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Plover Bay Technologies (1523 HK - US$318 million) is a Hong Kong-based developer of SD-WAN routers under the “Peplink” brand name. A friend of the publication @DaBao mentioned it as a long-term compounder, and I was intrigued enough to dig deeper.
Companies and government organisations use SD-WAN routers to create computer networks. Compared to using leased cables to connect an organisation, SD-WAN routers direct traffic using software. It can also use various new technologies, including DSL, 5G and Starlink.
This approach to creating private networks lowers costs and increases reliability. They also enable connectivity from even remote locations.
These benefits have enabled the SD-WAN router industry to grow around 30% annually. As a niche service provider focusing on wireless SD-WAN routers, Plover Bay has been able to ride with growth with a revenue CAGR of 23% and EPS CAGR of 27% since 2013.
Plover Bay’s business model is built on bundling its hardware with software features such as a cloud service offering and charging for them on a subscription basis. Thanks to this approach, switching costs have become low. And revenues have become predictable, increasingly growing in line with the installed base of routers.
From what I can tell, Plover Bay’s corporate governance is excellent. The founder has a decent reputation in the industry. The company has a simple corporate structure. The dividend payout ratio is exceptionally high. And the accounting is straightforward, with strong free cash flow generation.
The only question mark I have is the 2022 divestitures of two strata-title office properties in Hong Kong for about US$1 million to the founder. But these transactions were done at a 4.1% cap rate, which I consider fair, if not overpriced. There is some risk that the founder will now jack up rents. But I don’t think these transactions are material.
My biggest question is whether hungry competitors could replicate Plover Bay’s technology. Its production and distribution are both outsourced to third parties. But there are several mitigating factors:
- Gartner featured Plover Bay’s Peplink brand in its September 2023 report on SD-WAN routers. It characterised Peplink as having “strong viability” as a company in its niche of wireless WAN use cases for enterprise customers.
- Their bundling of software and hardware into subscriptions should imply switching costs. That makes Plover Bay more of a solutions provider than a pure commodity hardware developer.
- Plover Bay also has hundreds of patents in its key markets of the United States and Europe.
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