plover ay 珩灣科技 (1523 hk) uy · 7/29/2019 · in iot devices. plover ay has positioned well...

Hong Kong Equity | Hong Kong Networking

Company in-depth

Orient Securities (Hong Kong) Limited Please read the analyst certification, company disclosure and disclaimer in the last page 1

Plover Bay 珩灣科技 (1523 HK)

Strong dividend and wireless SD-WAN growth play

Plover Bay is a wireless-focused, niche player in a rapidly expanding SD-WAN market. It reported FY18 core net profit/revenue of USD11.4mn/USD41.8mn, up 19.6%/12.6% yoy. The improvement in net margin was due to good cost control/tax benefits facing slower revenue in a soft macro backdrop in FY18. We expect the company to deliver stronger topline growth with expanding GPM/NPM. We estimate FY19E/FY20E core EPS to be US¢1.29/US¢1.56 (21%/20% yoy) to reflect growth acceleration and margin expansion. With a near-100% payout, we expect FY19E/FY20E DPS at HK¢9.9/ HK¢11.33. We initiate at BUY with a TP of HK$2.00.

Wireless SD-WAN to lead growth. In contrast to a slower FY18 as production grappled with component shortages and weak global trade (China-US trade/uncertain geopolitics in some SEA countries), we believe that in FY19E the wireless segment will grow above the company’s 10-20% yoy guidance for total revenue due to improving mix of higher ASP models.

Warranty revenue to grow ~30% yoy on ~90% GPM. We believe industry adoption of recurring revenue model will be a tailwind for Plover Bay’s warranty business that allows end-users to consume its cloud management service (e.g. InControl) and be entitled to free advance replacement of defective hardware. We estimate combined warranty & software revenue to increase 31.9%/31.6% yoy and GPM at 91.7%/91.4% in FY19E/FY20E.

Wired SD-WAN losing momentum. As Plover Bay has been focusing on wireless over wired routers, growth in this segment has clearly lost steam as 1H19E wired SD-WAN revenue could have fallen slightly yoy. But we believe in a stronger back half and still expect 2% yoy revenue growth for FY19E/FY20E.

5G is an important catalyst for further wireless adoption. Management believes that wireless connections will eventually dominate, particularly as LTE data cost come down as 5G is introduced. Also, 5G will also bring about a surge in IoT devices. Plover Bay has positioned well with its 5G/LTE ready routers, bandwidth bonding technologies and cloud management software.

Strong dividend play, initiate with BUY. We believe Plover Bay has robust net margins coupled with a fast growing topline to support a near-100% payout policy. Despite a short trading history, its track record is solid and we employ DDM to arrive at TP of HK$2.0, implying 16x FY2020E PE.

Investment Summary FY-end Dec 2017 2018 2019E 2020E 2021E

Turnover (US$ k) 37,132 41,806 50,056 61,640 74,499

Chg (%) 31 13 20 23 21

Core Profit (US$ k) 9,518 11,381 13,909 17,000 21,234

Chg (%) 38% 20% 22% 22% 25%

Core EPS (US$ cents) 0.95 1.07 1.29 1.56 1.92

Chg (%) 19 13 21 20 23

P/E (x) 15.8 14.0 11.6 9.6 7.8

P/B (x) 5.2 4.7 4.3 3.9 3.5

P/OCF (x) 55.9 8.1 17.3 7.7 8.3

EV/EBITDA (x) 13.8 12.1 9.4 7.7 6.1

DPS (HK cents) 6.08 8.80 9.90 11.33 13.97

Yield (%) 5.2 7.5 8.5 9.7 11.9

Source: Company data, Orient Securities (Hong Kong)

BUY

Share Price Target Price

HK$1.17 HK$2.00

Hong Kong / Technology / Networking

29 July 2019

Fung Ho Ting (SFC CE: BKB324)

(852) 3519 1201

[email protected]

Latest Key Data Total shares outstanding (mn) 1,035

Market capitalization (HK$mn) 1,211

Enterprise value (HK$mn) 1,009

12M daily average turnover (HK$mn) 0.6

12M volatility (%) 45

PEG FY19-21E (X) 0.5

RoE avg FY17-19E (%) 35

P/B FY19E (x) 4.3

Net debt/equity FY19E (%) Net Cash

Performance (%)

1M YTD 12M

Absolute 5 4 (9)

Relative to HSI 6 (5) (8)

Major Shareholders (%)

Mr. Chan Wing Hong Alex 73

Auditor

Ernst & Young

Price Chart

Price (HK$) Turnover (HK$mn)

Source: Bloomberg, Orient Securities (Hong Kong)


Company in-depth

See last page for disclaimer. 2

A focused, wireless player in a rapidly expanding SD-WAN market

Plover Bay is engaged primarily in the design, development, marketing and sales

of its SD-WAN routers and complementary service offerings, including support

and cloud management software. Established in 2006 and listed on the SEHK in

2016, the company has been focusing on SD-WAN routers which it markets

under its brand names of “Peplink” and “Pepwave” that run SpeedFusion, its

patented and proprietary technology that allows the bonding and securitization

of multiple WAN connections.

More recently, as global internet traffic move over to mobile and as more

people and devices are connected, Plover Bay has been shifting focus to the

wireless subset of SD-WAN routers, becoming a globally relevant, wireless niche

player. It sells its product and services through an extensive network of

independent distributors over the world. It does not manufacture its products

but outsource such process to several contractors mainly based in Taiwan.

Spearheaded by a veteran engineer who owns a majority stake

The company’s founder and chairman, Mr. Chan Wing Hong Alex, is an industry

veteran with over 30 years of experience in electronic engineering and IT. After

receiving a higher certificate in electronic engineering from the Hong Kong

Polytechnic (currently known as The Hong Kong Polytechnic University), he

worked as a Regional Network Engineer in Telerate Asia-Pacific(s) Pte Ltd., a

computerized network providing market data and news for major financial

markets, from September 1988 to March 1991 and was responsible for building

the infrastructure for data communications and the fault-tolerant computing

systems in Asia Pacific. He later found Unitech Group in 1991 which was in the

business of trading networking products and providing consultancy and system

integration services. Unitech Group ceased its business and commenced its

winding up process after 2006.

He currently holds a ~73% stake in Plover Bay Technologies Limited, diluted

from 75% at the date of listing. As a key personnel who is responsible for

formulating overall strategies, planning and business development, Mr. Chan’s

large shareholding aligns well with the interests’ of other shareholders and we

reasonably expect the company to adopt a sustainable dividend growth policy.

Figure 1. Company key milestones

Source: Company, Orient Securities (Hong Kong)

Figure 2. Company ownership structure


2019 February

Flagship product, MAX HD4, obtained the U.S. First Responder Network Authority (FirstNet) certification

Plover Bay Technologies was recognized in 2018 Gartner Magic Quadrant for WAN Edge Infrastructure

2018 October

2015 April

Plover Bay was granted the first U.S. patent for its WAN bonding technology

2012 July

Launched MediaFast series routers

Plover Bay filed the first patent application in the U.S. for its WAN bonding technology, which was later branded SpeedFusion

2009 December

2008 September

Launched InControl cloud management and administrative software, and SD-WAN routers

Launched the MAX series wireless routers

2008 April

2007

Incorporated for designing, developing and marketing of wireless broadband devices, Balance series multi-WAN routers and solutions

Mr. Chan （~73%)

Plover Bay Technologies

Protean Holdings (BVI)

Pepwave (HK)Peplink

International (HK)

Pismo Labs (HK)Pismo Research

(Malaysia)Pismo Labs

Technology (HK)Ultra Land (HK)

Ultra Prosper (HK)

Pismo Technology Asia

(HK)

Pismo Tech (Taiwan)

Pegatrack (HK)

Public market

Designing/developing/marketing SD-WAN routers and warranty/software services

Development of

SD-WAN routers Holds IP rights

Holds properties

Development of

SD-WAN routers Investment holding

Property rental

leasee

Mr. Chan was entitled to ~HK$66.5 million in dividends in 2018. Being key personnel, his large shareholding aligns well with the interests’ of other shareholders who may have vested interests in the sustainable growth of dividends.

Institutional

shareholders

~3%


Company in-depth


5G upgrade, a positive catalyst for wireless SD-WAN

Software Defined Wide Area Network (SD-WAN) emerged as an alternative to

traditional routers by swapping expensive leased lines and combining multiple

affordable wired/wireless WAN connections to allow software algorithms to

choose the best performing WAN connection. Plover Bay’s SpeedFusion can

facilitate hot failover, bandwidth bonding and WAN smoothing which ultimately

reduces networking costs, improves speed, reliability and reach, opening up

new real time, mission critical use cases.

As 5G is deployed, mobile data cost for 4G/LTE will likely decline and would still

be suitable to cover areas where the short range 5G cannot reach. This will

trigger a cycle to replace wired WAN connections. Moreover, 5G upgrade cycle

will introduce a variety of new use cases as latency is reduced and speed is

increased which will facilitate connected device growth and ultimately the

demand for wireless routers.

Riding and improving on 5G with wireless SD-WAN

Congestion/ Short Range

Dead spots

10x faster than LTE

speeds of 100-200Mbps

Reduces latency from

20-50ms to <1ms

Serves as a backhaul for

mobile broadband services connecting billions of devices

Benefits Use cases

Opens up possibility for latency sensitive uses: ◼ Robo-surgery/mobile

clinic ◼ Autonomous driving ◼ Drones manipulation

◼ Cloud gaming

Problems

800MHz to

mid-band 3-5GHz range

Low band (<6GHz): for 4G-like reliability over

speed improvement. Allows for mission critical connections.

Plover Bay’s SD-WAN solutions

WAN Smoothing/Forward Error Correction technology to replace/extrapolate lost packets

for consistent connections.

Result: Carrier-agnostic/reliable/fast/secure connections which help eliminate dead spots and mitigate congestion problems.

Using Peplink/Pepwave routers and

SpeedFusion/inControl to bond multiple connections to form a reliable, failsafe VPN link

Figure 5: 5G use cases and how Plover Bay fits in


SD-WAN controller

Figure 4: SD-WAN vs Traditional WAN comparison


SD-WAN

Branch office SD-WAN router Public internet SD-WAN router

Fiber/DSL/LTE Fiber/DSL

Headquarters

Traditional WAN

Branch office Traditional WAN router

Private leased lines

Traditional WAN router Headquarters

Figure 3: IoT devices growth

Source: IoT Analytics 2018, Orient Securities (Hong Kong)

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BnIoT non-IoT

10% CAGR (# of global active

device connections)


Company in-depth


Secure, unbreakable VPN routers

Since 2007, Plover Bay focuses on the design, development, marketing and sale

of SD-WAN routers. Its extensive range of product and services allows them to

meet the ever-changing networking demands of end users. Their goal is to

design easy-to-use and reliable routers both on hardware and software sides.

Their WAN routers can be centrally managed with the cloud management

service, inControl, which is included for products covered under warranty. Also,

SpeedFusion is their unique, patented technology that allows bonding multiple

WAN connections into a secure VPN connection.

SpeedFusion – untapping the potential of existing connections

SpeedFusion can tap into existing or new connections ranging from DSL to

3G/4G/LTE to the upcoming 5G, combining them to form a single bonded,

secure data-pipe which can allow for Hot Failover (switch to another connection

if the primary one drops), WAN smoothing (extrapolate packet loss for

uninterrupted video/voice conferencing etc) and bandwidth bonding (increase

data transfer speeds).

Figure 6: Live broadcasting


Figure 7. Key Products Comparison

MSRP (USD) 250-350 ~1000 ~5000

GPM ~40% ~50-60% ~80%

% of total revenue ~20% ~15% ~10%

Number of LTE modems 1 2 4

Redundant SIM slots Yes No Yes

Power over Ethernet No Yes Yes

SpeedFusion Yes (but no bandwidth

bonding)

Yes Yes

InControl Cloud Yes Yes Yes

Warranty (includes cloud) 1 Year limited warranty 1 Year limited warranty 1 Year limited warranty

Comment Bread and butter product;

price varies depending on

LTE/LTE-A, number of ports,

other features. Suitable for

1-60 users.

Higher throughput allows

up to 150 users. No

redundant SIM slots.

Suitable for passenger

Wi-Fi, fleet management.

Quad LTE with redundancy,

more wired ports. Suitable

for a large number of users

(500) and high bandwidth

requirements.

SpeedFusion Dual-LTE Docking for any camcorder, providing unbreakable uplink for live event broadcasting

Figure 8: LSU Health Mobile Mammography (Rural area)

Uses MAX BR1/HD2/HD4/Balance 580 for unbreakable cellular bonding. Remotely access vital information, such as patient registration and databases, as well as communicate using VoIP.


Figure 9: Ferrari Group Fleet Tracking for Armored Transports

Uses Max BR1/HD2/inControl 2 for unbreakable, secure cellular bonding. Maximized bandwidth handles streaming of high-resolution surveillance video and images and encrypted transmission of sensitive surveillance and location data.




Company in-depth


Getting ahead of mainstream wireless SD-WAN adoption

Wireless revenue 38% CAGR during 2013-18

In order to take advantage of the growing adoption of wireless connections,

Plover Bay has focused on designing and developing its wireless SD-WAN

routers along with complementary software to support advanced features and

mitigate inherent weaknesses of wireless connections. We expect wireless

revenue to recover from the FY18 setback and grow 20%/25% in FY19E/FY20E

as 5G goes mainstream with 4G/LTE data costs coming down FY20E+. We

believe that the new (non-commoditized) modular routers like EPX/Max HD4

MBX will drive higher ASPs/GPMs as they are 5G ready/future-proof/scalable.

Wireless segment profit 32.7% of total in 2018, up from 18% in 2013

Due to the success of its wireless products, the segment drove significant

contribution to its bottom line over the years while enabling the monetization

of cloud services through the warranty business. FY18 wireless segment profit

margin fell 1.8ppt to 27.2% due to lower GPM as basic models had a higher

contribution. But good cost control (wireless R&D-to-sales fell 1.5ppt in FY18)

helped offset the decline.

Warranty support, a lucrative and growing business

We think the warranty business, which embeds its cloud management software

along with defective hardware replacement, will be a key driver for growth.

Warranty revenue is recurring and also prepaid. GPM is expected to be ≅90%

(low defective rates and COGS). We believe a growing portion of end-users will

subscribe as evidenced by the current adoption trend. Cloud registered users

grew 45% yoy to 160k in FY18.

Wired routers segment in the backseat

As they do not focus on wired routers, wired revenue growth is likely to stall to

~2% yoy in FY19E/FY20E with 1H19E likely to register a decline yoy. Wired GPM

is higher than wireless as they do not go for volume and large enterprises which

use wired routers as backbone are more likely to have a bigger budget.

Figure 10. Revenue breakdown


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Warranty & Software

Wireless

Wired

Wireless mix

Figure 12: Key growth assumptions

USD’000s 2018 2019 2020 2021 2018-21 CAGR

Revenue 41,806 50,056 61,640 74,499 21.2% Wireless 22,251 26,701 33,377 40,052 21.6% Wired 8,170 8,333 8,500 8,670 2.0% Warranty/software 11,385 15,021 19,763 25,777 31.3%

YoY Total 12.6% 19.7% 23.1% 20.9% - Wireless 4.1% 20.0% 25.0% 20.0% - Wired 3.0% 2.0% 2.0% 2.0% - Warranty/software 45.5% 31.9% 31.6% 30.4% -

GPM - Blended 62.6% 63.8% 65.1% 65.7% - Wireless 46.1% 47% 49% 49% - Wired 66.4% 67.50% 67.00% 67.00% - Warranty/software 92.3% 91.7% 91.4% 91.2% -

R&D expenses (% of revenue) - Blended -17.5% -17.0% -17.5% -17.5% - Wireless* -16.8% - - - - Wired* -18.0% - - - - Warranty/software* -17.1% - - - -

* Segment R&D is estimated. Source: Company, Bloomberg, Orient Securities (Hong Kong)

Figure 11. Market CAGR 2017-2022

Source: Gartner Oct 2018

-21%

37%

-3%

-30%

-20%

-10%

0%

10%

20%

30%

40%

TraditionalWAN

SD-WAN Total WANEdge

Market

The wired segment still makes up a vast majority of the broader SD-WAN market.

Hence, we see Plover Bay growing at a notch slower until a wide adoption of wireless equipment triggers, likely during 5G upgrade.

Wireless mix may stabilize as we believe the lucrative warranty/software business will pick up during 2019E+.


Company in-depth


Competitors and peers in the SD-WAN space

Figure 14. Key Competitor Comparison

Market Cap ($mn) 150 430 - -

Profile Plover Bay offers a broad array of WAN products

optimized for applications where

bandwidth is limited. It focuses on wireless

connections with unique, patented VPN bonding

technologies.

Sierra Wireless is engaged in building IoT with wireless solutions

for organizations, offering a portfolio of 2G/3G/4G

cellular embedded wireless modules and

gateways, integrated with its secure cloud and

connectivity services.

Cradlepoint offers a broad suite of branch

office, mobile and IoT-focused products

with an emphasis on 4G LTE data networking.

Teldat offers a broad range of voice and data products including LAN,

WAN, wireless LAN (WLAN) and voice, and

integration services.

Key products Wireless routers: MAX BR1, MAX HD2, MAX HD4

Cellular modules: HL/EM/AR/WP series;

integrated IoT solutions: AirVantage platform

NetCloud platform routers: IBR600 (IoT),

AER1600 (LTE), CBA850 (LTE failover)

Teldat-M1 corporate router (optional switch,

3G/4G integration)

Strengths ◼ Supports a large number of links in

its platforms and can bond

multiple links (wired+wireless) into

a single logical link to deliver

high-bandwidth connections

◼ Rich set of WAN management and

troubleshooting capabilities,

particularly relating to wireless

issues.

◼ Vertical-specific capabilities such

as ruggedized platforms and

applications for fleet management

- ◼ Broad/deep knowledge of wireless

networking: highly optimized

solutions, including advanced

monitoring and analytics.

◼ Has relationships with major

network service providers such as

AT&T and Verizon, which extend

its market coverage

◼ Cost-effective solutions which can

address customer branch

challenges beyond just the WAN

edge, including LAN and WLAN,

from the same management

console available as an OTT

service.

◼ A large installed base of customers

using its traditional routers, and a

proven ability to support

large-scale WANs of more than

1,000 locations

Cautions ◼ Limited sales channels, which can

make it difficult for buyers to

obtain its products from existing

suppliers

◼ Modest number of channel

partners and its limited installed

base mean there is a limited pool

of networking personnel familiar

with Peplink’s products

- ◼ Lacks support for legacy T1/E1

interfaces, WAN optimization and

link remediation, which are

required for many large

deployments.

◼ Cumbersome troubleshooting

requires individual device logging

◼ Limited expertise with DIY

enterprises as it is heavily focused

on selling through carrier and MSP

partnerships in Europe and Latin

America ◼ SD-WAN product is relatively new,

with limited customer adoption

(less than 50 customers), and

limited advanced features.

Source: Company, Gartner 2018, Orient Securities (Hong Kong)

Wireless focused

Enterprise focused

Figure 13. Gartner’s Magic Quadrant WAN Edge Infrastructure

Source: Gartner 2018, Company, Orient Securities (Hong Kong)

According to Gartner’s publication in October 2018, more than

90% of WAN edge infrastructure refresh initiatives will be

based on virtualized customer premises equipment (vCPE)

platforms or software-defined WAN (SD-WAN) software/

appliances compared with traditional routers by the end of

2023 (up from less than 40% late 2018.)

Technology-agnostic big players

While the industry growth refers mostly for wired SD-WAN, as

evidenced by the number of large players serving

multinational enterprises for their networking demands, the

wireless SD-WAN niche is an emerging area for growth.

According to Plover Bay, they believe WAN connections will

ultimately transition to wireless/cellular, and thus they have

positioned themselves to capture such opportunities by

focusing on wireless routers and bonding technologies.

Competition in the wireless space is relatively healthy which

allows smaller players to thrive. Bigger players might in fact

buyout emerging technologies once they begin to mature.


Company in-depth


Lucrative, fast growing warranty support business

Plover Bay’s warranty and support services allow end-users to enjoy a longer

warranty period after the first year warranty-free period that comes embedded

with the initial sales of the SD-WAN routers. Moreover, the inControl cloud

management software is provided at no additional cost during such warranty

period. After-sales service is covered by the distributor while Plover Bay only

replaces defective hardware for free once confirmed during the warranty period.

Given the high gross margins of the routers and the low defective rate, we do

not expect the cost of warranty to be high, thus GPM should be ≅ 90%.

Management has guided 30%+ yoy growth in FY19E, ahead of overall revenue,

and we believe the move towards a recurring subscription revenue model is

common practice as evidenced by increasing proportion of warranty revenues.

We estimate combined warranty and software revenue to increase

31.9%/31.6% yoy in FY19E/FY20E.

Growing registered user base

Based on our discussion with the management, we believe that end users prefer

the peace-of-mind when purchasing additional years of warranty. In addition, as

the inControl cloud management software is bundled with the warranty service,

we expect to see a trend in a growing portion of users subscribing to the service.

Registered user base increased to 160k in 2018 from 110k in 2017, or 45% yoy

growth, inline with the 43% yoy warranty & support revenue growth. Current

estimated portion of registered user base is more than half of the install base,

so we expect further upside in the conversion.

Being prepaid help improves cash flow

Warranty subscriptions are prepaid and start at one year contracts while some

customers may choose to subscribe for 3 years. The current portion of contract

liabilities is ~4x the non-current portion, with the current portion averaging

~72% of warranty revenue in the same year. We assume that most of warranties

are on one-year contracts.

Figure 15. Warranty/software growth


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Figure 16. Warranty/software GPM


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Figure 17. Warranty/software segment profit


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USD mn

Segment Profit

Segment profit margin

Implied R&D, % of segment sales

Figure 19. Warranty sales relative to SD-WAN router sales


11.9% 13.1% 13.0% 16.0% 19% 22% 25%0

100

0%

100%

2015 2016 2017 2018 2019E 2020E 2021E

USD mnSD-WAN router sales

2 year growth rate (SD-WAN)

Warranty sales as % of rolling 2-year avg SD-WAN sales

Figure 18. Current/non-current portion of contract liabilities relative to warranty sales


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2013 2014 2015 2016 2017 2018

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% o

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Current contract liabilitiesNon-current contract liabilitiesCurrent/non-current ratio

Avg: 72%

Avg: 20%

Flexibility of software license In order to provide flexibility regarding the

pricing of the SD-WAN routers, some software licenses, such as SpeedFusion and unlocking of WAN ports, can be purchased

separately from the distributor. We believe these one-time purchases could add to the fluctuation in annual sales but is largely

offset by the small contribution to total revenue.


Company in-depth


Diverse base of distributors and end-users

Plover Bay primarily sells its products and services through an expansive

network of independent distributors. They generally do not deal with customers

directly unless they have the necessary IT expertise. We believe one of the

largest direct customers could be a well-known internet company based in the

US which is a demonstration of Plover Bay’s global relevance.

They rely on the distributors to promote and market their products, provide

technical/warranty support, and to gather feedback on their products and

market trend data. Generally, they maintain a buyer/seller relationship with the

distributors who manage their own inventory levels and are not entitled to

refunds apart from hardware defects. They communicate with the distributors

periodically relating to their existing inventory and sales data to understand the

market performance of the products.

The credit terms offered for existing distributors with a track record of 6 months

or more are 30-60 days (typically 58-60days) while new distributors are required

to pay upfront. Distributors are encouraged to register their deals via an online

system to avoid unhealthy cannibalism. Plover Bay can track ongoing sales and

assist distributors in closing deals by offering price discounts exclusively.

Discounts to the MSRP offered to distributors can vary from 40-50%, with the

majority closer to 40%.

Revenue generated geographically are well diversified

North America makes up the bulk of its sales and will continue to be an

important market in the foreseeable future. EMEA is a fast growing region as

demand from the transportation market for cellular routers increased.

Moreover, the Baltic States offers relatively lower tax rates and the SD-WAN

market there is fragmented, allowing niche players like Plover Bay to have an

advantage. In 2018, sales in Asia fell 12.8% yoy due to uncertainties in global

trade which hurt tech related demand especially in the second half. Also

political instability in certain Southeast Asian countries caused some projects to

fall through. Given that >80% of the production is in Taiwan, we do not believe

US-China tariffs to directly impact them.

Increasing selling and marketing efforts

The company is planning to increase effort in developing sales globally, and we

expect them to add several marketing and sales headcount, thus we raise S&D

costs accordingly.

Figure 20. Revenue breakdown by region


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Figure 21. Current estimate of end-user mix

Note: Due to the timing of deals/unforeseen events, these categories could change or differ

greatly from time to time.


Public safety

Transport

RetailMaritime

Others

Figure 22. Contribution by major customers


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Figure 23. Change in number of distributors


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Figure 25. FY18 PBT sensitivity to FX

USD +5% USD -5% USD/EUR -48bps +48bps USD/RMB -2bps +2bps USD/MYR -2bps +2bps USD/GBP -6bps +6bps

As sales are denominated in USD, generally, depreciation of USD in terms of foreign currency will help boost demand in non-US regions and also benefit PBT via translation effects.


Figure 24. Deployment in Poland

Free public bus Wi-Fi deployment by KPKM in Poland. Allows for free Wi-Fi, ad serving, bus deployment and real-time tracking. Future plans for CCTV and bus schedule tracking/display for passengers.



Company in-depth


Max HD2 (Dual LTE) MSRP ~US$1k/GPM: ~50-60%

0

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2013 2014 2015 2016 2017 2018

USD '000sRevenue breakdown by product

Wired Wireless Warranty and support services Software licences

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PetabytesFixed Internet traffic Mobile Internet traffic

Internet traffic growth and evolution: increasing demand for wireless

0%

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200%

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2015 2016 2017 2018

USD '000s Dividend history

Total Dividend Payout ratio

0%

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60%

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2013 2014 2015 2016 2017 2018

Steady gross profit margins

Wired Warranty and support services Software licences Wireless

Total traffic, 2007-2017 CAGR: 34%

Total traffic, 2018-22E

CAGR: 29%

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GDP per capita (US$)

Mobile cellular subscriptions vs world GDP per capita (2000-2017)

Mobile traffic growth still leads

CAGR Mobile Fixed

2007-17 95% 32%

2018-22E 42% 26%

As internet applications become more advanced, more data is consumed to connect with billions worldwide, fueling demand for networking equipment and lowering the cost of infrastructure.

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50

100

150

2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E

ExabytesMobile data usage by application

Video Social Networking Audio Web Browsing

Software update File Sharing Other

Video data growth is driven by increasing video quality, richer content, surveillance (CCTV), live streaming/broadcasting etc. Such use cases call for secure, unbreakable, fast mobile connections which Plover Bay solutions can help deliver.

The provision of additional/upgraded licenses on existing products does not incur costs to deliver. Warranty includes cloud services as well as hardware replacement service. Hardware is inexpensive and is rather durable, hence strong GPM.

Despite a short trading history, Plover Bay pays out 101% of its net profit on average due to the large stake held by management and resilient cash flow generation. The management’s interest is well aligned with other shareholders and the company expects to continue to grow its dividends in the future.

Wireless routers typically carry lower ASPs but sell at higher volumes vs. wired, thus has a lower GPM.

Plover Bay plans to continue to grow its dividends sustainably

DPS: 3.66

6.08 8.80

2016-18 DPS CAGR: 55%

Fragmented and relatively nascent wireless SD-WAN market allows Plover Bay to command high margins with its patented VPN bonding technologies

As world GDP per capita grows, we can project cellular subscriptions to increase linearly, boosting demand for networking equipment, including wireless SD-WAN.

2013-18 CAGR: Wireless – 38% Wired – 4.7%

Warranty – 39%

⚫ Best seller

⚫ Single LTE ⚫ MSRP: US$250-350 ⚫ GPM: ~40%

⚫ Competitors: Sierra Wireless, Cradlepoint

Max HD4 (Quad LTE) MSRP ~US$5k GPM: ~80%

Source: Ericsson

Source: World Bank


2009: cellular subscriptions grew even when economy faltered

2017

2000

2007

2008

Patent granted

Source: Cisco

Others


Company in-depth


Core profit 34.7% CAGR from 2013-18

Plover Bay’s core profit (ex. listing expenses/share based compensation) has

grown steadily thanks to a fast growing topline and robust net margins. During

CY14-CY18, the company posted net margins which were on average ~17ppt

higher than the market weighted average of companies in the Hang Seng

Composite SmallCap Index despite slower revenue growth rate.

We estimate core EPS to increase 21%/20% yoy with core net margin to remain

steady at 27.8%/27.6% in FY19E/FY20E. We expect dilution, mainly due to share

based compensation, to be contained ~1.5% per year.

The near-100% dividend payout is an important highlight. Based on our

discussion with the management, we sense that a sustainable dividend growth

policy can be viably adopted.

Figure 27: Historical financials

USD’000s 1H2016 2H2016 1H2017 2H2017 1H2018 2H2018 HoH YoY

Revenue 12,033 16,325 17,788 19,344 19,728 22,078 11.9% 14.1%

Gross profit 7,923 10,022 10,502 12,473 12,449 13,740 10.4% 10.2%

GPM (%) 66% 61% 59% 64% 63% 62% 0.9ppt 2.3ppt

Operating profit 3,975 4,103 4,788 5,614 5,715 6,287 10.0% 12.0%

Net profit 2,801 2,439 4,135 4,619 4,743 5,877 23.9% 27.2%

Net profit

margin (%)

23% 15% 23% 24% 24% 27% 2.6ppt 2.7ppt

EPS (US¢) 0.37 0.25 0.41 0.46 0.47 0.57 21.3% 23.9%

DPS (HK¢) 1.73 1.93 2.58 3.50 2.92 5.88 101.4% 68.0%

Source: Bloomberg, Company, Orient Securities (Hong Kong)

Figure 26. PB v. “HSSI” small cap profit growth

Source: Bloomberg, Orient Securities (Hong Kong)

-20%

30%

80%

2014 2015 2016 2017 2018

HK Small Cap Avg Net Margin

Plover Bay Net Margin

HK Small Cap Avg Sales Growth

Plover Bay Sales Growth

+19.1% yoy

0

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FY13 Wired Wireless Warranty/Software Wired Wireless Warranty/Software Allocated admin exp. FY18

US$mn FY13-FY18 Segment Profit Analysis

Gross profit R&D expenses

Wired - Not a major focus as competition is a swath of large players

Wireless - main profit generator, niche advantage allows for customizations, faster time to market, unique patented technologies

Warranty – a latecomer but lucrative business comprising cloud service and warranty support. Revenue is a growing mix of rolling average router sales.

Est. wired R&D averaged 19% of sales and has been falling/providing positive lever

Est. wireless/ warranty/software R&D averaged 20% of sales and has been stabilizing

27.6% CAGR

0

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FY17 Wired Wireless Warranty/Software Wired Wireless Warranty/Software Allocated admin exp. FY18

US$mn FY17-FY18 Segment Profit Analysis

Gross profit R&D expenses

Wireless – despite 4% sales growth, margin fell on component shortages causing delays, slightly higher costs and increasing mix of lower ASP products

Warranty – high margin, fast growing business with registered users growing 45% yoy to ~160k.

Lower R&D expenses during a slower growth environment in 2018 helped drive positive operating leverage

Absolute R&D expenses for warranty/software increased but shrank as a % of sales




Company in-depth


HKSAR Tax Incentives for R&D further driving core profit margins

The Inland Revenue (Amendment) (No. 7) Ordinance 2018 has come into

operation in November 2018 to implement an enhanced tax deduction regime

for qualifying R&D expenditures in HK incurred since April 2018. The new rules

will classify qualified R&D expenditure (subject to meeting certain conditions)

into two broad categories that are deductible, namely Type A expenditure which

qualifies for a basic 100% tax deduction, and Type B expenditure which qualifies

for an enhanced two-tiered tax deduction (300% for the first HKD2mn and 200%

for any remaining amount). Under the amendment, qualified direct wages and

consumables for R&D purposes could receive tax deduction.

A welcome change but meeting the qualifying conditions could be subjective

The management sees a positive benefit from the new tax amendment which

will allow some of its R&D expenses to be tax deductible. But, it is noted that

approval for such tax deductions are entirely subject to IRD’s discretion which

could be subjective as to what type of R&D is considered innovative. As a result

of the tax deduction, FY18 effective tax rate improved to 13% from the average

tax rate of ~17.1% between FY13-17.

Based on our discussion with the management, they prefer to estimate forward

effective tax rate at a conservative ~15%. Using our assumptions below, it could

indicate ~10-20% of R&D expenses could qualify for 100-200% deduction which

forms our base case. The bull case assumes double the amount deductible

which is closer to the rate seen in FY18. We use the base case in our model but

we use 17% tax rate for the after-deduction portion of PBT to factor in possible

adverse tax adjustments. Therefore, our final effective tax rate for FY20E is

50bps higher at 15.3% but inline with guidance.

Figure 29. Tax deduction benefits (base case)

USD ‘000s 2018 2019E 2020E 2021E

Tax benefit 527 255 324 391

Deductible amount* 3,194 1,547 1,961 2,370

R&D expenses 7,318 8,509 10,787 13,037

% of R&D expenses (100%) 44% 18% 18% 18%

% of R&D expenses (200%) 22% 9% 9% 9%

Effective tax rate benefit 4.3% 1.6% 1.7% 1.6%

New effective tax rate† 13.0% 14.9% 14.8% 14.9%

Core profit benefit 4.9% 1.9% 1.9% 1.9%

* assumes 16.5% tax rate, 100% deductibility † assumes no other tax adjustments

Figure 28: Effective tax rate


HKSAR Tax Incentives

for R&D in 2018

Figure 30. Tax deduction benefits (bull case)

USD ‘000s 2018 2019E 2020E 2021E

Tax benefit 527 562 712 860

Deductible amount* 3,194 3,404 4,315 5,215

R&D expenses 7,318 8,509 10,787 13,037

% of R&D expenses (100%) 44% 40% 40% 40%

% of R&D expenses (200%) 22% 20% 20% 20%

Effective tax rate benefit 4.3% 3.6% 3.8% 3.6%

New effective tax rate† 13.0% 12.9% 12.7% 12.9%

Core profit benefit 4.9% 4.2% 4.4% 4.2%

* assumes 16.5% tax rate, 100% deductibility † assumes no other tax adjustments

Figure 31. Diagram of the enhanced tax deductions under the new R&D regime

Source: KPMG, Orient Securities (Hong Kong)

R&D activities

Qualifying R&D activities (wholly undertaken/carried on in HK)

In-house

Staff costs and consumables

Type B Expenditure

Other R&D expenditures

Type A Expenditure

Outsourced

Undertaken by designated local research institutions

Type B Expenditure

Other R&D activities (incl. those undertaken outside HK)

In-house or undertaken by designated local research

institutions/ overseas universities or colleges

Type A Expenditure

The new R&D tax regime could help

drive core profit by 2-4%. There is

considerable upside should more R&D

expenses qualify for enhanced

deduction by the CI&T.




Company in-depth


Asset light, outsourced manufacturing, pristine balance sheet

As Plover Bay outsources manufacturing, it is able to maintain an asset-light

position with long-term assets at ~7.5% of total assets. The main increase in

PP&E was the purchase of property for office/storage use in FY17. There are

plans to increase office space in Cheung Sha Wan but the amount should be

small.

Majority of the assets lie within its inventory and trade receivables. As sales

have grown rapidly in the recent years, inventory and receivables have

increased significantly. At discretion, the management may time the purchases

of inventory under favorable terms. We do not believe there is a large risk to

this strategy as the products carry high gross margins and are targeted primarily

to enterprise customers which typically have longer replacement cycles,

reducing the risk of obsolescence.

Moreover, both outstanding trade receivables/payables are stable around 60

days in the recent years. We expect inventory days to keep above 220 days.

>80% of manufacturing in Taiwan

While most of the manufacturing is done in Taiwan, the company has one PRC

manufacturer (~20% COGS) which will likely be shifted to work on non-US

orders. Production time is ~2 weeks with 2 weeks to 1 month of order visibility

from customers. We believe that >50% of the COGS comes from the wireless

module (~50USD ASP), 5-10% from labor cost and memory chips/other forming

the rest. Customer pays for the shipping cost. There was a shortage of MLCC

supply which caused delays in production in FY18 though the situation has

largely eased.

Figure 34: Inventory level/days


Plover Bay took advantage of seasonally favorable terms from supplier to build inventory in FY17

We believe inventory will build once again to meet sales need after destocking in FY18

Figure 35: Cash conversion cycle


Increase in CCC mainly due to inventory build as sales surged

Figure 32: PP&E additions


Increase in PP&E in FY17 was due to purchase of $1.2mn of property office/storage use.

Figure 33: Trade receivables/payables


Sales growth in FY18 was slower while receivables turnover improved. We expect receivables/payables to increase as sales/COGS grow faster.

Figure 36: Major suppliers


0%

20%

40%

60%

80%

100%

2013 2014 2015 2016 2017 2018

5 largest Top supplier

We believe they will reallocate non-US orders to the PRC manufacturer.


Company in-depth


Initiate at BUY with TP of HK$2.0

Plover Bay is well positioned to take advantage of SD-WAN growth, particularly

in the wireless subset. Its unique, patented SpeedFusion technology sets it apart

from the competition in addition to its cloud management service, InControl

and others soon to be launched. The 5G upgrade cycle should provide the

catalyst for broad acceptance of using mobile/wireless as core connections.

Moreover, its warranty & software business introduces a robust

recurring/prepaid revenue business model with ≅90% GPM.

We expect total revenue to grow 19.7%/23.1% yoy to USD50mn/USD61.6mn

and GPM to expand 1.2ppt/1.3ppt to 63.8%/65.1% in 2019E/2020E. We

estimate core profit to reach USD13.9mn/USD17mn and core EPS to grow

21%/20% to US¢1.29/US¢1.56 in 2019E/2020E. Given its near-100% payout, we

employ DDM and arrive at our TP of HK$2.0, implying 2020E PE of 16.5x.

Figure 39: Plover Bay’s DDM valuation

USD’000s 2019F 2020F 2021F 2022F 2029F

Net profit 13,148 16,076 20,117 22,684 34,099

Dividends 13,148 15,272 19,111 21,550 32,394

Payout Ratio

100% 95% 95% 95% 95%

Discounting factor

0.95 0.85 0.76 0.67 0.30

PV of dividends

12,521 12,958 14,452 14,525 9,748

PV of DPS (HK cents)

9.43 9.62 10.57 10.62 7.13

Source: Company data, Bloomberg, Orient Securities (Hong Kong)

Figure 41: Plover Bay’s DCF valuation

USD’000s 2019F 2020F 2021F 2022F 2029F

Pre-tax income 15,534 18,978 23,766 27,330 38,457

Tax paid (2,385) (2,903) (3,649) (4,646) (6,538)

Depre. & Amort.

895 1,083 1,297 1,460 1,820

Change in WC (5,356) 3,256 (2,312) 5,657 (6,447)

CAPEX (1,444) (1,705) (1,819) (1,866) (1,810)

Free cash flow (HK$ mn)

56 146 135 218 275


Figure 43: Valuation Comparison

Name Ticker Last price

(LCY)

Market Cap

(US$bn)

P/E

20E

P/S

20E

Div. yield

20E

Plover Bay 1523 HK 1.17 0.15 9.6 2.6 9.7

Unrated

Arista ANET US 267.41 20.49 25.5 7.1 -

Cisco CSCO US 56.62 242.38 16.7 4.6 2.6

Ericsson ERICB SS 83.98 29.73 17.0 1.2 1.7

F5 Networks FFIV US 147.69 8.88 14.1 3.8 -

Juniper JNPR US 26.47 9.11 13.5 2.0 2.9

Nokia NOKIA FH 4.9715 31.23 13.7 1.1 4.3

Sierra Wireless SW CN 15.44 0.42 15.5 0.5 - Source: Bloomberg, Orient Securities (Hong Kong)

Figure 37: Historical P/E

Source: Bloomberg

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Figure 42: Historical dividend yield

Source: Bloomberg

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Figure 38: Assumptions of DDM

WACC 12.2% 2022F-2029F growth rate

6%

Terminal perpetual growth rate

5%

Total PV of dividends per share

100.9¢

Terminal value per share 99.0¢ DDM per share (HK$) 2.00 Upside potential 71%


Figure 40: Assumptions of DCF

WACC 12.2% PV of FCF (2019F-29F) 1,099 Terminal perpetual growth rate

5%

FCF value per share 1.1 Terminal value per share 1.2 Net cash per share 0.17 DCF per share (HK$) 2.31



Company in-depth


Financial statements & forecasts

Income Statement (consolidated)

FY-end Dec (US$'k) 2017 2018 2019E 2020E 2021E Revenue 37,132 41,806 50,056 61,640 74,499

Wired 7,932 8,170 8,333 8,500 8,670

Wireless 21,373 22,251 26,701 33,377 40,052

Warranty & Software 7,827 11,385 15,021 19,763 25,777

Cost of goods sold (14,157) (15,617) (18,104) (21,519) (25,553)

Gross profit 22,975 26,189 31,952 40,121 48,946

Other income and gains, net 463 295 400 493 596

Selling and distribution expenses (1,636) (2,107) (2,753) (3,698) (4,097)

R&D expenses (7,189) (7,318) (8,509) (10,787) (13,037)

Administrative expenses (3,958) (4,814) (5,506) (7,089) (8,567)

Operating Profit 10,655 12,245 15,584 19,040 23,840

Finance cost (26) (32) (50) (62) (74)

Profit before tax 10,629 12,213 15,534 18,978 23,766

Income tax expenses (1,875) (1,593) (2,385) (2,903) (3,649)

Minority interest - - - - -

Discontinued operations - - - - -

Net profit 8,754 10,620 13,148 16,076 20,117

EBITDA 10,016 11,416 14,689 17,957 22,543

EBIT 10,655 12,245 15,584 19,040 23,840

Basic EPS (US cents) 0.87 1.04 1.27 1.53 1.89

Core EPS (US cents) 0.95 1.07 1.29 1.56 1.92

DPS (HK cents) 6.08 8.80 9.90 11.33 13.97

Cash Flow (consolidated)

FY-end Dec (US$'k) 2017 2018 2019E 2020E 2021E Pre-tax profit 10,629 12,213 15,534 18,978 23,766 Taxes paid (2,547) (2,526) (2,385) (2,903) (3,649)

Depreciation of property, plant and equipment 385 461 494 542 594

Amortization of intangible assets 254 368 401 541 704

Change in working capital (6,821) 8,374 (5,356) 3,256 (2,312)

Others 909 601 616 791 997

Operating cash flow 2,809 19,491 9,303 21,206 20,099

CAPEX (2,140) (1,537) (1,454) (1,714) (1,829)

Disposals 17 1 10 10 10

Decrease/(increase) in

non-pledged bank deposits (7,115) 7,115 - - -

Others 302 243 243 243 243

Investing cash flow (8,936) 5,822 (1,201) (1,462) (1,576)

Change in debt 1,643 (632) 319 (160) 80

Dividends paid (5,824) (8,351) (12,119) (13,856) (16,551)

Share options 887 937 918 991 1,090

Interest paid (26) (32) (26) (33) (29)

Financing cash flow (3,320) (8,078) (10,908) (13,058) (15,411)

Free cash flow 690 17,982 7,891 19,543 18,333

Net cash flow (9,447) 17,235 (2,806) 6,686 3,112

Semi-Annual Breakdown a(consolidated)

FY-end Dec (US$'k) 2H16 1H17 2H17 1H18 2H18 Revenue 16,325 17,788 19,344 19,728 22,078 Gross profit 10,022 10,502 12,473 12,449 13,740

Operating profit 4,103 4,788 5,614 5,715 6,287

Pre-tax profit 3,245 4,981 5,648 5,776 6,437

Tax (806) (846) (1,029) (1,033) (560)

Net profit 2,439 4,135 4,619 4,743 5,877

Gross margin (%) 61% 59% 64% 63% 62% Operating margin (%) 25% 27% 29% 29% 28%

Effective tax rate (%) 25% 17% 18% 18% 9%

Net margin (%) 15% 23% 24% 24% 27%

EPS (US cents) 0.25 0.41 0.46 0.47 0.57 DPS (HK cents) 1.93 2.58 3.50 2.92 5.88


Balance Sheet (consolidated)

FY-end Dec (US$'k) 2017 2018 2019E 2020E 2021E Current assets 37,881 41,904 47,709 55,814 67,349

Inventories 11,629 8,372 13,452 12,489 18,314

Trade receivables 7,763 4,922 8,091 9,964 12,042

Prepayments, deposits and other

receivables

1,713 1,491 2,023 2,491 3,011

Cash and cash equivalents 16,747 26,850 24,044 30,730 33,842

Other current assets 29 269 100 140 140

Non-current assets 2,678 3,391 3,950 4,578 5,100

Property, plant and equipment 1,995 2,470 2,708 2,969 3,256

Intangible assets 661 891 1,203 1,564 1,798

Other non-current assets 22 30 40 46 46

Total assets 40,559 45,295 51,660 60,392 72,449

Current liabilities 10,529 10,559 13,554 17,186 22,231 Trade payables, other payables

and accruals

2,630 2,274 2,926 3,478 4,130

Deferred revenue/Contract

liabilities

5,036 6,763 8,957 12,142 16,455

Interest-bearing bank borrowings 1,944 1,306 1,625 1,466 1,545

Tax payable 919 216 46 100 100

Non-current liabilities 1,280 2,018 2,607 3,516 4,662

Deferred tax liability 95 109 120 132 132

Long-term debt - - - - -

Deferred revenue/Contract

liabilities

1,185 1,909 2,487 3,384 4,530

Total liabilities 11,809 12,577 16,161 20,702 26,893

Share Capital 1,307 1,326 1,345 1,364 1,383

Share premium and reserves 27,443 31,392 34,154 38,327 44,174

Total equity 28,750 32,718 35,499 39,691 45,557

Total liabilities & equity 40,559 45,295 51,660 60,393 72,450

Net cash/(debt) 14,803 25,544 22,419 29,265 32,297

Working capital 27,352 31,345 34,156 38,628 45,118

Total capital employed 30,030 34,736 38,106 43,206 50,219

Net gearing (%) NC NC NC NC NC

BVPS (US cents) 2.86 3.21 3.43 3.78 4.27

Key Ratios

FY-end Dec 2017 2018 2019E 2020E 2021E Growth (%) Revenue 31 13 20 23 21

Gross profit 28 14 22 26 22

EBITDA 33 14 29 22 26

EBIT 34 15 27 22 25

Net profit 67 21 24 22 25

Basic EPS 45 20 22 20 23

Core EPS 19 13 21 20 23

Margins (%) Gross 62 63 64 65 66

EBITDA 27 27 29 29 30

EBIT 29 29 31 31 32

Net 24 25 26 26 27

Core 26 27 28 28 29

Others (%) Effective tax rate 18 13 15 15 15

Dividend payout ratio 90 109 95 95 95

RoCE 29 31 34 37 40

Average RoE 33 35 38 42 46

Average RoA 27 27 30 32 34

Interest cover (x) 410 383 311 309 320

Key Assumptions

FY-end Dec (YoY %) 2017 2018 2019E 2020E 2021E Wired 3.2% 3.0% 2.0% 2.0% 2.0% Wireless 49.6% 4.1% 20.0% 25.0% 20.0%

Warranty & Software 22.7% 45.5% 31.9% 31.6% 30.4%


Company in-depth


.

Analyst Certification

I, Fung Ho Ting, being the person primarily responsible for the content of this research report, in whole or in part, hereby certify that:

(1) all of the views expressed in this report accurately reflect my personal view about the subject company(ies) and its (or their) securities;

(2) no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report, or our Investment Banking Department;

(3) I am not, directly or indirectly, supervised by or reporting to our Investment Banking Department;

(4) the subject company(ies) do(es) not fall into the restriction of the quiet period as defined in paragraph 16.5(g) of SFC Code of Conduct;

(5) I and my associates do not deal in or trade in the stock(s) covered in this report within 30 calendar days prior to the date of issue of the report;

(6) I and my associates do not serve as an officer(s) of the listed company(ies) covered in this report; and

(7) I and my associates have no financial interests in relation to the listed company (ies) covered in this report.

Meanings of Orient Securities Ratings

Buy – Describes stocks that we expect to provide a total return of >10% within a 12-month period.

Accumulate – Describes stocks that we expect to provide a total return of >0% within a 12-month period.

Hold – Describes stocks that we expect to provide a total return of between -20% and +20% within a 12-month period.

Sell – Describes stocks that we expect to provide a total return of <0% within a 12-month period.

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plover ay 珩灣科技 (1523 hk) uy · 7/29/2019 · in iot devices. plover ay has positioned well...

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