Pax Global:Buying opportunity

Soft China outlook, overseas robust momentum continues.

Pax Global’s share price declined by -15% since the end of Novembermainly due to 1) news around UnionPay and PBoC regulations and 2) themarket’s concern over new competitors for SmartPOS. The company isguiding softer sales growth for China in 2016, but overseas sales areexpected to remain robust. Based on our recent factory visit, the new PX7multilane product for the US is already in mass production. We areconfident the overseas market will continue driving overall growth. Weupgrade to BUY from O-PF with a new target price of HK$11.25 fromHK$11.04.

UnionPay and PBoC regulations.

UnionPay is starting to regulate the mobile POS market due to increasingviolations such as volume cash-outs and fake card payments often occurringwith mobile POS. In addition, the PBoC also issued a notice to identifyunlicensed secondary payment clearance service providers via peer reporting.

Merchants signed up with these unlicensed parties are at risk of not gettingtheir money back after payment transactions. In our opinion, these twoevents are aimed at eliminating crimes and violations, rather than the mobilePOS product itself. Pax has limited exposure to mPOS in China.

Lakala showcased SmartPOS, market worried cannibalisation for Pax.

Lakala, a third-party payment acquirer in China, recently showcased a newAndroid-based SmartPOS terminal featuring merchant account and customerpayment and promotion management applications. Pax is a beneficiary of theSmartPOS trend as it is one of Lakala’s product partners (not a competitor)and is developing SmartPOS terminals for several customers. Managementexpects SmartPOS volume shipment by late 1Q16.

Weak China outlook but robust overseas growth for 2016.

Pax is providing a softer China outlook for 2016 (mid-single-digit revenuegrowth) due to: regulation on unlicensed payment acquirers (indirect greymarket demand); proposed new debit/credit transaction fees on paymentvalue chain causing uncertainty in predicting demand; and Pax’s product mixshifting to low-mid-end products. However, the company expects overseasmarket growth momentum to continue with 25%+ revenue growth in 2016.

Upgrade to BUY from O-PF.

We increased our overseas revenue forecasts by +4% and +16% in 2016 and2017 by raising our shipment assumptions while cutting our China revenueforecasts by -2% due to weaker guidance. We view the sharp share pricecorrection as a good entry point and upgrade to BUY from O-PF with anincreased target price of HK$11.25 based on 20x 16CL EPS.