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PAX Global (327 HK) Alex Ng Marley Ngan Time for Harvest: U.S Monday, January 25, 2016 China Merchants Securities (HK) Co., Ltd. Company Report Hong Kong Equity Research PAX Global (327 HK) Alex Ng Marley Ngan 852-3189 6125 852-31896635 Time for harvest: U.S. sales to double in FY16E [email protected] [email protected] ■ Ready to take on Verifone and Ingenico in U.S. market with newly rollout multilane terminals PX5/PX7 ■ Positive on FY16E overseas growth (CMS est. +27%YoY): U.S. sales WHAT’S NEW to double, APAC to remain strong, Middle East leadership to maintain N/A ■ Maintain BUY with TP HK$12.0, based on 15.5x FY16E ex-cash P/E plus HK$2.63 cash BUY Multilane products rollout marks a major breakthrough in U.S. PAX announced in analyst briefing held on 22 Jan that its high-end multilane Previous BUY terminals PX5/PX7 shipment will commence next week with first batch of 1,000 Price HK$6.97 units per week to a tier-1 merchant in U.S. Management is confident to achieve triple-digit growth in sales (in U.S. market), backed by its salesforce expansion 12-month Target Price HK$12.00 (+72%) plan – doubling sales and marketing team size from 65 to 130 in FY16E. We (Potential upside) believe the multilane terminals rollout marks a major breakthrough in the highly- concentrated market (Verifone + Ingenico = 85% of market share in U.S.) and we Previous HK$12.00 are positive on PAX to gain shares from the top-2 players given PAX’s edges on 1) shorter time-to-market, 2) flexible web-based integrated platform for centralized Price Performance terminal management 3) most cost-effective and secure payment solution (%) 327 HSI Index resulting in better margins for acquirers. We estimate multilane ASP to range 100 from US$300-500 with GPM at 50% or above (vs. CMS est. FY15E GPM of 38%). We expect U.S. sales contribution to be 4%/6%/8% in FY15E/16E/17E. 50 Robust overseas growth remains intact Apart from U.S., PAX believes sales growth in other overseas regions will remain 0 strong in FY16E. For APAC region, although China market remains a concerns (CMS est. +9.6%YoY in FY16E), PAX sees sales picking up in other countries -50 including Malaysia/Indonesia/India. While for Middle East, PAX is confident to Jan/15 May/15 Sep/15 Dec/15 maintain a leadership position with market share >15% (vs. No. 1 Verifone share at 16%). We estimate overseas sales growth of +27%YoY in FY16E with sales Source: Bigdata contribution of over 53%. For currency concerns, PAX expect benefits from USD- % 1m 6m 12m 327 HK (25.4) (51.6) (12.9) denominated overseas sales to offset sales weakness in China amid RMB HSI (14.9) (27.4) (23.9) depreciation, and thus overall impact will be minimal. Maintain BUY with TP of HK$12.0 Industry: Hardware Technology Trading at 7.2x ex-cash FY16E P/E, 54% discount vs. global peers, the stock is Hang Seng Index 19081 oversold and we maintain BUY with TP of HK$12.0, based on 15.5x ex-cash HSCEI 8105 FY16E P/E plus HK$2.63 cash. Our TP implies 24% discount to global No. 1 Key Data Ingenico given higher sales exposure in China and lower recurring income. 52-week range (HK$) 5.79-14.2 Downside risks include product launch delay and weak China sales. Market cap (HK$ mn) 7751 Avg. daily volume (mn) 7.76 Financials BVPS (HK$) 2.59 Shareholdings Structure HK$ mn 2013 2014 2015E 2016E 2017E Hi Sun Technology (818 HK) 32.9% Revenue 1,472 2,373 2,811 3,310 3,922 FMR LLC 6.2% No. of shares outstanding (mn) 1,112 Growth (%) 12% 61% 18% 18% 18% Free float 60.9% Net profit 227 392 569 668 791 Growth (%) 24% 73% 45% 17% 18% Related Research EPS (HK$) 0.22 0.36 0.51 0.60 0.71 1. PAX Global (327 HK) – Implications of Heartland Payment acquired by Global Payments DPS (HK$) 0.00 0.00 0.04 0.06 0.07 (18/12/2015) 24.5 14.3 9.0 7.2 5.1 Ex-cash P/E (x) 2. PAX Global (327 HK) – Positives in China: P/B (x) 3.5 3.0 2.5 2.1 1.8 Smart POS and stringent mPOS policy (10/12/2015) ROE (%) 11% 15% 19% 18% 18% Sources: Company data, CMS (HK) estimates Please see penultimate page for additional important disclosures. China Merchants Securities (CMS) is a foreign broker-dealer unregistered in the USA. CMS research is prepared by research analysts who are not registered in the USA. CMS research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities, an SEC registered and FINRA-member broker-dealer. 1 Monday, January 25, 2016 Focus charts Figure 1: FY15E-17E revenue CAGR: 18% with Figure 2: We expect U.S. market sales contribution increasing overseas exposure to reach 8% by FY17E HKD mn 100% 1% 4% 5,000 70% 2% 13% 13% 14% 15% 8% 3% 3% 2% 4% 4% 5% 60% 80% 6% 4,000 17% 13% 12% 8% 11% 50% 10% 60% 14% 12% 11% 10% 3,000 59% 40% 55% 40% 2,000 52% 30% 42% 67% 20% 55% 56% 54% 53% 29% 20% 1,000 41% 58% 48% 45% 10% 71% 0 0% 0% 2013 2014 2015E 2016E 2017E 2013 2014 2015E 2016E 2017E China APAC ex China Middle East/ Africa China Overseas Total revenue YoY US Europe Latin America Source: Company, CMS(HK) estimates Source: Company, CMS(HK) estimates Figure 3: U.S. POS shipment market share Figure 4: Top 3 players POS shipment globally Unit mn 100% 20 65% 21% 29% 26% 29% 80% 3% 3.0 0% 2% 15 60% 12% 2% 11% 27% 60% 17% 1.3 2.1 5.5 10 0.9 55% 40% 5.2 4.2 0.5 4.4 60% 61% 3.2 51% 49% 5 9.1 50% 20% 5.7 6.7 4.1 4.8 0% 0 45% 2010 2011 2012 2013 2014 2011 2012 2013 2014 VeriFone Ingenico PAX Others Ingenico (France) VeriFone (U.S.) PAX Technology (China) Top 3 market share Source: Nilson report, CMS(HK) Source: Nilson report, CMS(HK) Figure 5: PAX’s multilane terminal PX7 was Figure 6: PAX provides retailers with a web-based showcased in Retail’s Big Show 2016 in NYC app for centralized terminal management such that performance of each terminal can be monitored Source: Company CMS(HK) Source: Company, CMS(HK) To access our research reports on the Bloomberg terminal, type CMHK <GO> 2 Monday, January 25, 2016 Multilane PX5/PX7, major breakthrough in mature U.S. market We attended PAX’s analyst briefing held on 22 Jan related to U.S. market updates, below are the key takeaways: 1. Multilane products rollout in U.S. marks a major breakthrough in mature market Management announced the first batch of multilane terminal shipment will commence next week with 1,000 units shipment per week to a tier-one merchant. Given a market size of 2mn POS terminal shipment per year with 40% being high-end multilane products in the U.S., we believe the multilane products mark a major breakthrough in the mature market, dominated by Ingenico and Verifone with combined market share of 85% in U.S. We estimate ASP per multilane terminal to range from US$300-500 with GPM at least 30% higher than Group’s average (CMS est. FY15E GPM: 38%). As there are still several pilot programs for tier-one merchants in the pipeline, according to management, we are positive that PAX will continue to gain shares from Verifone amid EMV migration. 2. Robust overseas growth intact in FY16E with U.S. sales growing at >100% PAX believes overseas sales will remain strong in FY16E. Especially in U.S., management targeted to achieve triple-digit sales growth and sales team size will be doubled from 65 to 130 in FY16E. For APAC regions, although China market remains a concern (CMS est. sales growth: +9.6%YoY in FY16E), management are positive on increasing demand from South-East Asia especially Malaysia (govt. targeted to triple POS terminal install base) and Indonesia (PAX has partnered with major bank BRI since 2015). For Middle East, PAX is confident to maintain a leadership position with market share >15% (vs. No. 1 Verifone 16%). 3. Limited impact on RMB/BRL depreciation Regarding concerns on currency depreciation impact given PAX’s exposure in emerging market like Brazil, as all overseas sales are booked in USD while 60% of COGS is in RMB, RMB depreciation is an advantage for overseas business. Although China sales may be affected as the company’s reporting currency is HKD, management believes the combined currency impact will be minimal. Figure 7: Multilane terminals specs comparison PAX Global Ingenico Verifone Multilane (327 HK) (ING FP) (PAY US) Flagship model PX7 iSC Touch 480 MX925 Payment solution Mag-stripe/ EMV/ Pin debit/ Mag-stripe/ EMV/ Pin debit/ Mag-stripe/ EMV/ Pin debit/ NFC/ contactless/ mobile NFC/ contactless/ mobile NFC/ contactless/ mobile wallets wallets/ QR codes wallets Speical features • Finger signing is • Biometric measurement • Multi-use screen shows supported and thus stylus includeing signature transactions and offers pen is optional speed and pressure and the same time detection • Instant alert will be sent if • Privacy shield is optional privacy shield or stylus pen is removed • Visible contactless logo • Visible contactless logo • Business controls are separated from security logic: Applications do not have to be separately certified Source: Company CMS(HK) To access our research reports on the Bloomberg terminal, type CMHK <GO> 3 Monday, January 25, 2016 Figure 8: PAX revenue assumptions HK$m, Dec-YE 2013 2014 2015E 2016E 2017E Sales of electronic payment products 1,431 2,547 2,759 3,254 3,862 YoY 11.2% 62.4% 18.7% 17.9% 18.7% POS terminals 1,367 2,222 2,407 2,874 3,426 mPOS - 222 263 293 349 Consumer activated devices (PIN pads) 48 92 83 82 81 Contactless devices 16 12 6 5 5 Services 21 26 29 32 35 YoY 12.1% 27.8% 9.0% 10.0% 10.0% Others 20 22 23 24 25 YoY 167.6% 7.3% 5.0% 5.0% 5.0% Total revenue 1,472 2,595 2,811 3,310 3,922 YoY 12% 61% 18% 18% 18% Sources: Company, CMS(HK) estimates Figure 9: Development overview (EFT-POS/mPOS terminals) FY15E Region Vol YoY Country Developments EM APAC 28% China 2012 Selected as UnionPay POS solutions providers 2014 Shipment over 1.3m in 40+ cities 2015 Selected by Postal Savings Bank of China to supply full range of POS terminals HK 2003 Products certified by EPS network and won HSBC bid Indonesia 2014 Partnered with 3 major banks with market share >50% of total merchant transaction volume 2015 Selected by Bank Rakyat Indonesia (>10,000 merchants) India 2013 Shipped 10,000 contactless N.Zealand 2014 Selected as mPOS solutions provider of ASB Bank Korea 2001 Won first overseas deal in Korea Vietnam 2001 Entered the market Latin 19% Brazil 2013 Partnered with no.
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