Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

Hollysys Automation Technologies / Event-Driven

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Earlier this month, <a href="https://www.smartkarma.com/entities/hollysys-automation-technolo" target="_blank" data-smartkarma-citation="entities:26078:1" rel="noopener">Hollysys Automation Technolo (HOLI US)</a> <a href="http://hollysys.investorroom.com/2021-05-13-Hollysys-Automation-Technologies-Reports-Unaudited-Financial-Results-for-the-Third-Quarter-and-the-First-Nine-Months-Ended-March-31,-2021" target="_blank" rel="noopener">announced</a> its 3Q21 results, which saw NPAT gaining ~15% yoy to US$15mn, reversing five consecutive down quarters.
<ul>
<li>The industrial automation ("IA") ops, the key revenue and growth driver, finished the third quarter with revenue and new contracts at $67.5mn and $106.7mn, or yoy growth of 97.1% and 68.7. For the first nine months of the FY21, IA revenue and new contracts achieved 44.1% and 34.0% yoy growth.</li>
<li>IA's contribution to revenue is up to 56% for the 9M21 versus 45% for 9M20.</li>
</ul>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/209/393/original/image_8755565231622097482669.png?1622097483" class="editor-image img-responsive" data-smartkarma-image-id="209393"></figure>
<ul>
<li>IA's contribution to revenue is up to 56% for the 9M21 versus 45% for 9M20.</li>
<li>The rail business ops finished the quarter with revenue and new contracts at $30.7mn and $15.7mn, or yoy growth of 7.0% and 215.2%. For 9M21, the rail business revenue and new contracts returned a 7.5% yoy decrease and 10.2% yoy growth, respectively.</li>
<li>The mechanical and electrical solutions business finished the quarter with revenue and new contracts at $11.8mn and $19.6mn, a 34.1% and 1.2% yoy decrease respectively.</li>
<li>Net cash, excluding short-term investments, increased to US$450mn, up from US$341mn as at December 2020. Including STI, net cash was US$623mn vs US$682mn as at 31 December.</li>
<li>To note, NPAT growth was slower than the top line growth.</li>
</ul>
No mention was made with respect to the consortium's Offer. No doubt that omission spurred the latest <a href="https://www.businesswire.com/news/home/20210525006034/en/Buyer-Consortium-Comments-on-Recent-Financial-and-Operational-Information-Released-by-Hollysys-Automation-Technologies" target="_blank" rel="noopener">salvo</a> from CPE Funds Management - who previously <a href="https://www.businesswire.com/news/home/20210413006213/en/Buyer-Consortium-Comments-on-Recent-Financial-and-Operational-Information-Released-by-Hollysys-Automation-Technologies" target="_blank" rel="noopener">critiqued</a> Hollysys' 1H21 results - which highlighted the following:
<ul>
<li>Net operating cash flow for the quarter ended March 31, 2021 was negative $6.4mn, the first negative quarterly operating cash flow in the last 16 consecutive quarters.</li>
<li>Revenue for the quarter ended March 31, 2021 was $109.9mn, representing a 12% decrease from $125.2mn for the comparable pre-pandemic period in 2019.</li>
</ul>
It's hardly a knock-out blow. Yet Hollysys would be better served mentioning, at least, there is no update to the Offer or that it undervalues the company. 
Currently trading at a gross spread of 27.6% to the consortium's non-binding proposal of $17.10/share. The street consensus has a fair value of US$19.32/share.
More below the fold.
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Earlier this month, Hollysys Automation Technolo (HOLI US) announced its 3Q21 results, which saw NPAT gaining ~15% yoy to US$15mn, reversing five consecutive down quarters.

The industrial automation ("IA") ops, the key revenue and growth driver, finished the third quarter with revenue and new contracts at $67.5mn and $106.7mn, or yoy growth of 97.1% and 68.7. For the first nine months of the FY21, IA revenue and new contracts achieved 44.1% and 34.0% yoy growth.
IA's contribution to revenue is up to 56% for the 9M21 versus 45% for 9M20.



IA's contribution to revenue is up to 56% for the 9M21 versus 45% for 9M20.
The rail business ops finished the quarter with revenue and new contracts at $30.7mn and $15.7mn, or yoy growth of 7.0% and 215.2%. For 9M21, the rail business revenue and new contracts returned a 7.5% yoy decrease and 10.2% yoy growth, respectively.
The mechanical and electrical solutions business finished the quarter with revenue and new contracts at $11.8mn and $19.6mn, a 34.1% and 1.2% yoy decrease respectively.
Net cash, excluding short-term investments, increased to US$450mn, up from US$341mn as at December 2020. Including STI, net cash was US$623mn vs US$682mn as at 31 December.
To note, NPAT growth was slower than the top line growth.

No mention was made with respect to the consortium's Offer. No doubt that omission spurred the latest salvo from CPE Funds Management - who previously critiqued Hollysys' 1H21 results - which highlighted the following:

Net operating cash flow for the quarter ended March 31, 2021 was negative $6.4mn, the first negative quarterly operating cash flow in the last 16 consecutive quarters.
Revenue for the quarter ended March 31, 2021 was $109.9mn, representing a 12% decrease from $125.2mn for the comparable pre-pandemic period in 2019.

It's hardly a knock-out blow. Yet Hollysys would be better served mentioning, at least, there is no update to the Offer or that it undervalues the company. 
Currently trading at a gross spread of 27.6% to the consortium's non-binding proposal of $17.10/share. The street consensus has a fair value of US$19.32/share.
More below the fold.









Hollysys (HOLI US): CPE's Broadsides Continue

On the 7 December, 2020, a consortium including co-founder and former <a href="https://www.smartkarma.com/entities/hollysys-automation-technolo" target="_blank" data-smartkarma-citation="entities:26078:1" rel="noopener">Hollysys Automation Technology (HOLI US)</a> CEO Baiqing Shao, Ace Funds, and Chinese PE outfit CPE Funds Management <a href="http://hollysys.investorroom.com/2020-12-10-Hollysys-Announces-Receipt-of-a-Non-Binding-Going-Private-Proposal" target="_blank" rel="noopener">pitched</a> an unsolicited US$15.47/share cash Offer for Hollysys, a leading automation control system solutions provider in China, which was summarily <a href="http://hollysys.investorroom.com/2021-01-08-Hollysys-Board-of-Directors-Rejects-Unsolicited-Offer" target="_blank" rel="noopener">rejected</a> on the 8 January as the Offer "substantially undervalues the Company and is not in the best interest of the Company’s shareholders .... (and that it) would deprive our shareholders of the value inherent in Hollysys for inadequate consideration."
Undeterred, the consortium bumped its Offer to acquire the company to US$17.10/share on the <a href="http://hollysys.investorroom.com/2021-02-01-Hollysys-Board-of-Directors-to-Review-Revised-Unsolicited-Proposal" target="_blank" rel="noopener">1 February</a>. Hollysys has yet to make public its opinion on the revised Offer, other than there is no need for shareholders to “take any action at this time”.
Concerning the legal dispute over the beneficial ownership of the Hollysys' shares held by Ace Lead and the beneficial ownership of the shares of Ace Lead held by Shao, Hollysys <a href="http://hollysys.investorroom.com/2021-03-15-Hollysys-Board-of-Directors-Received-a-Notice-From-Hollysys-Committee-on-Trust-Interests" target="_blank" rel="noopener">announced</a> a legal action had commenced in the Hong Kong High Court against Shao and Ace Lead on March 9, 2021.
In a press release on the <a href="https://www.businesswire.com/news/hk-zh/20210314005017/en/Shao-Baiqing-and-Ace-Lead-Profits-Limited-Won-Preliminary-Victory-Against-Hollysys-Automation-Technologies-in-the-BVI" target="_blank" rel="noopener">14 March</a>, Shao Baiqing and Ace Lead Profits allege they had won a preliminary victory against Hollysys.
Hollysys countered <a href="http://hollysys.investorroom.com/2021-03-16-Hollysys-Response-to-Ace-Lead-Profits-Limited-Misleading-Press-Release" target="_blank" rel="noopener">these</a> statements were highly misleading.  The fact is that the Court has yet to adjudicate on the validity of the claim brought by Shao and Ace Lead and the legality of certain amendments to the Memorandum and Articles of Association. 
<h3>The New News</h3>
CPE has <a href="https://www.businesswire.com/news/home/20210413006213/en/Buyer-Consortium-Comments-on-Recent-Financial-and-Operational-Information-Released-by-Hollysys-Automation-Technologies" target="_blank" rel="noopener">critiqued</a> Hollysys' 1H21 results (to 31 December 2020), and concluded that:
<blockquote>
It is clear that existing management and the board of directors of the Company do not know how to run the business successfully.
</blockquote>
Quite the soap opera. Currently trading at a 34% gross spread to terms.
As always, more below the fold.

On the 7 December, 2020, a consortium including co-founder and former Hollysys Automation Technology (HOLI US) CEO Baiqing Shao, Ace Funds, and Chinese PE outfit CPE Funds Management pitched an unsolicited US$15.47/share cash Offer for Hollysys, a leading automation control system solutions provider in China, which was summarily rejected on the 8 January as the Offer "substantially undervalues the Company and is not in the best interest of the Company’s shareholders .... (and that it) would deprive our shareholders of the value inherent in Hollysys for inadequate consideration."
Undeterred, the consortium bumped its Offer to acquire the company to US$17.10/share on the 1 February. Hollysys has yet to make public its opinion on the revised Offer, other than there is no need for shareholders to “take any action at this time”.
Concerning the legal dispute over the beneficial ownership of the Hollysys' shares held by Ace Lead and the beneficial ownership of the shares of Ace Lead held by Shao, Hollysys announced a legal action had commenced in the Hong Kong High Court against Shao and Ace Lead on March 9, 2021.
In a press release on the 14 March, Shao Baiqing and Ace Lead Profits allege they had won a preliminary victory against Hollysys.
Hollysys countered these statements were highly misleading.  The fact is that the Court has yet to adjudicate on the validity of the claim brought by Shao and Ace Lead and the legality of certain amendments to the Memorandum and Articles of Association. 
The New News
CPE has critiqued Hollysys' 1H21 results (to 31 December 2020), and concluded that:

It is clear that existing management and the board of directors of the Company do not know how to run the business successfully.

Quite the soap opera. Currently trading at a 34% gross spread to terms.
As always, more below the fold.

Hollysys (HOLI US): CPE Heightens Its Case Amid Shareholding Dispute

<a href="https://www.smartkarma.com/entities/hollysys-automation-technolo" target="_blank" data-smartkarma-citation="entities:26078:1" rel="noopener">Hollysys Automation Technology (HOLI US)</a>, a leading automation control system solutions provider in China, has <a href="https://app.quotemedia.com/data/downloadFiling?webmasterId=101533&amp;ref=115585559&amp;type=PDF&amp;symbol=HOLI&amp;companyName=Hollysys+Automation+Technologies+Ltd.&amp;formType=6-K&amp;dateFiled=2021-02-01&amp;CK=1357450" target="_blank" rel="noopener">announced</a> a consortium including co-founder and former Hollysys CEO Baiqing Shao, Ace Funds, and Chinese PE outfit CPE Funds Management, had bumped its Offer to acquire the company to US$17.10/share. 
Back on the <a href="https://app.quotemedia.com/data/downloadFiling?webmasterId=101533&amp;ref=115490363&amp;type=PDF&amp;symbol=HOLI&amp;companyName=Hollysys+Automation+Technologies+Ltd.&amp;formType=6-K&amp;dateFiled=2020-12-10&amp;CK=1357450" target="_blank" rel="noopener">7 December</a>, 2020, the consortium pitched an unsolicited US$15.47/share cash Offer, which was summarily <a href="https://app.quotemedia.com/data/downloadFiling?webmasterId=101533&amp;ref=115541784&amp;type=PDF&amp;symbol=HOLI&amp;companyName=Hollysys+Automation+Technologies+Ltd.&amp;formType=6-K&amp;dateFiled=2021-01-08&amp;CK=1357450" target="_blank" rel="noopener">rejected</a> on the 8 January as the Offer "substantially undervalues the Company and is not in the best interest of the Company’s shareholders .... (and that it) would deprive our shareholders of the value inherent in Hollysys for inadequate consideration."
Given US/China tensions and moves last year to force the delisting of US-listed Chinese companies should they be in noncompliance with US accounting standards, there has been a surge in “take private” transactions for these US-listed companies (often expecting to re-list elsewhere at higher valuations) and secondary listings in markets outside of the United States, such as Hong Kong and Shanghai. This was extensively discussed in <a href="https://skr.ma/TDg1T" target="_blank" rel="noopener">Homecoming For Chinese Companies: Appraisal Rights &amp; Fair Value</a>.
Hollysys is incorporated in the BVI. This jurisdiction provides four key takeover methods.
Hollysys also has net cash of US$630mn (as at 30 September 2020), accounting for ~71% of its market cap. Dissension rights are available under certain take-private transactions.
As always, more below the fold.

Hollysys Automation Technology (HOLI US), a leading automation control system solutions provider in China, has announced a consortium including co-founder and former Hollysys CEO Baiqing Shao, Ace Funds, and Chinese PE outfit CPE Funds Management, had bumped its Offer to acquire the company to US$17.10/share. 
Back on the 7 December, 2020, the consortium pitched an unsolicited US$15.47/share cash Offer, which was summarily rejected on the 8 January as the Offer "substantially undervalues the Company and is not in the best interest of the Company’s shareholders .... (and that it) would deprive our shareholders of the value inherent in Hollysys for inadequate consideration."
Given US/China tensions and moves last year to force the delisting of US-listed Chinese companies should they be in noncompliance with US accounting standards, there has been a surge in “take private” transactions for these US-listed companies (often expecting to re-list elsewhere at higher valuations) and secondary listings in markets outside of the United States, such as Hong Kong and Shanghai. This was extensively discussed in Homecoming For Chinese Companies: Appraisal Rights &amp; Fair Value.
Hollysys is incorporated in the BVI. This jurisdiction provides four key takeover methods.
Hollysys also has net cash of US$630mn (as at 30 September 2020), accounting for ~71% of its market cap. Dissension rights are available under certain take-private transactions.
As always, more below the fold.

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Equity Capital Markets

Hollysys Automation Technologies / Equity Capital Markets

<a href="https://www.smartkarma.com/entities/26078" target="_blank" data-smartkarma-citation="entities:26078:1">Hollysys Automation Technolo (HOLI US)</a> plans to raise around US$170m in its follow-on offering.
The company has been reporting flattish earnings for the past few years and remains well positioned in its main segments. HOLI is net cash, it has ample cash for that matter, and it has been generating operating cash flow consistently. It hasn't provided any specific reasons for the capital raise. Which makes one wonder if this is just an opportunistic raise. 
In my view, either the company needs to clearly disclose the intended use of capital or it needs to offer the deal at a very wide discount to where the shares are currently trading.

Hollysys Automation Technolo (HOLI US) plans to raise around US$170m in its follow-on offering.
The company has been reporting flattish earnings for the past few years and remains well positioned in its main segments. HOLI is net cash, it has ample cash for that matter, and it has been generating operating cash flow consistently. It hasn't provided any specific reasons for the capital raise. Which makes one wonder if this is just an opportunistic raise. 
In my view, either the company needs to clearly disclose the intended use of capital or it needs to offer the deal at a very wide discount to where the shares are currently trading.

Hollysys Auto Tech Placement - Has Ample Cash, Reasons for the Raising Remain Unclear

Founder and Strategist, Entext Economics & Strategy

Sean Maher

Founder and Strategist

Entext Economics & Strategy

Entext provides institutional investors with distinctive, actionable asset allocation and thematic research, which typically challenges the market consensus. Our clients range from credit, equity and multi-asset hedge and pension funds to family offices and sovereign funds. 
 
We focus on identifying key inflection points in macro data and relative asset performance amid the 'groupthink'  and confirmation bias that characterizes most investment bank analysis.

Macro Driven Investment Insight

Thematic (Sector/Industry)

<ul>
<li>The huge investment being made in autonomous vehicles will dramatically boost the use of robots in new sectors, as sensors such as Lidar give them real-time awareness of their environment.</li>
<li>Japan still dominates the industry and even as local Chinese brands benefit from state support, most value add in the form of actuators, servos and other key components will have to imported.</li>
<li>Amazon which has integrated Kiva, Midea which now owns Kuka, Honda which has teamed with SenseTime and UK online…</li>
</ul>


The huge investment being made in autonomous vehicles will dramatically boost the use of robots in new sectors, as sensors such as Lidar give them real-time awareness of their environment.
Japan still dominates the industry and even as local Chinese brands benefit from state support, most value add in the form of actuators, servos and other key components will have to imported.
Amazon which has integrated Kiva, Midea which now owns Kuka, Honda which has teamed with SenseTime and UK online…


Online Retail Boom and Autonomous Car Sensors Transforming Robotics…

United States

Hollysys Automation Technologies Ltd. manufactures automation and control systems.  The Company produces process, industrial, rail and subway, and nuclear power plant automation equipment.

Hollysys Automation Technologies (HOLI US)

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Hollysys Automation Technologies (HOLI US)

Hollysys (HOLI US): CPE's Broadsides Continue

I like Hollysys here. Shares are cheap, It has a profitable business with quality clients. It is net cash representing 55% of if its market cap,...

David Blennerhassett

Hollysys (HOLI US): CPE Heightens Its Case Amid Shareholding Dispute

Shares are cheap here, and may drift cheaper, until a firmer timeline of the legal wrangles unfolds. I suspect CPE will continue to flame the...

David Blennerhassett

Hollysys (HOLI US): Machine Earning

The short turnaround from the consortium in bumping its Offer provides a certain degree of determination. At $17.10/share, this is still being done...

David Blennerhassett

Hollysys Auto Tech Placement - Has Ample Cash, Reasons for the Raising Remain Unclear

Hollysys Automation Technolo (HOLI US) plans to raise around US$170m in its follow-on offering. The company has been reporting flattish earnings...

Sumeet Singh

Online Retail Boom and Autonomous Car Sensors Transforming Robotics…

The huge investment being made in autonomous vehicles will dramatically boost the use of robots in new sectors, as sensors such as Lidar give them...

Sean Maher

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