The company's positive profit forecast indicates a strong recovery in the second half of 2020, mainly due to stronger demand than expected and an increase in the share of sales of Android products
The increase in dividend payments and the special dividend proposal underline Baifu Global's commitment to increasing shareholder returns
The valuation is not high; investors are likely to reconsider Baifu Global
Demand recovered and product mix improved in the second half of the year, and profits rebounded strongly
We raised our earnings forecast for Baifu Global and raised the target price from HK$5.2 to HK$9.5, reflecting its growth prospects, improved shareholder returns, and stock revaluation. The company released a positive profit forecast for 2020 (link to the announcement), where net profit is expected to increase by more than 40%, which means a strong recovery in the second half of the year. We think the profit surprise came from: 1) demand in the LACIS, EMEA, and USCA regions recovered strongly thanks to cashless payment trends and increased market share; 2) growth in Android POS sales, which led to increased revenue and profit margins (the profit margin of Android products was 5 percentage points higher than traditional products). The overseas competition pattern is also beneficial to Baifu Global, as VeriFone and ING FP no longer focus on hardware sales, and Chinese peers have yet to penetrate overseas markets. We conservatively predict that Baifu Global's net profit will grow by 42% and 16% in 2020 and 2021, respectively.
Special dividend proposal further enhances shareholder returns
Baifu Global has been more active in increasing shareholder returns this year. Following a 75% year-on-year increase in the interim dividend to HK$0.07 per share (payout rate of 20%, 14% and 18% for the first half of 2019 and full year respectively), the company has just proposed to distribute a special dividend (to be reviewed and approved on December 18, 2020). We think management will try to balance its investment needs with shareholder returns, so it should not pay most of the cash at once. Pak Fu Global has net cash of approximately HK$3 billion (HK$2.75 per share), while the dividend of HK$500 million (HK$0.46 per share) still gives Pax Global sufficient cash to use for working capital and future mergers and acquisitions opportunities.
The company's improved prospects and dividend payments will drive stock revaluation
Over the past three months, Baifu Global's stock has risen about 60%. Earnings in the first half of 2020 exceeded expectations, while the long-awaited increase in dividends attracted investors' attention in the hope that the company would begin distributing cash. We believe that with Baifu Global's strong recovery in the second half of the year and improved shareholder returns, more investors will re-appreciate this dusty jewel, thereby driving further stock revaluations. The current valuation of Baifu Global is 7.4 times the price-earnings ratio for 2021, which we think is still not high. The long-term market trend is positive because the penetration rate of POS machines in emerging countries is still very low. We raised our forecast and target prices for 2020-22 and maintained buying.