7 July 2017 · target users with high demand for reliable connectivity. Its products are widely used in mission-critical sectors such as public safety, transportation, hospitality,

1

7 July 2017

Plover Bay Technologies – Initiation of Coverage BUY

Be Connected TMT

Plover Bay Technologies Limited (“Plover Bay”) was the world’s fifth largest Software Defined WAN (“SD-WAN”) vendor in terms of revenue in 2015. With its innovative and patented technologies, robust profitability, committed R&D, as well as the growing market of SD-WAN, we expect the company to record a 45.6% CAGR in net profit in FY17E-19E. We initiate a BUY rating with a target price of HKD1.41, based on a 15x FY18E PER, representing 53.7% of upside potential. Speedy and unbreakable connectivity – Plover Bay’s patented SD-WAN technologies target users with high demand for reliable connectivity. Its products are widely used in mission-critical sectors such as public safety, transportation, hospitality, broadcasting, and government services. SD-WAN is a technology that uses multiple affordable wired or wireless WAN connections, while the company’s patented SpeedFusion technology enables connections between different providers with up to 13 mixed internet connection methods with enhanced connection capacity and prioritized WAN usage based on availability. In addition, its InControl cloud service enables the network administrators to monitor and manage their entire networks remotely. CAGR of 45.6% in NP for FY17E-19E – Driven by the solid top-line growth, sustainable GPM, as well as effective cost control, we expect its net profit to reach USD17.2mn by FY19E from USD5.2mn in FY16. Its GPM is expected to maintain at above 64% in FY17E to 19E by virtue of its commitment to product R&D. It has been granted 21 patents and has more than 150 patent applications in progress as at the end of 2016. The market size of global SD-WAN routers is expected to grow at a CAGR of 31.8% from 2015 to approximately USD1.5bn by 2020, according to Quocirca. Net-cash position with high dividend payout ratio – We expect the company to be debt-free with cash on hand of about USD19.7mn as at the end of FY17E, accounting for approximately 15.3 HK cents/share or 16.6% of the current share price. The company has paid dividend twice in just twelve months of listing history, totaling 3.66 HK cents, with a payout ratio of about 90%. The company is currently trading at a dividend yield of around 4.0% and we expect the company to maintain a stable dividend payout ratio of no less than 75% in the near future. Risks – (i) limited number of suppliers; (ii) ability to follow the latest technologies; and (iii) unauthorised copying or imitation. Key Financials – Fiscal Year Ended 31 Dec

(USD’000) FY15 FY16 FY17E FY18E FY19E Revenue 21,859 28,358 36,941 48,709 64,410

Growth 21.8% 29.7% 30.3% 31.9% 32.2% Operating profit 4,140 6,675 9,702 14,512 20,562

Growth -3.4% 61.2% 45.3% 49.6% 41.7% Net profit 3,357 5,240 8,101 12,118 17,169

Growth -10.3% 56.1% 54.6% 49.6% 41.7% CAGR FY17E-19E 45.6%

EPS (US cents) 0.34 0.52 0.81 1.21 1.72 PER (x) 35.2 22.6 14.6 9.8 6.9 PBR (x) 16.6 4.9 4.4 3.8 3.1 Dividend Yield (%) N/A 4.0% 5.1% 7.7% 10.9%

Source: Bloomberg, Company data, Quam Securities

Recommendation

Ticker 1523 HK

Target Price HKD1.41

Previous Target N/A

Up/Downside 53.7%

Previous Rating Initial coverage

Share Information

Last Closing HKD0.92

52-week range HKD0.38-HKD1.02

ADT (3M) HKD5mn

Market Cap. HKD920mn

Shares outstanding 1,000mn

Free float 25%

SH-HK Stock Connect No

SZ-HK Stock Connect No

Major Shareholders

Chan Wing Hong Alex 75.00%

Share Price Performance

Source: Bloomberg

Tsz Wang Poon

T: +852 2571 5432

E: [email protected]

Howard Wong

T: +852 2571 5435

E: [email protected]

Plover Bay Technologies (1523 HK) 2

Table of Contents 1. Investment Highlights ................................................................................................................................................. 3

1.1 Growing demand for SD-WAN ............................................................................................................................. 3

1.2 32% CAGR growth in revenue.............................................................................................................................. 3

1.3 Patented technologies determined its success ................................................................................................... 4

1.4 Dedicated to R&D ................................................................................................................................................ 4

1.5 Sustainable profit margin .................................................................................................................................... 4

1.6 Net cash and at least 75% payout ratio ............................................................................................................... 5

1.7 Key risks ............................................................................................................................................................... 5

2. Valuation and Comparables ....................................................................................................................................... 6

3. Business Overview ........................................................................................................................................................ 8

4. Company Background ................................................................................................................................................ 16

5. Financials..................................................................................................................................................................... 17

5.1 Revenue CAGR of 32% for FY17E-19E................................................................................................................ 17

5.2 GPM edging up .................................................................................................................................................. 18

5.3 Slightly decreasing SG&A to turnover ratio ....................................................................................................... 19

5.4 Substantial investment in R&D .......................................................................................................................... 19

5.5 Net profit grows by 45.6% CAGR in FY17E-19E ................................................................................................. 20

5.6 Sustainable dividend payment .......................................................................................................................... 20

5.7 Financial Statements ......................................................................................................................................... 21


1. Investment Highlights

1.1 Growing demand for SD-WAN

Software-defined WAN (“SD-WAN”) is a technology for providing reliable and efficient

data connectivity by using multiple wired or wireless WAN connections. According to

Quocirca, the market size of global SD-WAN routers is expected to grow at a CAGR of

31.8% to approximately USD1.5bn by 2020. Furthermore, Gartner predicted that the

enterprise adoption of SD-WAN will increased from 1% in 2015 to 30% in 2019. The

technology is widely used by various sectors requiring high-speed and stable

connectivity, namely public safety, broadcasting, transportation, financial, education, etc.

For example, the combat of terrorism around the world have channeled more resources

into anti-terrorism technology. As such, the use of SD-WAN solution is increasing sharply

in the public safety sector, due to its reliability and flexibility.

Figure 1: Global SD-WAN market forecast

Source: Quocirca, Quam Securities

1.2 32% CAGR growth in revenue

Plover Bay is primarily engaged in developing and commercializing SD-WAN solutions

under its own brands – “Peplink” and “Pepwave”. It also grants software license

subscriptions and provides warranty and support services in connection with its SD-WAN

solutions. According to Quocirca, Plover Bay was the fifth largest SD-WAN router vendor

internationally in 2015 in terms of revenue value. The company is known in the industry

for delivering disruptive Internet connectivity technologies, and we expect it will

continue to leverage its strength in new product development particularly in the

Internet of things (IoT) area. There will be new product launches and more cloud-based


subscription services in the near future. We project its total revenue to grow by 32.0%

CAGR from USD37mn in FY17E to approximately USD64mn in FY19E, driven by the

increasing sales revenue of its wireless SD-WAN routers and related services.

1.3 Patented technologies determined its success

The core value of Plover Bay is its patented SpeedFusion technology which transmits

true packet-level bonding enabling seamless failover from end-to-end connectivity, as

well as at higher connection speeds than was previously possible. In addition, its

InControl cloud services help users to manage their devices in a centralized manner and

monitor the entire network remotely. These applications have maximized SD-WAN’s

possibilities, making it functional for different customers under different circumstances.

The company had been granted 21 patents and has more than 150 patent applications

filed internationally as at the end of 2016.

1.4 Dedicated to R&D

Plover Bay is highly committed to R&D with the majority of its staff being R&D oriented.

Its R&D expenses in FY16 stood at 17% of its total revenue. Going forward, we expect

the R&D expense ratio to be maintained at 15-20% in the FY17-19E in order to keep its

leading position in the industry. Beside a high calibre product development team, it also

maintains an effective online ecosystem for product improvement and new product

ideas. Its online forum allows its distributors, prospective customers and end users to

seek information and share knowledge about its products and software. The solutions,

problems and suggestions posted by members on the forum enabled Plover Bay’s R&D

team to quickly resolve issues with its existing products and improve features in future

products and product enhancements.

1.5 Sustainable profit margin

Plover Bay’s commitment to R&D and a speedy product development cycle pays off into

strong and sustainable margins. Coping with its strict cost control strategy and the

increase in sales of wireless SD-WAN products, we forecast its GPM to rise steadily to

64.7% in FY19E from 58.1% in FY15. In addition, its SG&A expenses-to-revenue is

expected to decrease from 18.0% in FY17E to 17% in FY19E, thanks to a higher operating

efficiency. The company relies on third party distributors of sales and marketing to


minimize product deployment time. As some one-off items such as listing expenses will

no longer exist starting in FY17E, we estimate Plover Bay’s net profit margin will increase

to approximately 21.9% in FY17E and gradually edge up to 26.7% in FY19E. Meanwhile

its net profit is estimated to increase to USD17mn in FY19E, representing a 3-year CAGR

of 45.6%.

1.6 Net cash and at least 75% payout ratio

Although the company is a technology-focused company, its CAPEX requirement for

product development is minimal and costs are well under control. According to the

management, the biggest item in its R&D expenses is largely the salary of its engineers.

Therefore, the company recorded strong cash flow from operation of USD4.4mn in FY16,

while it had about USD18.9mn net cash on hand as at 31 Dec 2016. Owing to the cash

rich position, Plover Bay was generous in dividend payments and it had paid out 90% of

its net profits in FY16. We expect the company to maintain at least 75% payout ratio in

the next few years and its sound financial position should be sufficient to support the

high dividend payment ratio.

1.7 Key risks

(i) Reliance on a limited number of EMS providers;

(ii) Ability to follow the latest technologies;

(iii) Unauthorised copying or imitation of the company’s products by competitors;


2. Valuation and Comparables

We initiate a BUY on Plover Bay with a target price of HKD1.41, based on 15x FY18

forward P/E ratio, implying a 59% upside potential, with an expected dividend yield of

5.0% in FY18E to support our target price.

Our target valuation is obtained by using a comparable approach based on the

comparison with other companies with leading technologies. Table 2 below shows that

the average FY18E PER of Plover Bay’s comparables stands at about 13.4x, far ahead of

the company’s 9.8x FY18 forward PER. On the other hand, we forecast the company’s

EPS to grow at a 45.6% CAGR in FY17E-FY19E, which will be the highest among its peer

group. Furthermore, we reckon that Plover Bay’s financial performance is way better

than most of its comparables. Table 3 below shows that the company has the highest

dividend yield (4.0%), GPM (63.3%), ROE (40.3%) and ROA (33.8%), while its net profit

margin ranked second in the peer group and stands at 18.5%, surpassing the group’s

average of 7.6%.

Figure 2: FY18E PER of comparables Company Name Ticker Closing Price FY18E EPS FY18E P/E FY17E-FY19E

HKD HKD Ratio (x) EPS CAGR

Plover Bay 1523 0.92 0.09 9.8 45.6%

Peer Group:

AAC Tech 2018 97.50 5.89 16.6 17.7%

Sunny Optical 2382 69.70 2.77 25.2 31.6%

Lenovo Group 992 4.98 0.44 11.2 16.1%

Tongda 698 2.32 0.15 15.1 20.9%

Truly 732 2.72 0.28 9.8 42.0%

Q Tech 1478 7.36 0.54 13.5 36.4%

CoWell 1415 3.35 0.52 6.4 12.6%

CH Display Opt. 334 1.16 0.13 9.2 26.6%

13.4 25.5%Peers average: As of 6 July 2017

Source: Bloomberg, Quam Securities

Figure 3: Financial positions of comparables Market Div EV/ EPS

Last Price Cap Hist Current Next P/B Yield T/O Profit EBITDA GPM NPM Growth ROE ROA

Company Name Ticker (HK$) (HK$'bn) (x) (x) (x) (x) (%) ('mn) ('mn) (x) (%) (%) (%) (%) (%) Currency

PLOVER BAY TECHN 1523 0.92 0.92 19.6 13.1 na 4.9 4.0 28 5 5.5 63.3 18.5 na 40.3 33.8 USD

Peer Group

AAC TECHNOLOGIES 2018 97.50 119.54 23.3 19.5 16.3 - - 17,177 4,469 - 41.5 26.0 29.6 - - CNY

SUNNY OPTICAL 2382 69.70 76.46 51.7 32.7 24.4 13.6 0.5 14,612 1,271 17.8 18.3 8.7 65.9 28.5 15.4 CNY

LENOVO GROUP 992 4.98 55.32 13.1 12.3 10.1 2.2 - 43,035 537 5.5 14.2 1.2 - 8.1 3.0 USD

TONGDA GROUP HLD 698 2.32 14.04 13.3 10.4 8.5 2.9 2.2 7,825 1,004 8.7 24.1 12.8 38.9 22.8 13.6 HKD

TRULY INTL HLDGS 732 2.72 7.91 18.8 11.7 9.1 - 2.9 22,903 421 - 9.9 2.6 (31.2) - - HKD

Q TECHNOLOGY GRO 1478 7.36 8.06 34.9 19.1 14.5 4.4 0.5 4,991 191 12.0 8.5 3.8 82.2 13.7 8.6 CNY

COWELL 1415 3.35 2.79 12.6 7.2 5.8 1.2 2.4 915 28 3.5 8.3 3.1 (54.7) 10.0 6.0 USD

CHINA DISPLAY OP 334 1.16 2.36 21.5 14.9 10.5 5.7 0.0 4,300 107 5.6 5.6 2.5 45.1 38.5 8.0 HKD

Simple Average 23.6 16.0 12.4 5.0 1.4 16.3 7.6 25.1

Trailing 12 monthsP/E

As of 6 July 2017

Source: Bloomberg, Quam Securities


In addition, Plover Bay is generous with dividend payments as the company is expected

to finance its operations principally from the cash generated from business operations.

We estimate the company will maintain a stable dividend payout ratio of about 75% in

FY17E-19E. This assumption gives us an expected dividend payment of 7.1 HK cents per

share in FY18E, and with our target price of HKD1.41, the expected dividend yield in

FY18E stands at approximately 5.0%, which gives support to our 15x FY18E valuation.

Figure 4: Expected dividend yield in FY18E

Valuation FY18E

Earning per share (HK cents) 9.43

PER(x) 15

Target Price (HKD) 1.41

Dividend per share (HK cents) 7.07

Payout ratio 75.0%

Divided yield 5.0% Source: Quam Securities

Summing up its solid financial position, growth potential, product innovation and

patented technologies, as well as its profitability, we are convinced that the company

should be valued at a P/E ratio that is higher than the average of its peer group, while

slightly below the market leaders. As a result, we initiate a BUY on Plover Bay with a

target price of HKD1.41, based on 15x FY18E PER.


3. Business Overview

3.1 Integration of products and services

Plover Bay is primarily engaged in developing and commercializing software-defined

WAN (“SD-WAN”) solutions under its own brands – “Peplink” and “Pepwave”, while it

also grants software license subscriptions and provides warranty and support services in

connection with its SD-WAN solutions. Although over 70% of the company’s revenue

was attributed to the sales of SD-WAN routers in FY17E, we believed the key value of

the company is built on the integration of its hardware and software, including SD-WAN

router, SpeedFusion and InControl2.

Figure 5: Product samples

Source: Company Data, Quam Securities

SD-WAN: Unbreakable connectivity – A traditional WAN router is connected to one

single WAN link using private leased lines. If this single connection fails, all data flow will

be suspended immediately. To address this shortcoming, SD-WAN has emerged as an

alternative, replacing expensive leased lines by using multiple affordable wired or

wireless WAN connections. SD-WAN routers can enhance the network efficiency by

increasing bandwidth, reduce networking costs, and ensure reliability of WAN

connections for the users.

Figure 6: Difference between traditional WAN and SD-WAN



SpeedFusion: Patented SD-WAN Technology – This technology enables its SD-WAN

routers to create secured private networks and to bond multiple WAN connections to

increase site-to-site bandwidth and reliability. With SpeedFusion in place, in case of

failure or network congestion at one or more WAN connections, other WAN connections

can be used to carry network traffic. SpeedFusion enables connections between

different providers with up to 13 mixed internet connection methods with enhanced

connection capacity and prioritized WAN usage based on availability. Therefore, it is

widely used in different sectors with a high demand for connectivity, such as public

safety, as it has the following advantages:

Eliminate dead spots – By combining the coverage areas of multiple LTE

connections, SpeedFusion can eliminate the occurrence of dead spots.

Seamless failover to commercial LTE – If a single LTE link fails, the SpeedFusion

connection will immediately switch over to another link to ensure smooth data

transmission.

Increased bandwidth – By combining the bandwidth of multiple LTE connections,

SpeedFusion makes HD video streaming possible even when on the move.

Figure 7: SpeedFusion bandwidth bonding


InControl2: Real Time Cloud Management Tool – InControl2 is a cloud based device

management, monitoring, and reporting tool designed specifically for Peplink and

Pepwave devices. With InControl2, end users are provided with advanced management

tools to configure, manage, log, analyse and visualise the status of their devices. Status

of their devices is displayed in charts and reports that are easy to comprehend. The


number of devices registered with InControl has increased from approximately 500 in

2013 to approximately 45,000 in 2015.

In addition, InControl2 provides full-fleet device management when used in combination

with the company’s vehicle-mounted and GPS–enabled devices. As a result, customers

can track their devices on Plover Bay’s interactive maps and check the vehicle speed and

cellular coverage, as well as traffic condition.

Figure 8: Features of InControl2


Integration of SD-WAN, SpeedFusion and InControl2 – The diagram below illustrates

how Plover Bay’s SD-WAN routers, SpeedFusion technology and InControl2 cloud

services can be used together. Each of the company’s SD-WAN routers (Balance 710,

Balance 380 and MAX HD2) can form SpeedFusion with each other. This ensures that

secured connections can be established among the headquarters, branches and vehicles.

Furthermore, its routers can be managed by InControl2 to reduce administrative efforts.


Figure 9: Integration of SD-WAN, SpeedFusion and InControl2


Multi-WAN Internet Load Balancer – Peplink Multi-WAN Link Load Balancing technology

is another noteworthy application of Plover Bay. Peplink’s SD-WAN load balancing

engine can distribute the traffic of up to 13 Internet links and can route data using seven

intelligent algorithms. It all adds up to high speeds and solid dependability at savings of

up to 90% compared to solutions built on traditional WAN and other expensive links,

according to the company. With the Peplink Balance, all connected cables, DSL, cellular,

and other links will work together to handle even the most demanding traffic, without

lags or downtime. Users can add more connections in order to raise the speed. It is also

application aware, for instance users can prioritize their important data and applications.

Figure 10: Features of Load Balancer


3.2 Application examples

SD-WAN in public safety – Public safety deployments need unbreakable connectivity to

maintain mission-critical communications. SpeedFusion SD-WAN combines commercial


LTE networks with private LTE networks, resulting in optimal coverage, solid reliability,

and high bandwidth. According to the management, patrol vehicles and ambulances in

several countries are using the company’s products and services.

Figure 11: Application in public safety


SD-WAN in broadcasting – Plover Bay’s SD-WAN solutions can be valuable in live

broadcasting industry as it provides an uninterruptible connectivity to ensure smooth

real-time streaming. Its SpeedFusion technology bonds multiple connections and

becomes a remote broadcasting hub, which allows users to deliver live broadcasts of

news, sports, and other events. The result is an affordable, reliable, and flexible mobile

backhaul system.

Figure 12: Application in broadcasting



SD-WAN in maritime applications – Mobile connectivity has become an essential

feature in today’s super luxury yacht. The company’s technologies not only able to

provide connection, it can also automatically switch between networks to minimize the

roaming cost. For instance, when the vessel is at shore, it will be connected to point-to-

point Wi-Fi. When this becomes unavailable, it will fail-over to cellular network

connections. Once it leaves shore coverage, cellular networks will take over until it is out

of reach of the cellular towers.

Figure 13: Application in maritime


SD-WAN in construction sites – The construction industry is an area with high demand

in mobile connectivity because it is practically impossible to have landline connections.

As a result, Plover Bay’s technology is widely used in construction sites as it provides the

best blend of connectivity at every location, even the most challenging ones.

Figure 14: Application in construction sites


3.3 Development roadmap

Development in Cloud and IoT – Looking ahead, Plover Bay will focus on developing

cloud services and IoT (Internet of Things)-related products to enhance its product range.

It is also looking to expand its scope of business to emerging markets and hence

enabling users from all over the world to experience the innovative and high-end SD-

WAN internet connectivity technologies.


3.4 Efficient operational system

Simplified manufacturing and selling processes – Plover Bay vows to focus on design

and development of products and services, and thus not keen to maintain any

manufacturing capabilities. It outsources the manufacturing process to EMS providers,

mainly in Taiwan for better IP protection. In addition, the company sells its products and

services mainly through independent resellers around the world. As of 31st Dec 2015,

Plover Bay has 415 distributors in approximately 70 countries. By outsourcing its

manufacturing processes and relying on distributors, the company can reduce and

control its product costs and SG&A expenses.

Quick response to market needs – Plover Bay maintains an online forum to encourage

distributors, prospective customers and end users to seek information and share

knowledge about its products. As such, the company can promptly collect feedbacks on

the functionality and effectiveness of its products, allowing the R&D team to quickly

resolve issues and improve features in future products. The company has also

established a feedback loop ensuring that any product complaint will be promptly

addressed and properly handled. The issue will also be conveyed to the R&D team for

refinement in future products.

Figure 15: Plover Bay’s discussion forums



Diversified Customer Base – Plover Bay has accumulated a wide-range of customers in

different sectors, including public safety, technology, hospitality, transportation,

broadcasting & media technology, government & nonprofits, F&B, advertising, industrial

and education, etc.

Figure 16: A renowned group of customer



4. Company Background

4.1 Company background

Established in 2006, Plover Bay is focused on the development of next generation

Internet connectivity technology to help organisations solve their connection issues

which include increasing speed, reducing networking costs, and ensuring reliability of

connections for accessing key resources such as e-mail, enterprise resource planning,

file sharing, and video conferencing. Listed on the HKEX in 2016, Plover Bay received net

proceeds of approximately HKD108mn at HKD0.50 per share for strategic expansion of

its business.

4.2 Shareholding structure

Figure 17: Shareholding structure

75% 25%

Chan Wing Hong Alex Public

Stock code: 1523

As of 22 Jun 2017

Source: Company data, HKEX, Quam Securities

Mr. Chan Wing Hong Alex, aged 50, is the executive director and chairman, as well as

the founder of the company. He has over 29 years of experience in electronic

engineering and information technology industry. He is responsible for formulating

overall strategies, planning and business development of the company. Mr. Chan

received a Higher Certificate in Electronic Engineering from the Hong Kong Polytechnic

University in 1988, and obtained an Executive Master of Business Administration degree

at The Hong Kong University of Science and Technology in 2004.


5. Financials

We forecast the total revenue of Plover Bay to grow at a CAGR of 32.0% for FY17E-19E,

while its net profits will increase by 45.6% CAGR in the same period owing to the strong

demand for wireless SD-WAN products. Based on its solid cash inflow and its healthy

financial position, we believed the company could maintain no less than 75% dividend

payout ratio in the near future.

As Plover Bay is a rapidly growing company, we assume most of its products and services

could maintain a stable YoY growth rate in FY17E-19E. Sales of software licenses and

support services should be somewhat proportional to the growth in router sales. We

expect the GPM of all its products and services to maintain stable in the next three years.

Figure 18: Key assumptions

Revenue YoY growth rate FY17E FY18E FY19E

SD-WAN routers (Wired) 10.0% 10.0% 10.0%

SD-WAN routers (Wireless) 34.0% 35.0% 36.0%

Warranty and support services 34.0% 35.0% 36.0%

Software licences 100.0% 75.0% 50.0% Source: Company data, Quam Securities

5.1 Revenue CAGR of 32% for FY17E-19E

Contributing 50.4% of Plover Bay’s revenue in FY16, the SD-WAN router (wireless) sector

is expected to maintain its solid growth rate in the future, driven by the increasing

demand for SD-WAN in different sectors, such as marine, teleco and public safety. As a

result, we forecast the total revenue of Plover Bay to grow at a CAGR of 32.0% for

FY17E-19E.

Figure 19: FY15-FY19E Revenue breakdown

Source: Company data, Quam Securities


Furthermore, we expect the company to have a better revenue mix. The demand for

wireless SD-WAN routers is expected to increase and thus its proportion of the total

revenue will increase from 48.9% in FY15 to 54.6% in FY19E. Furthermore, we estimate

the granting software licences and the provision of warranties and support service will

become more important sources of income in the next few years as the accumulated

number of SD-WAN routers is increasing and they will require extended services or

warranties.

Figure 20: Revenue mix, FY15-FY19E

Revenue Mix FY15 FY16 FY17E FY18E FY19E

SD-WAN routers (Wired) 32.0% 27.1% 22.9% 19.1% 15.9%

SD-WAN routers (Wireless) 48.9% 50.4% 51.8% 53.1% 54.6%

Warranty and support services 17.9% 18.3% 18.8% 19.3% 19.8%

Software licences 1.3% 4.2% 6.4% 8.6% 9.7% Source: Company data, Quam Securities

5.2 GPM edging up

We forecast the overall GPM for Plover Bay will rise steadily from 58.1% in FY15 to

64.7% in FY19E, thanks to the significant increase in GPM of wireless SD-WAN routers

from 40.7% in FY15 to 50.0% in FY19E. In addition, the GPM of software licences is

expected to maintain at 100% from FY15 to FY19E as all the costs of software licences

are recognized as R&D expenses when incurred.

Figure 21: GPM trend of key product, FY15-FY19E



5.3 Slightly decreasing SG&A to turnover ratio

Owing to its stringent cost control measures, we believe that the company will have

better economies of scale in FY17E-19E. The percentage rate of SG&A expenses over

turnover is expected to decrease to 17% in FY19E from 18% in FY16. In addition, the

operating margin of Plover Bay starting FY17E is expected to recovery, given the absence

of listing expenses.

Figure 22: Operating margins and SG&A to turnover ratio

% of Total Revenue FY15 FY16 FY17E FY18E FY19E

Selling and distribution expenses 4.6% 6.0% 6.0% 6.0% 6.0%

Administrative expenses 12.4% 12.0% 12.0% 11.5% 11.0%

Total SG&A 17.0% 18.0% 18.0% 17.5% 17.0%

Operating Margins 18.9% 23.5% 26.3% 29.8% 31.9% Source: Company Data, Quam Securities

5.4 Substantial investment in R&D

In order to keep up with the technological progression, we expect the company to

maintain a relatively high spending ratio on R&D expenses in the coming years. The

company’s R&D expenses represent mainly salaries and benefits of the company’s

engineering, testing and supporting staff, product testing fee, certification costs, tooling,

components and parts used for product research and development purposes. As the

total revenue of the company is expected to record a significant increase, the proportion

of R&D expenses over total revenue is likely to decrease from 20% in FY17E to 16% in

FY19E.

Figure 23: R&D expenses and % to turnover



5.5 Net profit grows by 45.6% CAGR in FY17E-19E

Thanks to its solid top-line growth, gradually rising GPM, as well as the effective cost

control, we expected the company to record a net profit of approximately USD8.1mn in

FY17E by applying a 16.5% income tax rate. Looking forward, we forecast Plover Bay’s

net profit to have a 45.6% CAGR in the coming three years and exceed USD17mn in

FY19E.

Figure 24: Profit & net profit margin


5.6 Sustainable dividend payment Given the strong operating cash flow, its operation is well financed and Plover Bay had

paid out 90% of its net profit as dividend in FY16. We believe the company does not

require heavy CAPEX in the near future, and the foreseeable cost increases will be in the

salary and benefits of its employees. Furthermore, we reckon the company would have

a strong net cash position of at least USD20mn as at the end of FY17E and beyond. In

short, we anticipate that the company will maintain a stable dividend payout ratio of no

less than 75% in FY17E-19E.


5.7 Financial Statements Income Statement (USD’000) 2015 2016 2017E 2018E 2019E

Revenue 21,859 28,358 36,941 48,709 64,410

Cost of goods sold (9,166) (10,413) (13,297) (17,249) (22,692)

Gross profit 12,693 17,945 23,644 31,460 41,717

Other income and gains, net 69 104 100 100 100

Operating expenses (8,621) (11,351) (14,038) (17,048) (21,255)

EBIT 4,141 6,698 9,707 14,512 20,562

Finance costs (1) (23) (5) - -

Profit before tax 4,140 6,675 9,702 14,512 20,562

Income tax expense (783) (1,435) (1,601) (2,394) (3,393)

Profit after tax 3,357 5,240 8,101 12,118 17,169

Minority interest - - - - -

Attributable profit to shareholders 3,357 5,240 8,101 12,118 17,169

Per Share Items (US cents) 2015 2016 2017E 2018E 2019E

EPS 0.34 0.52 0.81 1.21 1.72

Diluted EPS 0.34 0.52 0.81 1.21 1.72

DPS (HK cents) N/A 3.66 4.72 7.07 10.01 BVPS 0.71 2.42 2.68 3.14 3.76

Balance Sheet (USD’000) 2015 2016 2017E 2018E 2019E

Non-current assets

PPE 556 694 792 924 1103

Intangible assets 277 383 441 521 634

Others 0 106 106 106 106

Total non-current assets 833 1,183 1,339 1,551 1,843

Current assets

Inventories 4,138 6,678 7,165 9,847 12,534

Trade receivables 3,857 5,315 6,342 8,780 11,115

Pledged bank balances - 129 129 129 129

Cash and cash equivalents 6,062 19,193 19,667 20,089 21,252

Others 459 - - - -

Total current assets 14,516 31,315 33,303 38,845 45,029

Total assets 15,349 32,498 34,642 40,396 46,872

Current liabilities

Trade payables 1,045 1,884 1,759 2,967 3,250

Deferred revenue 2,852 3,551 3,551 3,551 3,551

Bank borrowings 1,238 318 - - -

Tax liabilities 516 1,589 1,589 1,589 1,589

Others 1,809 - - - -

Total current liabilities 7,460 7,342 6,899 8,107 8,390

Non-current liabilities

Deferred tax liabilities 40 56 56 56 56

Deferred revenue 736 854 854 854 854

Total non-current liabilities 776 910 910 910 910

Total liabilities 1,552 1,820 1,820 1,820 1,820

Shareholders’ equity

Share capital - 1,288 1,288 1,288 1,288

Reserves 7,113 22,958 25,545 30,092 36,284

Total shareholders’ equity 7,113 24,246 26,833 31,380 37,572

Minority interest - - - - -

Total equity 7,113 24,246 26,833 31,380 37,572

Cashflow Statement (USD’000) 2015 2016 2017E 2018E 2019E

Operating cashflow

EBITDA 4,509 7,641 10,464 15,547 21,976

Non-cash items & adjustments - - - - -

Tax paid (777) (346) (1,601) (2,394) (3,393)

Operating cashflow before W/C 3,732 7,295 8,863 13,152 18,583

Change in working capital (712) (2,875) (1,639) (3,912) (4,738)

Cash flow from operations 3,020 4,420 7,224 9,240 13,845

Investing activities Capex (480) (937) (913) (1,247) (1,705)

Others (436) - - - -

Cash flow from investing activities (916) (937) (913) (1,247) (1,705)

Financing activities Bank loan movement 1,238 (920) (318) - -

Dividend paid (2,800) (3,228) (5,514) (7,571) (10,977)

Interest paid (1) (23) (5) - -

Issue/(Buyback) Shares - 16,111 - - -

Others 1,765 (2,286) - - -

Cash flow from financing activities 202 9,654 (5,837) (7,571) (10,977)

Net increase/decrease in cash

and cash equivalents 2,306 13,137 474 422 1,163 Cash and cash equivalents at beginning of the Year 3,696 6,062 19,193 19,667 20,089

Effect of foreign exchange rate 60 (6) - - -

Cash and cash equivalents at end of the Year 6,062 19,193 19,667 20,089 21,252

Ratio Analysis 2015 2016 2017E 2018E 2019E

Growth (YoY%)

Revenue 21.8% 29.7% 30.3% 31.9% 32.2%

EBIT - 61.7% 44.9% 49.5% 41.7%

Net profit -10.3% 56.1% 54.6% 49.6% 41.7%

Diluted EPS - 56.1% 54.6% 49.6% 41.7%

Margins Gross profit margin 58.1% 63.3% 64.0% 64.6% 64.8%

EBIT margin 18.9% 23.6% 26.3% 29.8% 31.9%

Net profit margin 15.4% 18.5% 21.9% 24.9% 26.7%

Other ratios Sales/ avg. assets N/A 118.5% 110.0% 129.8% 147.6%

Return on average assets N/A 21.9% 24.1% 32.3% 39.3%

Return on average equity N/A 33.4% 31.7% 41.6% 49.8%

ROIC 40.2% 21.3% 30.2% 38.6% 45.7%

Dividend payout ratio N/A 89.8% 75.0% 75.0% 75.0%

Valuation measures PSR (x) 5.3 4.1 3.1 2.4 1.8

PER (x) 34.5 22.1 14.3 9.5 6.7 PBR (x) 16.3 4.8 4.3 3.7 3.1

Dividend yield N/A 4.1% 5.2% 7.9% 11.1%

Key Ratios 2015 2016 2017E 2018E 2019E

Debt to equity 42.8% 1.3% - - -

Net debt to equity - - - - -

Capex/ Sales 2.2% 3.3% 2.5% 2.6% 2.6%

Current ratio (x) 1.9 4.3 4.8 4.8 5.4

Quick ratio (x) 0.81 2.61 2.85 2.48 2.53

Interest coverage (x) 4509 332 2093 - -

Days inventory (days) N/A 190 190 180 180

Days receivable (days) N/A 161 160 160 160

Days payable (days) N/A 51 50 50 50

Cash conversion cycle (days) N/A 299 300 290 290



Rating Definitions Disclaimer and Risk Statement BUY We expect the stock to have a total return of > 15% over the next

12 months This document is published by Quam Securities Company Limited (“Quam Securities”), a licensed corporation (CE No. AAC577) regulated by the Securities and Futures Commission in Hong Kong. This document is not intended for distribution to or use by, any person or entity who is a citizen or resident of any jurisdiction where such distribution or use would be contrary to applicable law or regulation within such jurisdiction. This document does not constitute an offer or a solicitation of an offer to buy or sell any securities. This document is circulated to addresses solely and may not be reproduced or redistributed to any other person or published, in whole or in part, for any purpose. The research is based on information obtained from sources believed to be reliable, but Quam Securities does not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without prior notice. Any recommendation does not have regard to specific investment objectives, financial situation and particular needs of any specific addressee. Quam Securities accepts no liability whatsoever for any direct or consequential loss arising from any use of this document. The prices of securities may move up or down, and past performance is not an indication of future performance. Investors shall consider seeking separate legal or financial advice before making investment decisions. Quam Securities and its group of companies (collectively “Quam Group”) has an investment banking relationship with the issuer within the preceding 12 months from the date of publication of this report. Quam Securities was one of the joint bookrunners for the initial public offering of the issuer in June 2015. The following analyst hereby certifies that his views about the issuer and its securities discussed in this report are accurately expressed and that he has not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Tsz Wang POON (CE No. BIB419) and WONG Horg Wang Howard (CE No. ADV962) and their associates declare that as of the date of the publication of this report, they do not hold any financial interest in the issuer.

HOLD We expect the stock to have a total return of < 15% and >-15% over the next 12 months

SELL We expect the stock to have a total return of < -15% over the next 12 months

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