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The Growing Pains At HollySys Are Real, But The Potential Is Worthwhile

Stephen Simpson profile picture
Stephen Simpson


  • HollySys has had a tough go since the fall of 2016 as air pockets in rail control orders have significantly undermined revenue and margins amid a downturn in industrial automation.
  • HollySys is looking to self-help (internal product development) and M&A to build up its industrial automation business, while also building out a more diversified rail control business.
  • This will never be an easy or safe stock to own, but if HollySys can deliver on its potential, the shares can move to $20 or higher.

Growth is seldom as smooth or easy as investors want it to be, and that has certainly been true with Chinese automation and control systems company HollySys (NASDAQ:HOLI). Competing with the likes of ABB (ABB), Honeywell (HON), and Siemens (OTCPK:SIEGY) is hard enough all on its own, but HollySys has to overcome the added burden that even other Chinese companies don't really trust domestic suppliers in industrial automation. Making matters worse, HollySys's train control business is largely tied to the unpredictable and inconsistent ordering habits of China Railways Corporation (or CRC).

HollySys shares have fallen about 15% since I last wrote about the company, as HollySys did in fact see the prolonged slowdown in automation and train controls that concerned me then. Although the market took that development badly, my long-term outlook really hasn't changed that much. I continue to believe that as HollySys matures it will deliver revenue growth around 6%-7% and double-digit FCF growth sufficient to support a fair value in the low $20s.

Industrial Automation Seeing The Turn?

Global automation rivals like ABB, Honeywell, and Rockwell (ROK) saw sentiment turn a while ago, but the Chinese market and HollySys's order book has been a little slower to swing back. Now, though, it does appear that demand for industrial and process automation equipment is recovering in China, with companies increasingly looking to automation to reduce labor costs (or offset shortages of skilled workers) and improve product quality and consistency. Orders rebounded nicely in the last quarter (the fiscal third quarter), with revenue once again growing after a protracted tough stretch.

Looking ahead, one of the best developments for HollySys will be the growing acceptance of Chinese companies as viable competitors in the market. Having followed the sector for quite a while, one thing I've noticed in recent years is that the

This article was written by

Stephen Simpson profile picture
Stephen Simpson is a freelance financial writer and investor. Spent close to 15 years on the Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That last part isn't entirely true. Probably.

Analyst’s Disclosure: I am/we are long ABB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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