Sunday, December 27, 2015

12th AIM Student Equity Update by Jack Kitzinger: Hollysys Automation (HOLI): High Speed Rebound for a Chinese Transportation Company That's on the Move

HOLI (Hollysys Automation): The Chinese Transportation Leaders
 By: Jack Kitzinger, Student at Marquette University

 Image result for Hollysys Automation logo

Disclosure: The AIM 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.

·                 Hollysys provides automation and control technologies in the industrial, railway, subway, nuclear power, and mechanical and electronic industries in Asia, Europe, and the Middle East. It was negatively affected by the downturn of the Chinese economy this summer.
·                 On November 10, HOLI announced that they were awarded ATP (Automatic Train Protection) and TCC Train Control Centers for two rail lines, as well as a control system for a subway line.

·                 HOLI has also been awarded an ATP contract valued at $75.5 million on December 14, 2015. 180 sets of high speed trains (>200 mph) will be delivered in 2016 and was a major win. 

·                 HOLI has had a strong ability to bounce back from lows of summer to hit their price target. Stock is up nearly 30% in past three months. 

Hollysys Automation Technologies (NYSE: HOLI) In the spring of 2015, HOLI was pitched to the AIM portfolio representing potential upside due to the transportation needs in China and the nuclear power support and control systems they can provide.  This thesis remains intact today and should continue to play out in 2016. 

This summer, the Chinese economy was put in turmoil.  The Chinese GDP rate came in much lower than estimated, the government was artificially boosting the stock market, and China devalued their currency.  This affected all Chinese stocks, especially ones like HOLI that are intertwined with the Chinese economy.  Even so, the congestion in China outlines the needs for high-speed rail.  Long-term prospects for HOLI are good, as can be seen by the continued contracts HOLI gets for their ATP systems.

China’s future will rely upon finding better ways to transport its citizens in the mega-cities.  Congestion on the highways is very large, and cannot fulfill the full transportation needs of all the citizens.  HOLI is able to provide support for both the high-speed trains as well as subways.  HOLI is also the only Chinese company that can provide nuclear power support and control systems.  As it is expensive to enter these markets due to the regulatory need and the possibility of failure, HOLI has a strong moat which will help continue their future growth.

What has the stock done lately? 
Since the stock announced earnings on November 12th, has traded between $19 and $22.  This band is much higher than the trading band during the turmoil in the Chinese economy this summer. The stock dropped as low as $16, but has shown good price momentum recently. 

Past Year Performance: HOLI’s stock is down about 10% on the year.  It is also down almost 21% from the high point early in the summer.  Much of the depreciation in stock price came from the Chinese turmoil, which caused the stock to go the early 2014 trading range.  HOLI’s stock is back around the price it was bought in the AIM program and the story and upside potential remains intact.

Source: Factset

My Takeaway
With all that has gone on in China during the past year, HOLI’s stock has done well to appreciate back to its pre-summer price.  HOLI has strong growth prospects in China due to their moat with the ATP systems and the nuclear power control systems.  While the stock may not appreciate to its 52 week high in the short term because of the reeling affects of the Chinese economy, the future prospects for the transportation growth of China and South-East Asia remain positive. The company is located in Beijing, China and has many important Chinese government ties!

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