Robots are taking over – at least when it comes to Chinese factories.
In 2016, the International Federation of Robots found that China set the record for a single country by installing 87,000 industrial robots that year. The following year, that number increased by 58%, compared to 31% growth in global demand.
Combine that with the enormous size of China’s economy, and it’s clear that investing in Chinese automation will be one of the most lucrative industries of 2019 and beyond.
The stock we’re bringing you today has been a leader in China’s industrial automation market for a quarter-century.
It’s also carved out a big chunk of the rail transportation industry – both high-speed rail and urban subways.
That’s a huge profit opportunity at a time when many big Chinese cities are in the middle of doubling or even tripling the size of their subway systems.
And it’s an even bigger deal when you consider China’s “One Belt, One Road” initiative, a multitrillion-dollar program that involves expanding rail access both within the country and connecting to destinations in Asia, Africa, and Europe.
Best of all, due in part to tariff fears that have hurt Chinese tech stocks in 2018, this one is available at about a 50% discount on its fair value – meaning shares could double in short order.
No wonder it has a top score from our Money Morning Stock VQScore™ system.
All those factors create a perfect storm that will be raining profits on our pick for years – and probably decades – to come.
Multiple Profit Trends Are Driving This Innovative Company Toward 100% Gains
Founded in 1993, HollySys Automation Technologies Ltd. (NASDAQ: HOLI) has 3,300 employees across 60 Chinese cities, plus subsidiaries and offices across Southeast Asia and the Middle East.
To give you an idea of the company’s commitment to innovation, more than 650 of those employees are working in research and development, where about 7% of revenue goes every year.
So it’s no wonder that HollySys has been able to stay at the top of its field, racking up more than 30,000 projects for more than 10,000 customers.
The biggest chunk of the company’s revenue comes from industrial automation. That includes both hardware and software to automate processes in industries ranging from petrochemicals to hospital safety equipment to city transportation and sewage systems.
One area where HollySys’ automation really stands out is in nuclear energy. In fact, the company holds about 14% of the plant automation market in China.
And since its competition in this space comes mostly from outside of Asia, HollySys has a leg up as Chinese investment in nuclear power ramps up. The World Nuclear Association projects China will have 56 reactors by 2020, compared to just 28 in 2017.
HollySys will be getting many of the contracts to provide systems to control those new plants and to protect the reactors from overheating – an absolutely critical task to protect the population in China and beyond.
HollySys’s presence in rail transportation accounts for more than a third of its revenue, reflecting its privileged position in China’s rail automation market. It’s one of only three approved providers for trains traveling up to 250 kilometers per hour as well as the “bullet trains” that reach a top speed of 350 kilometers per hour.
These automation systems can signal and control high-speed trains from a centralized location. That technology can potentially save hundreds of lives in the event that something goes wrong on the rails.
According to the National Development and Reform Commission, high-speed rail in China is set to expand 136% from 19,000 kilometers in 2015 to 45,000 kilometers by 2045.
Urban rail, where HollySys offers its propriety subway signaling system, is growing at an even faster rate. The China Association of Metros projects Beijing’s subway to grow from 604 kilometers in 2015 to 1,000 by 2020. Shenzen is adding 246 kilometers to its system in that time, and Guangzhou is expected to expand 183% from 247 to 700 kilometers.
As it happens, all three cities are already HollySys clients.
The trends are clearly pointing in HollySys’s favor, making it a great stock to buy and hold for the long term. And that’s before we consider how undervalued it already is.
This Is the Time to Buy HOLI
As we said earlier, HOLI has been dragged down by the general sell-off for Chinese tech stocks. It’s down to about $19 after being as high as $28 in mid-March.
But tariffs and trade wars haven’t done much to slow HollySys’s business, and there’s little reason to think that will change. The incredible growth in its home market alone will be plenty to keep HollySys improving its bottom line.
Case in point: Earnings per share in the 2018 fiscal year was up 53.4% from the year before. That was after it paid its 0.9% dividend yield, more than three times the industry average.
Just about every cash flow measure has been steadily improving over the last four years. Net operating cash flow, for example, is up 174% in that time, from $46.7 million to $128.5 million.
Those solid financials and steady growth trends are part of the reason Wall Street loves this stock. Five out five analysts tracked by FactSet call HollySys a “Buy” or “Overweight.” And Deutsche Bank Research sets a price target representing more than a 50% rise.
Looking at HOLI’s value metrics, it could rise even more than that.
Its forward price/earnings (P/E) ratio comes in at 47% of the industry average. It’s a similar story for the last 12 months, for which the P/E ratio is 50% of the average.
HOLI’s price/earnings-to-growth (PEG), price-to-book, and price-to-cash flow ratios all come in between 40 and 50% of the industry average, suggesting a gain of 100% or more.
No matter how you look at it, this stock appears to be significantly undervalued. And at just the time when it has caught its wave – or waves.
Buy it now and ride those waves to the bank.
— Stephen Mack
Source: Money Morning