Company: PAX GLOBAL TECHNOLOGY Ltd. (327)
Sector: Technology Hardware
Price (June 5th, 2020): HK$3
Target price (12m): HK$4.5
Expected Share Price Return: 50%
Dividend Yield: 3.3%
Investment Risk: Medium
Market Cap.: HK$3.25bn (US$412m)
Rationale for investment
- Riding on the global cashless trend, accelerate the overseas business and boost PAX’s market share
- The stock is traded at 5.3x P/E discounted by a half versus the industry P/E and pays regular dividends
- POS terminals market is poised to grow at a CAGR of about 9% during the period 2021-2024
Profile
PAX Global Technology Limited (PAX) is a leading international supplier of secure electronic payment terminal hardware and transactional software services listed in Hong Kong. Headquartered in Hong Kong, PAX runs R&D and operational center mainly in Shenzhen, China and has subsidiaries in Florida – USA, Milan – Italy, Japan and India. PAX develop and sells countertop and mobile EFT-POS terminals which are able to process a wide range of electronic payment types.
Valuation
POS terminals market is estimated to grow at a CAGR of about 9% during the period 2021-2024. PAX revenues increased 12% to HK$4.93B ($636m) and net income increased 19% to HK$624m ($80m) in 2019. I expect flattish top line and profit in 2020 due to Covid19 disruption and 10% p.a. growth for 2021-2024. Operating margin stays around 15%. Company is currently trading at an undemanding 5.3x P/E and 0.69 P/B multiples, while the industry is trading at 10x PE and 2.4 P/B. I believe higher P/E valuation multiple is justified for the third largest POS global provider in a fragmented industry. I believe 8x P/E multiple is justified against 2020 earnings a 20% discount to the peers for producing in China. I estimate net income of HK$630m ($80m) in 2020. I set PAX target price at HK@4.5 based on a P/E of 8x 2020 earnings.
Investment Risks
- Trade war between China and US may disrupt supply chains;
- Corporate governance and policy issues in China may keep the stock at lower valuation for long time;
- Competitors enter the space in a fragmented industry and execute better.
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