Soo Jin Hou contributed this article to NextInsight

For the past couple of years, central banks around the world have declared war against cash.

As cash is the payment method of choice for the black economy, deterring cash transactions brings the black economy back in line with the formal economy. 

Also, there is increasing inter-governmental cooperation to crack down on tax evasion, in particular automatic tax information exchange. 

Using big data analytics, governments can employ data matching to catch tax evaders and improve tax revenue collection. 

This can only be achieved if governments have appropriate data, which is why the war on cash will not cease.

Some of the news recently:

• The Australian government banned cash payments above A$10,000.
• India’s demonetisation of the Rs 500 and Rs 1,000 notes.
• Malaysian government deposited RM30 incentive to each e-wallet user to encourage usage.



PAX Global prodt2.20PAX Global (HKEX: 327) has been riding on the war on cash and it trades at unbelievably cheap valuation.   

PAX makes point-of-sales (POS) terminals and sells them to merchant acquirers all over the world. 

All the known listed customers of PAX trades at mid double-digit price-earning-ratios, but PAX trades at a mere 7.5 PER at a share price of HKD4.0. 

Bourse

PER (ttm)

EV/EBIT

PAX

HKEX

7.5

2.6

Revenue Group

Bursa

55.6

41.7

GHL Systems

Bursa

42.3

25.1

StoneCo

Nasdaq

65.9

34.5

Pagseguro Digital 

NYSE

33.2

22.5


When balance sheet strength is taken into account, the difference in valuation is even more extreme with PAX’ EV/EBIT at just 2.6.  This is due to PAX’s cash hoard making up 58% of its market capitalization, or HKD2.5b. 

It is inexplicable that the market is highly optimistic on the prospects of PAX’ customers, and yet this optimism does not extend to the enabler of their businesses.

The 2 largest POS players in the world are Ingenico and Verifone.  Verifone was bought out by private equity group Francisco Partners in 2018 for US$3.4b, and Ingenico is about to be acquired by Worldline for US$8.6b. 

While the revenues of Ingenico and Verifone are 6x and 3x that of PAX, respectively, PAX trades at only a fraction of their acquisition prices at an enterprise value (EV) of US$238m.   

In other words, Ingenico and Verifone are valued at 36x and 14x more expensive than PAX.

Bourse

PER (ttm)

EV/EBIT

Revenue (2018)

PAX

HKEX

7.5

2.6

USD$569m

Ingenico

Paris

38.46

32.7

USD$3,320m

Verifone *

NYSE

Loss making

Loss making

USD$1,870b

*  Last available full fiscal year result

The discrepancy in valuation is mind boggling.  It is not as if PAX is not doing well. 

While it is true that margins have contracted due to stiffer competition from other POS as well as new fintech players, PAX has compensated by winning greater market shares in Latin America, especially in Brazil, and Asia Pacific. 

In fact, PAX saw strong growth from 2017 up to 1H19, and has issued recently a positive profit alert that the profit for 2019 will see a growth of at least 20%.  

Since 1H19 saw a growth of 28% compared to 1H18, 2H19 will certainly be stronger than 2H18. 

metrics2.20

But the POS terminal business faces 2 primary threats:

1) the growth of online commerce where payments are executed without any physical terminals and

2) the increasing popularity of fintech innovations such as e-wallets and QR codes where payments are executed via apps. 


While the need for POS terminals may diminish as a result, no physical store can reasonably function without a POS terminal.

Firstly, terminals are needed to process physical Visa or Mastercard payments, which are the 2 most popular credit card payments in the world. 

Secondly, POS terminals are needed to issue physical paper receipts that serves as proof of purchase. 

To PAX’s credit, they have strived to offer an omni channel payment solution catering to all types of payments including e-wallets like Alipay and WeChat Pay. 

This is done via their proprietary app store called PAXPAY where new functionality can be introduced to their Android-based terminals.

Revenue outside of China, US


PAX offers considerable protection against the trade war between US and China, as well as the turmoil in China from the novel coronavirus, as most of its revenue is generated outside these 2 countries.  PAX is doing especially well in Brazil, the largest economy in Latin America. 

Despite sitting on a large cash hoard, PAX is not particularly generous with dividends. 

Payout in 2019 only amounts to 15% of earnings, yielding just 2%. 

However, company has started share buybacks recently and from 7/1/20 to 10/2/20, PAX bought back 9.6m shares, which cost about HKD36.5m assuming average purchase price of HKD3.8. 

Other pertinent financial metrics are:

Market capitalisation

HKD4.4b

ROE

13%

ROIC

31%

Price to book

98%


PAX announced in December 2019 their intention to enter the Australian market.  It is the author’s opinion that it is an astute move because Australia has a large Chinese diaspora community and it receives many Chinese tourists.   

This community is underserved in a payment regime dominated by Visa and Mastercard because their payment methods of choice are typically UnionPay, Alipay or WeChat Pay.

SooJinHou2019Soo Jin HouIn conclusion, the recently announced acquisition of Ingenico is an immediate affirmation of the unbelievable bargain PAX is at the current price. 

Notwithstanding rising competition, the secular trend of demonetisation espoused by central banks and governments around the world should continue to support growth. 

At the same time, PAX has plenty of financial firepower for acquisition should they need to as the industry consolidates. 



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