HollySys Automation Technologies (NASDAQ: HOLI) stock has endured a volatile few months. Despite doubling in value between March and September 2021, the HOLI share price has since plummeted. Is now the time to buy shares in HOLI?
What is HollySys Automation Tech?
HollySys is a Chinese automation company serving industrial, rail, mechanical, nuclear and electrical markets.
It makes many automation products including signaling systems for high-speed rail. It also makes non-safety controls for nuclear power reactors.
The company hopes to expand from mainland China to pursue business opportunities in Hong Kong SAR, Singapore, Malaysia, India, Indonesia, and the Middle East.
How does HollySys make money?
HollySys Automation Technologies makes money from product sales, integrated solutions contracts, maintenance services and extended warranty services. The latter two bring recurring revenue.
In fiscal year 2020, HollySys made $503.3m in revenues, down from $570.3m in 2019.
Process automation is one of the core businesses of HollySys, while it also works on Transportation Automation and Manufacturing Automation.
Like many companies operating in China and Southeast Asia, HollySys experiences lower levels of revenues in the quarter ending on March 31 due to the Chinese New Year holiday.
HollySys Acquisitions and Subsidiaries
The company has made several acquisitions over the years:
2011: HollySys acquired Concord Group for $42.9m in cash and stock. Concord Group provides electric solutions to the rail industry in Singapore, Qatar, UAE and Saudi Kingdom and the building retrofit market in Singapore.
2013: HollySys Automation bought the Bond Group for $73m in cash and shares of HollySys. Bond Group provides complete mechanical and electrical solutions to a wide array of industries, including factories, data centers, banks, hospitals, airports, power stations, gas and instrumentation plants, hotels, commercial centers, residential buildings and infrastructure works.
2015: HollySys established CECL to explore the market in Qatar. The Concord Corporation has a 49% direct ownership of CECL and the remaining 51% equity interest is held by a nominee shareholder.
2016: HollySys diluted its equity interests in Hollycon from 51% to 30%.
2018: HollySys transferred its equity interest in HollySys Intelligent, in exchange for a 40% equity interest in Ningbo HollySys.
HOLI Financial Overview and Metrics
P/BV: 1.1
P/S: 1.6
P/E: 12
EPS: 0.42 in September Q1 missing consensus estimate.
HollySys does not offer a dividend.
HOLI Stock: $20.50 Price Target
One FactSet research analyst has a $20.50 price target with a Buy rating on HOLI stock.
MACRO Outlook
Organizations are seeking ways to obtain an edge in rapidly scaling new technology and achieving autonomous transformation. Process automation plays a key part in making this happen.
Is HOLI in trouble?
Unfortunately, in November, HollySys filed a notice with the US SEC stating it would miss the deadline to file its annual report for the period ended June 30, 2021. It also disclosed replacing Ernst & Young Hua Ming LLP as its independent auditor. This spooked investors and the HOLI share price fell 29% the following day. The share price has since remained volatile.
The company cited a “delay in collecting supporting documents and information” as the reason for missing the deadline. There are now two New York law firms investigating shareholder concerns over whether the company has violated federal securities laws.
Meanwhile a private group has shown interest in acquiring HollySys for $1.5bn. However, the company founder has now returned after eight years to lead the company to a brighter future and has no intentions to sell.
On January 24, 2022, HollySys Automation Tech’s Director and CEO wrote the following open letter to investors:
Dear investors,
It's a great honor that, after an eight-year absence, I have been invited by the Board to return as CEO of the company I founded. The last two years have been difficult—the pandemic caused an unprecedented public health crisis that threw the world economy into a recession. During that time, the value of our shares has also seen ups and downs. However, I am pleased to see that our two principal business divisions—industrial automation and signal systems—have been steadily growing during this volatile period.
I believe that my time away from HollySys has given me perspective and that I will be able to revitalize the company and its growth. When Steve Jobs returned to his post as chief executive officer of Apple in 1997, he led one of the most remarkable business turnarounds in history and led a transformation that resulted in Apple becoming the most valuable company in the world. While I have no illusions of HollySys becoming the most valuable company in the world, I hope to be able to use the example Steve Jobs set to lead our own turnaround and increase shareholder value. Based on discussions with board members as well as many colleagues, I believe that it is in the best interest of shareholders to focus on strengthening and optimizing the business operations of the Company rather than considering a sale at present.
My priorities in the next few months are:
to reunite all the invaluable human resources and rekindle their working morale and aspiration;
to examine and evaluate each business divisions and segments, to optimize our business and seize opportunities to grow; and
to restore the confidence of our investors.
I am truly grateful for the trust and support of our investors. I hope to be able to meet with many of you in the near future.
Thank you for your continuous support. We look forward to the joint path ahead.
Yours truthfully,
Dr. Changli WANG
Director, CEO and CSO of HollySys Automation Technologies Ltd. (NASDAQ: HOLI)
Risks to investing in HOLI:
HollySys spends a significant amount on new product and service development and acquisition opportunities to stay competitive and grow the business.
The company and the businesses it serves could be subject to government regulatory changes that affect profitability. This is particularly common in infrastructural development, such as high-speed rail and urban mass transit.
A loss of major contracts or key personnel could impact profits.
Customer orders fluctuate.
The company has ambition to expand overseas but it has little experience in international operations. This comes with significant cost and time pressures on navigating the unknown environments.
Who are HollySys competitors?
HollySys Automation’s rivals and comparable companies include:
Siemens (ETR: SIE)
Honeywell International (LON: HON)
General Electric (NYSE: GE)
Schneider Electric (EPA: SU)
ABB (NYSE: ABB)
Emerson Electric (NYSE: EMR)
Is HOLI a good investment?
Being based in China makes this a less transparent investment than if it were in the US. Although it’s reassuring that the founder has returned to take the helm, shareholder trust has been eroded and that will take time to fix.
To potentially reduce investment risk and volatility, HollySys shares could alternatively be purchased via a mutual fund.
For instance, Holi stock is currently included in:
Fidelity China Special Situations (LON: FCSS)
Davis Global Fund (MUTF: DGFAX)
Fidelity Funds SICAV Global Technology Fund
Eastspring Investments - Global Emerging Markets Customized Equity
BNP Paribas Funds - Emerging Equity
HollySys Automation Technologies, Ltd. is expected to report earnings in the next few weeks. Until then the outlook is unclear and investing remains speculative.
If you’re interested in investing in Chinese stocks, why not check out our recent article about Alibaba as an investment.
