company research · pos in china is 324, much higher than uk’s 109 and us’s 171. by 3q14, there...

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Company Research Initiating Coverage

See the last page of this report for important disclosures

Pax Global Techn (327 HK) Blossom over the globe PAX Global (PAX) ranked as the third largest EFT-POS terminal vendor in the world in 2013. The company has further expanded its oversea business during 2014 and started harvesting from its efforts invested in the earlier years. The better business environment and the higher margin in the international markets will improve the fundamentals. Based on the bright growth prospects we initiate coverage with a BUY and a TP of HK$9.97.

Strong Growth from Latin America and EMEA markets. Orders from Brazil and Middle East surged in 1H14 and PAX’s oversea sales increased substantially by 125% from 1H13. The preliminary preparations such as product certifying and test use are undergoing in both developed and emerging markets, and PAX has sequentially announced the breakthroughs in some markets such as Argentina, Turkey and Venezuela in 2014. We expect the orders from these countries will contribute to the oversea sales from 2015 onward. Penetration accelerating in developed countries. Growth in developed countries mainly attribute to two sides. Firstly, the EMV migration in US is will accelerate in 2015 with the approaching of the deadline of liability shift set by the credit card networks (Visa and MasterCard). Based on the forecast made by US acquirers of the penetration rate of the EMV capable POS terminals, we estimate over 6mn units of terminals in US will be upgraded to be EMV capable by the end of 2015. PAX’s team in US is set to capture this POS replacement opportunity. The second growth driver comes from the penetration into European countries, which have high demand for POS terminals (UK, Italy and Germany). New policy opens up middle and west regions in China. The ‘One Belt and One Road’ policy opens up the middle and west regions of China. The increased business activity will also lead to a higher demand for non-cash payment and thus increases the POS terminal sales. The number of bankcard per POS in China is 324, much higher than UK’s 109 and US’s 171. By 3Q14, there are 14.7m connected POS terminals and ~49m merchants in China, indicating a 30% POS adoption rate, less than US’s 63.5% and Canada’s 78.1%. We believe the domestic market is yet well penetrated and there is room for the market of POS terminal to double in the future. Valuation: HK$9.97 DFC-based price target (g 2%, WACC 11%) We initiate coverage on PAX Global with a BUY rating and a target price of HK$ 9.97. The company is currently trading on 17x FY15 earnings, which is at 37% discount to peers’ average FY15 PE of 27.1x. Our TP implies a FY15 PE of 22.7x, which leaves 16% discount to the average PE. Based on a WACC of 11% and a 2% terminal growth of the FCFF, our DCF model yields an equity value of HK$9.97 per share by end-2015, providing an upside potential of 31%.

Figure 1: Financial Summary

Year to Dec 31 (HK$mn) 2012A 2013A 2014E 2015E 2016E

Revenue 1,313 1,472 2,115 2,582 3,234 Operating Profit 211 251 450 536 667 Underlying Profit 183 227 397 473 589 Underlying EPS (HKD) 0.18 0.21 0.37 0.44 0.52 BVPS (HKD) 1.74 1.94 2.34 2.79 3.19 P/E (x) 43.4 36.2 20.6 17.4 14.7 P/B (x) 4.4 3.9 3.3 2.7 2.4 ROE (%) 10.7 11.6 17.3 17.2 17.8

Source: Guosen Securities(HK)

Hong Kong Technology Hardware

28 January 2015 BUY Target price HK$9.97

Last price (28 Jan 15) HK$7.64 Upside/downside (%) 30.5 HSI 24861.81 Mkt cap (HK$bn/US$bn) 8.4/1.1 52 week range (HK$) 3.30 - 9.50 Avg trading volume daily (US$mn) 5.6 Free float (%) 57.9% Source: Bloomberg Performance

Performance 1M 3M 12M Absolute (%) (6.0) (2.4) 117.7 Absolute (US$, %) (5.9) (2.4) 118.0 Relative to HSI (%) (12.5) (8.1) 104.5 Source: Bloomberg

Company background PAX Global Technology Ltd. is an electronic fund transfer point-of-sale (EFT-POS) terminal solutions provider. The Company principally engaged in the development and sale of EFT-POS products and provision of related services. PAX develop and sells countertop and mobile EFT-POS terminals which are able to process a wide range of electronic payment types. Source: Bloomberg

Max Gan, CFA SFC CE No.: BDA494 +852 2899 3145 [email protected]

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公司报告首次覆盖

研究报告仅代表分析员个人观点，请务必阅读正文之后的免责声明。

百富环球 (327 HK) 花开满地百富环球(百富)在 13 年一跃成为世界第三大的金融电子支付终端

机供货商。公司在 14 年继续深耕开拓海外市场，并已由先期投入的一些新兴市场开始收获大量订单。海外较于国内更优的商业环境

和更高的利润率将会不断提升百富的基本面。鉴于公司广阔的前景我们首次覆盖给予买入评级和 9.97 港币的目标价。

新兴市场布局基本完成，拉美与 EMEA 市场的增长显著百富过去几年在新兴国家布局的成果开始显现。先期准备工作如各级安全

认证，软件定制开发与产品测试在各个国家均逐渐完成，预计百富海外的出货量将进入上升通道。百富 14 年上半年海外销售额同比增长 125%，巴西与中东国家的出货量在 14 年出现井喷式增长，得益于便携式 POS 机的畅销，公司一举成为当地领先 POS 机供应商。同时今年百富在其他新兴市场如阿根廷，委内瑞拉，土耳其，印尼与非洲多国均获得不同程度上的扩张，未来出货量增加可期。因此我们预计未来 2 年海外的收入将以约 30%

的速度增长。海外发达国家市场渗透速度开始加快在发达国家的增长因素主要来自两方面，其中美国 EMV 迁移所带来的市场机会巨大。我们认为美国在 2015 年开始 POS 机升级与换机速度将会加快，因于 Visa 与 Master 在 15 年 10 月以后将盗卡所产生的损失转嫁到非 EMV标准的商户或收单机构。由于美国在 EMV 标准上在全球较为落后，使得近

几年盗卡和相关信用卡犯罪率逐渐升高。美国收单行业公司预期在 15 年底将有近一半的 POS 机将符合 EMV 标准，按照 13 年底的统计数据，我们认为在 14-15 年将需要升级近 600 万台，为新进入市场的百富带来机会。公司聘请了当地的软件工程师专为其美国的产品做应用开发，并已获得相关的认证。第二，百富在西欧的业务也逐渐展开，已在英国，意大利与德国等传统 POS 机需求大的市场获得所需认证。我们预计在美国与西欧国家

的出货量在今后几年会增长迅速。国内中西部及三四线城市 POS 市场广阔我们认为一路一带政策将会提升中西部城市的商业活动，同时亦带动商户对非现金支付需求的上升，对 POS 机产业是一利好。国内市场总体的 POS机渗透率仍远未饱和。截止 14 年第三季度，平均每台 POS 机对应 324 张银行卡，高于英国的 109 张与美国的 171 张。全国现有 1470 万台 POS 和

4900 万家商户，渗透率约为 30%，远低于美国的 63.5%和加拿大的 78.1%。我们相信国内市场仍有增长一倍以上的空间。高于行业增长率与较低的市盈率，首次覆盖目标价 HK$9.97. 百富的收入增长高于 POS 行业的平均增长率并较平均市盈率有近 37%的折让。基于海外增长的前景明确与国内的平稳向上的持续趋势，我们首次覆盖公司并给予买入评级和 9.97 港元的目标价，隐含 15 年市盈率为 22.7

倍，并在未来 12月提供约 31%的潜在上升空间。

Figure 2: 盈利预测

截至 Dec 31 (港元百万) 2012A 2013A 2014E 2015E 2016E

营业额 1,313 1,472 2,115 2,582 3,234 经营盈利 211 251 450 536 667 实际盈利 183 227 397 473 589 每股实际盈利 (HKD) 0.18 0.21 0.37 0.44 0.52 每股账面价值 (HKD) 1.74 1.94 2.34 2.79 3.19 市盈率 (x) 43.4 36.2 20.6 17.4 14.7 市净率 (x) 4.4 3.9 3.3 2.7 2.4 净资产收益率 (%) 10.7 11.6 17.3 17.2 17.8

资料来源：国信证券(香港)

香港科技

硬件

2015 年 1月 28 日买入目标价 HK$9.97

收盘价 (28 Jan 15) HK$7.64 Upside/downside (%) 30.5 恒生指数 24861.81 总市值 (HK$/US$bn) 8.4/1.1 52 周最高/最低 (HK$) 3.30 - 9.50 日均成交额 (US$mn) 5.6 流通量 (%) 57.9% 资料来源: 彭博

股价表现

股票数据 1M 3M 12M

绝对回报 (%) (6.0) (2.4) 117.7 绝对回报 (US$, %) (5.9) (2.4) 118.0 相对 HSI 回报 (%) (12.5) (8.1) 104.5 资料来源: 彭博

公司簡介

百富环球科技有限公司是一家电子支付(EFT-POS)终端机解

决方案供货商。该公司主要从事开发及销售 EFT-POS 产品

并提供相关服务。百富研制和销售能够处理多种类型电子支付范围的台面和移动电子支付终端机。

资料来源: 彭博

甘中辉, CFA 证监会中央编号:BDA494 +852 2899 3145 [email protected]

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Pax Global Techn (327 HK) Max Gan, +852 2899 3145, [email protected]

Guosen Securities (HK) 3

Strong Growth from Latin America and EMEA markets Outstanding 1H14 results achieved in oversea markets

In 1H14, sales from oversea markets increased substantially by 124% to HK$452.8mn from HK$201.7mn in 1H13. The company started harvesting the seeds planted in the emerging markets. Sales in Brazil and Middle East countries were outstanding in 1H14 and the momentum is expected to continue in 2H14 and onward. In particular, the Rio 2016 Summer Olympic Games will also contribute to the growth for POS terminal sales in Brazil.

PAX has been building up sales network in EMs and strengthening relationships with existing distributors in the domestic market in China. In addition to its competitive pricing, its wide product range, superior technical support service and high security standard helps it entering new markets in both developed and developing countries. We believe the 2015-17 CAGR from oversea sales would be ~25%. PAX’s oversea sales accounted for 45% of the total sales in 1H14, which is close to its target of 50%.

Figure 3 Interim Sales Growth in Domestic and Oversea Markets (YoY%)

Source: Guosen Securities(HK) Research

Figure 4 Annual sales of PAX(HK$'mn) Figure 5 Revenue Composition (%)

Source: Guosen Securities(HK) Research Source: Guosen Securities(HK) Research

PAX becomes the leading POS terminal provider in Latin America

According to Nelson’s report, PAX has shipped 29,000 units to Latin America in 2013, which only accounted for 1.4% of its total shipment of the year. Brazil has an advanced electronic payment environment among the developing countries and a large group of small and medium merchants. This particular market brings opportunities to PAX’s mobile POS solutions (MOPS), a small size POS that work together with smart device (smartphone or tablet).

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The shipment to Brazil and Middle East region surged during 2014



In Nov 2013, CIELO (a leading company in merchant acquiring and payment processing industry in Brazil) selected PAX’s MPOS model D-series for its mobile solution. It is estimated over 500k MPOS have been shipped to Brazil in 2014. The ramp up in sales partly attribute to the Brazilian World Cup. We believe the shipment during 2H14 would be lower than 1H14, and remains steady in 2015, then ramp up again in 2016 ahead of the Rio Summer Olympic Games. As a reference, 107,870 and 278,700 units of POS terminals installed in the U.K. during 2011 and 2012 thanks to the Summer London Olympic, comparing to 73,520 units in 2010.

The shipment to other Latin American countries will increase their revenue contribution in 2015. In Nov. 2014, PAX announced its co-operation with a local Venezuelan distributor to offer payment solution to the largest processor in Venezuela, CONCORCIOCREDICARD. Similar breakthrough took place in Argentina. In December 2014, PAX announced their first order from LAPOS was fulfilled. LAPOS is a local payment service company set up by Visa Argentina. Those local distributors help PAX to fulfill all the specific security requirements and develop terminal software for processors and acquirers. PAX will also be able to leverage upon distributor’s existing sales channel in the local market to expand its business. Therefore, we expect to see a surge in shipments to LatAm for 2014. The 1H14 result has reflected the rapid increase in oversea sales already.

Figure 6 POS Terminal shipment in Latin America Figure 7 Market Share in Latin America in 2013

Rank Region Shipment in 2013(Unit)

Latin America 3,036,556 1 Ingenico 1,307,000 2 VeriFone 950,000 3 Castles Tech. 221,400 4 CyberNet 162,000 5 Yarus 130,000 9 PAX 28,858

Other 237,298

Source: Guosen Securities(HK) Research, Nilsen Report

PAX maintains its solid position in MEA region

PAX has been a top POS vendor in the MEA region. In 2011, PAX has shipped over 150k POS units to Iran and we expect shipments would double in 2014. We believe the geographical factor have contributed to the shipment increase as local service provider would select companies that is more stable in providing products and services in the long term.

Turkey will also be a growth driver in the coming years. The Ministry of Finance in Turkey requires POS terminals to be able to connect to the tax authorities and all transactions should be recorded in the fiscal memory of the device. It will drive the replacement of the existing 3m terminals in Turkey on top of the ~440k units new installments each year.

Figure 8 POS Terminal shipment in MEA Figure 9 Market Share in MEA in 2013

Rank Region Shipment in 2013(Unit)

Middle

Ease/Africa 2,130,040

1 Bitel 607,700 2 VeriFone 395,000 3 Castles Tech 275,000 4 Ingenico 210,000 5 PAX 172,670

Other 469,670


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Figure 10 PAX's activities and achievements in emerging markets throughout 2014

Emerging Markets PAX activities Annoucement Date Expected shipment

ramp-up period

Argentina

Filled the first order from LAPOS, a local payment service company set up by Visa Argentina. The achievement was a result of the co-operation with First System S.R.L., which is the software provider of Visa Argentina as well as banks and card associations in Argentina. PAX designated First System as its exclusive sales agent in July 2014.

Dec. 29th 2015 onward

Venezuela To team up with local Venezuelan distributor to offer payment solution to CONSORCIOCREDICARD, C.A., the largest processor in Venezuela.

Nov.27th 2015 onward

Russia

PAX to launch a brand new fiscal E-payment Terminal throughout Russia and the Commonwealth Independent States (“CIS”) region with INPAS, one of the largest suppliers of payment solutions for banks and retail in Russia.

Nov.17th Late 2015

Middle America Becomes the leading EFT-POS provider in central America, with more than 40k units installed in the past three years, mainly in Panama and Nicaragua.

Oct.21st 2014 onward

Egypt over 20,000 units of PAX’s S90 mobile terminal will be deployed across multiple provinces in Egypt in an initiative by the Egyptian government to better regulate the distribution and management of food subsidies.

Sept. 29th late 2015

Turkey

Turkey recently legislated that all fiscal cash registers and E-payment Terminals have to be upgraded and combined to be part of a unified system. It necessitates the deployment of smart EMV PIN pads or even new types of fiscal E-payment Terminals to cater for such requirements.

Sept. 17th Late 2014

Indonesia PAX to launch cooperation with three major banks in Indonesia as a chosen technology enabler to help boost efficiency in non-cash transactions in the Indonesian market.

Sept. 1st late 2015

India Alliance with AGS TTL, a leading Indian ATM outsourcing and Payment Services Company, to provide EPOS in both urban and rural markets of India.

April 3rd late 2015

Barzil Partnering with UOL, the leading internet services and online content company in Brazil, who has more than 3000 retail POS software customers.

Mar. 3rd 2014 onward

Source: Guosen Securities(HK) Research Estimates, Company Information



Penetration accelerating in developed countries Deadline of liability shift is approaching

To encourage a more secured electronic payment environment, payment networks (Visa, MasterCard and Europay) established an association to advocate the EMV standard, which is also known as the ‘chips and pin’. Visa and MasterCard also set a roadmap to help US acquirers, processors and merchants support chip and mobile payment acceptance. Effective from 1 Oct 2015, the party who does not comply the EMV standard will be held financially liable for any resulting card-present counterfeit fraud losses. After a series of credit card breaches in large retailers like Home Depot and Target throughout 2014, we believe the retail industry will speed up the upgrade of their POS terminals to be EMV comlient before the rule becomes effective.

Terminal upgrade in the US provide a huge opportunity to new entrants

At the end of 2013, less than 3% of the POS terminals in the US were EMV enabled. According to a report of Knowledgefaber in May 2014, the installed base of POS terminal in the US is estimated at 13.9mn in 2013. A forecast made by US acquirers (representing 80% of U.S. purchasing volume) in October 2014, showed that at least 47% of U.S. merchant terminals will be enabled for EMV chip technology by the end of 2015. It indicates more than 6mn units of POS terminal could be upgraded to be EMV capable during 2014 and 2015. Base on the Nilsen report, there were 1.8mn units of POS terminal shipped to the U.S. during 2013 and PAX has shipped 35,453 units of it. During 2014, PAX has tripled its direct sales team in the U.S. and hired local software engineers to develop products that meet U.S. client’s requirements and needs. The transition to EMV will be a long-term process, which provides sustainable growth opportunity to new entrants like PAX.

Market consolidation create opportunities for PAX

Equinox, the second largest POS terminal solution provider in US, went bankrupt and got acquired by Canadian POS and payment service provider NBS Payment Solution in early 2014. Market consolidation creates opportunities for new players like PAX due to various factors such as conflict of interests and instability of product and service provision. POS clients also intend to induce competitions to maintain their bargaining power.

Apple Pay, another upgrade reason for merchants

NFC and Apple Pay also contribute to the terminal upgrade. Currently, consumers can use Apple Pay to complete the payment procedure in more than 40 merchants (~220k stores as referenced by Apple) in the U.S., including MacDonald’s, Whole Foods and Macy’s. The increasing adoptions of contactless and mobile POS will also be growth drivers for technology advanced POS vendors like PAX. The coming Apple Watch will improve the Apple Pay user experience further by leaning the watch near the terminal to complete the payment, instead of carrying the phone in hand.

Expansion in European developed countries poised to accelerate

PAX keeps penetrating into developed countries such as the U.K., Portugal, Italy and North European countries by providing a wide range of products and superior technical support.

PAX has been targeting European countries where the there is strong demand for POS terminal. During 2014, PAX announced its co-operation with local payment service providers in the UK, Portugal and Scandinavian Countries, such as Denmark, Iceland, Finland and Sweden, and indicate similar process is undergoing in Germany and Italy. We believe the sales in the highlighted countries in Figure 11 will ramp up in 2015.

PAX’s business expansion in developed countries start accelerating



Figure 11 Annual Net change of POS terminal number in major EU countries(Thousands unit)

2011 2012 2013 Germany 32.73 9.09 23.62 Spain (26.21) (46.56) (191.21) France 17.02 (43.73) (55.60) Italy 86.63 75.65 73.58 UK 107.87 278.70 14.64 North European Region* 83.58 (1.36) 37.12 Portugal (4.35) (14.25) (3.34)

Source: Guosen Securities(HK) Research, European Central Bank

Figure 12 POS Terminal shipment in Europe Figure 13 Market Share in Europe in 2013

Rank Region Shipment in

2013(Unit) Europe 4,413,914

1 Ingenico 2,300,000 2 VeriFone 1,209,000 3 Spire Payments 286,700 4 Worldline 119,740 5 CyberNet 118,000 6 Yarus 94,000 7 PAX 81,063 Others 205,411


Figure 14 present the actions initiated by PAX that will improve future shipment in the developed countries and regions.

Figure 14 Business Development Updates in developed countries and regions during 2014

Countries and Regions Announcement

data Expected shipment

ramp-up period

Hong Kong and Macau PAX has been selected as the exclusive EPOS provider for DFS Group outlet in Hong Kong and Macau.

Oct. 8th Late 2014

New Zealand PAX was selected as a MPOS solution provider pf ASB Bank, one of New Zealand's leading commercial banks

Oct. 13th 2015 onward

Portugal

PAX has passed SIBS certification in Portugal for its S800 countertop and S900 wireless E-payment Terminal models, and partnering with PETROTEC, a reputable payments systems integrator in Portugal.PAX's S800 and S900 models are ready for taking orders.

June 20th late 2014

UK PAX has expanded into the UK market and has jointly launched of a new E-payment Terminal offering for acquiring banks, processors and merchants in the UK with Optomany, a UK payments systems integrator.

June 3rd 2015 onward

North Europe

Jointly launched new secure POS solutions featuring PAX three new products adapted for the Scandinavian markets with Samport, a leading Scandinavian payments systems integrator. Samport will be able to broaden its offering to small and medium-sized customers, as well as increasing its competitiveness within specific industries such as transport and the retail trade.

April 22nd late 2014

Source: Guosen Securities(HK) Research Estimates, Company Information

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Domestic market yet to be well penetrated ‘One Belt and One Road’ policy opens up the middle and west regions of China

We forecast the sales growth in the domestic market of to be 21% / 19% in FY15 / FY16 as we expect the number of newly installed POS terminal is growing at a high speed. There are 14.7m units of POS terminal connected in 3Q14. The number of bankcards (both credit and debit cards in use) per POS terminal in China is 324, much higher than U.K.’s 109 and U.S.’s 171. Assume the number of bankcards remains steady at the current level, the POS terminal industry still has rooms to double, or even triple to match the level in developed countries.

In the US, about 63.5% merchants have adopted POS, and have about 1.9 POS terminals per store, where in Canada it is 78.1% and 2.13 POS, respectively. There are over 49m merchants in China and 14.7m connected POS terminals, which indicates a 30% POS adoption rate. We believe most of the POS installed are in Eastern China (43% of the total number of merchants), where most of the business activities taking place. Backed with the recent policy “One Belt and One Road”, the investment activities in Central and Western China (57% of the total number of merchants) will stimulate business activities and increase the demand for electronic payment, thus have a positive impact on the POS terminal industry. Therefore, we believe the domestic market is yet to be well penetrated and the number of connected POS terminal will be at least double in the next three to five years.

Figure 15 Number of connected POS terminal in China(mn unit) Figure 16 Newly added POS terminals in China(mn unit)

Source: Guosen Securities(HK) Research, Wind Source: Guosen Securities(HK) Research, Wind

Figure 17 number of card per POS terminal Figure 18 POS terminal adoption rate

Source: Guosen Securities(HK) Research, UK Cards Association, Wind, Statista Source: Guosen Securities(HK) Research, Knowledgefaber, MIIT

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The new ‘One Belt and One Road’ policy will stimulate the business activities in the tier3&4 cities in the middle and west regions of China



Paused third party payment service providers resume to business

PBOC temporary banned eight third party payment service providers, who deemed to be violating the regulations, to develop new clients from March 2014. Third party payment service providers compose a large portion of PAX’s client base in the last few years, thus a pause of developing new business also have a negative impact on PAX. We believe that, after the consolidation in 2014, the third party payment service industry will become more regulated. Those third party service providers who banned for developing new clients in 2014 will resume to business, which will be positive to PAX.

Expanding into other segments of the value chain via M&A

In December 2014, PAX entered into an agreement to acquire 51% equity interest of Nanchang Kashuo Information Technology Company (Kashuo) with a cash consideration of RMB 30.6mn. Kashuo is a payment software provider offers sales & marketing service and client relationship management for merchants, including:

n Collect data related to transaction, analyze consumer behavior for target marketing

n A platform connecting merchants, acquirers and consumers

n Generate recurring revenue from valued added service

About 98% of the total revenue of PAX generated from selling hardware to its clients who are mainly the acquirers and payment service providers, thus it hardly reaches the end users of the devices, which are the merchants who have the transaction and consumer data. Transaction data becomes increasingly important in the Big Data era. By analyzing consuming behavior, PAX can improve its POS terminal product to better suit various types of merchants and users.

The acquisition of Kashuo will also bring recurring income to PAX, despite we expect the contribution will not be meaningful in the near term. The two international peers Ingenico and Verifone have diversified their revenue structure by acquiring companies along the value chain. We believe the acquisition of Kashuo indicates PAX’s intention to start its own M&A mode. With a net cash position of ~HK$1.6bn, PAX is capable to carry out a series of medium size acquisitions that will help it to be more diversified in the revenue source.

Figure 19 The Value Chain of E-payment Processing

Source: Guosen Securities(HK) Research, Company Information

Acquirer Kashuo



Valuation DCF-based valuation

We initiate coverage on PAX Global with a BUY rating and a target price of HK$ 9.97.

The company is currently trading on 17.4x FY15 earnings, which is at 37% discount to peers’ average FY15 PE of 27.4x. Our TP implies a FY15 PE of 22.7x. We estimate PAX will have a net cash of HK$2,229m or HK$2.08/share by the end of 2015, which accounts for 21% of its share price. Excluding the cash component, the ex-cash implied forward PE of the company would be 17.9x.

Based on a WACC of 11% and a 2% terminal growth of the FCFF, our DCF model yields an equity value of HK$9.97 per share by end-2015.

Figure 20 DCF Analysis

HK$'mn 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E Terminal

Domestic Sales Growth 14% 30% 21% 19% 16% 15% 13% 12% 8% 3% 2% 2% 2% Oversea Sales Growth 8% 90% 32% 28% 20% 18% 16% 14% 8% 6% 3% 3% 2% Total Revenue growth 12% 44% 22% 25% 18% 16% 13% 12% 8% 4% 2% 2% 2% Revenues 1,472 2,115 2,582 3,234 3,802 4,416 4,982 5,580 6,048 6,274 6,420 6,581 6,712 EBIT margin 18% 22% 22% 21% 21% 21% 21% 21% 20% 20% 19% 19% 19% EBIT 266 467 555 692 795 927 1,041 1,156 1,228 1,283 1,226 1,266 1,298 EffectiveTax rate 15% 15% 15% 15% 15% 15% 15% 15% 15% 15% 15% 15% 15% EBIT(1-t) 226 397 473 589 677 789 886 984 1,045 1,092 1,043 1,078 1,105 DEP&AMTZN 4 8 15 12 10 9 9 8 8 7 5 4 3 Capital Expenditure (1) (38) (6) (8) (7) (7) (7) (7) (6) (3) (2) (2) (2) Change in working capital (52) 263 111 (80) (66) (76) (67) (71) (51) (29) 4 (21) (17) FCFF 177 630 593 513 615 715 820 913 997 1,067 1,051 1,059 1,089 PV 459 493 514 528 527 515 493 436 393 362 Cost of capital 12% 12% 12% 12% 12% 12% 12% 12% 12% 12% Year 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 Discount Factor 0.90 0.80 0.72 0.64 0.58 0.52 0.46 0.41 0.37 0.33

Terminal cash flow 1,089

Terminal cost of capital 12%

Terminal value 11,301

PV(Terminal value) 3,758

PV (CF over next 10 years) 4,720

Sum of PV 8,478

Value of operating assets = 8,478

- Debt 0

- Minority interests 0

+ Cash(at Dec31,2015) 2,229

Value of equity 10,707

Number of shares 1,074

Estimated value per share(End-15)

9.97

price 7.64

Price as % of value 30.5%

Cost of capital

Risk free rate 3%

Risk Premium 8%

Unleveraged Industry Beta 1.08

Gearing 0.00

Beta 1.08

WACC 12%




Financial Analysis Key Operating Assumptions

We expect the shipment growth in the domestic market will remain in 20-30% range during 2014-2016, and then lower to 18% in 2017 and 15% in 2018. It is based on our assumption that the total number of installed POS terminal will double in five years, and as a leading POS vendor in China, PAX has the capability of doubling its shipment to over 3.4mn units in 2018. The oversea shipment will grow at a 2 year CAGR of ~34% from 2014 to 2016, thanks to the gradual expansion in different regions.

We also expect the ASP in the domestic market to decrease at a 3% rate in 2015 and 2016, due to the intense competition from smaller vendors who intend to grab market shares from larger players like PAX. The ASP in oversea markets also drops due to the rising popularity of the MPOS models, which have a lower ASP comparing to the traditional countertop terminals. However, the ASP in oversea markets remains at a higher level than the domestic ASP and providing a higher margin for PAX.

The portion of sales from services is projected at the same level as in 2013. Although the acquisition of Kashuo will contribute more revenue to the service category, the growth and amount will not be very meaningful in the short term.

Figure 21 Key Revenue Assumptions

2012 2013 2014e 2015e 2016e Domestic Market

Device shipped(mn unit) 0.88 1.32 1.70 2.12 2.61 YoY 74% 50% 29% 25% 23%

ASP(HK$) 1019 771 780 757 734 YoY -29% -24% 1% -3% -3%

Domestic Device Sales(HK$'mn) 892 1014 1324 1606 1916

Oversea Markets Device Shipped (mn unit) 0.29 0.32 0.62 0.80 1.12

YoY 12% 8% 95% 30% 40% ASP(HK$) 1327 1313 1200 1140 1106

YoY 0% -1% -9% -5% -3% Oversea Device Sales(HK$'mn) 386 414 738 912 1238 Total Device Sales(HK$'mn) 1278 1428 2062 2517 3153 Service Revenue Percentage 2% 3% 3% 3% 3% Total Revenue(HK$'mn) 1313 1472 2115 2582 3234


Abundant Cash with Low Capex

PAX held more than HK$1.7bn of cash as at Dec 31 2013, while only had ~HK$1mn Capex. This is due to its asset-light business model. With the abundant cash reserve, PAX is able to carry out a few medium-size acquisitions either to expand to the downstream of the payment industry, or to strengthen its R&D capability to develop more competitive products to further penetrate into those markets(US and Europe) mainly dominated by its two international peers.

Figure 222 Cash and Capex

2012 2013 2014e 2015e 2016e Cash and equivalents 1358 1698 1821 2212 2906 Restricted Cash 16 17 17 17 17 Financial Assets 10 0 0 0 0 Total Cash and equivalent assets 1385 1715 1838 2229 2922 Total Assets 2183 2824 3391 4083 4978 Capex 3 1 38 6 8




Figure 233 Detailed P&L

2012 2013 2014e 2015e 2016e HK$'mn HK$'mn HK$'mn HK$'mn HK$'mn

Total Revenues 1,313 1,472 2,115 2,582 3,234 Domestic Sales 919 1,045 1,358 1,647 1,965

%of total revenue 70% 71% 64% 64% 61% Oversea Sales 394 427 757 935 1,270

%of total revenue 30% 29% 36% 36% 39% Cost of goods sold (849) (931) (1,311) (1,575) (1,973) Gross Profit 464 541 804 1,007 1,261 Gross Margin 35% 37% 38% 39% 39%

Gen&Admin expense (157) (194) (212) (281) (358)

%of revenue 12% 13% 10% 11% 11% Selling Expense (114) (131) (190) (248) (307)

%of revenue 9% 9% 9% 10% 9% SG&A and Other (271) (325) (402) (529) (664)

%of revenue 21% 22% 19% 20% 21%

Operating profit - EBIT 222 266 467 555 692 Interest expense 0 0 0 0 0 Interest income 11 15 17 20 25 VAT refund 16 33 41 50 59

%of domestic revenue 2% 3% 3% 3% 3% Other Income 2 2 7 8 11

%of revenue 0% 0% 0% 0% 0% Other Gains 2 0 0 0 0 Pretax income - EBT 223 266 467 555 692 Taxes (40) (40) (70) (83) (103) Net Income 183 227 397 473 589 Net Margin 14% 15% 19% 18% 18% Basic EPS

Preferred dividends 0.00 0.00 0.00 0.00 0.00 Net income for basic EPS 183 227 397 473 589 Basic shares outstanding 1,038 1,039 1,039 1,039 1,096 Basic EPS(HK$) 0.18 0.22 0.38 0.45 0.54

YoY 1% 24% 75% 19% 18% Diluted EPS Net income for diluted EPS 183 227 397 473 589 Stock options 2 34 34 34 34 Diluted shares outstanding 1,039 1,074 1,074 1,074 1,131 Diluted EPS(HK$) 0.18 0.21 0.37 0.44 0.52

YoY 0% 20% 75% 19% 18%




Peers Comparison

PAX Global is currently trading at discount to the financial technology sector on 14.9x EV/EBITDA and 17.4x FY15 P/E vs the sector on 18.6x and 27.7x respectively. We estimate the diluted EPS of PAX will be HK$ 0.37, 0.44 and 0.52 for FY14, FY15 and FY16 respectively.

Figure 24 Peers Comparison

Name Ticker CCY Last Mkt cap (US$m)

PER FY14

PER FY15 PEG

Div yld FY13

P/B FY13

ROE FY13

ROE FY14

Net gearing

FY13 (%)

Gross margin

FY13 (%)

Net margin

FY13 (%) VERIFONE SYSTEMS pay us USD 32.25 3,655 16.8 14.0 0.75 N/A 3.53 (3.5) 20.5 59.1 38.8 (2.0) INGENICO ing fp EUR 91.19 6,230 27.4 21.7 0.96 0.9 5.86 18.6 21.4 38.7 43.7 8.3 SZZT 002197 ch CNY 16.17 694 38.5 29.4 1.12 0.4 3.80 6.7 N/A 0.0 32.0 7.0 FUJIAN NEWLAND 000997 ch CNY 29.59 2,465 44.3 33.2 0.99 0.2 8.55 16.6 15.9 0.0 37.7 12.3 XINGUODU 300130 ch CNY 31.52 577 78.8 38.9 0.68 0.3 3.32 5.8 N/A 0.0 37.5 11.1 PAX GLOBAL 327 hk HKD 7.64 1,085 20.7 17.4 0.49 N/A 3.58 15.7 17.3 0.0 36.7 15.4 Average 41.2 27.4 0.9 5.01 8.82 19.28 37.9 7.3 Source: Guosen Securities(HK) Research,Bloomberg

Historical share price comparison

PAX’s share price has outperformed its major global and domestic peers in the past three years with most of the divergence appears in 2014. In our view, this is due to the expectation that PAX’s oversea shipment will increase sharply as a result of the breakthrough into emerging markets. The penetrating process continues in the next few years as now PAX has more experience in dealing with oversea markets and the same process can be applied to new markets.

Ingenico acquired Global Collect, an online full service payment provider, in July 2014 and its share price has rallied over 30% since then. VeriFone has been going through a period of restructuring which has been reflected in its relatively poor share price performance in last three years.

Figure 25 Stock Price Performance in the last three years

Source: Guosen Securities(HK) Research, Bloomberg



DuPont’s Analysis

Figure 26 DuPont's Analysis

Dupont Analysis 2009 2010 2011 2012 2013 2014e 2015e 2016e Tax Burden 84% 84% 88% 82% 85% 85% 85% 85% Interest Burden 100% 100% 100% 101% 100% 100% 100% 100% Operating Margin 20% 24% 19% 17% 18% 22% 21% 21% Asset Turnover 75% 70% 63% 63% 59% 68% 69% 73% Financial Leverage 1.2x 1.2x 1.2x 1.2x 1.3x 1.4x 1.4x 1.4x ROE 16% 17% 13% 11% 12% 17% 17% 18%

Source: Guosen Securities(HK) Research Estimates

We believe the increasing sales from the overseas market will improve the operating margin in the coming years. On average the domestic ASP is ~RMB 800 vs ~RMB1200 in markets outside China. The rising portion of sales in oversea markets will improve the entire company profitability.

Thanks to the asset-light business model, we believe the increase is asset size will be slower than the growth of revenue, which results an improvement of asset turnover, indicating more sales generated on the asset deployed.

Risk n Currency Risk. Despite the orders are priced in USD in the agreements, the depreciation of

emerging market currencies would have negative impact on their demand for import products in the long term.

n Economic Risk. The deterioration of economy in emerging markets and the deflation of economy will slow down the business activities which lead to a lower demand for POS terminals.

n Intensified competition business environment. The rising competition on both domestic and oversea markets will drive down the profitability.

n Product Substitution Risk. The rising of online payment company are trying to bypass the traditional value chain of the payment industry and educate consumers to make payment without bankcard and traditional POS terminals



Company Profile A world leading POS terminal vendor PAX is an EFT-POS terminal solution provider. The company provides both countertop and mobile terminals to process electronic payments for debit cards, credit cards, pre-paid cards or mobile devices. According to the June 2014 issue of the Nilson Report, PAX ranked as the third largest POS terminal vendor in the world with 2.06 million units shipped in 2013, a 64% growth from 2012. Ingenico and VeriFone lead the global POS terminal industry with 30% and 19% market share.

Product Range

PAX offers a full range of EFT-POS product from the classic countertop POS terminal to the most advanced mobile and wireless model with NFC feature:

Figure 27 Product range

Counter Top Mobile & Wireless Contactless PINpad


Leader in the domestic EFT-POS industry

According to the Nilson Report, PAX is one of the largest EFT-POS vendors in China and ships over 30% of the total POS terminals in 2013. Global POS leader Ingenico had secured its position in China through acquiring Fujian Landi Commercial Equipment (shipped 2.2mn POS terminals in 2013), which also accounted for about 30% of the market. SZZT Electronics (002197, CH) mainly supplies products to financial institutions and weight less on EFT-POS terminals that used by merchants. Fujian Newland (000997, CH) and Shenzhen Xinguodu (300130, CH) are less than half the size of PAX in terms of total shipment size. To secure its leading position in the domestic market, PAX also offers comprehensive after sales services and provides customized software solutions to clients, which is less addressed by its domestic peers.



Figure 28 POS Terminal shipment in Asia/Pacific Figure 29 Market Share in Asia/Pacific in 2013

Rank Region Shipment in

2013(Unit) Asia/Pacific 10,757,439

1 Ingenico 2,440,000 2 PAX 1,734,619 3 SZZT Eletronics 1,640,000 4 Fujian Newland 936,000 5 Xinguodu 775,400 6 VeriFone 645,000

Others 2,586,420


EMV migration pioneer in Asia PAX was the pioneer in the EMV migration in Asia when the standard was initially established by the three credit card networks (Europay, Mastercard and Visa). Its success of winning the Korean market in its early stage of business made its name to other Asian countries which comply with the EMV standard. PAX then expanded its business in China with its edges on security and product quality, which were less addressed by domestic peers at that time.

Effective cost control and international standard of product quality enable PAX to enter oversea markets PAX has been able to effectively control its production cost and increase efficiency, which enable its products to be more price competitive in markets outside China when comparing to the two international peers (Ingenico and Verifone). More importantly, Landi, which is a major competitor of PAX, has restricted its business inside China after being acquired by Ingenico. Thus competition from major domestic peers which have similar cost advantages in oversea markets will not be a major issue in the short term. For smaller domestic EPT vendors, the multi-layer, time-consuming security certification application process is a natural barrier to them when they want to enter oversea markets and compete with PAX, which has obtained more than 300 domestic and international certifications and their products are sold in over 80 countries.

Asset-light business model with strong R&D capability

PAX outsources the manufacturing process, while it takes care of the material purchasing and inventory storage. PKS is the EMS provider and responsible for manufacturing PAX’s products. This Japanese EMS provider also manufactures electric devices for other Japanese and European vendors, which have high quality standard requirements. PKS also has the flexibility to expand the production capacity in case the orders exceed normal production level, which enables it to meet PAX’s surprise increase in orders from oversea markets. PKS also communicates with PAX regularly to discuss issues like improving the efficiency, such as controlling the production cost when production capacity is increased. Automated production lines have been introduced for making POS terminals in PKS, which is the result of the effort contributed by both PAX engineers and PKS. This is how PAX increase the efficiency in production and improve its margin.

Over half of PAX’s staff are in the R&D (~360 engineers). Operating system, application and hardware development each accounted for 25% of the R&D force. The company has a very competitive R&D force comparing to its domestic peers, especially at the security segment, which takes up 15% of the R&D personnel. The platform server is an area that is less addressed by PAX and is where the two international peers have advantages. On average PAX spend 6% of the total sales in R&D every year.

23%

16%

15%9%

7%

6%

24%

Ingenico

Pax

SZZT EletronicsFujian NewlandXingipdu

VeriFone

Others

PAX focus on enhancing its research and development ability.



Certified globally

The major entry barrier of the EFT-POS terminal industry is compliance of various levels of security certifications. There are three layers of certifications, from international to customer levels and PAX has obtained more than 300 domestic and international certifications. PAX has passed Paywave (Visa), PayPass (Master),TQM standards and the following certifications in different levels:

� International Level: EMV level 1& 2, PCI,

� Country level: PBOC, JCB, UKCC, CB2, Anatel, ABECS etc.

� Customer Level certification: Class A&B certification in North America

Porter’s Five Forces We look at the POS terminal industry within the Porter’s Five Forces framework to understand the competitive landscape in which PAX operates.

n Threat of new entrants: We think the rigorous and complicated certification application and long waiting period are the major barriers to new entrants to the POS terminal industry. In addition, major players have captured a majority of the market shares in their home base (Verifone in US, Ingenico in EU and PAX in China), which makes new entrants hardly to compete and grow. PAX shipped POS terminal to over 80 countries and has obtained various layers of certifications for its broad product lines. Therefore we believe the threat of new entrants is low.

n Supplier power: In our view the supplier power is weak given that PAX manages its own production materials which it orders from multiple sources. Despite the majority of PAX’s production is handled by PTK, the large scale of production and the increasing shipment enables PAX to have stronger bargaining power over the manufacturer.

n Competition: The domestic market is a more competitive field than the oversea markets for PAX. LANDI Commercial Equipment (acquired by Ingenico in 2009) is the major peer to PAX that have shipped another 30% of the total POS terminal in 2013. Oversea markets are led by Ingenico and Verifone in different regions. However, the severe competition in the domestic market enable PAX to better control its cost thus it could offer competitive price in emerging markets and provide superior technical support to clients. Moreover, domestic peers have very limited oversea exposures comparing to PAX. Thus the oversea market is less competitive than the domestic market.

n Threat of substitution: We do not see any products and solutions to replace the POS terminal in the short term as card payment is by far a payment method which offer both high security standard and convenience. However, the emergence of online payment such as Alipay which do not involve POS terminals will become a threat to POS vendors in the long term. This is also the reason that PAX intend to increase its business exposure in oversea emerging markets where the card payment remains the major non-cash payment method and is still gaining popularity.

n Buyer Power: customer concentration for PAX is low in domestic markets but high in each countries outside China. In addition, due to the high competitiveness in the domestic market, buyers have more suppliers of POS terminals to select from, which increases their bargaining power in terms of price. In oversea markets buyers usually only have three vendors are able to provide a large scale of shipment in high quality and technical support. On the other hand, PAX usually co-operate with only one or two local payment service providers to sell its products, which reduces its power over buyers.

Threat of new entrants: Low -High security standard -Certification application process is long and complicated -High R&D cost

Supplier Power: Weak -Supply chain is competitive -PAX manages its own production material -Large scale of order offers bargaining power over OEM

Competition: High in domestic market and relatively lower in oversea markets. -Domestic peers have less exposure in the oversea markets

Threat of Substitution: Low in the short term -Card payment is, and will remain the mainstream non-cash payment globally in the near future

Buyer Power: Moderate -Intensive competition in China leads to a low switching cost -Weak bargaining power over SOE clients in China -Co-operate with only one or two local distributors in oversea markets



The POS terminal industry Swiping cards remained the key growth drivers for non-cash transactions

Convenience and security are the two most important factors in the payment process. As technology advances, new payment methods are continuously introduced and adopted by consumers. We are seeing a continued up trend of non-cash transaction throughout the world since 2007. According to Capgemini’s World Payments Report 2014, Non-cash transactions recorded CAGR of 25.2%, 14.6% and 19.3% in CEMEA, Latin America and Emerging Asia during 2008 to 2012, respectively. In comparison, the CAGR in Mature APAC, N. America and Europe reached 11%, 3.6% and 4.3% during the same period. We believe the trend continues in the past three years and will keep a global CAGR at 10% in the next 5 years as the migration to non-cash transaction in emerging market keeps the growth momentum, and the new non-cash payment options are starting adopted by consumers in developed markets.

The use of both debit and credit cards keeps growing as the most popular non-cash payment methods. In the European Union, total card payments achieved a CAGR of 7.6% between 2008 and 2012, reached Euro39.8bn in 2012. Despite the variety of non-cash payment methods, card transactions accounted for 37% of the total non-cash payment transactions in 2007 and increased to 41% in 2011.In the U.S., the total number of card payment transactions was 50bn in 2007 and reached 82.4bn in 2012, representing a CAGR of 10.5%. Card payment accounted for 58.4% of the total non-cash payment transactions in 2011 and increased to 60.9% in 2012.

Similar pattern is observed in developing countries, but at a faster pace. Non-cash payment transactions had a CAGR of 15%, 20% and 26.6% in Latin America, Emerging Asia and CEMEA, respectively, during 2007 and 2011. Card transactions accounted for 46%, 79% and 72% in 2011, of the total non-cash payment methods. Despite the high growth rates, the number of total card transactions in these three areas is much less than the developed countries. The sum of the card transactions in the developing counties reached 44.7bn in 2011, less than 60.7bn in North America. The gap leaves business potentials for POS terminal makers like PAX, as the usage of card payment method partly depends on the number of POS terminals installed.

EMV and new EMV and new securities standard stimulate POS upgrade

Since 2002, Europay, Mastercard & Visa and other credit card networks have been promoting a standard (i.e. the EMV standard) that requires all credit cards to have an IC chip in it as a more advanced anti-fraud measure than what is available in traditional magnetic-strip cards. This new standard created POS terminal upgrade needs for merchants using non-EMV compliant POS terminals. By 4Q13, most of the terminals other than those in the US and Asia Pacific have met the EMV standard. Due to the lag in the adoption of EMV, the credit card fraud in US has increased

Figure30 POS Installed Devices Per 1,000 People

Source:European Central Bank, The World Bank, Guosen Securities(HK) Research



sharply in the last few years. According to Aite Group, the US has had a 70% increase in credit card fraud while the UK has seen an 80% decrease after migrating to EMV since 2007.

The main reason of low

The low EMV adoption rate in the U.S. is due to the high cost of switching to IC card and EMV-compliant EFT-POS Terminal. A magnetic-stripe card costs US$0.25 compared with US$1.25-$2.5 for an IC card. In addition, it is estimated that the cost of upgrading the whole customer terminal in U.S. is close to $6.8billion. The total cost of switching to EMV-compliant payment system will be at least $8 billion, where the card fraud costs of the U.S. card payment industry is estimated at $5.5 billion estimated by the US Federal Trade Commission. The relatively low benefits brought by upgrading the system reduce the incentives for merchants and financial institutions to take the initiative. Also the unbalanced distribution of the benefit and cost of upgrading the whole system among the financial institutions and merchants make them hesitate to take the initiative.

The incentive was strengthened in 2011 by Visa. A policy was announced that the counterfeit fraud liability would shift to acquirers and merchants if the merchant does not have an EMV-compliant POS device after Oct. 2015. MasterCard also has similar policies that for merchants have upgraded their systems and terminals to EMV standard, they will be 100% relief of those fraud costs if 95% of its transactions take place on EMV terminal. Currently, credit card holders in the U.S. have limited liability of $50 in the event that their card is stolen and misused without their consent, if they reported the fraud within 60 days of receiving the statement. Merchants and financial institutions bears the losses. Other credit card companies have similar arrangements to promote the more secure EMV standard.

Actions were taken by authorities in China to strengthen the security of card payments. The PBOC announced in March 2011 that, from the beginning of 2015, all card issued by commercial banks in most cities of the country should be IC card. This indicates that the previous generations of EFT-POS terminal will be replaced to enable the option of Chip-and-PIN card payment to be available.

Figure 31 Worldwide EMV Global Adoption

Source:EMVco, Guosen Securities(HK) Research



MPOS and Contactless, the future of POS terminal

The cloud technology along with mobile network enable Mobile POS (MPOS) to become smaller and more portable for use by micro-merchants whose turnover is between €10k and €100k per annum. This group of merchants, who are predominantly taking cash or cheque presently, was neglected by the acquirers as their volume of transactions was too low to attract acquirers attention. MPOS like the D210 model, which can be connect to smart devices and cheaper in price, enable these micro-merchants to accept card payment from clients, which in turn can increase their turnovers. Emerging markets like Brazil has a large number of these micro-merchants and there will be a huge demand for MPOS.

Senior Management of PAX

Figure 32 Senior Management of PAX

Name Position Descriptions Approximate% of shareholding*

Mr. Nie Guoming Chairman, Executive Director

aged 51, Mr.Nie is responsible for the overall management and strategic development of the Group. Mr. Nie has over 18 years of experience in the card payment industry. He joined PAX since founding of the company in 20 March 2000. He was the vice president of PAX Technology from 20 March 2000 to 1 January 2001. He has been the president of PAX Technology from 2 January 2001 to 14 June 2010. He was appointed as the chairman of PAX since 14 June 2010.He was appointed as the Chairman and an Executive Director of the Company on 1 December 2010.

0.74%

Mr. Lu Jie CEO, Executive Director and President

aged 49, Mr. Lu joined the Group in August 2001 and is responsible for managing all the business development, sales and marketing functions of the Group in the PRC. Mr. Lu has over 13 years of experience in sales and marketing in the electronic payment industry and served a number of management positions and executive role at a system integration company, Beijing Order Computer Company, from 1998 to 2001 including general manager of insurance department, general manager of marketing department and vice president of the company. He had also worked as an engineer of the Ministry of Geology and Mineral Resources of the PRC and the Chinese Academy of Geological Sciences from 1986 to 1994 and from 1994 to 1995, respectively. He was appointed as the Chief Executive Officer and an Executive Director of the Company on 23 May 2013.

0.93%

Mr. Li Wenjin Executive Director

aged 50, Mr. Li is responsible for risk management and treasury management. He is also responsible for overseeing operations of PAX Technology of which he has been a Director since 5 April 2000. Mr. Li is also the managing Director of Hi Sun(818 HK), being a substantial shareholder of the Company, since 7 June 2001.

0.92%

Ms. Luo Shaowen Executive Vice President

aged 45, Mr. Luo is responsible for the procurement and supplies activities, and oversees the finance of the operations in Shenzhen. Mr. Luo has over 17 years of experience in the card payment industry and over 12 years of experience in financial administration and supply chain management. He joined PAX in December 2004 as CFO. Prior to joining the Group, Mr. Luo served various management positions including general manager of the Zhuhai Branch of the Beijing Order Computer Company.

Mr. Lee Chris Curl CFO, Joint Secretary aged 37, Mr. Lee is responsible for overseeing the business development and the finance of the Group. He joined the Group as the Group Financial Controller in August 2011.

*as at June 30 2014




Figure 33 12 months forward PE band chart Figure 34 12 months forward PB band chart

Source: Bloomberg, Guosen Securities(HK) Research Source: Bloomberg, Guosen Securities(HK) Research

PE(x) 18.2Xmax 19.6X

min 9.4X

avg 14.1X+1sd 18.0X

-1sd 10.2X

0.001.002.003.004.005.006.007.008.009.00

10.00

Feb-14 Oct-14

HK$

PB(x) 2.9Xmax 3.1X

min 1.5X

avg 2.2X

+1sd 2.8X

-1sd 1.6X

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

Feb-14 Oct-14



Summary financial statements Profit & Loss (HK$mn) 2012A 2013A 2014E 2015E 2016E Financial Ratios 2012A 2013A 2014E 2015E 2016E

Revenue 1,313 1,472 2,115 2,582 3,234 Revenue growth (%) 19.0 12.1 43.6 22.1 25.3

Cost of sales (849) (931) (1,311) (1,575) (1,973) Operating profit growth (%) 4.8 19.1 79.1 19.1 24.5

Gross profit 464 541 804 1,007 1,261 Reported profit growth (%) 0.6 23.8 75.4 19.0 24.5

Other income/(expense) 18 35 48 58 70 Underlying profit growth (%) 0.6 23.8 75.4 19.0 24.5

Operating expenses (271) (325) (402) (529) (664) Underlying EPS growth (%) 0.4 19.9 75.4 19.0 18.3

Operating profit 211 251 450 536 667 Dividend growth (%) 0.0 0.0 0.0 0.0 0.0

Other non operating inc/(exp) 2 0 0 0 0 Gross profit margin (%) 35.3 36.7 38.0 39.0 39.0

Finance income 11 15 17 20 25 Operating profit margin (%) 16.1 17.1 21.3 20.8 20.6

Finance expenses 0 0 0 0 0 Underlying profit margin (%) 13.9 15.4 18.8 18.3 18.2

Associates & JCE 0 0 0 0 0 Net debt/equity (%) (76.5) (82.2) (73.3) (74.3) (80.9)

Profit before taxation 223 266 467 555 692 Net debt/total assets (%) (63.1) (60.5) (53.5) (54.1) (58.4)

Taxation (40) (40) (70) (83) (103) Current ratio (%) 570 379 366 366 356

Non-controlling interests 0 0 0 0 0 Dividend payout (%) 0.0 0.0 0.0 0.0 0.0

Net profit 183 227 397 473 589 Interest cover (x)

Other Adjustments on UP 0 0 0 0 0 Dividend cover (x)

Underlying Profit 183 227 397 473 589 Dupont Analysis 2012A 2013A 2014E 2015E 2016E Source: Guosen Research estimates Tax burden (%) 82.0 85.1 85.1 85.1 85.1

Interest burden (%) 106 106 104 104 104

Operating profit margin (%) 16.1 17.1 21.3 20.8 20.6

Asset turnover (x) 0.6 0.6 0.7 0.7 0.7

Leverage ratio (x) 1.2 1.3 1.4 1.4 1.4

ROA (%) 8.7 9.0 12.7 12.5 12.9

ROE (%) 10.7 11.6 17.3 17.2 17.8

Source: Guosen Research estimates

Balance Sheet (HK$mn) 2012A 2013A 2014E 2015E 2016E Cashflow (HK$mn) 2012A 2013A 2014E 2015E 2016E

Fixed assets 10 8 43 34 30 Operating profit 222 266 467 555 692

Associates & JCE 0 0 0 0 0 Depreciation & amortization 3 4 8 15 12

Others 0 0 0 0 0 Interest income (11) (15) (17) (20) (25)

Non-current assets 10 8 43 34 30 Change in working capital (2) 54 (263) (111) 80

Inventories 244 465 655 786 985 Tax paid (29) (42) (64) (77) (95)

Debtors & prepayments 555 644 898 1,067 1,070 Other operating cashflow 17 24 14 14 14

Bank deposits & cash 1,375 1,715 1,838 2,229 2,922 Operating activities 200 291 144 377 676

Others 10 0 0 0 0 Purchase of non-current assets (Capex) (3) (1) (38) (6) (8)

Current assets 2,183 2,824 3,391 4,083 4,977 Free cash flow 198 290 106 371 669

Bank & other borrowings 0 0 0 0 0 Disposal of non-current assets 0 0 0 0 0

Trade & payables 225 446 627 753 944 Associates & JCE (net) 0 0 0 0 0

Taxation 27 25 44 52 65 Interest received 12 15 17 20 25

Others 131 275 255 310 388 Dividends received 0 0 0 0 0

Current liabilities 383 746 926 1,116 1,397 Other investing cashflow (8) 10 0 0 0

Bank & other borrowings 0 0 0 0 0 Investing activities 1 23 (21) 14 17

Others 0 0 0 0 0 New loans raised 0 0 0 0 0

Non-current liabilities 0 0 0 0 0 Repayment of loans 0 0 0 0 0

Net assets 1,811 2,087 2,508 3,000 3,610 Dividends paid 0 0 0 0 0

Share capital 104 104 104 104 104 Other financing cashflow 0 8 0 0 0

Premium & reserves 1,707 1,983 2,404 2,896 3,506 Financing activities 0 8 0 0 0

Shareholders' funds 1,811 2,087 2,508 3,000 3,610 Inc/(dec) in cash 201 323 123 391 693

Non-controlling interests 0 0 0 0 0 Cash at beginning of year 1,152 1,358 1,698 1,821 2,212

Total equity 1,811 2,087 2,508 3,000 3,610 Foreign exchange effect 3 17 0 0 0 Source: Guosen Research estimates Cash at end of year 1,357 1,698 1,821 2,212 2,906

Source: Guosen Research estimates



Information Disclosures Stock ratings, sector ratings and related definitions

Stock Ratings:

Buy: A return potential of 10 % or more relative to overall market within 6 – 12 months.

Neutral: A return potential ranging from -10% to 10% relative to overall market within 6 – 12 months.

Sell: A negative return of 10% or more relative to overall market within 6 –12 months.

Sector Ratings:

Overweight: The sector will outperform the overall market by 10% or higher within 6 –12 months.

Neutral: The sector performance will range from -10% to 10% relative to overall market within 6 –12 months.

Underweight: The sector will underperform the overall market by 10% or lower within 6 – 12 months.

Interest disclosure statement

The analyst is licensed by the Hong Kong Securities and Futures Commission. Neither the analyst nor his/her associates serves as an officer of the listed companies covered in this report and has no financial interests in the companies.

Guosen Securities (HK) Brokerage Co., Ltd. and its associated companies (collectively “Guosen Securities (HK)”) has no disclosable financial interests (including securities holding) or make a market in the securities in respect of the listed companies. Guosen Securities (HK) has no investment banking relationship within the past 12 months, to the listed companies. Guosen Securities (HK) has no individual employed by the listed companies.

Disclaimers

The prices of securities may fluctuate up or down. It may become valueless. It is as likely that losses will be incurred rather than profit made as a result of buying and selling securities.

The content of this report does not represent a recommendation of Guosen Securities (HK) and does not constitute any buying/selling or dealing agreement in relation to the securities mentioned. Guosen Securities (HK) may be seeking or will seek investment banking or other business (such as placing agent, lead manager, sponsor, underwriter or proprietary trading in such securities) with the listed companies. Individuals of Guosen Securities (HK) may have personal investment interests in the listed companies.

This report is based on information available to the public that we consider reliable, however, the authenticity, accuracy or completeness of such information is not guaranteed by Guosen Securities (HK). This report does not take into account the particular investment objectives, financial situation or needs of individual clients and does not constitute a personal investment recommendation to anyone. Clients are wholly responsible for any investment decision based on this report. Clients are advised to consider whether any advice or recommendation contained in this report is suitable for their particular circumstances. This report is not intended to be an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned.

This report is for distribution only to clients of Guosen Securities (HK). Without Guosen Securities (HK)’s written authorization, any form of quotation, reproduction or transmission to third parties is prohibited, or may be subject to legal action. Such information and opinions contained therein are subject to change and may be amended without any notification. This report is not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject Guosen Securities (HK) and its group companies to any registration or licensing requirement within such jurisdiction.



信息披露

公司评级、行业评级及相关定义

公司评级

买入：我们预计未来 6-12 个月内，个股相对大盘涨幅在 10%以上；

中性：我们预计未来 6-12 个月内，个股相对大盘涨幅介于-10%与 10%之间；

减持：我们预计未来 6-12 个月内，个股相对大盘跌幅大于 10%。

行业评级

超配：我们预计未来 6-12 个月内，行业整体回报高于市场整体水平 10%以上；

中性：我们预计未来 6-12 个月内，行业整体回报介于市场整体水平-10%与 10%之间；

低配：我们预计未来 6-12 个月内，行业整体回报低于市场整体水平 10%以上。

利益披露声明

报告作者为香港证监会持牌人士，分析员本人或其有联系者并未担任本研究报告所评论的上市法团高级管理人员，也未持有其任何财务权益。

本报告中，国信证券（香港）经纪有限公司及其所属关联机构（合称国信证券（香港））并无持有该公司须作出披露的财务权益(包括持股)，在过去 12 个月内与该公司并无投资银行关系，亦无进行该公司有关股份的庄家活动。本公司员工均非该上市公司的雇员。

免责条款

证券价格有时可能非常波动。证券价格可升可跌，甚至变成毫无价值。买卖证券未必一定能够赚取利润，反而可能会招致损失。

本研究报告内容既不代表国信证券（香港）的推荐意见，也并不构成所涉及的个别股票的买卖或交易要约。国信证券（香港）或其集团公司有可能会与本报告涉及的公司洽谈投资银行业务或其它业务（例如配售代理、牵头经办人、保荐人、包销商或从事自营投资于该股票）。国信证券（香港）不排除其员工有个人投资于本报告内所提及的上市法团。

报告中的资料均来自公开信息，我们力求准确可靠，但对这些信息的正确性、公正性及完整性不做任何保证。本报告没有考虑到个别客户特殊的投资目标、财务状况或需要，并不构成个人投资建议，客户据此投资，责任自负。客户在阅读本研究报告时应考虑报告中的任何意见或建议是否符合其个人特定状况。本报告并不存在招揽或邀约购买或出售任何证券的企图。

本报告仅向特定客户传送，未经国信证券香港书面授权许可，任何人不得引用、转载以及向第三方传播，否则可能将承担法律责任。研究报告所载的资料及意见，如有任何更改，本司将不作另行通知。在一些管辖区域内，针对或意图向该等区域内的市民、居民、个人或实体发布、公布、供其使用或提供获取渠道的行为会违反该区域内所适用的法律或规例或令国信证券（香港）受制于任何注册或领牌规定，则本研究报告不适用于该等管辖区域内的市民、居民或身处该范围内的任何人或实体。

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