20140801-京华山一-Domestic_POS_leader_to_go_global_11页_735kb

Domestic POS leader to go global

Core Content

PAX Global is a leading domestic POS terminal provider in China and is positioned to expand globally. The company is ranked as the third-largest global supplier of EFT-POS terminals, with a 9.2% market share in 2013. It is currently experiencing strong growth, with a forecasted 32.1% 3-year CAGR in net profit and a 27.7% CAGR in revenue. The report recommends initiating a BUY rating due to its competitive advantages and growth potential in both domestic and international markets.

Key Points

• Market Position: PAX is the third-largest global EFT-POS supplier, with a 9.2% market share.
• Global Expansion: Overseas business is expected to grow significantly, with a 51% 3-year CAGR in revenue. This growth will increase the contribution of overseas revenue from 29% in FY13 to 48% by FY16F.
• Profitability: Overseas revenue has a higher gross margin (50%) and lower AR turnover days compared to domestic operations, improving working capital efficiency.
• NFC and Mobile Payment: NFC POS terminals are expected to gain traction due to industry standards, iPhone 6 compatibility, and initiatives from PBOC and UnionPay. PAX is targeting 60% NFC penetration in domestic markets.
• Downstream Integration: PAX is moving towards becoming a comprehensive payment service provider by expanding into downstream services such as payment gateways, processors, and acquirers.
• Valuation: PAX is trading at 21.2x and 16.4x FY14F/15F PER, and 0.75x FY14F-16F PEG. The target price is set at HK$7.98, representing a 28.3x/21.8x PER and 1.0x PEG.
• Competitive Advantages: PAX benefits from lower engineering costs (80% less than in the US and Western Europe), a strong R&D focus (6% of sales), and a track record of passing international certifications.
• Product Innovation: PAX is developing MPOS and self-served POS terminals, which cater to micro merchants and emerging payment scenarios.

Key Financial Highlights

Growth Drivers

• EMV Migration in the US: Expected to increase US market share from 2% to 10% over 3 years. The enforcement of the Fraud Liability Shift policy is anticipated to drive adoption.
• PCI 3.0 Standards: Encouraging POS upgrades, which will increase demand for new terminals.
• MPOS and Self-Served POS: These products are well-positioned for growth, especially in emerging markets.
• 3rd Party Payment Providers: PAX is a major beneficiary of the growth in this sector, with over 60% of its shipments coming from third-party providers.
• Emerging Markets: Low penetration rates in countries like India, Indonesia, and Nigeria offer significant growth potential for PAX.

Investment View

• BUY Rating: The company is expected to outperform global peers in profit growth due to its strong overseas expansion and R&D capabilities.
• Valuation Premium: The current valuation is not demanding compared to its growth potential and that of its peers.
• Risk Factors: Potential setbacks in overseas expansion, slower industry standard upgrades, mobile wallet development not meeting expectations, economic slowdown, and challenges in maintaining relationships with EMS providers.

Summary of Market Share and Financials

Conclusion

PAX Global is well-positioned to capitalize on the global POS market expansion, particularly in the US and emerging markets, due to its competitive pricing, strong R&D focus, and strategic downstream integration. The company's growth trajectory and valuation make it an attractive investment opportunity.