Hollysys Automation Technologies Ltd.

Here’s another company that does most of its business in China and is relatively unloved by the market. Hollysys Automation Technologies is headquartered in Singapore and manufactures integrated automation systems for the a) Industrial b) Railway Transport and c) Mechanical and Electrical solutions segments. It generated 85% of its revenues from China with the balance from other markets in South East Asia and the Middle East.

It reported sales of $575m in 2019, ebitda (a proxy for cash earnings) of $107m , and net income of $117m. Other income comprised interest income from cash balances, rental income from certain properties in Beijing with 10 to 15-year leases, and dividends from an investee company (disposed during the year and gains of $5.8m recorded).

Normal ebitda has ranged between $100-140m in the recent past. Capital expenditures have been relatively negligible at less than $10m per year. Good free cash flow generation has enabled the company to virtually wipe out its borrowings.

The distinctive feature of the balance sheet is the outsized cash balance of $571m as at December 31st, 2019. Interest-bearing debt amounted to only $2.7m.

Unfortunately, the dividend policy appears to be quite stingy with payouts less than a fifth of last year’s profits.

The equity sells for $867m. This implies a trading multiple of about 3x ebitda for the operating business (net of its substantial cash hoard). This is less than the amount a senior secured lender would lend against the earning power of the business.

Its business is based on long-term contracts (up to five years) and warranties (up to three years) – therefore performance is likely to be lumpy, particularly after Covid-19. Management are unable to predict the impact of the pandemic on the business but the company has $587m in order backlog and substantial staying power via cash and undrawn bank facilities of $260m.

Although not ridiculously cheap, this stock appears to be at least reasonably priced on its financial characteristics.