Hollysys Automation Technologies Ltd.

HOLI Details

Hollysys Automation Technologies Ltd. (NASDAQ: HOLI) is an automation control system solutions provider in China, with operations in eight other countries and regions throughout Asia. It derives revenues from two segments, viz. 1) Industrial Automation, delivering the full spectrum of automation hardware, software, and services spanning field devices, control systems, enterprise manufacturing management, and cloud-based applications, and 2) Rail Transportation, providing advanced signaling control and Supervisory Control & Data Acquisition (SCADA) systems for high-speed rail and urban rail.

Various Contract Awards: During Q4FY21 (ended June 30, 2021), HOLI signed various contracts in the power, petrochemical, railway, and other segments, including a 2*660MW integration contract with a power company, which involves adopting the DCS (ICS) smart control platform to realize smart testing, monitoring, and controlling of power generation processes. This project is expected to increase the company's ability to provide integrated solutions for smart power plants.

It also won the bid for a petrochemical project with a state-owned enterprise. HOLI will provide DCS, a Gas Detection System (GDS), fire & gas probes, and low-temperature detection instruments, among others, to deliver clean natural gas energy to various cities in China.

Unsolicited Acquisition Proposal by Mr. Shao: On June 29, 2021, a consortium of Mr. Shao Baiqing, Ace Lead Profits Ltd., and CPE Funds Management Ltd. revised their unsolicited proposal to acquire 100% of HOLI at USD 17.10 per share (increased from the previous offer of USD 17.01 per share).

According to the management, the offer still undervalues the company. It also stated that certain eligible employees of HOLI’s Chinese subsidiaries contended in the Hong Kong High Court, claiming that Mr. Shao and Ace Lead’s shareholding in HOLI are held on their behalf. As a result, these employees have sued for the return of these shares.

Q3FY21 Results: The company reported a sharp uptick of 36.08% in total revenue to USD 109.91 million in Q3FY21 compared to USD 80.77 million in Q3FY20, driven primarily by a 97.07% increase in revenue from the Industrial Automation segment to USD 67.45 million in Q3FY21. Net income for Q3FY21 was USD 18.68 million, more than USD 13.94 million reported in Q3FY20.

Key Risks: The company’s business performance is susceptible to changes in the Chinese government policies relating to the promotion of infrastructural development, such as high-speed rail and urban mass transit. In addition, the Chinese authorities' recent crackdown on its U.S.-listed tech businesses and the consequential possibility of more rigid rules could dent the company's operations. This is after the passage of a bill in the U.S. that could lead to the delisting of some Chinese companies from the country’s exchanges (if the U.S. authorities are unable to audit the company for three consecutive years satisfactorily). These constitute significant political and regulatory risks for the firm.

Outlook: For FY21, HOLI expects to generate ~USD 560 – USD 595 million in revenues, representing 11% to 18% YoY growth. Its Industrial Automation business is estimated to grow over 30% YoY.

Valuation Methodology: Price/Sales Multiple Based Relative Valuation

(Analysis by Kalkine Group)

• % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

HOLI Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: HOLI stock increased by 22.07% in the past three months and is currently close to the high-end of the 52-week range of USD 9.83 to USD 16.31. The stock is currently trading above its 50 and 200 DMA levels, and its RSI Index is 62.04. We have valued the stock using the Price/Sales-based relative valuation methodology and arrived at a target price of USD 13.24. Considering the significant uptick in the stock price, the looming threat of hostile takeover, political risks, and current valuation, we recommend a “Sell” rating on the stock at the current price of USD 15.60, up 4.14% as of July 20, 2021, 11:34 AM ET.

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV.