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Pax Global Technology: Growth With a Wide Margin of Safety

Summary and history

Pax Global Technology Ltd. (HKSE:00327) is a global leader in the payment terminal research and development industry. Founded in 2000, it was initially a subsidiary of Hi Sun Group. After being spun off, Pax was listed on the Hong Kong Stock Exchange in December 2010. The company had 80% of its sales in China the year of its initial public offering, but today has a presence in more than 100 countries and more than 90% of its sales come from abroad. Its most important market is Latin America with 56% of sales (Brazil being 80% of those sales).

Businesses evolution and financial strength

Since its IPO, the company has increased its sales from 700 million Hong Kong dollars ($89.3 million) to more than HK$4 billion in 2018 and has a sales forecast for 2019 that will be close to HK$5.5 billion. The global payment terminal industry has grown at an average rate of 8%, while Pax Global's average revenue growth since 2010 was 25%. The industry's annual global growth forecast for 2021 will be 9%, with Pax Global estimating growth of over 15% due to a greater presence in undeveloped markets.

Pax Global has a market share of 11.5% of the payment terminals worldwide and is only surpassed by Ingenico (XPAR:ING) with 20% and Verifone (NYSE:PAY) with 16%.

The company has invested significant amounts in research and development to have the most secure and technologically advanced payment terminals to remain a leader in the main markets where it operates.

The payment terminal industry will continue to grow strongly, reaching more and more users in more and more countries. The new terminals include a safer technology to prevent fraud and are compatible with new technologies, forcing older modelst to have to be replaced.

Pax Global Technology has more than 100 product and technology patents and more than 500 international certifications that allow it to obtain an important competitive advantage against rivals.

Management and shareholders

Nie Guoming is the current chairman and CEO of Pax Global Technology. He has more than 20 years of experience in the card payment industry and has been the president of the company since its inception in 2000. He has been responsible for the strategic development of the company and has strongly increased sales. Guoming, together with the board of directors, owns approximately 21 million shares, or roughly 2%, of Pax Global's shares.

The main institutional shareholder is its former parent company, Hi Sun Technology Group, which currently owns 33.1% of outstanding shares. Other institutional investors include Templeton, Vanguard, BlackRock and Kopernik Global Investors. Together, institutional shareholders own about 30% of the stock.

Valuation

One of the main aspects that affect the investment thesis of Pax Global is its valuation. The company has a market capitalization of HK$3.7 billion. It has net cash of more than HK$2.5 billion and is generating a profit of HK$522 million, which we expect to exceed HK$620 million in 2019. Its equity continues to grow and exceeds its market capitalization.

Shares are quoted at less than 6 times profit and 3 times enterprise value-Ebitda. Net cash is 70% of the capitalization and the price-book value is 0.85.

The mismatch between the share price and the evolution of the company since 2015 has been enormous, with its balance sheet growing a lot while its shares have fallen.

Its shares are near the same level as when the stock was first listed, while profits, sales, equity and total assets have grown very strongly, giving it a tremendously low valuation.

Based on the growth we foresee for the company, including record profits and maintenance costs and even improvement in the net margin, we believe Pax Global has a wide margin of safety.

Risks

The payment terminals market is being punished since it is believed Apple (NASDAQ:AAPL) or Android's payment technologies will replace it, but these technologies need the traditional terminals in order to work, so they are not competitors but complementary.

In addition, Pax Global has invested in outfittng its terminals with more advanced technology, making them more compatible with those of Apple Pay and Android. It has also invested in improving security, thereby reducing the number of potential scams. This resulted in significant expenses that reduced margins, but will generate a higher rate of replacement of the terminals at a higher price.

Outlook

The outlook for the company and industry are quite favorable. As Pax expands further into developing and emerging markets, the rate of growth will continue to be significant.

Pax Global's growth in the first half of the year was solid and the company is expected to end 2019 with strong increases in both sales and profits.

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This article first appeared on GuruFocus.