HollySys: Power Plants to Bullet Trains

07/03/2014 10:00 am EST

Focus: GLOBAL

Paul Goodwin

Emerging Markets Specialist and Analyst, Cabot Heritage Corporation

China is better known for its human labor force than for advanced manufacturing techniques and controls, but our latest featured stock is a useful exception, explains Paul Goodwin, editor of Cabot China & Emerging Markets Report.

HollySys Automation Technologies (HOLI), which likes to call itself “HAT,” began in 1993 as a department of the Chinese Ministry of Electronics.

Spun off as a private company in 1996 as Beijing HollySys Automation Engineering Co., HollySys continued to develop control systems for the automation of manufacturing processes.

1997 brought the company’s first nuclear power plant computer and it brought out its first transport automation system in 1999, the same year it transformed itself into a public company.

HollySys has continued to expand its offerings into controls for everything from bullet trains and urban mass transit systems to conventional and nuclear power plants and petrochemical transportation systems.

HollySys has also been moderately active on the M&A front, buying Singapore-based Concord Corporation in 2011 for its strong position in rail and industrial industries in China.  It also bought Singapore-based Bond Corporation in 2013; this brought extensive expertise in mechanical and electrical engineering.

While most of HollySys’ contracts for nuclear power plant controls have come from France, which has a large network of nukes, analysts see China as a big opportunity.

China’s air pollution problems are pushing the government away from fossil fuels, and the Chinese nuke market is forecast to realize a compound annual growth rate of over 20% per year through 2020.

China is also expected to continue its rapid development of high-speed rail and municipal subway systems, each of which requires control systems for which HollySys is an attractive supplier.

The technical chart for HOLI is impressive. After a crushing 2011 correction from $18 to $4.5, the stock has been in a major uptrend with a few major (but diminishing) pullbacks.

We think HOLI is buyable here, but care must be taken with any stock that’s at new highs. A pullback toward $23 would be an ideal entry point.

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