Pax Global
H1 2021
By Manuel Maurício
August 20, 2021
Pax’s results for the first half of 2021 came out recently and, although I wrote a short comment on the Subscribers Facebook Group, I’m taking a closer look.
If you’re new to Pax Global, do read my previous write-ups here.
In the first half of the year, the revenue went up by 30%, the earnings-per-share by 33%, and the dividend by 71% (!).
These are astonishing results.
To put them into perspective, this is the most that Pax has grown year over year in the past 6 years.
The growth is due to a mix of technical innovation – more Android terminals being sold ($1.2 billion vs $645 million) – and the beginning of the upslope in the replacement cycle.
That’s also the reason why the management has updated its guidance from 10% to 25% growth!
But this growth comes at a lower margin. According to management, the underlying cause for this weakness was the appreciation of the Renminbi (most of the R&D and manufacturing costs are in Renminbi).
On a geographical basis, the company grew in every single market.
EMEA grew 64% in the first half of 2021, and the USA 72%!
These two geographies have the highest gross margins among all regions – because they usually require more advanced terminals – so I think it’s fairly reasonable to expect higher margins in the coming years.
Although the gross margin has decreased a little bit, the company has managed to keep its operating costs stable in relation to revenue…
… leading to record profits of HKD$515 million.
But, as always, I’m not too happy with the Cash Conversion Cycle. Especially as it went from 129 days to 151 days.
The CFO was clear in saying that he’s aiming for a Cash Conversion Cycle of 120 days n the long term ( I guess that, like me, many other shareholders have asked him about this).
The reason it went up recently was due to the higher payments to suppliers to secure enough inventory as we’re in the middle of a global chip shortage.
That sounds like a good strategy. In fact, it was exactly the high level of inventory, which I dislike, that made it possible for the company to keep growing during the pandemic. Sometimes, resilience comes from where you least expect it.
Now, what is the company doing with all its cash?
They’ve continued with the buybacks, and increased the dividend by 71% (!).
I would love to see them buy back as many shares as possible at these prices, but Gabriel Castro, the fellow fund manager who alerted me to the opportunity, told me that the management/board feels that it has bought too many shares already and is now favoring dividends.
I can’t say that I like that. I’m fearful that, by not seeing an immediate reflection on the share price, they’ll be thinking that it’s pointless. Either way, they’re returning excess cash to the shareholders. That’s a good thing.
Apart from returning the cash to the shareholders, the company recently announced the construction of its future Smart Terminal Industrial Park.
It will cost HKD$501 million, which is the same amount as the company earned in profit for the first half of this year.
The company states that the Park will allow for capacity expansion from the current 12 million units to, at least, 22 million units, doubling their market share from the current 10% to 20-25% (Ingenico’s current market share is estimated to be around 25%).
Pax won’t be manufacturing the devices. It will invite its suppliers and partners to come into the campus. Smart move.
This raises a question. From their Annual Report, they’ve mentioned having sold more than 10 million units in 2020. If their current capacity is 12 million units, and they’re growing at 30% yoy, that means that they’ll be reaching full capacity this year or the next.
They also mention that the Park will be up and running by mid 2023. That means there will be a bottle neck somewhere in 2022. Maybe they can outsource some more capacity. I’ll be sending them an email asking about this.
CONCLUSION
It’s no news that I’ve always been cautious about Pax’s future.
I see the Point-of-Sales devices industry as a commoditized one.
But even so, Pax was able and lucky:
It was able to shift its focus away from the overcrowded Chinese market.
It was able to invest heavily in Android terminals.
It was able to increase its inventory and receivable days making it too hard for its competitors to match their terms.
But it was also lucky:
It was lucky because Ingenico is divesting from the terminals business.
It was lucky because it had prepared beforehand and when the pandemic struck and everyone needed contactless payments, they were the best option.
As I believe that we’re still on the rising slope of the replacement cycle and the price is so appealing, I’m keeping my shares.
But if the business stays the same (highly focused on physical terminals) I can’t help but to think that competition will eat away Pax’s profits one day (Sunmi, for example, which is backed by Alibaba and Xiaomi is going public later this year).
So, unless the company really boosts its App Store revenue or acquires another company in a new vertical, I’ll need to be cognizant of the cyclical nature of the business and get out at the right time.
That won’t be easy to do, but as I believe it will take some time for that to happen, I’ll be able to get a better understanding of the industry and its dynamics.
Besides, the price at which I bought Pax was so low that it will likely forgive any mistakes that I make along the way.
And not only was it cheap a few months ago, when I first bought it, it’s still cheap today.
I estimate that the company will be making around HKD$7.3 billion in revenue for the full year and $1 in Earnings-Per-Share.
The current stock price is $9.02. Even without considering all the cash on the balance sheet – which is $3 per share – the stock is trading at 8.6x profits. That’s incredibly cheap for a profitable company planning to double its revenue in 3 to 5 years.
DISCLAIMER
The material contained on this web-page is intended for informational purposes only and is neither an offer nor a recommendation to buy or sell any security. We disclaim any liability for loss, damage, cost or other expense which you might incur as a result of any information provided on this website. Always consult with a registered investment advisor or licensed stockbroker before investing. Please read All in Stock full Disclaimer.