PAX Global (0327.HK) - An Undervalued Chinese POS Manufacturer with Significant Growth Runway in Emerging Markets
This month, we decided to do a more in-depth dive into a Hong Kong-listed company due to its significant exposure to emerging markets. The time of recording was on 1 November 2022.
WHAT IS PAX GLOBAL?
PAX Global (0327.HK, “PAX”) is the second largest point of service (“POS”) supplier in the world – it supplies the physical hardware that collects the digital payments that are becoming increasingly common in our daily lives. The company is the number one supplier in rapidly growing emerging markets, such as Latin America, the Middle East, Africa, and developing APAC.
Podcast version also available on Spotify
PAX essentially operates as an R&D and wholesale outfit, primarily outsourcing manufacturing. This focus on R&D allows the company to keep abreast of the latest technological (e.g. contactless, QR codes, and biometrics) and regulatory dynamics (e.g. security, financial compliance, and data management) driving demand for payment terminals.
These developments mean that selling hardware such as payment terminals is by no means a one-off sale. In fact, merchants usually need to replace terminals every 3-5 years as the aforementioned technical and regulatory dynamics necessitate upgrades.
PAX benefits directly from the global shift to cashlessness. While this trend is well underway in developed markets, we are only seeing the beginning of this shift in emerging markets. Throughout the world, this global shift to cashlessness is mostly motivated by greater efficiencies in tax collection, combating crime, data collection, and as well in labour and accounting. This trend has only been accentuated by the COVID-19 pandemic and a heightened reluctance to handle cash. The trends driving pro-cashless policy are particularly pertinent in emerging markets, where governments grapple with a narrow tax base, money laundering, and corruption, and are generally encouraging a shift towards digital payments.
In terms of guidance, PAX is projected to achieve at least 15% YoY growth for FY22e and has traditionally been conservative in its estimates. We think there is a good chance for a surprise (beat). Notably, PAX did mention that 60% of their sales are now coming from the more sophisticated Android smart products, which are more profitable than traditional products, so this is helping drive a higher margin. PAX has a strong track record of capturing market share over the past several years to become the second-largest global player in a growing industry, which has yet to be reflected in the stock price today.
As for competitors, based on average consensus estimates on PAX, the stock is very cheap when considering its current earnings and growth trajectory. As mentioned in the video presentation/podcast, PAX presents one of the few proxies into the global POS market. PAX is the only listed company out of the other two top global POS producers (Ingenico and Verifone), which are no longer listed due to M&A activity. The other listed mainland Chinese companies are primarily concentrated in the highly competitive and low-margin China market, which PAX has pivoted away from. The necessary R&D capacity to keep abreast of the aforementioned regulatory and technological developments across varying markets presents a significant barrier to entry for PAX’s China-reliant peers.
VALUATION (TARGET RANGE)
Our target range for PAX’s stock is HKD 9.00-12.00. However, our view is that the stock could trade higher, due to several potential catalysts, such as faster-than-expected adoption rate of its new Android terminals, overseas expansion exceeding growth expectations, continued share buybacks and dividend increases. We do see risks in the business, such as a slower adoption rate of PAX’s products and services, a slower-than-expected sales growth and margin compression, and a failure to maintain an adequate dividend payout.
For further details on our deep dive on PAX, please refer to the video presentation, podcast or slides.
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