PAX Global Technology Still Very Much Under A Cloud

 

The ongoing doldrums at PAX Global Technology (OTCPK:PXGYF) bring to mind a semi-famous quote (often misattributed to Mark Twain or Winston Churchill) that , “a lie can travel halfway around the world while truth is putting on its boots.” Reports of a serious security breach with the company’s terminals, including their use in cyberattacks, and an investigation by the FBI (among others) attracted plenty of negative attention … but hardly any of the sites reporting the sensational accusations reported the follow-up that Palo Alto Networks (PANW) found nothing wrong or out of the ordinary with those terminals.

It remains to be seen how much impact this has had on PAX’s global business, but investors will get a look later this month when the company reports results for the second half of 2021. I expect to see healthy growth in Latin America, but what management has to say about the near-term prospects for growth will clearly be material for the stock. At this point, although the shares look quite undervalued on what I believe should be conservative assumptions, the liquidity and lack of transparency are major issues for me when considering a potential investment.

 

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PAX Global Technology Still Very Much Under A Cloud

PAX Global Remains Well-Leveraged To Double-Digit Growth In Cashless Transactions

Credit where it’s due – PAX Global Technology (OTCPK:PXGYF) (327.HK) management has done a very good job over the past couple of years in pivoting the business toward better growth opportunities in merchant point-of-sale (or POS) terminals, particularly its Android terminals, and deemphasizing markets like China where competition is just too fierce to make attractive returns. Moreover, some of the company’s fiercest competitors, including Verifone and Ingenico have chosen to deemphasize hardware in many of the markets PAX targets.

With that, these shares have appreciated more than 100% since the time of my last article, handily beating its comp group, though not keeping pace with Square (SQ) or PayPal (PYPL) over that time period.

There are plenty of issues for investors to consider before investing in PAX Global. Management’s disclosures have gotten better, but investors expecting transparency on par with U.S.-listed companies are likely to be disappointed. What’s more, while these shares have decent liquidity, investors may find the Hong Kong-listed shares more attractive.

I do continue to see an elevated risk profile here, but with mid-single-digit revenue growth and a double-digit discount rate still supporting a double-digit long-term total annualized expected return, it’s hard not to still lean favorably toward these shares.

 

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PAX Global Remains Well-Leveraged To Double-Digit Growth In Cashless Transactions

PAX Global Still Facing Some Significant Issues

Although the shares are up about 15% since my last update, PAX Global (OTCPK:PXGYF) (0327.HK) remains a frustrating company and stock in many respects. The mid-teens revenue growth is certainly positive, as is the company’s relationship with fast-growing PagSeguro (PAGS) in Brazil, but management has repeatedly missed its own targets for the North American business and the Chinese business has eroded drastically. What’s more, management took a regrettable turn towards less disclosure earlier this year despite a prior pledge to be more open with shareholders.

For every positive about Pax Global, I can find a negative (and vice versa). I am concerned about the company’s lack of investment in software and services, and I do worry about the competitive threat presented by peer-to-peer payment technologies and other fintech players. But with the shares trading close to tangible book and pricing in relatively lackluster growth, there could still be an opportunity here for aggressive investors.

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PAX Global Still Facing Some Significant Issues

PAX Global Technology Getting Minimal Benefit Of The Doubt

Since my last write-up on PAX Global (OTCPK:PXGYF) (0327.HK) in January of this year, the shares have more or less marked time, though there was a nice run heading into fourth quarter earnings in March that ultimately faded away. Relatively speaking, though, that's not such a bad performance in what has been a tough payments technology space - while Square (SQ) has done very well so far this year, Ingenico (OTCPK:INGIY) has had a tough run (down 20%) and VeriFone (PAY), too, was drifting lower before receiving a buyout bid.

The shares remain a challenging call. While PAX is doing quite well in Brazil and surprisingly well in Europe, I do have concerns that there are long-term fundamental shifts in the market working against PAX, exacerbating its lack of a value-added service business. Likewise, the company's home market (China) remains quite difficult, and management has trading gross margin for market share across multiple geographies. If PAX management can stabilize the business and report a few clean quarters, though, I believe there's enough underlying fundamental value here to merit a closer look from more aggressive investors.

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PAX Global Technology Getting Minimal Benefit Of The Doubt

PAX Global May Be Pounded Down Into Bargain Territory

When last I wrote about PAX Global (OTCPK:PXGYF) ((0327.HK)), the latest story was the company's now-former CFO throwing a temper tantrum at a sell-side analyst (Timothy Lam) who had the temerity to be negative on the stock. By the way, not only did that tirade cost the CFO his job, that bearish analyst was right - the stock has fallen more than 40% since then, and a lot of what the analyst pointed out as bearish concerns (a weakening position in China, inflated expectations for developed market adoption, weak service offerings) have become significant issues.

I do have some real concerns about PAX's position in its home market, as well as its ability to penetrate developed markets like the U.S., but I also see solid execution in markets like Brazil as a sign that PAX isn't beyond redemption. I have slashed back my expectations to single-digit revenue and FCF growth, but even those lower projections support a fair value almost 60% higher than today's price. Although this is a very high-risk name, I'm starting to wonder whether these shares have beaten down to a point where they offer a good return on the risk.

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PAX Global May Be Pounded Down Into Bargain Territory

PAX's CFO Just Made A Grievous Error

I have been basically bullish on Chinese point of sale (or POS) terminal manufacturer Pax Global (0327.HK) (OTC:PXGYF) for some time, including a piece earlier this week that I wrote right before earnings. Now actions on the part of senior management force me to reconsider that position.

This is a good case study in the difficult gray area between quantifiable fundamentals and "feel." By no means does what Pax Global's CFO did rise to the level of a "crime" or some unconscionable offense against shareholders, but it does speak to a concerning lack of judgment in what is a key management position. While I'm sure there are readers who will cheer seeing a bearish analyst ejected from a company presentation, responsible investors should be alarmed that management is apparently so thin-skinned.

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PAX's CFO Just Made A Grievous Error

PAX Global Caught In An Uncomfortable Squeeze

PAX Global (0327.HK) (OTC:PXGYF) continues to disappoint. None of the major point-of-sale (POS) terminal providers have done particularly well since the time of my last update on this Chinese POS vendor, but PAX's 25% drop (the ADRs) is still notably worse than the 12% decline at VeriFone (NYSE:PAY), the 6% drop in the ADRs of Ingenico (OTCPK:INGIY), and the 1% rise in the local shares of Fujian Newland (000997.CH).

In the case of PAX, the company is getting squeezed by significant weakness in Brazil and a challenging (and perhaps changing) market in China while emerging growth opportunities in Europe and the U.S. are still much too small to offset those pressures. While I still believe that PAX Global can become a viable #3 in large markets like the U.S., the problems in China could be more structural and there's more risk now in what was already a high-risk story. My fair value has declined by only 10% since February, but I will be paying close attention to the upcoming first-half earnings report before deciding whether there is enough of a discount here to merit the risk.

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PAX Global Caught In An Uncomfortable Squeeze

Seeking Alpha: PAX Global Technology Looking To Swipe U.S. Market Share

PAX Global Technology (0327.HK) (OTC:PXGYF) ("PAX") has had a rough go of it since May of 2015 when I last wrote about the company. While the company has more or less kept to its plan of driving growth in China and emerging markets like Brazil and prepping for a major entry into the U.S., the stock has been hit by worries about those emerging markets, weakness in Chinese/Hong Kong stocks in general, and some company-specific competitive and performance worries.

By no means is this a safe stock, but I believe it is an undervalued growth opportunity that is going to start seeing meaningful growth in the large U.S. point of sale (or POS) terminal market in 2016. While I don't think PAX will unseat VeriFone (NYSE:PAY) or Ingenico (OTCPK:INGIY) in the U.S. or Western Europe, I believe the company has established a strong beachhead in faster-growing markets like Brazil and China. These shares seem to react to every hint of news about competitive product introductions, but I believe the shares are more than 25% undervalued on the basis of long-term high-teens annualized FCF growth.

While there is an ADR listing in the U.S., the volume is pretty much non-existent. Many of the better brokers now handle international trades (and at reasonable commissions), and I would strongly recommend going with the Hong Kong shares if that is an option.

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PAX Global Technology Looking To Swipe U.S. Market Share

Seeking Alpha: PAX Global Shooting Higher As It Unlocks Global Potential

Heavy is the head that wears the crown and both VeriFone (NYSE:PAY) and Ingenico (OTCPK:INGIY) may find that burden getting lighter in the years to come. Chinese rival PAX Global (OTC:PXGYF) (0327.HK) has built itself into the #2 player in China and is taking an increasingly large amount of share in major emerging markets like Brazil and Indonesia, while taking aim at the developed markets in Europe and North America.

Taking a winning formula in China and replicating it in the U.S. and EU isn't easy, but PAX Global has been investing the resources into product development and has several quality platforms to show for it. It's still an uphill climb, but the conversion to EMV-enabled terminals (as well as terminals capable of taking Apple Pay) could give the company an opportunity to disrupt these cornerstone markets.

There's nothing modest about the assumptions I use to value PAX Global, as annualized revenue growth of more than 16% over a decade leads to pretty significant market share and a mid-teens FCF margin assumes solid operating leverage. That said, PAX Global has yet to let me down in terms of operational or financial performance and this wouldn't be the first example of an industry significantly altered by a low-cost up-and-comer from China willing to put in the effort to develop quality products at lower prices.

Given that PAX's U.S. ADR listing is effectively theoretical, investors should look to buy the Hong Kong-traded shares. Most major brokerages now offer that service to investors and the commissions and fees are usually quite reasonable.

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PAX Global Shooting Higher As It Unlocks Global Potential

Seeking Alpha: PAX Global Technology - Exceptional Growth And Exceptional Performance

I liked PAX Global Technology (OTC:PXGYF) back in January, but I'm not going to pretend that I saw an 80% gain (for the Hong Kong shares) in the subsequent seven months as the expected outcome. Management has ramped up its distribution capabilities faster than I expected and is continuing to make the most of strong growth in the adoption of credit and debit cards in China and other emerging markets. With a significant focus on internal R&D and a stated goal of buying its way further into payment services and software, I believe investors can expect a long run of double digit free cash flow and good long-term stock performance.

Readers should note that buying these shares will take a little extra work. For liquidity reasons, I would encourage readers to buy the Hong Kong-listed shares (0327.HK) - most major U.S. brokerages now allow trading on major foreign markets and the commissions are not bad (though buying shares for a retirement account may not be allowed). I would be surprised if the company didn't ultimately pursue a sponsored ADR, but that may not happen for some time.

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PAX Global Technology - Exceptional Growth And Exceptional Performance

Seeking Alpha: VeriFone Firmly Back In The Good Graces Of Growth Investors

Payment technology developer VeriFone (PAY) still has work to do in turning around actual reported growth numbers, but the market has fully re-embraced this stock as a growth story in the payments technology space. Rival Ingenico (OTCPK:INGIY) still appears to be growing faster and gaining share, but VeriFone seems to be getting its legs back underneath it and fixing the problems that hammered the company (and the stock) from early 2012 through mid-2013. Value investors are going to have a hard time with this one, but the EBITDA multiple does not seem out of line with near-term growth prospects.

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VeriFone Firmly Back In The Good Graces Of Growth Investors

Seeking Alpha: PAX Global Technology Looking To Disrupt The Point Of Sale Duopoly

In the U.S. and Europe, when it comes time to swipe your credit or debit card, the odds are very high that it is going to go through a machine made by either VeriFone (PAY) or Ingenico (OTCPK:INGIY). China's PAX Global Technology (OTC:PXGYF) (327.HK) is hoping to change that, though, and the company already boasts significant share in China and the wider Asia-Pacific region. As the U.S. approaches the adoption of EMV standards ("chip cards"), PAX Global could be approaching some significant share growth potential.

PAX Global is not a bargain basement stock, though. The stock is not widely covered by Western sell-side banks yet, but the stock sports a pretty healthy multiple and still has a lot of work to do in building out the software and service offerings it will need to compete in North America and Europe. With that, investors need to make sure they're comfortable that this company can continue to grow fast enough to outrun these concerns in the short run.

As a quick note, I would suggest investors try to buy the Hong Kong-listed shares (327.HK) if at all possible. Although PAX Global technically has a U.S. ticker symbol it appears to be effectively a dead ticker.

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PAX Global Technology Looking To Disrupt The Point Of Sale Duopoly

Seeking Alpha: VeriFone's New Management Says The Right Things, But Execution Is Key

Say what you like about sell-side research, it can at least tell you which way the wind is blowing about a particular stock. When it comes to VeriFone (PAY), analysts seem eager to forgive-and-forget and buy into the story of a strong turnaround in the making. Given how the stock has been performing, I'd say that investors are taking a similar viewpoint.

I still have my doubts. I like the hire the company made for the CEO position, and I've liked what I've heard from him so far in terms of strategy, but two troubling facts remain. First, mobile payment options are changing the electronic payments world. Second, Ingenico (OTCPK:INGIY) as capitalized on VeriFone's missteps to gain share, and has no plans to let up. I've substantially upgraded my growth expectations in light of the new CEO, but even with that I don't see these shares as a must-own on a GARP basis.

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VeriFone's New Management Says The Right Things, But Execution Is Key