Goldpac Group Limited
3315 HK
Goldpac's origin can be traced to 1993 when the founder, Lu Run Ting, started the business to provide financial cards to banks. In 1995, it commenced its first operating centre in Zhuhai. In 1999, its first card personalization centre in China was opened during which Gemalto, a global leader in digital security solutions, became a strategic investor with a substantial stake in the firm.
In 2005, Goldpac became the first company to produce the first EMV (Europay MasterCard Visa) card issued in China. As an early player in the financial card industry in PRC, today Goldpac is the only card manufacturer in China that is certified by all the 6 leading card issuance organisations (Visa, Mastercard, Amex, Unionpay, Diners, JCB).
In late 2013, Goldpac launched its IPO in Hongkong Stock Exchange, offering new 200M shares at price of HK$5.39, raising more than HK$1B.
Since the establishment of the Group, it has developed expertise in the business of card manufacturing and providing card production solutions relating to these products. Currently, the business primarily consists of two segments, namely,
(i) Embedded software and secure payment products
- Embedded software and secure payment products for smart secure payment
(ii) Platform and service
- Provision of personalisation service, system
platforms and other total solutions for customers in a wide business range
including financial, government, healthcare, transportation and retails by
leveraging Innovative Fintech
According to 2016 annual report, it is the market leader in China with a market share of 15% of China UnionPay IC Card Shipment. It is also the world’s 4th largest supplier of payment card with chips in 2015, according to the Aug16, Nilson Report.
Driven by the high growth of China's economy and ongoing migration from magnetic strip cards to smart cards (such as EMV) for better security and functionality, Goldpac was able to enjoy rapid growth in its business in years prior to 2015. Due to the stringent security, qualification and certification requirements, this industry can be said to have high barrier to entry. Goldpac's customers are mainly financial institutions.
(Source: Zhitongcaijing)
However, initiatives taken by China government in first half of 2016 to rectify and regulate the Internet financial market, especially irregularities involving third party payments, has pushed the banking industry into improving its risk management and slowdown in both the IC card migration and growth of the payment card. Coupled with the deceleration of China's economic growth, Goldpac reported its post-IPO declines of sales by 17% and net profit by 15%.
However, initiatives taken by China government in first half of 2016 to rectify and regulate the Internet financial market, especially irregularities involving third party payments, has pushed the banking industry into improving its risk management and slowdown in both the IC card migration and growth of the payment card. Coupled with the deceleration of China's economic growth, Goldpac reported its post-IPO declines of sales by 17% and net profit by 15%.
Recently, the emergence of mobile payments and rapid growth ewallets such as Alipay, WeChat Pay in China has casted a dark shallow in the minds of the investors on the relevance of physical bank debit and credit cards producers such as Goldpac .
With all these negative factors lingering, the share price of Goldpac took a big hit and tumbled from the historic high of HK$9.50 in 2014 to below HK$2 in late 2016.
While it is understandable that the China Government regulation of the internet banking and payment is aimed at providing a more secured and orderly growth of the banking industry in the longer term, are the substitution threats from mobile payment such as ewallets, as well as P2P ecommerce and NFC (Near field communication) devices going to eliminate the use of bank cards, in particularly the credit cards?
Without doubts, the rise of the different types of internet & mobile payments will provide an array of different payment modes that the consumers can choose from, which will help to accelerate the transition into a cashless society. More importantly, these new payments modes are currently not targeted to replace an important function of the credit card, at least not at this moment, that is, to provide the CREDIT (lending) function in the payment process.
In addition, debit and credit cards are not only used to facilitate payments, they also serve 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 Singapore context, e.g. OCBC Premier card, DBS Treasures, UnionPay Diamond, UOB Professional Platinium). It is also used for branding, promotion of loyalty and group identity, local examples are M1,Takashimaya, Metro, Esso Mobil, SIA, NTUC, NUS Alumni card).
Currently, the credit card penetration rate in China is still very low at less than one card per capita. The low penetration rate provides ample opportunities for expansion as China's middle class size and urbanization continues to grow. Since Apr 2015, China allow VISA and MasterCard to clear domestic China payments which might promote further growth in credit cards market as these two card networks expand in China.
Outside China, the continued globalisation of RMB, accelerated overseas expansion of China UnionPay & China banks may also provide growth impetus for credit cards. The on-going migration to EMA compliant card in Asia is yet another avenue for card providers to grow. To capture these opportunities, Goldpac has set up operations in both The Philippines and Singapore recently.
Goldpac has also won numerous awards over the years. For example, in 2016 & 2017, it was awarded:
- China Securities Golden Bauhinia Award – the Best Listed Company in Technology Innovation
- Best Employer Award for Three Consecutive Years since 2014
- Innovation Award at China Soft Expo for Goldpac GCaaS for second consecutive year
- Winner of seven ICMA Elan Awards for categories such as Unique Innovation, Best Secure Payment Card, Best Personalization & Fulfillment, The People's Choice Award, based on the ballots as cast by ICMA EXPO delegates & Loyalty, Promotional and Gift Cards
Notably, ICMA Elan Awards casts a spotlight on the
best of the best in the global card industry, honoring world-class achievements
in both card design and technological innovation. Widely acknowledged as the
most recognized award platform, the Elan Award is the Oscar’s equivalent for
card development excellence. In 2017, Goldpac was honored for awards in five
categories out of a total of seven. The Elan Awards recognition demonstrates
Goldpac’s commitment to design quality and technical advances that drive the
future of the global card industry, and is a testament to Goldpac’s technology
leadership and ability to innovate.
As a matter of fact, Goldpac has been increasing its investments in R&D over the years and in 2016, it invested about 7% of its sales revenue on secured payments, wearable product lines that cover payment jewelry, GPS, payment watches & payment wristbands and is now actively developing its Fintech capability. In 2016, it was honored with the Innovation Award at the 20th China International Software Expo (China Soft Expo) for its GCaaS cloud platform.
Goldpac's GCaaS platform integrates four key modules: Cloud Operations, Cloud Lab, Cloud Payment and Cloud TSM (Trusted Service Management), enabling a onestop solution for e-commerce, data task processing and smart card applications. These services are targeted at global card issuers, merchants and cardholders and other one-stop shop capabilities such as e-commerce, integrated business management, centralized data task processing as well as smart card application services.
Goldpac's GCaaS platform integrates four key modules: Cloud Operations, Cloud Lab, Cloud Payment and Cloud TSM (Trusted Service Management), enabling a onestop solution for e-commerce, data task processing and smart card applications. These services are targeted at global card issuers, merchants and cardholders and other one-stop shop capabilities such as e-commerce, integrated business management, centralized data task processing as well as smart card application services.
Other than being recognized as an innovator, Goldpac has also been recognized as being "shareholder friendly" by winning 2016 Golden Hong Kong Stock Awards, the Best Shareholders' Return & the Best Social Responsibilities. Since its listing in 2013, Goldpac has been increasing its dividend payments to shareholders at a CGAR 52%, and a total of HK$390M in dividends has been paid during the period.
Valuation:
(Based on December 2016 Financial statements)
Share price as at 28 July 2017: HK$2.56.
Exchange rate RMB/HKD: 1.16
1. Financial Position
Net Cash Value per share: RMB2.12 or HK$2.46
Net Book Value per share: RMB2.25 or HK$2.61
2. Discounted Earnings Method
(using discount rate of 4% for 10 years)
Base Case:
(a) assuming zero growth: HK$2.59
(b) assuming 5%p.a. growth: HK$3.20
3. Relative Valuation Method
The table below compares various financial matrix between Goldpac and its close competitor, Hengbao Co. Ltd. (002104) listed in Shenzhen Stock Exchange.
Note also that under the negative factors described above, Hengbao had suffered a revenue decline of 26% and profit drop of 61% in 2016 as compared to a more moderate decrease of 17% and 15% for Goldpac. This could show that Goldpac is more resilient in managing its business.
Based on the discussion above, Goldpac should in fact justify a higher PE valuation than Hengbao given Goldpac's leadership position in China. Assuming using a exaggerated 70% discount to Hengbao's PE of 49.6x, we should derive a PE of 15x for Goldpac or a share price of HK$4.35.
Growth Catalysts:
1. Increase in credit card issuance in China market as credit card adoption rate increases as well as entry of foreign players such as VISA & Master Card into China market
2. Further inroads into foreign markets through the Road and Belt initiatives of UnionPay and PRC banks
3. Continue migration to EMA cards in overseas markets
4. Increase adoption rate of PRC banks using Goldpac Fintech solutions
5. Take-off in sales for wearable payment products
Risks:
2. Further inroads into foreign markets through the Road and Belt initiatives of UnionPay and PRC banks
3. Continue migration to EMA cards in overseas markets
4. Increase adoption rate of PRC banks using Goldpac Fintech solutions
5. Take-off in sales for wearable payment products
Risks:
1. Intensification of competition among the existing domestic players during bidding for financial card shipments resulting in lower pricing and profitability
2. Regulatory changes that might affect the financial card issuers
3. Slow down of China economy and consumer market
4. New payment technologies, such as NFC or even virtual credit cards, that could reduce demand for physical financial cards as a payment method
5. Competition from P2P lending and other Fintech products that might reduce the demand for credit cards as the source of lending
Conclusion:
So is there gold in Goldpac?
The valuation of Goldpac looks undemanding, considering that it is trading at near its cash and book values.
When compare to its close competitor, Hengbao, which is listed in Shenzhen Stock Exchange, Goldpac looks much like an undervalued bargain especially with a mouth-watering dividend yield of 6.6%p.a.
From the
above table, based on the different assumptions used for valuing Goldapac, we
get a discount to current share price of ranging from 1.2% to 67.2% or an average discount of 21.4%.
In July 2017, Goldpac announced that its first half 2017 smart card shipments saw an uplift of 10.6%, to 91.392 million units (82.621 million units in H1, 2016) and a 38% year-on-year surge in credit card shipments. Is this the start of the earnings recovery for Goldpac? Its half year report card for 2017 will be keenly watched.
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