HOLI (HollySys Automation Technologies
Ltd.): “When (or If) Chinese Stocks Come Back in Favor, Keep Your Eye on HOLI”
By: Daniel Fernandez Guerra, student at
Marquette University
Disclosure: The AIM International Equity
Fund currently holds this position. This article was written by myself, and it
expresses my own opinions. I am not receiving compensation for it and I have no
business relationship with any company whose stock is mentioned in this
article.
Summary
•
HollySys Automation Technologies Ltd. (NASDAQ:
HOLI) engages in the provision of automation and control technologies and
applications in China (77.3%), United States (5.9%), Japan (1.6%), Brazil
(0.8%) and Western Europe (3%).
•
Small-cap stocks have become a primary attraction for investors for 2016 as
analysts expect low returns from the S&P.
•
HollySys Automation Technologies remains highly liquid and has experienced an
expansion of its margins recently.
•
HOLI has some delayed projects that have caused revenue to slow. However, when these
projects are fully implemented, they will become the basis of the company as it
would ensure its growth and competitiveness.
•
HollySys Automation revenues increased 17.3% in FY2016 Q2 compared to FY2015 Q2
•
The company’s stock hit an all-time 52-week low price of $15.00 on January. HollySys
has been affected by the underperforming numbers that China presented compared
to analysts’ expectations.
Key
Points: HollySys has been on
a tightrope due to the current uncertainty of the Chinese economy and the
weakened currency. The significant slumps in their stock price since December
29, 2015 has been a reflection of the ambiguity in the country. Shares went
down from $22.59 to $15.29, 32% decrease in less than a month. This decline can
be seen as a clear reflection for investors that are slowly staying away from
small to mid-cap Chinese companies.
On February 4, 2016 the company
announced its earnings call for Q2 2016 results. Despite the stock price
dramatic decline, HOLI reported solid numbers. Total revenues were $152.77M
compared to $125 in the previous quarter. Net Earnings reached $32.95M, almost
14M higher than the same quarter of last fiscal year. Earnings per Share (EPS)
stayed consistent at 0.54, similar to the past three quarters. An outstanding
figure was the widened of the gross margins, going from 37.08% to 39.65% compared
to the same period last year. Lastly Operating EBITDA scale almost 6%, being at
20.36% from 14.51%.
The company’s earnings growth was inclined
by improvements from one year to another in gross margins from 37.08% to 39.65%
as well as better cost controls. Management has shifted its focus to start
working on expanding for new Railway Transportation products and technologies
such as track circuit which would make potential revenue
contribution in the near future. Along with this, management has stated their
intentions to gain market share in the High Speed Rail market as it has become
the principal contributor for their total revenues.
What has the stock done lately?
HollySys
has been investing in several projects and contracts to its different segments
in order to increase the market share. The power segment has maintained stable,
HOLI has been able to sing large and important contracts that create large
number of high-level generator units. In regards to the Railway Transportation
segment which accounts for the largest portion of its revenues ($63.8M in Q2), HollySys
signed a large contract to provide Automatic Train Protection equipment and
system to China Railways Corporation which is expected to make a large revenue
impact in short-term.
Lastly, a key catalyst for the stock price will be the
performance of the Industrial Automation segment ($54.2 M) that due to the weak
macro environment, the IA business experienced a revenue contraction. Analyst
believe that this trend could continue through the rest of the fiscal year
given the strong backlog for the rail segment (50% of total excess 2QFY16) and weak
IA sales trend.
Past
Year Performance: HollySys
Automation Technologies was bought at $23.49 on May, 2015. The company is
currently trading at $17.74, representing a -25% decrease in value since it was
added to the international portfolio. Most analyst have been given a price
target to HOLI of ~$30, and they have not make adjustments despite the poor
performance of the stock. The reason for the recent unfavorable performance can
be attribute to the unexpected slowdown in China as well as in the railway
market, and to its slow overseas expansion.
Source: FactSet
My
Takeaway
HollySys Automation Technologies'
revenues comes primary from China (77.3%) which represents a big risk for the
company. China’s economy has entered into a slowdown stage and has been
continuously devaluing its currency in order to stay worldwide competitive. The
lack of diversification can be one of the biggest areas of improvement for the
company. However, despite the tough conditions that the company is facing, management
has followed a strategy that consist on developing aftersales and services which
has been successful and has continuously helping to take a larger percentage of
their revenue.
