| Company Research | Initiation |

Hong Kong | TMT

5 February 2016

Pax Global Harvesting season begins in the U.S. High-end models shipment kicks off in the U.S. After a long preparation and certifying process, PAX is finally harvesting in the US from this year. The company starts shipping its high-end multilane model Px7 and Px5 to top-tier merchants. PAX’s multilane products will improve overall gross margin, thanks to its higher ASP, and its brand awareness in the US payment market, which is in a long and assured EMV migration process. The strengthening of the USD will also provide room for pricing strategies since PAX’s orders are priced in USD.

BUY Previous rating Previous TP La s t Pri ce Crosby Target Price Ups i de / (Downs i de)(%)

Non Rated N/A 7.76 9.88 27.3%

Crisis-proof with steadily growth even in down cycle The rising volatility in capital market reflects the investors’ worry on the prospects of the global economy. Contrary to intuition, data shows that the global financial crisis in 2007/08 had limited impact on the POS terminal market. In particular, despite negative GDP growth in 2009 in many countries, the POS terminal market still achieved decent growth in the same year. The world’s POS terminal market has been growing steadily at a CAGR of 8% in the past 7 years, if we exclude China, which achieved a 44% CAGR from 3Q12 to 3Q15. We believe the EPOS industry could be considered defensive in a volatile market.

Comprehensive product line for a well-diversified market portfolio After a decade’s development, PAX has built a well-diversified market portfolio which reduces the impact of volatility in any single market. PAX has enriched its product line to match the specific demand from different markets. Examples including the MPOS for Brazil, Multilane for US, Smart POS for China and price competitive counter POS for developing Asian countries where their large population base is driving a booming for non-cash transactions. Higher margin in overseas markets will neutralize margin pressure in domestic market due to severe competition and enable the company to maintain a steady overall margin.

Key Data Ti cker 327 HK Ma rket Ca p (HK$m) 8,629 3M a vg Da i l y T/O (HK$m) 50 52-week Hi gh/Low (HK$) 14.2/ 5.79 Free Fl oa t (%) 65.7% Sha res O/S (m) 1,112

Performance Abs ol ute 1 month 3 months 6 months

-1.0% -24.9% -35.5%

Rel a ti ve 11.1% -8.8% -16.7%

Price Chart HK$ 16

14 12

10

Attractive valuation after price drawback, initiate with TP HK$9.88

8

After the correction from mid-2015, the company is now trading at an attractive 12.5x of FY16 earning, on the back of its 16.1% earnings CAGR over the next two years. Its current PE is also lower than both the international and domestic peers, which are at 14.5x and 44.3x, respectively. Given the high margin US business started ramping up this year and a ~20% growth in overseas markets, we believe the company is currently trading lower than its fair value. We initiate with a BUY-rating with end-16 TP of HK$9.88 based on DCF valuation. Our TP offers 27% upside and implies a FY16 PE of 15.9x.

6

Summary financial data (Year to Dec 31) Revenue (HK$ mn) Net Income (HK$ mn) EPS (HK$) EPS Chg (%) PE (x) PB (x) Dividend Yield (%) ROE (%)

FY12A 1,313 183 0.17 (1.8) 38.1 3.8 10.7

FY13A 1,472 227 0.21 21.1 31.4 3.4 11.6

FY14A 2,373 392 0.35 67.4 18.8 2.9 16.9

FY15E 3,087 602 0.53 52.7 12.3 2.4 0.3 21.2

FY16E 3,512 698 0.62 16.0 10.6 1.9 20.0

FY17E 3,957 812 0.72 16.3 9.1 1.6 19.1

4 2

0 Jan 15

Apr 15

Jul 15

Oct 15

Jan 16

Source: Bloomberg

Max GAN, CFA Analyst [email protected] +852 3476 2725

Source: Crosby Securities

Please refer to the end of this report for analyst certifications and required disclosure information.

1

PAX Global (327 HK)

High-end models shipment kicks off in US Not only a matter of the hardware In the US payment industry, providing solutions is more critical than simply selling hardware. Value added services provided by POS terminal vendors, which include CRM system integration, allow merchant to efficiently manage transaction data while having payment and customer data secured. Open architecture software development environment cut recertification cost PAX designed two multilane models (PX7, and PX5) for US merchants, including many large ones. Both products have obtained security certification from PCI, EMV, VISA, MASTERCARD, INTERAC, AMERICAN EXPRESS AND DISCOVER, and its open software development environment meets the needs for fully or semi-integrated with the POS configurations. PAX’s Px studio development rd environment allows 3 parties to develop their own Px terminal application, which is the same rational behind Andriod and iOs App development for smart devices. Open source on POS terminal software will create more software to meet retailer’s specific needs for different business environment. For the merchants, an integrated POS terminal will save them operation costs and improve efficiencies. From PAX’s perspective, the costly recertification is not required because all the security and payment functionality is segregated from the terminal application and certified separately. As a result, the time to obtain certifications is significantly shortened from years to months, which improves the business turnovers for PAX in terms of new business development. 7” high resolution screen creates advertising panel for merchants PAX’s multi-lane has been successfully certified and tested by many large merchants in the US and shipment has started from late-January 2016. From the figure 1, PAX’s flagship Px7 is matching all the features and functions of the models from its US peers. Merchants can post offers or other promotions on the 7” high resolution LCD screen which create marketing opportunities. The multilane lines accepts a wide range of non-cash payment which also welcomed by merchants. Figure 1 Flagship multilane products comparison

PAX

Ingenico

Verifone

Equinox

Flagship Multilane Product

Model Screen Security EMV Payment Options

Px7 7” PCI PTS 4.0 L1&2 -Mag. Stripe Card(Sign) -Smartcard(Chip & Pin) -Contactless/NFC

iSC Touch 480 7” PCI PTS 4.0 L1 - Mag. Stripe Card(Sign) -Smartcard -Contactless/NFC

MX925 7” PCI PTS 4.0 L1&2 - Mag. Stripe Card(Sign) -Smartcard -Contactless/NFC

L5300 TB 5.7” PCI PTS 3.0 L1&2 - Mag. Stripe Card(Sign) -Smartcard -Contactless/NFC

Source: Company website, Crosby Securities

Please refer to the end of this report for analyst certifications and required disclosure information.

2

PAX Global (327 HK)

PAX chooses to focus on multilane product in the US In our view, PAX’s open source software platform will enable it to enter the higher tier merchant group market thanks to its convenience in solution design and short time requirement. Most competitors have captured the traditional POS terminal market by providing solutions with the countertop EPOS terminal. The pushing of its own multilane product could cannibalize their existing business line. EMV migration continues in the US The US retail payment industry is under an EMV migration, to upgrade terminals to a more secured chip-and-pin models that are EMV compliant. To encourage a more secured electronic payment environment, major credit card issuers such as Visa, MasterCard, Discover and American Express set 1 Oct 2015 as the deadline and any loss from fraud transaction will be shifted to the party who is not EMV compliant. Despite the shift of penalty, the EMV migration still moves slowly in the US comparing to other markets. According to the EMVCO’s 2015 Dec. data, only 0.26% of the total transactions in US are EMV during July 2014 to June 2015, despite increased 8 folds from the 0.03% a year before, still remains the lowest in the world. Figure 2 Percentage of card-present transactions that are EMV 120% 100% 80% 60% 40% 20% 0%

96.94%

86.95%

83.77%

96.33%

83.33%

75.90%

65.41%

33.55% 50.47% 19.42%

Africa& The Middle East

Asia

0.26% 0.03%

Canada, Latin Europe Zone1 Europe Zone2 The United America States July 2013-June 2014 July 2015-June 2015

Source: EMVco, Crsoby Securities

Top-tier merchants, such as those large supermarket chains and department stores were hesitated to upgrade due to high cost. The intention to shift to more secured EMV standard started heating up after a series of serious data breaches took place during 2013 and 2014. The breaches cost Home Depot and Target an estimate of US$56m and US$10m to compensate the victims, respectively. Top-tier merchants’ start realizing the potential financial impact from fraudulent transactions is higher than the upgrade cost thus we expect the upgrade demand will accelerate. We estimated there are about 10m EPOS terminals in the US. The EMV-ready terminals are estimated to be 60% as at End-2015, according to a report from Aite Group in Feb 2015. The report also expected the penetration rate of EMV-ready terminal will be 90% in 2017, despite we believe the process may take longer than that. There are about 4m units of existing terminals to be replaced with EMV compliant terminals. Thus the EMV migration creates a huge demand for POS terminals in the US comparing to other developed markets, and PAX will be benefited from this slow but accelerating trend. The management is targeting a 3x increase in US sales. Figure 3 Recent financial breaches in retail industry of US Organization Breached

Date Breached

Records Breached('000)

Home Depot

9/2/2014

109,000

Target

11/4/2013

110,000

Hannaford Bros

2/27/2014

4,200

Michael's Stores, Aaron Brothers

1/27/2014

3,000

Schnucks

2/18/2013

2,400

Staples

10/21/2014

1,160

Neiman Marcus

7/1/2013

1,100

Source: Breach Level

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3

PAX Global (327 HK)

A defensive industry for economy slow down The volatile commodity prices and capital markets have raised concerns from investors on the prospects of the global economy. From the data during the US sub-prime mortgage crisis in 2008 and Europe debt crisis in 2011, we notice growth in POS terminal connected remained resilient during these cycles (The fig below still shows the swing in growth, but GDP could be even more volatile). The CAGR of the POS number in the world is about 8% in the past 7 years, if China is excluded. Even during 2009 when many countries encountered negative GDP growth, the POS units connected in these countries in fact still achieved growth. While initiation suggests the POS industry could be very cyclical but historical data indicates otherwise. The YoY growth of total EPOS terminal units in the top POS terminal holding countries from 2008 to 2014 is shown in Figure 3. From the chart we can see that, growth of total number of EPOS terminal(China excluded) remained flat during the 2008 subprime mortgage and retreated to 6% in the 2011 European debt crisis but raise to the 10% after 2012. Figure 4 YoY growth of total EPOS units in the markets and world GDP growth 25%

6% 5.4% 20.9% 5%

20% 18.5%

4.2%

16.8%

15%

3.4%

3.1% 10%

10.9%

10.3% 7.2%

4%

8.5% 7.1%

11.1%

10.4%

3.3%

3.4%

9.9%

9.8%

3% 2%

6.9%

6.0%

5%

Growth rate of EPOS terminal units in 21 countries Growth rate of EPOS terminal units in 22 countries(China included) World GDP growth

1%

0%

0%

0.0% 2008

2009

2010

2011

2012

2013

2014

Source: IMF, Bank for International Settlements, Crosby Securities estimates

Please refer to the end of this report for analyst certifications and required disclosure information.

4

PAX Global (327 HK)

Figure 5 Country GDP and POS units YoY growth in 2007-2010 50.0%

40.0% 30.0% 20.0% 10.0% 0.0% GDP

POS

GDP

2008

-10.0% -20.0%

POS

GDP

POS

2009

2010

Australia

Belgium

Brazil

Canada

France

Germany

India

Italy

Japan

Mexico

Netherlands

Russian Federation

Saudi Arabia

Singapore

South Africa

Sweden

Switzerland

Turkey

United Kingdom

60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% GDP

-10.0% -20.0%

POS

GDP

2011

POS

GDP

2012

POS

GDP

2013

POS 2014

Australia

Belgium

Brazil

Canada

France

Germany

India

Italy

Japan

Mexico

Netherlands

Russia

Saudi Arabia

Singapore

South Africa

Sweden

Switzerland

Turkey

United Kingdom

Source: Bank for International Settlements, Crosby Securities estimates

Please refer to the end of this report for analyst certifications and required disclosure information.

5

PAX Global (327 HK)

Comprehensive product line for a well-diversified market portfolio PAX Global (PAX) has shipped its EPOS terminal to over 80 countries and became a leading vendor in regions such as the Middle East, LatAm and SE Asia. The company adopts different strategies to match the specific local retail payment environment. For markets filled with small merchants and card payment infrastructure are well developed, such as Brazil, PAX quickly expand its market share by promoting its light and convenient Mobile POS terminal. For markets where traditional EPOS penetration rate is high but also with expensive labour cost, such as the US, PAX has designed two high-end, open platform multi-lane models to break into the high tier merchants. PAX’s standard EPOS terminals are also popular in markets in high-growth phase, such as developing Asian and EMEA countries. We believe a well-diversified market portfolio has reduced the risk of drop in demand for EPOS terminals in any single market due to various factors such as local currency depreciation and economic slowdown. PAX has four large overseas market regions. Following table shows the major countries under each region have actively contributed to the overseas orders. Figure 6 Market divisions of PAX and the local business operation Region

Representative markets

Distribution

EMEA

Italy, Iran, Turkey, Saudi Arabia, South Africa, Germany, United Kingdom, Scandinavia countries

Direct sales in Brazil and Italy, partnership with local distributors in other markets

LACIS

Brazil, Russia, Argentina, Central American countries

Partnership with local distributors

Asia ex. China

Vietnam, Hong Kong, Taiwan, Malaysia, Indonesia, India

Direct sales in India, partnership with distributors in other markets

United States, Canada

Direct sales Direct sales

North America China Source: Crosby estimates

Overseas sales will become major revenue growth driver We expect overseas revenue will surpass domestic revenue for the first time n 2016, due to sluggish growth in China and a steady growth overseas, and overseas pipeline will become the major growth driver in the future. Despite domestic shipment remains strong, identical products offered from POS vendors create severe price competition and depressed profit margins. ASP of a countertop POS terminal in domestic market is ~Rmb600, comparing to over Rmb1000 in overseas market. For high-end product like Px7, the gross margin can reach 50-60% vs xx% for mass-market products. With rising share of overseas sales, we expect overall margin to remain stable. Figure 7 Market sales composition

Figure 8 Dollar value of sales comparison (HK$’mn) 2500

100% 18%

22%

80%

32%

30%

29%

2000 42%

50%

52%

55%

60% 40%

82%

2158

1377

1500 1000

78%

68%

70%

71%

58%

20%

50%

48%

45%

500

404 89

564 159

750 353

919 394

1046

1556 1531

1818 1772 1660

997

427

0

0% 2009 2010 2011 2012 2013 2014e 2015e 2016e 2017e Domestic

2009 2010 2011 2012 2013 2014 2015e 2016e 2017e Domestic Overseas

Overseas

Source: Company data, Crosby estimates

Source: Company data, Crosby estimates

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6

PAX Global (327 HK)

PAX has built up sales network in markets those absorbs the majority of the shipment of POS terminals during 2012-2014. The following chart listed the top demand shows the net added units of POS terminal in the countries (excluded US) where the shipment volume is large. Figure 9 Net new added number of POS terminals in 2012-2014(thousand units)

Source: Bank for International Settlements, Crosby Securities

MPOS assembled in Local factory of Brazil reducing import tax nd Brazil was the 2 largest market of EPOS terminal as at end-2008 where more than 2.6mn units in operation, which is about half of the number in the United States. The annual net added EPOS terminal in Brazil is also leading other emerging markets other than China, as well as most developed countries, with 400k units added on average from 2008 to 2014. According to the Bank for International Settlement report on payment for 2014, there are 5mn units of EPOS rd terminal connected in Brazil, ranked as the 3 place after China and US. Brazil, which added 400k units p.a. between 2008 and 2014, is one of the key markets for PAX. We estimate that the company shipped 700k units of MPOS in 2015 with ASP of MPOS about 50% of the standard EPOS model but with similar gross margin. PAX exports EPOS parts into Brazil and a local factory will assemble the final products. This arrangement helps reducing import tariffs and makes their product more competitive in pricing since this is an outsourcing arrangement, similar, to the arrangement in China, potential FX loss form their operation there should not be a concern.

Please refer to the end of this report for analyst certifications and required disclosure information.

7

PAX Global (327 HK)

Trading at discount to both domestic and international peers average Forecast assumptions We forecast revenue growth will slow down due to sluggish growth in the domestic market as a result of severe competition, which depressed ASP. But the growth is expected to stabilize as overseas sales growth will mitigate the impact from this year. As we mentioned previously, due to the increase in share of overseas sales, overall GPM should be stable and we actually forecast a minor improvement. As a result, we expect growth in net profit growth will surpass that of revenue. We expect the company to achieve an EPS CAGR of 16.1% over the next two years Figure 10 Forecast assumptions

Total Shipment

2013A

2014A

2015E

2016E

2017E

1.63

2.62

3.80

4.41

5.12

Domestic Shipment(mn)

1.32

1.73

2.30

2.53

2.80

ASP(HK$)

771

780

663

656

637

Overseas Shipment(mn)

0.32

0.89

1.50

1.88

2.33

ASP(HK$)

1313

1100

1000

950

903

12.1%

61.2%

30.1%

13.8%

12.7%

13.7%

32.6%

12.3%

8.9%

7.2%

Revenue Growth Domestic Sales Growth

8.4%

131.2%

55.0%

18.8%

17.8%

Net Profit Growth

Overseas Sales Growth

23.8%

73.0%

53.6%

16.0%

16.3%

Gross Profit Margin

36.7%

36.4%

39.0%

39.5%

40.0%

EBIT Margin

18.1%

19.5%

22.4%

23.1%

24.1%

Net Profit Margin

15.4%

16.5%

19.5%

19.9%

20.5%

Source: Crosby Securities

Please refer to the end of this report for analyst certifications and required disclosure information.

8

PAX Global (327 HK)

DCF –based valuation We initiate coverage on PAX Global with a BUY rating and an End-16 target price of HK$ 9.88. The company is currently trading at 12.5x FY16 earnings. Our TP implies a FY16 PER of 17.2x. We estimate PAX will have a net cash of HK$2,900m or HK$2.57/share by the end of FY16, which accounts for 26.7% of its share price. Excluding the cash component, the ex-cash implied forward PER of the company would be 12.6x. Based on a WACC of 11% and a 1% long term growth rate, our DCF model yields an equity value of HK$9.88 per share by end-2016, providing a 27% upside potential. Figure 11 DCF valuation HK$'mn Revenues EBIT Margin EBIT Effective Tax Rate(t) EBIT(1-t) DEP&AMTZN Capital Expenditure Change in working capital Other non cash expenses FCFF Terminal Value

2013A 1,472 18% 266 15% 226 4 (1) 52 14 294

2014A 2,373 20% 463 15% 392 4 (11) (238) 27 174

2015E 3,087 22% 692 13% 602 5 (9) (167) 0 432

Total NPV(EV) - Debt - Minority interests + Cash(at Dec31,2015)

2016E 3,512 23% 812 14% 698 6 (5) (84) 0 616

2017E 3,957 24% 955 15% 812 6 (5) (79) 0 733

2018E 4,557 24% 1,085 15% 922 6 (7) (146) 0 775

2019E 5,131 22% 1,150 15% 977 6 (7) (158) 0 819

2020E 5,768 23% 1,298 15% 1,103 6 (8) (152) 0 950

2021E 6,278 21% 1,320 15% 1,122 7 (6) (150) 0 973

2022E 6,458 21% 1,364 15% 1,160 7 (2) (42) 0 1,122

616

733

775

819

950

973

1,122

ROE (%)

ROIC

2023E 6,641 21% 1,377 15% 1,171 5 (2) (52) 0 1,121 9,645 10,76 6

8,174 0 0 2,975 11,14 9 1,129 9.88

Value of equity Number of shares Estimated value per share(End-16, HK$) Cost of capital Risk free rate

3.0%

Risk Premium

8.0%

Adjusted Beta WACC

1.21 12.7%

Source: Crosby estimates

Peers Comparison Figure 12 POS terminal vendor comparison table 3-m th Com pany HSI HSCEI CSI300 PAX GLOBAL TECHN Verifone Ingenico Xinguodu Fujian New Land Pax Global

Ticker

Price 19,183 7,974 2,985

327 HK 7.76 PAY US 22.86 ING FR 104.15 300130 CH 27.02 000997 CH 17.49 327 HK

7.76

Domestic Average International Average

Mkt cap (US$m )

avg t/o (US$m )

P/E (x)

FY15-FY17

FY15 9.6 6.2 11.0

FY16 8.6 5.6 9.8

EPS Cagr (%) 9.9 2.1 N/A

FY1 PEG (x) 0.97 2.93 N/A

P/B (x) Hist 1.02 0.81 1.72

FY15 0.95 0.73 1.45

Hist 13.6 14.2 14.4

FY15 13.0 13.1 13.6

Share px chg (%)

Hist (%) 1-m th (9.5) (13.5) (14.2)

3-m th 12-m th (16.8) (22.5) (24.9) (32.4) (19.5) (11.4)

1,108 2,554 7,113 941 2,501

6.3 35.2 18.7 42.7 108.4

14.3 10.6 22.3 73.0 40.4

12.3 9.2 19.8 56.9 31.8

27.2 24.7 13.3 20.7 33.6

0.53 0.43 1.68 3.53 1.20

3.00 2.86 4.55 5.14 7.66

2.77 2.35 4.37 N/A 7.18

19.3 8.2 19.6 7.1 19.1

21.2 25.6 21.8 7.1 18.6

64.2 5.7 10.3 2.0 16.1

(2.3) (23.3) (17.9) (25.9) (8.2) (5.5) (12.2) (8.3) (19.3) (32.0)

23.4 (28.0) 8.6 43.9 0.3

1,108

6.3

14.3

12.3

27.2

0.53

3.00

2.77

19.3

21.2

64.2

(2.3) (23.3)

23.4

56.7 16.5

44.3 14.5

27.1 19.0

2.37 1.06

6.40 3.71

7.18 3.36

13.1 13.9

12.8 23.7

9.1 8.0

Source: Bloomberg, Crosby Securities

Please refer to the end of this report for analyst certifications and required disclosure information.

9

PAX Global (327 HK)

From the comparison table we can see the forward PER of PAX is at discount to both its international and domestic peers. We believe the general PER in the A-share market is much higher than other stock markets. Assume the fair value of the domestic forward PER is at a level of 20x, given our projection that 48% of the sales will be from domestic market and the rest from international markets, then the fair weighted End-16 PER should be 17.2x, which is slightly higher than the implied PER of 15.9x derived from our DCF model. For being conservative, we opted the fair value generated from DCF valuation as our End-16 target price.

Risks Intensified competition business environment. Rising competition in either the domestic or oversea markets will depress margins. Product substitution risk. Online payment companies are trying to bypass the traditional value chain of the payment industry and educate consumers to make payment without bankcard and traditional POS terminals. Consumer moving to online purchase is also a concern but recent news that Amazon could be opening 400-500 shops may indicate a reverse in trends. Currency Risk. Despite the orders are priced in USD in the agreements, the depreciation of emerging market currencies would have negative impact on their demand for imported products.

Please refer to the end of this report for analyst certifications and required disclosure information.

10

PAX Global (327 HK)

Summary financials Year ended 31 Dec Profit & Loss (HK$m) Domestic Sales YoY% Overseas YoY% Turnover YoY% COGS Gross profit Margin Selling & distribution Admin R&D Other opex Total opex YoY% Operating profit Margin Other income / (exp) Finance costs Associates' income Pre-tax profit Tax Profit after tax Margin Minority Interest Net profit YoY% Margin Non-core items adj. Core profit YoY% Margin EBITDA YoY% Margin Fully diluted EPS (HK$) YoY% DPS (HK$) YoY%

Year ended 31 Dec Cash Flow (HK$m) Operating profit Dep. & Amort. Chg in working cap Others Cash from operations Tax paid Net cash from operations YoY% Capex Investments Disposal of assets Interest received Others Net cash from investments Issue/ buyback of shares Interest paid Dividends paid Net change in debt Others Net cash from financing Net change in cash Adjustments Opening cash Closing cash FCF YoY%

2013A

2014A

2015F

2016F

2017F

1,045 13.7 427 8.4 1,472 12.1 (931) 541 36.7% (131) (194) 0 0 (325) 20.0 216 14.7% 3 0 0 219 (40) 179 12.2% 0 179 14.6 12.2% 0 179 14.6 12.2% 270 19.8 18.3% 0.21 21.1 0.00 N/A

1,386 32.6 987 131.2 2,373 61.2 (1,508) 865 36.4% (219) (254) 0 0 (472) 45.1 393 16.5% 5 0 0 398 (71) 327 13.8% 0 327 82.6 13.8% 0 327 82.6 13.8% 467 73.3 19.7% 0.35 67.4 0.00 N/A

1,556 12.3 1,531 55.0 3,087 30.1 (1,883) 1,204 39.0% (262) (324) 0 0 (586) 24.2 617 20.0% 7 0 0 624 (90) 534 17.3% 0 534 63.5 17.3% 0 534 63.5 17.3% 697 49.2 22.6% 0.53 52.7 0.02 N/A

1,695 8.9 1,818 18.8 3,512 13.8 (2,125) 1,387 39.5% (299) (362) 0 0 (660) 12.6 727 20.7% 8 0 0 735 (114) 621 17.7% 0 621 16.3 17.7% 0 621 16.3 17.7% 818 17.4 23.3% 0.62 16.0 0.00 N/A

1,816 7.2 2,141 17.8 3,957 12.7 (2,374) 1,583 40.0% (328) (396) 0 0 (724) 9.7 859 21.7% 9 0 0 868 (143) 725 18.3% 0 725 16.6 18.3% 0 725 16.6 18.3% 961 17.4 24.3% 0.72 16.3 0.00 N/A

2013A

2014A

2015F

2016F

2017F

266 4 54 10 334 (42) 292 44.3 (1) 0 (0) 15 12 25

463 4 (320) 25 172 (18) 154 (47.1) (7) 0 0 24 0 16

692 5 (167) (21) 510 (83) 426 176.1 (9) 0 0 21 0 12

812 6 (84) (26) 709 (105) 603 41.5 (5) 0 0 26 0 21

955 6 (79) (32) 849 (133) 717 18.8 (5) 0 0 32 0 27

8 0 0 0 0 8

74 0 0 0 0 74

0 0 (22) 0 0 (22)

0 0 0 0 0 0

0 0 0 0 0 0

325 17 1,358 1,700

245 (24) 1,698 1,919

416 0 1,919 2,335

624 0 2,335 2,959

744 0 2,959 3,702

290 45.6

147 (49.4)

418 184.4

598 43.2

711 18.9

Year ended 31 Dec Balance Sheet (HK$m) Fixed assets Assoicates & JCE Goodwill & intangibles Deferred tax assets Others Non-current assets

2013A 8 0 0 0 0 8

11 0 0 0 0 12

18 0 0 0 0 19

17 0 0 0 0 17

16 0 0 0 0 17

Inventories Trade & bills receivables Prepayments, deposits & others Investments Cash Others Current assets

465 638 6 0 1,698 17 2,824

475 898 14 0 1,919 16 3,323

587 1,168 17 0 2,335 16 4,124

662 1,329 20 0 2,959 16 4,986

740 1,498 22 0 3,702 16 5,978

Total assets

2,833

3,334

4,142

5,004

5,995

446 21 25 0 0 254 746

424 33 78 0 0 252 786

543 41 98 0 0 323 1,004

612 47 123 0 0 376 1,159

684 52 156 0 0 436 1,328

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

746

786

1,004

1,159

1,328

Total net assets

2,087

2,548

3,138

3,845

4,667

Share capital Reserves Shareholder's equity Minority interests Total Equity

104 1,983 2,087 0 2,087

110 2,438 2,548 0 2,548

110 3,028 3,138 0 3,138

110 3,735 3,845 0 3,845

110 4,557 4,667 0 4,667

Total debts Net cash/(debts) BVPS (HK$)

0 1,698 0.000

0 1,919 0.000

0 2,335 0.000

0 2,959 0.000

0 3,702 0.000

Year ended 31 Dec Key ratios Margins (%) Gross margin EBITDA margin EBIT margin Net margin Net margin (Core profit) Effective tax rate (%) Selling exp as % of rev Admin exp as % of rev R&D exp as % of rev Other opex as % of rev Total opex as % of rev Interest coverage (x) Dividend payout (%) Balance sheet ratios Inventory days Acct. rec. days Acct. payable days Cash cycle Net debt/equity (%) Net debt/total cap (%) Current ratio (x) Returns (%) Asset turnover (x) Financial leverage (x) EBIT margin (%) Interest burden (x) Tax burden (x) ROE (%) ROIC (%)

2013A

2014A

2015F

2016F

2017F

36.7 18.3 14.7 12.2 12.2 18.1 8.9 13.2 0.0 0.0 22.1 N/A 0.0

36.4 19.7 16.5 13.8 13.8 17.9 9.2 10.7 0.0 0.0 19.9 N/A 0.0

39.0 22.6 20.0 17.3 17.3 14.4 8.5 10.5 0.0 0.0 19.0 N/A 3.7

39.5 23.3 20.7 17.7 17.7 15.5 8.5 10.3 0.0 0.0 18.8 N/A 0.0

40.0 24.3 21.7 18.3 18.3 16.5 8.3 10.0 0.0 0.0 18.3 N/A 0.0

139 147 131 154 Net cash Net cash 3.79

114 118 105 127 Net cash Net cash 4.23

103 122 94 132 Net cash Net cash 4.11

107 130 99 138 Net cash Net cash 4.30

108 130 100 139 Net cash Net cash 4.50

Trade & bills payables Accruals & other payables Tax payable Bank loans Bonds, CB & debentures Others Current liabilities Bank loans Bonds, CB & debentures Deferred tax liabilities Others Non-current liabilities Total liabilities

0.59 1.29 14.8 1.00 0.82 9.2 42.5

2014A

0.77 1.33 16.8 1.00 0.82 14.1 64.2

2015F

0.83 1.31 20.2 1.00 0.86 18.8 74.6

2016F

0.77 1.31 20.9 1.00 0.85 17.8 73.6

2017F

0.72 1.29 21.9 1.00 0.83 17.0 78.3

Source: Crosby Securities

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PAX Global (327 HK)

Information Disclosures The information and opinions in this report were prepared by Crosby Securities Limited and/or its affiliate(s) (collectively, hereinafter “Crosby”) and the research analyst(s) named in this report.

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Stock Ratings Disclosure: Fundamental Rating System Our Fundamental Ratings are based on our estimated potential total return for the stocks over a 12 -month time horizon. Potential total return is the sum of (1) share price upside or downside express in percentage plus (2) gross dividend yield over the next 12 months. Buy (B): The stock’s potential total return is expected to be over 10%/15% for Large Caps/Small&Mid Caps, respectively. Neutral (N): The stock’s potential total return is expected to be ranging from -10% to 10%/15% for Large Caps/Small&Mid Caps, respectively. Sell (S): The stock’s potential total return is expected to be less than -10% over the next 12 months. Tactical Call Rating System Our Tactical Calls are based on short-term share-price catalyst(s), technical factor(s) and/or quantitative analysis for a time horizon of 3 months. Our Tactical Calls could be on companies not covered by our fundamental rating system or contrary to our fundamental ratings of the same companies. Tactical Buy (TB): The stock’s potential total return is expected to be over 20%. Tactical Sell/Short (TS / TSH): The stock’s potential total return is expected to be less than -20%. Closure/Expiry of Tactical Call: Our Tactical Call(s) will be considered closed or expires when (1) the share price(s) of our tactical Call(s) reaches either the TakeProfit or Cut-Loss levels after the initiation of the Tactical Call(s); or (2) after 3 months from the initiation of the Tactical Call(s), whichever comes earlier. Not Rated (NR): Stocks that we have no Fundamental or Tactical Call rating Under Review (UR): An indication of the stock's target price and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. We generally define LargeCaps as companies with a total market capitalization of US$5bn or above, while those with total market capitalization below this level are defined as Small&Mid Caps. Due to daily price volatility, actual total market capitalization of stocks of defined size categories may temporarily deviate from the above thresholds and potential total return of stocks covered by our Fundamental Rating System may temporarily be inconsistent with the defined potential total return associated with the assigned fundamental ratings.

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PAX Global (327 HK)

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