Hollysys ($HOLI) provides automation solutions across various sectors such as transport and energy in the People’s Republic of China, Southeast Asia, India, and the Middle East. It is listed on the Nasdaq and has a market cap of $1bn.
It has achieved solid revenue growth over the last 10 years with the automation trend throughout the sectors it operates, albeit it had a couple of years of revenue decline during this time, including 2020 where it was impacted by the COVID-19 pandemic. Nonetheless, it has a good client base supported by its ability to achieve healthy gross and net margins of ~40% and ~20% respectively.
Hollysys is a relatively unfamiliar name in the Nasdaq and has historically attracted limited attention. It does however have a strong institutional holding of over 80%. The last 12 months have been more eventful than expected though, as summarised below:
07/12/20 - Non-binding offer received to take it private at $15.47 (24% Premium to prior day share Price), led by an ex-CEO, Baiqing Shao (who is deemed to hold 7% of the Company)
08/01/21 - Offer rejected, BoD argues it undervalues Hollysys. Management announces it plans to acquire $50m of stock (>6% of Mkt Cap) over next 6 months.01/02/21 - Baiqing Shao consortium increases offer to $17.10 (30% Premium to prior day share price)
15/03/21 - Announcement that the ~7% shares held by Baiqing Shao are held on behalf of ex-Chairman, Changli Wang.
March to Aug 2021 - Legal procedures start on the 7% ownership, and various statements issued by Baiqing Shao over time criticizing current management, and by Hollysys criticising Baiqing (and its past performance as CEO of Hollysis). Hollysys re-affirms that it has institutional support to reject the $17.10 offer as it undervalues the company.
02/08/21 - Announcement of a non-binding offer to take it private at $23.00 (48% premium to prior day share price). Consortium led by Changli Wang and Ascendent Capital Partners (Private Equity company in China)
24/08/21 - Announcement that certain members of existing Management of Hollysys have joined the Changli Wang consortium (Share price close to $20 around this time)
31/10/21 - Change in Auditor from EY to a small accounting firm (Union Power HK CPA Limited). EY had been auditors of Hollysys for 8 years. Share price crashes 30% to $13.70
02/11/21 - Nasdaq issues warning that Hollysys is not in compliance with listing regulations regarding filling of annual report ending 30/06/21 which had a deadline of 31/10/2021
15/11/21 - Company says delay in filing is due to share based awards in connection with 2009/2010, will seek an extension from Nasdaq
15/11/21 - Company announcement of a non-binding offer to take it private at $24.00, led by a listed chemicals group Zhejiang Longsheng Group Co. (Client of Hollysys) and Loyal Valley Innovation Capital (Private Equity Fund)
Hollysys is now trading at ~$15.00, a discount of ~50% to both offers on the table at the moment so market doesn’t believe there's any chance of these deals completing
As I said, Hollysys is held 85% by Institutional Investors. Davis Funds (11% - sold 3% of position in last quarter), Fidelity (7%, upped position by 10% in last quarter), M&G (6%, sold 8% of position in last quarter), Wellington (6%, upped position by 50% in last quarter).
At $15 per share, the business is trading at 2.7x NTM EBITDA. The offer prices imply a multiple of ~6x EBITDA which is still towards the low end of the range at which the business traded at pre-covid. This is one of the recent updates from Davis Fund on Hollysys:
"Hollysys Automation (HOLI) has been a long-term holding in Davis Global Fund, but is still unfamiliar to most investors. Hollysys is a Chinese manufacturer of automation equipment for power plants, petrochemical facilities and factories, as well as safety and control systems for high-speed rail and subway cars. The company has attractive growth prospects in a handful of industrial automation niches, where it has built a loyal customer base over the years, as well as in the rapidly-growing high-speed rail market in China. While Hollysys has seen some order delays during the pandemic, it is a provider of essential equipment to keep the Chinese economy running and should resume growing once order cycles return to their normal cadence. HOLI is one of the cheapest stocks in the Fund, currently trading for 8–9x owner earnings, and if one takes into account the roughly $0.6 billion of net cash the company has on its balance sheet (equal to well over half of the company’s market cap), HOLI is trading under 5x owner earnings.
So why is it so cheap? Part of Hollysys’ challenge is that while it is one of the top industrial automation firms in China, it is still relatively unknown to the investing public in the U.S., where HOLI is listed. The recent push to de-list U.S.-traded Chinese companies has led to worries that it could have an adverse impact on HOLI’s trading liquidity and even force a de-listing in three years, if regulators do not find a compromise. This could make for a bumpy ride in the capital markets and force the company to seek out a more receptive trading venue (i.e., one closer to its end market of China), but we believe there is underlying value in Hollysys that will eventually be more fully recognized, regardless of where the stock trades. The value is being driven by the earnings of the business, rather than the exchange it is being traded on."
With this institutional shareholder base and with two offers from credible parties on the table implying a 50% uplift to the share price, the risk seems asymmetric at the moment. The change in auditor, imo looks like a tactic played by Management (which are backing the Changli Wang consortium) to force the competition out of the transaction process as well as force institutional shareholders to agree a sale. This is supported by the fact that the competing offer was only announced by Hollysys on 15/11/2021 to the market but they outlined it was received on 10 September 2021 and the interested party confirmed the interest even after the change in auditor.
No comments:
Post a Comment