922 1561 Linda Huang (China, Hong Kong) (852) 3922 4068 William Montgomery (Japan) (813) 3512 7864 Danny Deng (Asia) (852) 3922 4646 Kai Tan (China) (852) 3922 3720 Aiman Mohamad (Malaysia) (603) 2059 8986 Per Gullberg (Asia) (852) 3922 1478 Zibo Chen (Hong Kong) (852) 3922 1130 Kervin Sisayan (Philippines) (632) 857 0893 Amit Mishra (India) (9122) 6720 4084 Corinne Jian (Taiwan) (8862) 2734 7522 Strategy/Country Fransisca Widjaja (Singapore) (65) 6601 0847 Patti Tomaitrichitr (Thailand) (662) 694 7727 Viktor Shvets (Asia, Global) (852) 3922 3883 Hendy Soegiarto (Indonesia) (6221) 2598 8369 Resources / Metals and Mining Chetan Seth (Asia) (852) 3922 4769 Toby Williams (Japan) (813) 3512 7392 Peter Eadon-Clarke (Japan) (813) 3512 7850 HongSuk Na (Korea) (822) 3705 8678 Rakesh Arora (India) (9122) 6720 4093 David Ng (China, Hong Kong) (852) 3922 1291 Karisa Magpayo (Philippines) (632) 857 0899 Stanley Liong (Indonesia) (6221) 2598 8381 Erwin Sanft (China, Hong Kong) (852) 3922 1516 Polina Diyachkina (Japan) (813) 3512 7886 Emerging Leaders Rakesh Arora (India) (9122) 6720 4093 Anna Park (Korea) (822) 3705 8669 Lyall Taylor (Indonesia) (6221) 2598 8489 Jake Lynch (China, Asia) (852) 3922 3583 Technology Chan Hwang (Korea) (822) 3705 8643 Aditya Suresh (Asia) (852) 3922 1265 Gilbert Lopez (Philippines) (632) 857 0892 Neel Sinha (ASEAN) (65) 6601 0562 Damian Thong (Asia, Japan) (813) 3512 7877 Conrad Werner (Singapore) (65) 6601 0182 Timothy Lam (Hong Kong) (852) 3922 1086 Allen Chang (852) 3922 1136 Jeffrey Ohlweiler (Taiwan) (8862) 2734 7512 Mike Allen (Japan) (813) 3512 7859 (China, Hong Kong, Taiwan) Alastair Macdonald (Thailand) (662) 694 7753 Kwang Cho (Korea) (822) 3705 4953 Nitin Mohta (India) (9122) 6720 4090

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