Why HollySys Automation Technologies Stock Can Double, Especially on China Trade Truce

HollySys Automation Technologies Ltd Stock Can Double
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HollySys Automation Technologies Ltd Looks to Revolutionize Processes

The future of manufacturing and many other processes will be driven by  advanced automation technologies. If you look at the modern factories in the U.S., China, Japan, and Europe, one thing you will immediately notice is the high degree of automation.

China, largely known as the “manufacturer to the world,” has a workforce of hundreds of millions of low-skilled workers willing to spend endless hours putting things together.

But a dramatic shift is taking place in the manufacturing and industrial space: automation is rapidly gaining ground.

A small-cap China-based company with strong prospects for long-term price appreciation is Hollysys Automation Technologies Ltd (NASDAQ:HOLI). The company focuses on developing proprietary industrial automation and control technologies for high-speed rail, subways, and nuclear power, along with other mechanical and electronic industries.

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My bullish view is centered around the company’s focus on automation technologies that should have strong tailwinds going forward.

On the chart below, you’ll see that HOLI stock is trading around the midpoint of its 52-week range and has rallied 23% over the past three months.

Chart courtesy of StockCharts.com

HollySys Automation Technologies stock appears to be showing signs of breaking out. A break of $25.00 could see the stock take a run toward its record high of $28.35, which it achieved in March 2018.

The Big Turnaround in 2018 Is Bullish for HOLI Stock

On the revenue end, HollySys Automation Technologies Ltd reported a strong fiscal 2018 (ending in June), when revenue surged 25.2% to $540.8 million after a 20.7% decline in fiscal 2017.

Fiscal Year Revenue (Millions) Growth
2014 $521.3
2015 $531.4 1.9%
2016 $544.3 2.4%
2017 $431.9 -20.7%
2018 $540.8 25,2%

(Source: “HollySys Automation Technologies Ltd.,” MarketWatch, last accessed April 5, 2019.)

The earnings growth for HollySys Automation Technologies Ltd is expected to continue: by 12.7% to $609.6 million in fiscal 2019 and by 12.9% to $688.1 million in fiscal 2020. (Source: “HollySys Automation Technologies, Ltd. (HOLI),” Yahoo! Finance, last accessed April 5, 2019.)

The company has also been generating positive earnings before interest, taxes, depreciation, and amortization (EBITDA) and profits, with strong growth in fiscal 2018.

Fiscal Year EBITDA (Millions) Growth
2014 $82.8
2015 $140.0 69.1%
2016 $124.8 -10.9%
2017 $80.9 -35.2%
2018 $104.8 29.6%

(Source: MarketWatch, op cit.)

Fiscal 2018 saw HollySys record its second-biggest generally accepted accounting principles (GAAP) earnings per share (EPS) in five years, growing 53.5% year-over-year.

Fiscal Year GAAP Diluted EPS Growth
2014 $1.19
2015 $1.61 35.3%
2016 $1.97 22.3%
2017 $1.14 -42.1%
2018 $1.75 53.5%

(Source: Ibid.)

On an adjusted basis, the company recorded $2.06 per diluted share in fiscal 2018 and is estimated to report $2.04 per diluted share in fiscal 2019. For fiscal 2020, its earnings are expected to rise to $2.31 per diluted share. (Source: Yahoo! Finance, op cit.)

HollySys Automation Technologies is positive in terms of free cash flow (FCF), reporting a record $122.9 million in fiscal 2018, up 85.7% from $66.2 million in fiscal 2017.

Fiscal Year FCF (Millions) Growth
2014 $74.9
2015 $79.7 6.3%
2016 $38.9 -51.2%
2017 $66.2 70.4%
2018 $122.9 85.7%

(Source: MarketWatch, op cit.)

The company’s balance sheet is also strong, with about $416.4 million in cash, which translates to $6.90 per share.

Analyst Take

I’m encouraged by the strong fiscal 2018 results and forward estimates for HollySys Automation Technologies Ltd.

On a valuation basis, HOLI stock trades at an attractive 9.74 times its estimate for fiscal 2020. On an ex-cash basis, the stock trades at a mere 6.75 times.

HollySys stock’s price/earnings-to-growth (PEG) ratio of 0.65 indicates that it’s trading at a severe discount to its estimated five-year compound annual growth rate for earnings. Even a doubling in its share price would not make for a high PEG ratio.