Marcial: Hollysys Is on the Express Track in China

U.S. investors can play China's rapid economic growth with Hollysys Automation Technologies, a maker of automation and control systems that pros see benefiting from state investment in the nuclear and railway industries

Hollysys Automation Technologies—52-week stock price

By Gene Marcial

BW's Gene Marcial

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China's robust economic growth, which is fueling much of the fiery advance in its stock markets, is becoming increasingly enticing to U.S. investors. But for the most part investors are scouting for Chinese companies with solid business fundamentals and attractive valuations whose shares trade on the New York Stock Exchange or Nasdaq.

Already, several of China's widely known publicly-traded enterprises have found their way into some U.S. investors' portfolios, including Baidu.com (BIDU), the Chinese-language Web search engine; Shanda Interactive Entertainment (SNDA), which operates online games in China; and Sohu.com (SOHU), a provider of Internet content, advertising, and search services,

But one Chinese company yet to catch the eye of many U.S. investors is Hollysys Automation Technologies (formerly named Holi Systems International) (HOLI), which trades on Nasdaq.

The company "provides investors with exposure to China's rapidly growing nuclear and rail sectors," says Mark Tobin, senior research analyst at Roth Capital Partners (it owns shares), who rates the stock a buy.

The stock has been on fire, more than tripling in value, to 7 on Aug. 4 from a low of 2 on Nov. 12, 2008. It has since eased a bit to 6.70 on Aug. 28. But Tobin figures it will go even higher, to 10, in 12 months, based on his earnings estimates of 57¢ a share for fiscal year 2010 (ending June 30) on revenues of $186.8 million, and 77" for fiscal 2011 on revenues of $225.5 million.

nuclear safety systems

Hollysys' main business is providing automation services to Chinese industrial companies, which, Tobin notes, are recovering from the impact of the global economic downturn. But the nuclear and rail industries, which so far account for only 30% of Hollysys' total revenues, appear to be the most promising for the company because of their rapid growth.

Specifically, Hollysys develops and operates automation and safety control systems for China's sensitive nuclear installations and vast high-speed railway system. Revenues from the combined nuclear and rail operations are growing at a yearly pace of 63.2%, vs. 16% for the company's industrial automation business.

Margins from the nuclear and rail automation segments are also a standout: 40% to 50% for the railroads and 50% to 60% for nuclear. Industrial automation clocks in at 30% to 35%.

What makes Hollysys a distinct part in China's economic engine is that it's the "only certified domestic automation control systems provider to China's nuclear industry," according to Dr. Changli Wang, the company's CEO. Plus, it is one of only two automation control systems and product providers approved by China's Ministry of Railways for the 300-350km high-speed railway segment. And it is only one of five approved for the shorter 200km to 250km high-speed sector.

China's high-speed railway system is expected to grow at more than 148% a year in kilometer-tracks through 2012, according to Peter Li, Hollysys' chief financial officer. He says China's $586 billion stimulus spending plan favors the nuclear and rail industries, and Hollysys, he notes, would be a direct beneficiary. Li says revenues from the company's rail and nuclear segments combined grew 63.2% from 2006 to 2008.

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