HollySys Benefiting From State Spending: Strong Growth Potential Ahead

| About: HollySys Automation (HOLI)
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Following comprehensive analysis of public information, on-the-ground due diligence and research, we conclude in our full length report that HollySys Automation Technologies (NASDAQ:HOLI) is a stock to that has strong growth potential.

Not all reverse merger companies are destined for the dustbin. HollySys Automation Technologies is likely to continue delivering strong operating results, due mostly to its broad exposure to industries that will remain a focus in China’s economic development.

HollySys makes automation and control technologies, or networks of sensors and machinery that control processes for the industrial manufacturing, railway, subway and nuclear industries. Most of its clients are large state-owned enterprises, like China Huaneng Group, Sinopec and China’s regional railway companies.

Like its competitors, HollySys benefits from huge government subsidies and tax refunds. The company received US$27.82 million in financial support from central and local governments between 2006 and 2009, accounting for 64% of its total net income during the period.

Any withdrawal of this support would hit the company’s financials hard. However, automation is likely to play a big role in China’s 12th Five-Year Plan, which emphasizes efficient, environmentally clean development.

HollySys is in the top five companies in China’s industrial automation market, behind foreign players like ABB, Emerson, Honeywell and Siemens, said Xiaoliang Shi, an analyst at MIR, a consultancy for the automation and power distribution industries. Industrial automation made up more than half of its US$174.09 million revenue in 2010.

Meanwhile, China is also investing heavily in building subways and highspeed railways, industries that each contributed nearly 20% to HollySys’s 2010 revenue. Around US$430.77 billion will be invested in high-speed railways during the 12th-Five Year Plan period. Automation systems usually account for around 2% of the total cost of a rail network, according to HollySys. The market for subway automation systems, meanwhile, is expected to grow by around 16% year-on-year between 2006 and 2012.

HollySys generated the remaining 6% of its revenue from the nuclear industry in 2010 and formed a powerful new alliance: a 50-50 joint venture with China Guangdong Nuclear Power, which controls nearly half of the country’s current nuclear market.

Despite the fallout from Japan’s nuclear disaster, China seems likely to continue in its nuclear build-out; the country now has 43 nuclear projects in operation, under construction or in planning, with total investment of US$276.92 billion.

Disclosure: We have no positions in any stocks mentioned, and no plans to initiate any positions. China Economic Review has no interest or investments in the stocks it covers, and has strict rules for staff with regard to holdings and trading to ensure their impartiality.