Pax Global(0327.HK):Valuation upgrade

2Q15 China POS net addition rebounded

The PBoC released 2Q15 payment data; POS net addition of 1.5m unitsdeclined by -3% YoY but up 214% QoQ, rebounding from weak 1Q. Paxhas devised a strategy to address the growing small merchants market,with its new mid-end S910 model selling well to third party paymentprocessors. Pax is also developing an Android based smart POS as weobserve the beginning of market adoption. We are lowering our netincome forecast by 7-12% for 2015-17 from more moderate overseasassumptions but upgrade from OPF to BUY due to attractive valuation.

2Q15 China POS net addition rebounded

China in-network POS reached 17.9m units in 2Q15, up 32% YoY or up 9%QoQ. POS net addition of 1.5m units rebounded 214% QoQ from a weak1Q15. Pax’s new mid-range POS S910 is selling well particularity to the thirdparty payment processors. The S910 is a cost-down traditional terminal witha lower price while keeping China gross margin stable at ~30%.

Android-based smart POS

The Android-based smart POS is the “smartphone” of the POS market. InChina, MinSheng bank has planned to build a merchant network of 100kCPOS. CPOS is MinSheng’s in-house Android-based open payment platform,incorporating hardware and authorized third party ERP applications for anenriched transaction experience. Pax has established a new smart terminaldepartment to develop new smart POS products.

Overseas market M&A opportunities

Pax’s mPOS installed base in Brazil has grown significantly exceeding 1munits. As Brazil is becoming a second home base for Pax, we expect Pax tostrengthen its market positioning by acquiring key distribution andmaintenance service provider. In the US, acquiring a Gateway provider isanother goal to speed up certification process and product launch. Pax plansto spend US$200-300m on future M&A projects.

Upgrade to BUY

We are trimming our net income forecast by 7-12% for 2015-17CL as weexpect overseas shipment will increase more moderately. We are upgradingPax from Outperform to Buy as the stock is trading at attractive valuationlevel of 14x 2015PE. Our new target price of HK$10.6 is based on 20x 2016earnings. 3Q15 operation update to be released in the 2nd week of October.