Dear Readers,
Thank you for your interests in the articles on Goldpac (金邦达:3315.HK) and your points raised. For the benefit of the other readers, some discussion points and comments are reproduced here.
If this
is your first visit to this blog, you may want to read the previous postings on
Goldpac before proceeding with this write-up.
Previous Posts:
31 July 2017 - Goldpac: Is There Gold in Goldpac? 16 September 2017 - Goldpac: Operating Profit Increased 16.3% For First Half 2017, But Net Profit Hit By Exchange Loss
30 September 2017 - Goldpac: Scored Double First As Selected Provider for New OTO Initiatives To Improve the Banking And Payment Ecosystem
The discussions here contain the opinions and ideas of the author. It is not a recommendation to purchase or sell the securities of any of the companies or investments herein discussed. Please refer to the disclaimer found at the bottom of this page.
Discussion Point 1: Goldpac is hoarding huge cash, is it a bane (or a boon)?
Comment:
The ROE of Goldpac is actually significantly
under-stated due to the huge cash holdings which are not invested to generate business
income.
However, having huge cash holdings may have the following
significance:
(a)
Prudence
spending by Management
Goldpac raised HK$975M in late 2013 IPO.
In January 2017, Goldpac has announced the acquisition of a piece of land
in Zhuhai and the development of Goldpac Fintech Innovation Hub to grow its
Fintech business. (Refer to more
information here)
(b)
Highly
cash generative business
Since IPO, from
2014-2016, Goldpac had generated a total of RMB813M in operating cashflow while
cumulative CAPEX over the same period was RMB117M, giving a free cashflow of
RMB696M. This is almost 40% of its current market capitalization!
This shows that
Goldpac is a highly cash generative business with low maintenance CAPEX. In
fact, Goldpac has invested a lot on technology to improve its manufacturing
process and has recently signed a strategic cooperation with Infineon to
improve its production through Industrial 4.0.
(c)
Rewarding its shareholders and sustainability
of dividends
Goldpac had been
paying its shareholders dividends every year since IPO. In fact, it has been
raising its dividend per share each year and special dividends had been introduced
since FY15.
From 2013 to six
month ended 2017, a cumulative dividend amount of RMB351M had been paid. With
high free cashflow, it is likely that Goldpac could continue to reward its
shareholders with dividends. Also, Goldpac had executed share buybacks in 2015 &
2016 and cancelled a total of 1.4 million shares.
From these actions,
it can be seen that Management had been returning excess cash to the
shareholders.
In fact, Goldpac
was honored with the “Best Shareholders’ Return” award in the 2016 Golden Hong
Kong Stock Award Competition which recognized the Group’s profitability and
consistent dividend policy. (Refer to Chinese article here)
Discussion
Point 2: Mobile payments such as AliPay and WeChat Pay are growing rapidly in
China. Will credit card be skipped altogether?
Please refer to comments under Discussion Point
3.
Comments:
China has managed to frog leap and skip
certain stages in its technology adoption due to the lack of historical baggage
as it did not previously have huge existing infrastructure in place for payment
devices as compared with other developed countries. Thus China can rapidly set
up NFC enabled payment systems in its MPOS network without the need to replace
huge existing network. In addition, the high adoption rate of smart phone in
China has enabled usage of mobile payments such as AliPay and Wechat Pay to
grow rapidly for small amount payments through the use of QR codes. AliPay and
Wechat Pay have been offering small discounts and Hongbaos (lucky draws) for
its users and these have worked well to attract users. These developments have
generally reduced the usage of cash, especially in the cities.
So is credit card dead? From the feedback of
some PRC friends working and living in China cities, the answers gathered from were
resoundingly “NO”. They have
commented that most of the people working in China cities do own credit cards
and they do use it for the following purposes:
i) for higher value purchases
ii) to get longer repayment period iii) overseas travels for hotel & purchase payments
It is interesting to know that even students
from better known universities are being offered credit cards even though they
do not have any income yet. Basically, it is not a binary outcome between
ewallets and credit cards, they are different modes in the payment ecosystem
that can co-exist, and both aimed at replacing cash transactions.
Compared with NFC payments, it should be
noted that credit card also provides an additional important function - CREDIT
i.e. lending during payment process, and not just solely to facilitate payment.
Mobile payment and credit card payments are different mode of payments with
different features, it all will work together to move into cashless society.
Click here for Chinese language
interview with Chairman of Goldpac in Nov 2016 on why he thinks e payment
cannot completely replace bank card payments.
Discussion
Point 4: Debit cards have been replaced, why can’t credit card be replaced by
virtual credit card?
Comment:
Debit cards have NOT been replaced. JD.com
has just jointly issued its first internet banking card with China Industrial
bank and Goldpac has been appointed as the major supplier. (Refer to article here)
Goldpac has also just been appointed to
issue a bluetooth ready bank card which can link to mobile phone for download
payment apps.
There are evidences of e-commerce players
and financial institutions using bank cards to link with internet banks &
mobile phones to improve O2O connectivity. More importantly, they have chosen
Goldpac as the provider of these initiatives and this illustrated Goldpac's
leadership in the industry.
Currently, none of the major credit card organisations
has issued virtual-only consumer credit card. It is highly possible that the
credit card networks (VISA, Mastercard etc) & credit card acquirers (banks)
still want to be on "top of the wallet" for marketing visibility rather than to be hidden in mobile phones.
Physical bank cards are used as a marketing
tools for the banks, clubs and merchants, by portraying income and status
differentiation via the criteria used for qualifying each type of credit cards.
In China, in order to attract users, the banks have partnered with Goldpac to
issue innovative bank cards such as LED smart cards and Sound smart cards. Moreover,
the costs of issuing bank cards only constitute a small portion of the overall
costs of the banks according to Goldpac.
Discussion
Point 5: What are the competitive advantages of Goldpac?
Comment:
Advantage
#1 – High entry barriers to industry
- Stringent security, qualification and
certification requirements
- Card manufacturers must have five years of
relevant production experience to obtain certification from payment
organisations
Advantage
#2 – Only Card Provider Certified by six leading credit card organisations
- Goldpac is the only card provider in China that
is certified by all the 6 leading card issuance organisations ; Visa,
Mastercard, Amex, Unionpay, Diners & JCB
-
Goldpac has worked many years with banks in
China and counts top banks like ICBC, BOC, ABC & CCB as its customers
- Over the years, it has expanded its business
relations to foreign banks as well as non-banking customers such as Starbucks.
- Card issuers are reluctant to change card
manufacturers frequently due to security and trust issues
- One non-executive Director was a board
representative nominated by BOC group
- Long time relationships build trust and enhance
the chance of winning new business, e.g. providing Fintech solutions to banks
Advantage
#4 – Strategic partnership with major supplier
- Major supplier, Gemalto holds 18.42% share
interests and has nominated a board representative in Goldpac
- Gemalto is the world leading supplier of IC
chips and digital security provider
- According to Management in an investors
communication meeting held on 20 April 2017:
Goldpac
and Gemalto are important strategic partners. We form powerful combination in
the business level and increase the bargaining power and market ability.
Gemalto attaches importance to the company`s growth in China market and
overseas development. In overseas markets, although the two companies have some
competition, we have different market advantages. Goldpac has more advantages
in the international development of UnionPay products and in Southeast Asia
market. Because of the needs of risk management, the world`s banks are trying
to avoid centralized procurement, so the company has great development and
cooperation opportunities in overseas markets.
Advantage
#5 – Strong Innovation Capability
- 25% of total workforce of 1,600 are engaged in
R&D. Invest ~7% of revenue on R&D
- Collaboration with Wuhan University on IoT
solutions
- Collaboration with Infineon on Industrial 4.0 to
improve productivity and cost efficiency
Evidence: Goldpac won numerous awards for
its product innovations over the years, including:
- GCaas, its Fintech solution for banks and
financial institutions
- ICMA Elan
Award, which is the Oscar’s equivalent for the industry
- Goldpac was selected as major provider for first
ever internet savings bank card issued under the partnership between JD.com and
Industrial Bank as well
- Goldpac was selected as major provider for the
first Bluetooth bank card
Discussion
Point 6: What are the opportunities Goldpac’s business?
Comment:
1.
Low
Credit Card Penetration Rate
According to estimates, the credit card
penetration rate in China is only less than 0.32 per capita compared to 4-6 per
capita for debit cards. If conservatively, the credit card penetration rate can
increase to 1 per person, then the addressable market is more than twice the
current size.
2.
Entry
by VISA, Mastercard card and other credit card organization into China
Moreover, due to WTO agreement, China is
opening up its domestic credit card market to allow foreign credit card
networks such as VISA & Mastercard into China market. Once they entered, it
is expected that credit card issuance will increase. The competition for credit
card market will intensify and it is likely to bring down the credit card
charges and credit card interest rates. This will simulate the growth of credit
cards as a form of payment financing.
3.
Low
EMV migration rate in Asia Pacific & China UnionPay Belt & Road Initiatives
EMVCO has set a deadline for mandatory
migration of existing magnetic stripe credit card to EMV compliant standard for
better security.
According to EMVCO statistics, the EMV card
adoption rate in Asia Pacific is only 38.8% percent in 2016. Goldpac has made
inroads into South East Asia, in particularly, Philippines to take advantage of
the EMV migration and it has also set up Fintech operations in Singapore. In
2016, the overseas sales is only RMB103M or less than 8% of its annual sales. The
migration to EMV standard is expected to accelerate as the EMVCo deadline approaches.
4.
Growing Recurring
Income from Payment Card Replacement Market
Credit card expiry period is typically set
at 3 to 5 years due to credit review required on the card holder by the banks.
This provides a future recurring income to the providers for credit card
replacement market. So even at zero growth, based on the current financials,
Goldpac can easy continue its high dividend payout given its low maintenance CAPEX
requirement.
5. Growing Innovative Payment Products & Fintech Business
While the current card solution business can
be seen as a steady growth cash-cow business, the Star for rapid growth would
be its Innovative Payment Products & Fintech business.
Goldpac has developed an award winning
Fintech technology for banks and financial institutions, GCaaS, which uses
cloud based technology to integrate secured e-commerce, business management and
linked up card issuers, merchants and cardholders in data processing.
Goldpac CTO, Li Jun, briefing on Goldpac’s GCaaS
at the 2016 AliCloud Fintech Summit
High-end Garmin Smart Payment
Sport Watch supplied by Goldpac to China Industrial Bank.
According to estimates by HIS Markit
reported in Goldpac’s announcement, the wearable market size in China was
expected to grow to RMB20B.
In the six months ended 2017, the sales of wearables
products was near RMB10M. As both wearable payment products and Fintech solutions
are still at its early growth stage at Goldpac, there are great potentials to develop
these businesses in years to come.
For a company that is ranked first in China
and fourth in the world in the financial cards industry, Goldpac is trading at
near 2x ex-cash PE (TTM) at current price. (view
valuation here)
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Previous Posts:
31 July 2017 - Goldpac: Is There Gold in Goldpac?
16 September 2017 - Goldpac: Operating Profit Increased 16.3% For First Half 2017, But Net Profit Hit By Exchange Loss
30 September 2017 - Goldpac: Scored Double First As Selected Provider for New OTO Initiatives To Improve the Banking And Payment Ecosystem
