Pax Global investing case

DISCLAIMER:
This report is intended for general guidance and information purposes only. This report is under no circumstances
intended to be used or considered as financial or investment advice.
The material in the report is obtained from various sources per dating of the report. Please note that we make no
assurance that the forward-looking statements are free from errors. Readers should not place undue reliance on
forward-looking information, which will depend on numerous factors, and any reader must make an independent
assessment of such projections.
We are long Pax Global Tecnhnology Ltd.

Pág. - 2 - RSR INVERSIÓN & PATRIMONIOS EAF, S.L.U.
NOVO BANCO GESTIÓN, S.G.I.I.C., S.A.
Executive summary ......................................................................................................3
Industry background....................................................................................................4
Business background...................................................................................................9
What is happening in China?.....................................................................................10
What is happening outside China? Overseas Region...................................................12
Financial Performance...............................................................................................14
Valuation..................................................................................................................17
Investment thesis .......................................................................................................19
Structural growth business with high entry barriers....................................................19
Profits and Cash Flow are coming...........................................................................19
Strong Balance Sheet.............................................................................................20
Valuation is ridiculously cheap................................................................................20
Catalysts ...............................................................................................................20
Risks to the thesis ......................................................................................................21
Could Chinese commodity payment market extend to Brazil or other worldwide
markets?...............................................................................................................21
Is the sector mature? Could it affect the margins?....................................................22
Could we expect a structural switch from high-end solutions (traditional POS) to low-
end solutions (mPOS)?...........................................................................................22
Is the QR code a threat? ........................................................................................23
Is Pax Global a fraud?...............................................................................................24
Fraud companies follow a different pattern..............................................................24
Pax auditor is PWC ................................................................................................24
The sector research (The Nilson Report) supports Pax terminal shipments...................25
The main Brazilian clients confirm Pax LACIS revenues .............................................25
Ingenico people support Pax data...........................................................................25
Our own analysis support Pax data.........................................................................25
Destroying the myths surrounding Pax.........................................................................26
Pax market is oversupplied and Pax is not generating strong returns..........................26
Pax cash is locked in China and it cannot be moved................................................26
Pax has a customer concentration risk.....................................................................27
So… Why is Pax so cheap?........................................................................................28
Conclusion ...............................................................................................................31

Executive summary
PAX Global Technology is principally engaged in the development and sales of electronic
funds transfer point-of-sale (“E-payment Terminals”) products, provision of payment solutions
services and maintenance and installation services. The Company was listed on the Main
Board of The Stock Exchange of Hong Kong Limited on 20 December 2010.
Pax Global Technology is a play on the cashless trend that we are experiencing around the
world because of globalization, digitalization, automation and ease and government fighting
against fraud. According to The Nilson Report, the most respected source of news and
analysis of the payment industry, Pax Global is the third world player with a 10.3% global
market share (18.2% excluding Asia).
Usually, when we hear about technology and Hong Kong, we often refuse to research more
about the topic since one of our investment principles are founded on investing in what you
really know and, when possible, close to your hometown. However, in this scenario, business
is simpler than it appears at the first look glance, as most of Pax's revenue comes from
outside of China.
Pax caught our attention after a thorough conversation with Ingenico where they pointed Pax
as a hard competitor. Pax fulfills the requirements for being an excellent investment:
1. Operates in a structural growth trend and achieves double digit returns (ROCE) with
strong entry barriers.
2. Controlling shareholder. Hi Sun owns 33.09%.
3. Powerful balance sheet with no debt and more than 70% of the current market cap
in cash.
4. Healthy and steady Free Cash Flow generation (15% FCF yield).
Pax’s stock price performance doesn’t do justice to Pax business evolution. Pax is trading at
7x 2019 estimated earnings despite its strong growth and balance sheet.
Pax was not always as cheap as it is. The company traded at more than 25x earnings in
2015, nevertheless, China macro concerns and a series of misunderstandings made it fall
into oblivion. We are glad to see that Pax is taking the right steps in order to catch investor
attention again. Recently, they hired an Investor Relation manager, uploaded their first
earning call transcript to Bloomberg, approved a share option scheme which aligns the
management with the shareholders, and left China in order to meet international investors
(“roadshow”). Moreover, we have seen Pax management more receptive to improve
shareholder remuneration and send a potent signal to the market.

Industry background
Pax Global Technology is a spin-off from Hi-Sun, a Chinese company controlled by Kui Man
Chun. Hi Sun has the major shareholder position (33.09%) while management retains 1.5%
of the company.
Pax has worked with nearly 90 distributors or partners worldwide and has sold products to
over 100 countries and regions, building a strong global presence.
world. It mainly sells payment terminal products that we use daily to pay with a credit card in
any shop.
Globalization, digitalization, automation, ease and government fighting against fraud are
the main drivers of the cashless trend which is growing every day.
Nordic countries are one step ahead; they are not producing cash paper anymore and have
announced the end of cash transactions for 2030. Other countries, like Spain, are
regulating the maximum amount that you can pay in cash up to 2.500€ and they intend to
lower this limit soon.
The developed countries are not alone,
emerging countries like India and Brazil are
taking measures to reduce laundered money
transactions in an effort to remove money
laundering from the economy. Do you
remember India demonetization in November
2016?
Source: The World Payments Report by
Capgemini
The World Payments Report 2019 from
Capgemini shows that cashless transactions
have been growing more than 10% CAGR
from 2013, led by emerging countries (>22
%), while mature countries also grow (~7%). Moreover, according to Capgemini, this growth
will increase until 2022 from 11.2% in 2017/2018 to 14% CAGR for 2017/2022.
Pax business is being positively affected by the cashless trend. The Nilson Report shows that
the manufacturers of Point-of-sale terminals shipped 68.8 million devices in 2017, up
25.2% from 2016. Asia (+26%) and LATAM (+76%) led the world growth. Moreover, this
trend accelerated in 2018. According to The Nilson Report, the shipments of POS terminals
reached 103.6 million, 39% more over 2017. We would like to highlight that smartphones
used as POS terminals, peripheral PIN pads, card reader dongles inserted in smartphones or
tablets are not included in those figures.

Source: The Nilson Report and Grand View Research, Feb 2019
New methods and devices of noncash payments like Apple pay, Android pay, Wechat,
Alipay, NFC (Near-Field Communication or Contactless), QR code, etc. and government
incentives will increase this growth during the next years. Moreover, the growing popularity of
unattended self-service and big data are helping this cashless transaction growth. Young
consumers have a bias for not carrying cash, they prefer to pay with their smart watch,
mobile or credit card.
The cashless lifestyle is unstoppable, it can be even noticed in the religious scene, having
caught up with this trend a few years ago. In 2017 the Church of England made it easier for
people to make donations with the introduction of contactless payment terminals across the
UK, with the institution recently reporting a 97% increase in donations.
Pax Global business is very easy to comprehend because it only works at the beginning of
the chain. For example, when you are going to pay for your dinner with your credit card in a
restaurant, you pay with a POS (Point of sale) terminal (E-payment terminal)
In the diagram on the next page, a typical cashless transaction is explained more in detail.
We must differentiate various players: The company who builds the E-payment terminal (or
POS terminal), the merchant acquirer, the bank (card) issuer, and the merchant’s (like a
supermarket) bank.

Source: 2016 Pax Annual Report
There are many players in a cashless transaction and to be honest, it is quite complex, but
our company just provides an E-payment Terminal and receives a one-off profit. Their main
clients are financial entities that work as merchant acquirers and introduce their software in
the Pax’s hardware. Pagseguro or Stone in Brazil, Worldpay, Global Blue… are among their
main clients.
In other words, Pax Global products don’t compete with Apple, Paypal, Global Payments,
Banco Santander… In fact, they need Pax products in order to work. Despite Pax not directly
benefiting from online payments through Paypal or Ebay, it benefits indirectly because it
provides more ease to accept E-payment Terminals and accelerates the cashless trend.
Source: Pax Annual Report

Results from 2018 show that 98% of its revenue comes from selling terminals and only 2%
come from Payment solutions services, maintenance and installation services (offering data
analytics, loyalty program & membership management, support bank card promotion
activities, electronic business software solution, outsourcing operation etc.). Pax is working to
expand the Payment solution services revenue, but this is not a short-term priority, because
as we will see, Pax revenues from terminal selling are more recurrent than what they may
seem initially.
Once its business is understood, we should ask ourselves if the terminal market is
overbooked due to the impressive growth we have seen last years.
According to The Nilson Report and Capgemini Report the sector should continue to grow
steadily for the next coming years (CAGR of 7.8% from 2019 to 2025), led by emerging
markets such as Brazil or Russia, among others.
It is encouraging for Pax because a higher increase is expected in countries where Pax owns
a higher market share.
Source: 2016 Ingenico Investor Day
An interesting fact to be aware of is that the terminal’s replacement cycle takes place every 5
or 7 years. Therefore, if you have a large customer base, you will also have recurring profits.
A good way to understand the sector is by comparing it to the cell phone sector. The mobile
sector shows a high level of penetration; however, mobile companies are increasing their
profits every year. This growth is mostly due to the replacement cycle. Generally, we replace
our cell phones every two to three years either due to an accelerated technological advance
or obsolescence. Therefore, it shows recurrent profits such as the POS terminal sector.
Moreover, the POS terminal sector is more rigorous than the mobile sector because they are
handling money. The sector is under regulatory scrutiny and the players are subject to
various controls to obtain international and local certifications. It is not as easy as it seems,
scale is very important. In fact, there are only three international players: Ingenico, Verifone
and Pax Global.

It is also curious the feedback heard through word of mouth. Nobody doubts that the mobile
sector is not a commodity and Apple owns a competitive advantage because its products
(Iphone) are 30%/40% more expensive than a Huawei with similar features. But everyone
“knows” that the POS sector is a commodity. We are wondering how they will react when
they discover that Ingenico products are 10%/15% more expensive than Pax Global products
and Pax Global products are 10%/15% more expensive than other small/local players.
Investors are missing that we are dealing with money and security and any mistake might
cost a huge amount of money. The ignorance in this sector may be explained because an
average citizen such as the taxi driver or the shop assistant that you may daily find, do not
distinguish between Ingenico or Pax POS, but they are not the real client, despite they are
dealing with the products every day.
Pax Global is usually regarded as the maker of a plastic box while the acquirer is considered
as the software provider. Far from the truth, the POS company does not build only a plastic
box, it also provides its software embedded, developed internally. Pax provides security
components that it enables to run and accept all type of payments in all countries as well as
the connection with the merchant acquirer platform. Moreover, the POS company provides a
management platform where the banks and acquirers are able to identify problems, push
apps and generate valuable data to merchants.
Source: Pax Global Investor Presentation 2019

Business background
Pax’s revenue has grown over 21.9% CAGR since 2011. If you have a look at the chart
below, you can see that Pax has experienced a double-digit growth outside China since its
internationalization in 2014, while it has also experienced problems in the Chinese market.
Revenue 2.012 2.013 2.014 2.015 2.016 2.017 2.018 2019e
China 21,7% 13,8% 32,5% 10,4% -17,8% -21,4% -30,9% -34,1%
Overseas 13,4% 8,1% 131,5% 35,8% 23,5% 57,1% 43,4% 4,3%
TOTAL 19,0% 12,1% 61,2% 21,0% 1,5% 23,2% 23,0% -1,7%
Ponderation 2.012 2.013 2.014 2.015 2.016 2.017 2.018 2019e
China 70% 71% 58% 53% 43% 28% 15% 10%
Overseas 30% 29% 42% 47% 57% 72% 85% 90%
SALES (HK thousands) 2.015 2.016 % Growth YoY 2.017 % Growth YoY 2.018 % Growth YoY
USCA 105.433 176.669 67,6% 254.723 44,2% 262.302 3,0%
% 3,7% 6,1% 7,1% 5,9%
LACIS 559.059 689.902 23,4% 1.479.993 114,5% 2.408.613 62,7%
% 19,5% 23,7% 41,2% 54,6%
EMEA 456.053 553.990 21,5% 609.284 10,0% 680.387 11,7%
% 15,9% 19,0% 17,0% 15,4%
APAC 220.362 236.092 7,1% 258.477 9,5% 380.990 47,4%
% 7,7% 8,1% 7,2% 8,6%
OVERSEAS 1.340.907 1.656.653 23,5% 2.602.477 57,1% 3.732.292 43,4%
% 46,7% 56,8% 72,5% 84,5%
CHINA 1.529.887 1.258.189 -17,8% 988.603 -21,4% 683.117 -30,9%
% 53,3% 43,2% 27,5% 15,5%
TOTAL 2.870.794 2.914.842 1,5% 3.591.080 23,2% 4.415.409 23,0%
Million Units 2.013 2.014 2.015 2.016 2.017 2.018
Terminals 2,1 3,0 4,0 4,6 6,4 10,7
Growth 46% 33% 15% 39% 67%
According to The Nilson Report, their total annual shipments have grown over 37.4% CAGR
since 2014, overperforming the worldwide Global shipment of E payment Terminals (36.1%
CAGR) and making Pax Global the third world player with a 10.3% global market share
(18.2% excluding Asia). Just behind Ingenico (10.7% global market share, 16.4% excluding
Asia) and Fujian Newland (13.8% global market share, 1.9% excluding Asia). Notice that
Fujian Newland does not own a significant market share excluding Asia. On the other hand,
Verifone is losing market share because its recent problems (6.1% global market share, 14%
excluding Asia).

What is happening in China?
China is experiencing an abnormal growth. The Nilson Report states that 55% of the world’s
annual terminal shipments are in China. According to People Bank of China, the number of
cards in circulation in 2017 has been 6.7 billion, a 24% increase since 2015 and the total
terminal shipments have been 31.2 million, a
37% increase since 2015.
This notable growth combined with a looser
regulation than the rest of the world, has
attracted a lot of competitors. Also, companies
like Alibaba and Wechat are providing
alternative payment methods such as the QR
payment method that, for example, allows a
grocer to accept cashless payments without a
POS terminal (Wallet to wallet transaction).
This new method of payment is vulnerable to fraud as the barcodes can be reproduced by
criminals and linked up to unknown sources, allowing them to intercept payments. In 2017,
90 million yuan (or $13 million), was reported stolen in Guangdong province alone. There
have also been reports of the QR codes on Mobike dockless bicycles being swapped for
personal QR codes, ensuring that the fraudster, not the company, gets paid.
Last year, The People’s Bank of China announced a new regulation. Starting on April 1st
,
2018, a single static QR code is only able to receive 500 yuan from an individual in a single
day. This cap can be raised once the institution accepting the payment passes security
checks, receives proper permits, or simply switches over to specialized Point-Of-Sale
terminals that create a new code for each transaction, making the process much more
secure.
According to the Financial Times, both Alipay and WeChat have voiced their support for
these regulations, with analysts believing that it will only strengthen China’s mobile payment
ecosystem in the long run by compelling more businesses to switch from static QR codes to
POS terminals.
In addition, there is only one local card payment organization, China Unionpay. Therefore,
since regulation is softer, a POS provider needs to obtain less certifications. That being said,
Chinese peers in the payment chain focus on cost instead of product quality and security.
We know that some of the Chinese peers change to unsafe and cheaper components in
order to earn more margin, which those components are different than the one they used for
getting the certification.
Hence, the real problem in China is the high competition due to the low barriers of entry and
the fact that two big companies (Alipay and Wechat Pay) are managing through their digital
wallets all Chinese payments.
Despite China’s competitiveness, the world POS terminal business has high entry barriers.
There are a lot of standards and certifications required in every country and region that you
must pass. The certification standard and government regulation are stricter than in China. It
is a business where you must fight with fraud every day, so you need the best technological

resources in order to fight against it. It is a sector where large scale is a must. Still, it requires
a great footprint and it is very difficult to break the relationship between the hardware and
the software provider because there are a lot of specific investments and any security breach
poses a huge liability. As stated before, the POS terminal is not just a plastic box, there is a
software embedded internally developed by the POS company that provides security,
payment applications and a management platform among other services. This competitive
advantage is known as “switching cost”. It explains why only three players are really
operating globally (Ingenico, Verifone and Pax).
Chinese payment culture is very different from the rest of the world. Due to China Unionpay
monopoly and Wechat and Alibaba disruption, there is a softer regulation and the software
investments do not fit other countries. Usually, Chinese players only sell POS in China
because their specific culture and product quality is not valid in other regions. Newland and
Centerm are good examples. They are the biggest terminal providers in China, however,
they have still not been capable of doing business outside of China. Even the giant Ingenico
is a good illustration. Ingenico operates two different companies; on the one hand, a
company named Ingenico where its R&D investments are worldwide suitable, and its
terminals are made in Taiwan. On the other hand, Fujian Landi whose terminals are made in
China and are only deployed in the Chinese market. We would like to highlight that Chinese
terminals are not valid for other countries due to the strict certification process in overseas
markets.
China’s POS case is very specific. In fact, if you go to Hong Kong, the payment method and
the competition is completely different. QR payment appeared in 2012 in China, but despite
WeChat and Alibaba efforts, nobody uses QR payment in Hong Kong. The same happens in
closer countries like Korea, Taiwan, Indonesia among others. In mature countries as Europe
we do not bank on seeing QR payments in the foreseeable future. We conclude that Chinese
payment habits are very different from the rest of the world and we can hardly expect any
significant changes in worldwide payment habits.
We consider that Pax management did an excellent job forecasting China’s future. They
were not large enough to invest in China and worldwide at the same time as Ingenico did.
Therefore, they decided to leave China and focus their efforts globally, especially in Brazil. In
2015, they switched into mid-to-low end solutions in Chinese market where they faced more
competition due to low barriers to entry and requires less investment requirements.
In any case, Pax Global announced during the last earnings results that they are
implementing strategic and structural adjustments in the Chinese region that will provide
some one-off costs for 2019. Those adjustments will improve the cost structure and
operating efficiency of Chinese business and make positive impact on the Group’s profit
margins.
They will improve the profitability in the Chinese segment in 2020, reducing their structure,
however, they will focus their efforts on the overseas region, where they have entry barriers.

What is happening outside China? Overseas Region
As you have seen, Pax management predicted the competition trend in China in advance
and invested many recourses in order to build a strong business outside China, specifically in
Brazil.
2018’s results show that 85% of the revenue comes from outside of China, in particular 55%
from LACIS region (Latin America and the Commonwealth of Independent States, mostly
Brazil and Russia). This trend has accelerated over of 2019 where we estimate that only 10%
of the revenue emanates from China.
In the overseas segment, Pax managers think can obtain a double-digit growth for the next
decade. They have a small market share in mature markets (3.3% in the USA, 5.4% in
Europe and 0.2% in Canada) while they have a big market share in emerging countries
(36.8% in LATAM and 7.9% in Sud-Africa and Middle East).
LACIS region is the biggest contributor of the overseas business. Pax operates through a
distributor in LATAM in order to avoid operational, regulatory and currency risk. However,
they hold a close relationship with their main end clients, who support their strong growth.
For example, Stone and Pagseguro (the biggest and fast growing acquire players in Brazil)
did an IPO last year and both highlighted that Pax Global was their unique supplier.
The prospects in the LACIS region are promising. Stone and Pagseguro confirmed that the
cashless trend is accelerating and there is huge potential market opportunities because the
POS penetration is still low. Cards are used only in 30% of the transactions while in mature
markets this percentage increases until 85%. This means, that for every 100 dollars paid, 85
of those are paid by card in countries like Spain. Moreover, the market has high entry
barriers, with Pax Global, Ingenico and Verifone as top POS providers.
We cannot feel disappointed with Pax guidance despite it implies a slightly decrease on
revenue for 2019 in the LACIS region. They are very confident for 2020 onwards. Pax target
for 2019 focused on achieving HKD 2bn of revenues, but they achieved HKD 2.4bn in
2018, mostly because their main LATAM clients did an IPO and accelerated some
investments. The problem in 2019 was the excellent result of 2018. But Pax management
states that after the 2019 consolidation year, in 2020 they will bounce back stronger.
Pax management is quite optimistic about the US region. According to our estimates, it will
be around 9% of 2019 sales. Their landing started in 2008 when one of their top managers
moved to the US and started set up their own US subsidiary. Nowadays, they feel
comfortable with its current position and they developed good relations that allow them to
enter in big auctions. Pax is putting more resources in the US segment, increasing the
headcount and moving the assembled line to the US. They cannot completely avoid Trump’s
tariffs as the components would be taxed if Trump’s plan moves on. Despite this, it’s still a
smart move because of the positive impact on customer service since this procedure will
make customization possible and will lead to further client confidence. Pax guidance implies
they will grow between 30% and 52% in 2019.
APAC and EMEA regions perspectives are quite optimistic as well. They have been growing
stronger the last years and increasing the recognition by acquiring banks and payment
service providers. India, Indonesia, Vietnam, Hong Kong, Thailand and the Philippines are

APAC regions where Pax has a strong market share and even if the POS penetration is still
small, it is growing each year. Among these regions, India has the best growth prospects due
to the huge population and promoting of a cashless environment. In this country, Pax has
achieved a record high of sale in 1H 2019.
Furthemore, Pax has invested a lot over the last years in its Android Terminal which comes
with higher margins and with the SmartKiosk series that will be rolling out in the second half
of 2019. These self-service payment terminals will be deployed in petroleum forecourts,
parking locations and for vending and ticketing.
The SmartKiosk series opens a huge market potential. According to “Intelligent Vending
Machine Market” issued by Global Market Insights, the Global intelligent vending machines
market is expected to grow at CAGR of 15% from 2018 to 2024. On the other hand, there
are around 25 million of vending machines and just 5% accept card payments. The cashless
trend is changing this situation. If you have the opportunity, take a minute to go to an airport
and compare the current vending machine with those from four years ago. You will see a
huge improvement!
In addition, Ingenico and Verifone could experience some headwinds in the short term and
Pax is prepared to take advantage of that. Ingenico, the biggest player in the world, recently
acquired Bambora, a merchant acquirer. So, from a customer perspective, that strategic
movement switches Ingenico from a terminal provider to a direct competitor (merchant
acquirer). Now, Ingenico can offer value in the whole chain, leaving behind its terminal role
as a unique terminal provider. That movement annoys some Ingenico’s customers and
makes them more receptive to switch to Pax products.
On the other hand, Verifone was acquired by Francisco Partners last year. Francisco Partners
is a Private Equity and it is implementing a huge cost cutting program that could potentially
scare away some clients in benefit to Pax and Ingenico. We would like to highlight that,
according to The Nilson Report, Verifone owns 28.7% market share in the United States,
16% in Europe, and around 10% in Canada and Latam.
It is also important that Pax works in US dollar around the world, except for Europe and
China. That fact significantly reduces its currency risk because the functional currency of Pax
(HK dollar) is pegged to US dollar since 1983.
Still, Pax has higher gross margins outside China, as stated in the last annual earning
conference call, they achieved 40-50% gross margin in 2018, remarkably if you compared
to 15-25% in China and in line with Ingenico’s terminal gross margin.

Financial Performance
Despite the strong revenue growth in the last years, the operating profit has not been
growing.
As you can see in the chart below, the gross profit margin is stable around 38%, however,
the operating margin went down from 19%/23% to a 14.5%/15%. The margin erosion was
not due to competition pressure but because the company boosted substantially the R&D
expense in order to support the Pax growth prospects. They doubled the R&D expense in
three years in order to expand their services (PAX successfully launched two new payment
services solutions, PAXPAY and PAXSTORE that will provide more recurrent revenue in the
foreseable future), launched the android terminals and the SmartKiosk series.
HK$ 000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019e
Revenue 723.610 1.103.180 1.313.330 1.472.488 2.373.272 2.870.794 2.914.842 3.591.080 4.415.409 4.341.000
Growth Revenue 52,46% 19,05% 12,12% 61,17% 20,96% 1,53% 23,20% 22,95% -1,69%
GROSS PROFIT 291.870 391.702 464.187 541.129 864.866 1.092.490 1.261.994 1.457.593 1.626.681 1.627.875
GROSS PROFIT Margin 40,3% 35,5% 35,3% 36,7% 36,4% 38,1% 43,3% 40,6% 36,8% 37,5%
Other income 27.390 41.712 30.079 50.378 70.445 109.235 71.593 75.054 84.506
3,8% 3,8% 2,3% 3,4% 3,0% 3,8% 2,5% 2,1% 1,9%
Selling expenses -74.371 -124.100 -113.674 -131.124 -218.568 -235.715 -297.396 -426.432 -437.809
10,3% 11,2% 8,7% 8,9% 9,2% 8,2% 10,2% 11,9% 9,9%
Administrative expenses -72.381 -101.851 -157.336 -194.193 -253.549 -308.037 -347.098 -501.721 -590.819
10,0% 9,2% 12,0% 13,2% 10,7% 10,7% 11,9% 14,0% 13,4%
R&D -34.899 -52.695 -82.808 -94.480 -113.841 -157.734 -183.614 -287.230 -332.016 -347.280
(include in Admin exp.) 4,8% 4,8% 6,3% 6,4% 4,8% 5,5% 6,3% 8,0% 7,5% 8,0%
Total Selling and Admin. 20,3% 20,5% 20,6% 22,1% 19,9% 18,9% 22,1% 25,8% 23,3%
Adjusted EBIT 172.508 207.463 223.256 266.190 463.194 657.973 689.093 604.494 682.559 651.150
Adjusted EBIT Margin 23,84% 18,81% 17,00% 18,08% 19,52% 22,92% 23,64% 16,83% 15,46% 15,00%
Growth EBIT 20,26% 7,61% 19,23% 74,01% 42,05% 4,73% -12,28% 12,91% -4,60%
Source: Pax Annual Reports
It is not the first time that the company raises substantially their R&D expenses. In 2012 and
2013, the company increased their expenses in order to support the international growth,
and they normalized this figure in 2014 and 2015 because of their consistent growth. Notice
how the absolute figure is higher each year, but lower if compared to the sales as a
consequence of the strong growth.
We believe that Pax carried out the right strategy increasing the R&D expenses, despite they
reduced temporally their profit growth. We’ve seen how Pax has been grabbing market share
during the last years, also, we have seen the gap between Ingenico POS quality and prices,
and Pax Global POS is narrowing, and we believe it was possible because Pax R&D
investments. Definitively, Pax is building a moat.
Pax financial statements are quite simple and easy to understand. Pax has no debt or
pension liabilities. Also, E-payment terminal companies operate under a light Capex
business because they use a fabless model.

Look at the chart below which shows its FCF generation.
2.010 2.011 2.012 2.013 2.014 2.015 2.016 2.017 2.018 2019e
CF OPERATING ACTIVITIES BEFORE WK 153.563 178.856 216.113 251.935 497.586 652.707 579.638 573.798 617.088 610.000
- 16,5% 20,8% 16,6% 97,5% 31,2% -11,2% -1,0% 7,5% -1,1%
CHANGE IN WK -34.415 -193.546 -2.091 54.090 -319.568 -314.897 -314.283 -338.481 -396.487 30.000
CAPEX -4.560 -2.366 -2.762 -1.406 -7.493 -5.248 -14.614 -17.520 -37.214 -45.000
FCF 114.588 -17.056 211.260 304.619 170.525 332.562 250.741 217.797 183.387 595.000
FCF conversion (EBITDA to FCF) 65% -8% 93% 113% 36% 50% 36% 34% 28% 89%
FCF preWK 149.003 176.490 213.351 250.529 490.093 647.459 565.024 556.278 579.874 565.000
FCF preWK conversion (EBITDA to FCF) 85% 84% 94% 93% 105% 98% 81% 88% 88% 85%
How is it even possible that a company who operates under a light capex business with no
debt and low taxes is converting just around 35% of their EBITDA into FCF?
The main reason is caused by its working capital structure, which is very similar to other
Asian companies.
CHANGE IN WC 2.010 2.011 2.012 2.013 2.014 2.015 2.016 2.017 2.018
Increase in trade and bills receivables, deposits and other receivables -54.542 -225.581 -29.059 -73.493 -284.891 -466.035 -183.707 -278.902 -292.099
Increase in inventories -37.962 -146.753 63.413 -222.874 -39.779 -154.855 -97.653 -255.183 -360.786
Decrease in restricted cash 0 0 -31 19 114 6.547 8.489 -11.728 -38.334
Decrease / Increase in trade payables, other payables and accruals 58.089 178.788 -36.414 350.438 4.988 299.446 -41.412 207.332 294.732
TOTAL -34.415 -193.546 -2.091 54.090 -319.568 -314.897 -314.283 -338.481 -396.487
PAX has a huge number of receivables on its balance sheet because it has many revenues
coming from emerging countries like China, Brazil, Middle East, Russia… These countries
have a larger trade and bills receivables policy than mature countries.
We devote a big number of hours to understand and check its working capital movements
and we conclude that its huge working capital number is not a handicap.
Due to the extension that sharing our due diligence would imply, we will not share it in this
report, however, whomever is interested in receiving more information can contact us.
HK$ 000 2.013 2.014 2.015 2.016 2.017 2.018
Revenue 2H 841.374 1.367.609 1.763.156 1.582.127 1.985.381 2.539.858
Growth Revenue 7,39% 62,54% 28,92% -10,27% 25,49% 27,93%
Factor 1,24 1,55 1,51 1,11 1,16 1,18
Receivable Estimate 677.709 884.262 1.168.997 1.421.747 1.718.850 2.157.140
Receivable Real 644.290 912.362 1.304.893 1.416.365 1.743.007 1.950.193
Accuracy 105% 97% 90% 100% 99% 111%
Pax Global barely uses factoring and it had little receivable impairments. They did a small
receivable impairment in China last semester, but it is a small quantity compared to the
overall sales.

If we look at the cash conversion period:
Source: 2018 Pax Annual Report
Pax management said that they are working to improve its cash conversion, mainly
enhancing LACIS and Chinese receivable turnover. It can be seen during the last half year
results:
Source: 1H 2019 Pax Presentation
Usually during the first half of the year they experience a negative net cash used in operating
activities because the working capital effect. They burned HKD 325M during the first half of
2017 and HKD 101M in 1H 2018 (Remember that they are FCF positive at the end of the
year each year since 2011). However, they surprised us this year. Pax generated HKD 486M
of net cash generated from operating activities. (12.6% cash flow yield in only 6 months)
This huge improvement was mainly due to its cash conversion uplift. Last year Pax needed
184 days for converting its investments in inventory into cash (cash conversion cycle), while
this year it improved to 148 days.
Pax management think that this improvement is sustainable, so we could expect a better cash
conversion in the coming years and an improvement in the working capital and cash flow
generation during the year.
In fact, the cash conversion improvement combined with an expected flat growth for 2019
should imply that we will see how the working capital position in the balance sheet is
reduced and a higher EBITDA to FCF conversion.

Valuation
Once business and the financial structure are laid down, we proceed to company valuation.
An emerging company needs to have a financial strong balance sheet to catch my attention.
Pax Global has no debt and sits on a cash position of 2.7 billion of HK dollars.
Looking at the financial reports you realize that they are easier to understand than most of
the European financial reports.
You quickly notice that equity is approximately the sum of inventories, receivables and cash,
minus total liabilities. (Net amount is more or less like equity). On the other hand, equity is
achieving a double-digit growth every year. Pax is generating value each year, but the
market is missing it. Notice that 1H 2019 figures are compared to 2018 FY; therefore, we
could reasonably expect a double-digit equity growth for 2019 FY.
Pax is trading now at HKD 3.5, so its market cap is around 3.8 billion of HK dollars. Notice
that the company is trading below its book value, despite its book value is mainly cash.
Moreover, Pax made HKD 580M of Free Cash Flow before WK or net profit in 2018, a
15.2% FCF yield and as we highlighted before, we are expecting a Free Cash Flow of at
least HKD 600 million for this year, 15.8% FCF yield. The difference from 2018 is that we
are expecting a positive working capital effect, so almost all of the EBITDA will be converted
into cash, different from 28% last year EBITDA to FCF conversion.
Taking 2018 profit into account, Pax is trading at 7.3x P/E ratio and 1.9 EV/EBITDA.
Remember that Verifone was acquired last year at 20.5x P/E ratio and 8.8x EV/EBITDA ($3.4
billion, or HKD 26.6 billion) by Francisco Partners and Verifone had net debt. If this does not
seem sufficiently interesting for you, then you are forgetting that PAX has HKD 2.7 billion in
cash (71% of market cap) and is free of debt. Therefore, if you adjust by cash, Pax is trading
at 2.1 P/E ratio.
But I want to go further, the amount that is easily converted in cash (inventories +
receivables + cash) sums a total of 6 billion and if you subtract all the liabilities (2 billion)

you get 4 billion of HKD. Remember that its market capitalization is HKD 3.8 billion,
therefore you have more than 100% of the market capitalization amount in “cash”.
After Verifone takeover, there are not pure play public companies like Pax. Ingenico,
Newland and Xinguodu operate other business than sale point-of-sale (POS) systems.
Despite the difference, we would like to highlight that those companies are trading at more
than 20x earnings and more than 13x EV/EBITDA and they are levered, while Pax it is
trading at 7.3x and has a big cash position.
In order to put it simply, we will not show you a DCF valuation, even though we valued the
company through different models.
Based on the balance sheet the company can be liquidated and it would be worth more than
HKD 4 billion. This implies that you can buy the business free today because Pax market cap
is HKD 3.8 billion.
We think it is worth HKD 11 billion (HKD 10 stock price) based on 10 times 2021 profit plus
HKD 4 billion of “cash”, which is reasonable because other Hong Kong listed companies in
the payment segment trade at higher multiples and the company has traded in the past on
average for 11 times earnings, reaching 25 times earnings in 2015. If you have other
expectations for the future, you can apply your own model here based on our inputs.

Investment thesis
We are aware of the length of this report. For this reason, we would like to put all data
together in a clear structured form for you to understand the investment thesis with ease.
Structural growth business with high entry barriers
world because of globalization, digitalization, automation and ease and government fighting
against fraud. According to The Nilson Report, Pax is the third world player with a 10.3%
global market share (second one excluding China).
The company has been growing at 25.2% CAGR since its IPO in 2010 and we believe that
Pax could maintain a double-digit growth for the next years due to its astonishing growth
prospects in the overseas region that we described in the report.
In addition, Ingenico and Verifone may experience some company specific headwinds in the
short term due to certain problems and Pax is prepared to take advantage of that.
Furthermore, Pax has invested much over the last years in order to fulfill high-end solutions
and successfully launched its Android Terminal and the SmartKiosk series.
Moreover, it is not easy to compete all over the global market. There are a lot of standards
and certifications required in every country and region that you must pass. Still, it requires a
great footprint and it is very difficult to break the relationship between the hardware and the
software provider because there are a lot of specific investments and any security breach
poses a huge liability. Pax is not just providing a plastic box, there is a software embedded
internally developed by Pax that provides security, payment applications and a management
platform among other services. It is a sector where large scale is a must, especially if you
want to offer high end solutions. In fact, only three players are really operating globally
(Ingenico, Verifone and Pax).
Profits and Cash Flow are coming
We have seen how Pax revenue has been growing but Pax profit has been slightly down
since 2015. The profit is lagging not due to competition pressure but because the company
boosted substantially the R&D expense in order to support its growth prospects. At the same
time, Pax Free Cash Flow generation was positive but weak with an EBITDA conversion of
35% despite Pax light capex business.
As the management let us know, Pax is comfortable with its current R&D ratio and it is time
for leveraging its R&D expenses. Pax margins will improve in the coming years as a
consequence of revenue growth in higher end solutions segment which will come with better
margins.
We strongly believe that Pax profit will grow again in 2020 led by Brazil region and the
leverage of its R&D expenses.
Moreover, Pax is more cautious about its working capital management. As we have seen
during the first half of the year, Pax is improving its cash conversion period from 184 days in
1H 2018 to 148 days in 1H 2019. Pax management is focused on improving the
receivables and payables metric and they think that there is room for improvement.

We estimate that Pax will generate around HKD 600 million this year. Knowing that Pax
market cap is HKD 3.8 billion, it means that the company generates more than 15% Free
Cash Flow Yield.
Strong Balance Sheet
Pax has no debt nor pension liability and owns HKD 2.7 billion of cash. Pax cash position
has been growing significantly. The company increased its cash position from HKD 1.7bn in
2013 to HKD 2.7bn in 1H 2019 despite its huge positive working capital position (the
receivable amount (HKD 2.1bn) is higher than the total liabilities number (HKD 2bn)) and
the fact that they did some acquisitions, repurchased shares and pay dividends.
Therefore, Pax strong Balance Sheet provides high degree of safety and reduces dramatically
the downside scenario.
Valuation is ridiculously cheap
Pax traded at more than 25x earnings in 2015, however, we can now buy it at 7x 2019
estimated earnings and 1.9 EV/EBITDA. The valuation is cheap from current
earnings/cashflow perspective and, as we explained, Pax holds high growth prospects.
To show how cheap is Pax, remember that Verifone was acquired last year at 20.5x P/E ratio
and 8.8x EV/EBITDA ($3.4 billion, or HKD 26.6 billion) by Francisco Partners and the
company has worse growth prospects than Pax. On the other hand, Ingenico is up more
than 100% this year after a double-digit growth in its terminal business that erase concerns
about the POS business.
That is not being reflected in Pax’s stock price, despite Pax has been grabbing market share
to be the second world player (excluding China).
Based on the balance sheet the company can be liquidated and it would be worth more than
HKD 4 billion. This implies that you can buy the business free today because Pax market cap
is HKD 3.8 billion.
We think it is worth HKD 11 billion (HKD 10 stock price) based on 10 times 2021 profit plus
HKD 4 billion of “cash”.
Catalysts
Management are taking steps in order to narrow down the huge difference between the
intrinsic valuation and the current valuation.
Recently, they hired an Investor Relation manager, uploaded their first earnings call transcript
to Bloomberg, approved a share option scheme which aligns the management with the
shareholders, and left China in order to meet international investors (“roadshow”) for third
consecutive year. Moreover, we have seen Pax management more receptive to improve
shareholder remuneration and send a potent signal to the market which can act as a catalyst
to revalue the shares combined with profit growth expected to restart next year. We want to
highlight that it will be the first profit growth since 2015 and the company will screen better.

Risks to the thesis
Could Chinese commodity payment market extend to Brazil or other
worldwide markets?
It is fair to ask ourselves these questions. If Pax has lost the market share in China, why
should it not happen the same in Brazil or other countries?
As we said in our report, China is a very specific market. We know that the POS market is a
commodity in China but not in the rest of the world. There is only one local card payment
organization, China Unionpay, and it makes easier to obtain the certifications needed. In
fact, in 2012, following a US government complaint, the World Trade Organization ruled
that China was discriminating against foreign payment providers, mainly Visa and
Mastercard, but neither is currently doing business in China. Moreover, Tecent (Wechat) and
Alipay disrupted the sector with QR code thanks to the government help in exchange to
some privileges like possessing data. The common QR transaction is a wallet to wallet
exchange that does not accomplish the international security standards. We have recently
seen how The People’s Bank of China announced a new regulation in order to promote the
POS terminals, but because the regulation is not strong enough and the POS terminal does
not provide value through its software embedded, the Chinese payment sector is
oversupplied.
Pax is the only Chinese player out of China. Chinese players cannot follow Pax steps. It
requires a huge investment because their actual software does not fit into the rest of the
world, so bank and acquirers are reluctant to trust them. In fact, Ingenico is operating a
completely different company with its own R&D expenses and terminal manufacturing (Fujian
Landi) in order to satisfy China payment business. We would like to remark that Landi
terminals are only deployed in China and cannot obtain the international and regional
standards to operate in other parts of the world.
In most of the overseas markets, POS company needs the invitation from the acquirers,
therefore, it is hard for other Chinese peers to get invitation from international acquirers or
banks because they need a strong reputation. Moreover, the certification process usually
takes 6 months to 1 year and the product need to get the following certification in order to
be sold from:
1. PCI PTS (Payment Card Industry PIN Transaction Security)
2. EMV (worldwide transaction authentication standard)
3. Card association specific payment (Visa payWave, Mastercard Contactless,
American Express Pay, Discover D-Pas, etc)
4. Merchant acquirer customized certification (i.e. Italy – PagoBancomat; France –
Carte Bancaire; Denmark – Dankort, etc)
We believe that the scale and knowledge needed to satisfy all regional and international
certifications and the footprint that Ingenico and Pax currently have cannot be replicated by
other players.

Is the sector mature? Could it affect the margins?
We have no doubt that the POS terminal market will continue to grow. According to The
Nilson Report and Capgemini Report the sector should continue to grow steadily for the next
coming years (CAGR of 7.8% from 2019 to 2025), led by emerging markets such as Brazil
or Russia, among others.
The cashless trend is accelerating in the emerging markets due to the huge population and
promoting a cashless environment. There are huge potential market opportunities because
the POS penetration is still low. Cards are used only in 30% of the transactions while in
mature markets this percentage increases until 85%.
On the other hand, mature countries are growing to a lesser extent, but in these countries
the POS providers benefit from replacement cycle which takes place every 5 or 7 years.
Margins in mature countries are higher because bank and acquirers demand more
sophisticated solutions. In fact, the barriers to entry are higher because the regulation is
stronger and regularly updated, while the relationship with its client is more worthy.
We do not believe that Pax margins come under pressure in the coming years. As we stated,
Pax margins declined because the company boosted substantially the R&D expense in order
to support its growth prospects.
Moreover, Ingenico and Pax managers confirmed to us that they are not feeling a higher
competitive environment.
Could we expect a structural switch from high-end solutions (traditional
POS) to low-end solutions (mPOS)?
Low-end solutions business has not barriers
to entry. Remember that we said that the
traditional POS is not just a piece of plastic
because the POS company provides an
embedded software. However, we can affirm
that low-end solutions are a piece of plastic
connected through Bluetooth to a mobile
where a payment application is running. This
solution is valid for micro merchants but not
for other merchants. This is because this
payment solution is not embedded and the cost of transaction is more expensive
(1.75%/transaction with a low-end solution vs 0.5%/transaction with a traditional POS
solution). When the merchant does not carry out several card transactions it is a valid
solution, but if the merchant starts to receive a higher number of card payments it is no
longer a valid solution due to its cost elevated. Usually, the micro merchant starts with the
low-end solutions, but as the business gets bigger, it switches to a traditional terminal
solution. Izettle is a good example of low-end solution company.
We think that low-end solutions are not valid for most merchants because it will not provide
enough services and because the cost per transaction is higher than the traditional POS
terminals. In addition, we do not imagine a world where you are billed with a mobile (mPos)
instead of a POS terminal.

Is the QR code a threat?
We can affirm that Chinese commoditization started with the QR code disruption. China was
more competitive than the rest of the world because the market structure (less certifications
needed, only one card organization…), however, the QR irruption commoditized the sector.
We do not bank on seeing QR payments in the foreseeable future outside of China. In fact,
if you go to Hong Kong, the QR code is not popular. QR payment appeared in 2012 in
China, but despite WeChat and Alibaba efforts, nobody uses QR payment in Hong Kong.
The same happens in closer countries such as Korea, Taiwan, Indonesia among others.
However, we have seen some small payments in Europe with the QR code technology,
mainly from Chinese citizens. We would like to highlight that those QR payments are not the
same as Chinese QR payments, it comes with stricter regulations and requirements. They are
carried out through a POS terminal instead of wallet to wallet transaction. Therefore, we are
not worried that those payments will bring commoditization.

Is Pax Global a fraud?
The first feedback that we usually receive when the investors take a look at the valuation is
questioning its financial statements. “How on earth can a company could be so low-priced
nowadays? It must be a fraud!”
We have known that Chinese regulators standards are more lenient than European and
American. We have recently seen how Kangmei Pharmaceutical Co Ltd plummeted 75%
after admitted that they overstated cash holdings by more than $4bn. Also, an investigation
by the CSRC into Kangde Xin, a polymer materials maker, found that it had inflated profits
over four years.
However, we are very confident of Pax statements. We base our confidence in the following
rationale.
Fraud companies follow a different pattern
There are many examples of accounting fraud in China, but if you take a look case by case,
all the companies follow the same pattern, they burn cash every year. Some of them blame
the high capex investments that promise a large revenue growth in the coming years, others
attribute it to the working capital… but, all of them reduce their cash position every year
or/and increase their debt. Why? It is simple to explain, their financial numbers are working
on paper, however, the business is not sustaining those numbers and at the end, the lie
comes to light.
This is not Pax case. Pax is increasing its cash position year by year. Since 2013 Pax boosted
60% its cash position despite there were special cash-outflows in the meantime since they
made some acquisitions, repurchased shares and pay dividends.
Pax auditor is PWC
Pax auditor is not a small and local auditor but one with strong international reputation;
PWC is auditing the annual accounts since the IPO and they never expressed a negative
opinion.

The sector research (The Nilson Report) supports Pax terminal shipments
The Nilson Report is the most respected source of news and analysis of the global card and
mobile payment industry. The Nilson Report does not accept paid advertising of any kind.
There are no advertisements, no articles written by any source other than their own staff.
There is no sponsored content such as webinars or white papers.
The Nilson Report data source is very exhaustive. They use Annual Report, Financial Data,
National Bureau of Statistics, Customs, interviews (Producer Interview, Raw Material
Interview, Consumer Interview) and third-party verification (Association, Specialist Deep
Interview, Company Data Exchange).
We have spoken with people from The Nilson Report and confirmed that they make a
meticulous study of their research. We came to the conclusion that they support Pax’s
financial data.
The main Brazilian clients confirm Pax LACIS revenues
At the moment, Pax is experiencing surprising growth in Brazil. Pax grew 23.4%, 114.5% and
62.7% in 2016, 2017 and 2018. Currently, 55% of the total revenue comes from LACIS
region. The LACIS region is mostly Brazil. Two main Pax clients did an IPO last year. We
carried out an extensive research about their IPO prospects and we found that Pax is their
major supplier.
Source: Stone IPO prospectus
Source: Pagseguro IPO prospectus
Ingenico people support Pax data
Analysts and Ingenico management point out Pax as their main competitor. In fact, we
discovered Pax after a thorough conversation with Ingenico in 2016. We cited Verifone as
the hardest competitor, however, Ingenico people corrected us and stated that Pax Global
was stronger than Verifone.
Our own analysis support Pax data
We have examined the financial statements in depth. We have built with precision the Cash
Flow Statement from the P&L and Balance Sheet. Moreover, we have spoken with several
clients and employees. Consequently, we can conclude that Pax’s financial data is accurate
and true.

Destroying the myths surrounding Pax
That being said, we would like to refute other myths about Pax.
Pax market is oversupplied and Pax is not generating strong returns
When investors observe the stock price performance, we completely understand that the first
thing that comes to mind is that Pax’s business is suffering, however, the reality is very
different. Pax stock was trading around HKD 14 in 2015 and now it is trading at HKD 3.5
(HK$ 000) 2.013 2.014 2.015 2.016 2.017 2.018
Revenue 1.472.488 2.373.272 2.870.794 2.914.842 3.591.080 4.415.409
12,1% 61,2% 21,0% 1,5% 23,2% 23,0%
Profit 226.540 391.806 620.286 603.434 513.037 515.398
73,0% 58,3% -2,7% -15,0% 0,5%
ROE 10,9% 15,4% 20,1% 17,2% 13,2% 12,2%
ROA 8,0% 11,8% 15,2% 13,6% 9,8% 8,9%
ROCE 57,0% 56,7% 65,1% 47,1% 32,7% 28,1%
ROE (excl. Cash) 60,9% 63,9% 66,2% 46,6% 29,8% 25,8%
Pax business is healthy, and its revenue is growing each year. As we explained before, its
profit is lagging the revenue growth because its strong investment in R&D.
On the other hand, the returns are very strong. Pax is making a double digit return on their
investments (ROCE). ROE and ROA returns are lower just due to its huge cash position. If we
exclude the cash, ROE and ROCE are very similar, underlying a very profitable business.
Pax cash is locked in China and it cannot be moved
Pax Global headquarters are located in Hong Kong; however, Pax runs Research and
Development and operational center mainly in Shenzhen, China. Their suppliers and
outsourced factories are also in China, but Pax headquarters is located in Hong Kong.
Because most of their expenses are in Renminbi, Pax keeps a huge amount of its cash there,
but this does not imply that all Pax cash is in China, as Pax Hong Kong is where all the
oversea revenue goes and is then filtered down into the necessary areas in order to continue
managing business within China.
Pax management told us that they plan to keep around 60% of its cash in China for the sole
purpose of putting it back into daily operations and as a contingency plan.
Although China has certain restrictions in effect that tax companies 5% if they wish to move
capital, these restrictions do not have an impact on Pax.
Pax has been paying a dividend since 2015 and they repurchased a small number of shares
in 2016 and 2017. All the transactions were executed without any problems and tax
payment. There were many transactions during the last years, but we would like to highlight
the followings:
Pax established a joint venture with CCV Group B.V., one of Europe’s largest payment
service and solution providers, focusing on the development of new payment technologies,

specifically on the development of unattended self-service terminals for public transportation,
petroleum forecourts, parking and vending machines in January 2019.
Pax acquired a Korean company, Kwang Woo, for an aggregate consideration of US$ 4.08
million in November 2017.
Pax acquired 60% of an Italian company, CSC Italia, for an aggregate consideration of EUR
3.0 million in April 2017.
Pax subscribed a 20% equity stake in a Swedish company, Onslip AB, for a consideration of
EUR 2.1 million in April and a 20% equity stake in a Shanghai company, Shanghai Coshine
Software Co., Ltd, for a consideration of RMB17.0 million in September 2017.
Pax has a customer concentration risk
The annual report shows that 45.9% of its sales comes from its largest customer. We
mentioned before that Pax operates in LATAM through a distributor who works exclusively for
PAX. Not only do they assemble Pax terminals, but they also sell to numerous end clients with
whom they maintain excellent relationships, clients like with Pagseguro, Stone or Cielo,
among others.

So… Why is Pax so cheap?
If you take a look at the graphs above which illustrated Pax’s financial data and return
metrics, you will be surprise for its stock price performance.
Source: Visual Chart
Last but not least, we are always interested in understanding what the market is feeling, as
Warren Buffett said, “If you don’t know who the patsy is, you’re the patsy”.
We have been reading many Pax reports and contacted several people in the sector, so we
will summarize the following points to you:
1. Pax Global is small, poorly covered and trades in the Hong Kong market. Pax Global
has HKD 3.8 billion of market cap, equivalent to 440 million of Euros. Pax has ADR
in the USA with literally 0 volume. In addition, Pax is not covered by any international
broker despite most of its shareholder base are international investors (excluding Hi
Sun).
Moreover, we had access to some broker research, and they valued Pax without
taking into account the cash position and applying a small multiple (7-8x P/E)
despite their own growth estimates. (Jefferies’ estimates imply a 20% EPS growth in
2020 and another 23% EPS growth for 2021, therefore, Jefferies expects a 48% EPS
growth for the next two years.)
2. Pax Global is losing market share in China. When a company is reducing revenues
coming from its own country, the analyst and local investor takes it the wrong way.
The reality is different. Pax predicted the enormous competence and created a big
market share in other growing countries that ensured its future growth. Moreover, as
you can see below, institutional investor Asian shareholder base is very low.

Source: Pax Investor Presentation 2019
3. Pax Global has had three years with no profit growth. The market is disillusioned with
Pax. We have seen how Pax revenue has been growing fast but Pax profit has been
slightly down since 2015. The profit is lagging not due to competition pressure but
because the company boosted substantially the R&D expense in order to support its
growth prospects. But after all, three years with no profit growth and 2019 will be
possibly the fourth. For those who did not homework, this might indicate a
oversupplied market.
4. Pax former CFO manager argued with a Macquarie analyst. The analyst rated the
company as underperform in 2016 mainly because he was sceptic about Brazilian
prospects. The former CFO manager did not take it well. They aggressively invited
the analyst to leave the earnings conference call. The following days, the former
CFO apologized in public and resigned. You can watch the video on Youtube. This
unfortunate event deteriorates the management reputation. Despite everything,
Macquarie analyst was completely wrong about his Brazilian concerns.
5. Pax Global has a hidden asset. Nobody takes into account the receivables amount
(52% of their market cap) and to our surprise most analysts do not take into account
the cash amount either (71% of market cap).
6. Pax Global has a major shareholder. Hi Sun Group owns 33.09% of the market cap.
Hi Sun reduced its position to 44.4% after the IPO in December 2010. After the
stock rally, Hi Sun sold another stake in September 2014 at HKD 7.5 reducing its
stake to the current position (33.09%). Hi Sun is controlled by Kui Man Chun
(>24%). Due to the Hi Sun control position and no interest in selling its stake, we
can hardly expect a takeover.
7. Hong Kong agitation. We all are witnessing how Hong Kong protests are becoming
worse. However, this will not have an impact in Pax business. We have spoken with

local people and they state that news does not reflect reality. They think that we have
even a harder problem in Spain with Catalonia.
We believe that the reasons that we explained are temporary or can be resolved with a better
shareholder policy. The next reason is probably what really explains why Pax is so cheap.
8. Pax shareholders are not being kept in mind and consequently, they feel discarded.
Pax business and its balance sheet are stronger each year, but the shareholders are not
taking profit out of it. Pax is sitting on HKD 2.7 bn of cash while they are generating more
than HKD 550M of FCF each year. However, the shareholders are only rewarded with HKD
88M each year (HKD 0.08 per share, 2.2% dividend yield).
Pax started paying dividend in 2015 and increased it in 2016. In addition, Pax made two
minor buybacks in 2016 and 2017 (a bit above HKD 50M each year). From the corporate
perspective we assume that it was a big step as Hi Sun, the main shareholder, has never
paid a dividend since its IPO in 2005.
However, we have reasons to believe that these issues are showing signs of improvement.
We see Pax’s management more receptive than during our first discussion. This is the third
year that management has left China in order to meet international investors, in addition,
they hired an investor relation manager.
On the other hand, they recently approved a share option scheme which aligns the
management with the shareholders. The Company offered to grant share options to
subscribe for a total of 82,510,000 ordinary shares. The last share option scheme was
approved in 2010 and the stock quintuplicated for the following 5 years. On the other hand,
we think it was a clever measure that during 2013 and 2014 Pax kept a very strong balance
sheet because the Chinese business concerns and the internationalization prospects.
However, Pax is currently bigger and more mature with a healthy Free Cash Flow generation
and an extremely strong balance sheet. We believe that it has come the time for the
company to reward its shareholders’ patience.
We are not speaking in vain, as the Chairman said in 2018 annual results earnings call and
subsequently confirmed by the Chief Financial Officer during 2019 half year results earnings
call, they are pondering the idea. They are in support of a special dividend; however, we
believe that at the current price, a buyback program or a tender offer would create more
value.
In any case, Pax could combine a special dividend with a buyback program which would
attract many investors to discover the real value of the company which is not reflected in the
current price.

Conclusion
Pax business is enjoying the structural cashless trend. Moreover, Pax holds a high market
share in the countries where the sector should grow at higher speed. Pax has strong entry
barriers and the company is achieving high returns on the invested capital (ROCE, ROE) and
generating a huge amount of Free Cash Flow. In addition, Pax has a resilient balance sheet
with 71% of its market cap in cash. In the last earnings calls, the company stated that the
shareholder will be involved and taken into account.
We are dealing with a growth company at value prices. We are firmly convinced that Pax
Global is going to grow at double-digit rate in the next five years and the market will
recognize its potential. As you can see, the P/E multiple is irrational, so we strongly believe
that Pax Global should be trading at a minimum price of HKD 10. (It is currently trading at
HKD 3.5). We enjoy these types of investments where we can buy the growth potential for
free.
What we really love of this company is the minor downside because it has most of market
capitalization in cash.
We stand behind this investment and urge you to go over our numbers by reading Pax
annual reports and contacting its management in order to verify our investment case.
We strongly recommend you take a look at it and contact us if you have any questions.
Gabriel Castro Lafuente, CFA
gcl@gruporsr.com
Tel +34 91 203 83 22
Calle Marqués de Villamejor, 6 | Planta principal | 28006 | Madrid
www.gruporsr.com
Neeraj Mohandas Pirshotam
neeraj.mohandas@gruponovobanco.es
Tel +34 91 400 55 26
Príncipe de Vergara, 112 | 6ª planta | 28002 | Madrid
www.nbgestion.es

Pax Global investing case

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