Intrinsic value of Hollysys Automation Technologies - HOLI

Previous Close

$19.44

  Intrinsic Value

$24.04

stock screener

  Rating & Target

buy

+24%

  Value-price divergence*

+55%

Previous close

$19.44

 
Intrinsic value

$24.04

 
Up/down potential

+24%

 
Rating

buy

 
Value-price divergence*

+55%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of HOLI stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 1.2

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  2.45
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  544
  555
  568
  582
  599
  617
  637
  658
  682
  707
  734
  763
  794
  827
  862
  899
  939
  981
  1,025
  1,071
  1,121
  1,173
  1,227
  1,285
  1,346
  1,410
  1,477
  1,548
  1,623
  1,702
  1,784
Variable operating expenses, $m
 
  419
  429
  440
  452
  465
  480
  496
  514
  533
  553
  569
  592
  616
  642
  670
  699
  731
  763
  798
  835
  874
  914
  957
  1,003
  1,050
  1,101
  1,154
  1,209
  1,268
  1,329
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  425
  419
  429
  440
  452
  465
  480
  496
  514
  533
  553
  569
  592
  616
  642
  670
  699
  731
  763
  798
  835
  874
  914
  957
  1,003
  1,050
  1,101
  1,154
  1,209
  1,268
  1,329
Operating income, $m
  119
  136
  139
  142
  147
  151
  156
  162
  168
  174
  181
  195
  203
  211
  220
  229
  239
  250
  261
  273
  286
  299
  313
  328
  343
  360
  377
  395
  414
  434
  455
EBITDA, $m
  126
  146
  149
  153
  157
  162
  167
  173
  179
  186
  193
  201
  209
  217
  227
  236
  247
  258
  269
  282
  295
  308
  323
  338
  354
  371
  388
  407
  427
  447
  469
Interest expense (income), $m
  1
  1
  1
  1
  2
  2
  2
  3
  3
  4
  4
  5
  5
  6
  7
  7
  8
  9
  10
  11
  12
  13
  14
  15
  16
  17
  19
  20
  22
  23
  25
Earnings before tax, $m
  138
  135
  138
  141
  145
  149
  154
  159
  165
  171
  177
  190
  197
  205
  213
  222
  231
  241
  251
  262
  274
  286
  299
  313
  327
  342
  358
  375
  392
  411
  430
Tax expense, $m
  14
  36
  37
  38
  39
  40
  42
  43
  44
  46
  48
  51
  53
  55
  58
  60
  62
  65
  68
  71
  74
  77
  81
  84
  88
  92
  97
  101
  106
  111
  116
Net income, $m
  118
  98
  101
  103
  106
  109
  112
  116
  120
  125
  129
  139
  144
  150
  156
  162
  169
  176
  184
  192
  200
  209
  218
  228
  239
  250
  261
  274
  286
  300
  314

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  271
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  1,004
  748
  765
  785
  807
  831
  858
  887
  919
  953
  990
  1,029
  1,070
  1,115
  1,162
  1,212
  1,265
  1,322
  1,381
  1,444
  1,510
  1,580
  1,654
  1,732
  1,814
  1,900
  1,991
  2,087
  2,188
  2,294
  2,405
Adjusted assets (=assets-cash), $m
  733
  748
  765
  785
  807
  831
  858
  887
  919
  953
  990
  1,029
  1,070
  1,115
  1,162
  1,212
  1,265
  1,322
  1,381
  1,444
  1,510
  1,580
  1,654
  1,732
  1,814
  1,900
  1,991
  2,087
  2,188
  2,294
  2,405
Revenue / Adjusted assets
  0.742
  0.742
  0.742
  0.741
  0.742
  0.742
  0.742
  0.742
  0.742
  0.742
  0.741
  0.741
  0.742
  0.742
  0.742
  0.742
  0.742
  0.742
  0.742
  0.742
  0.742
  0.742
  0.742
  0.742
  0.742
  0.742
  0.742
  0.742
  0.742
  0.742
  0.742
Average production assets, $m
  93
  95
  97
  100
  102
  105
  109
  113
  117
  121
  126
  131
  136
  141
  147
  154
  161
  168
  175
  183
  192
  201
  210
  220
  230
  241
  253
  265
  278
  291
  305
Working capital, $m
  530
  274
  280
  288
  296
  305
  315
  325
  337
  349
  363
  377
  392
  409
  426
  444
  464
  484
  506
  529
  554
  579
  606
  635
  665
  697
  730
  765
  802
  841
  882
Total debt, $m
  34
  31
  38
  47
  57
  67
  79
  92
  106
  120
  136
  154
  172
  191
  212
  234
  257
  282
  308
  335
  364
  395
  427
  461
  497
  534
  574
  616
  660
  706
  755
Total liabilities, $m
  330
  327
  334
  343
  353
  363
  375
  388
  402
  416
  432
  450
  468
  487
  508
  530
  553
  578
  604
  631
  660
  691
  723
  757
  793
  830
  870
  912
  956
  1,002
  1,051
Total equity, $m
  674
  421
  431
  442
  454
  468
  483
  500
  517
  537
  557
  579
  603
  628
  654
  682
  712
  744
  778
  813
  850
  890
  931
  975
  1,021
  1,070
  1,121
  1,175
  1,232
  1,291
  1,354
Total liabilities and equity, $m
  1,004
  748
  765
  785
  807
  831
  858
  888
  919
  953
  989
  1,029
  1,071
  1,115
  1,162
  1,212
  1,265
  1,322
  1,382
  1,444
  1,510
  1,581
  1,654
  1,732
  1,814
  1,900
  1,991
  2,087
  2,188
  2,293
  2,405
Debt-to-equity ratio
  0.050
  0.070
  0.090
  0.110
  0.120
  0.140
  0.160
  0.180
  0.200
  0.220
  0.240
  0.270
  0.290
  0.300
  0.320
  0.340
  0.360
  0.380
  0.400
  0.410
  0.430
  0.440
  0.460
  0.470
  0.490
  0.500
  0.510
  0.520
  0.540
  0.550
  0.560
Adjusted equity ratio
  0.554
  0.563
  0.563
  0.563
  0.563
  0.563
  0.563
  0.563
  0.563
  0.563
  0.563
  0.563
  0.563
  0.563
  0.563
  0.563
  0.563
  0.563
  0.563
  0.563
  0.563
  0.563
  0.563
  0.563
  0.563
  0.563
  0.563
  0.563
  0.563
  0.563
  0.563

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  118
  98
  101
  103
  106
  109
  112
  116
  120
  125
  129
  139
  144
  150
  156
  162
  169
  176
  184
  192
  200
  209
  218
  228
  239
  250
  261
  274
  286
  300
  314
Depreciation, amort., depletion, $m
  7
  10
  10
  11
  11
  11
  11
  11
  11
  12
  12
  6
  6
  6
  7
  7
  7
  8
  8
  8
  9
  9
  10
  10
  11
  11
  12
  12
  13
  13
  14
Funds from operations, $m
  -42
  109
  111
  114
  117
  120
  123
  127
  132
  136
  141
  145
  150
  156
  162
  169
  176
  184
  192
  200
  209
  218
  228
  238
  249
  261
  273
  286
  299
  313
  328
Change in working capital, $m
  -89
  5
  6
  7
  8
  9
  10
  11
  12
  12
  13
  14
  15
  16
  17
  18
  19
  21
  22
  23
  24
  26
  27
  29
  30
  32
  33
  35
  37
  39
  41
Cash from operations, $m
  47
  103
  105
  106
  108
  111
  114
  117
  120
  124
  128
  130
  135
  140
  145
  151
  157
  163
  170
  177
  184
  192
  201
  210
  219
  229
  240
  251
  262
  274
  287
Maintenance CAPEX, $m
  0
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -6
  -6
  -7
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -11
  -12
  -12
  -13
  -13
New CAPEX, $m
  -8
  -2
  -2
  -2
  -3
  -3
  -3
  -4
  -4
  -4
  -5
  -5
  -5
  -6
  -6
  -6
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -12
  -12
  -13
  -13
  -14
Cash from investing activities, $m
  -2
  -6
  -6
  -6
  -8
  -8
  -8
  -9
  -9
  -9
  -11
  -11
  -11
  -12
  -12
  -13
  -14
  -14
  -16
  -16
  -16
  -18
  -18
  -20
  -20
  -22
  -23
  -24
  -25
  -26
  -27
Free cash flow, $m
  45
  97
  98
  99
  101
  103
  105
  108
  111
  114
  117
  120
  124
  128
  133
  138
  143
  149
  155
  161
  168
  175
  182
  190
  199
  208
  217
  227
  237
  248
  260
Issuance/(repayment) of debt, $m
  -20
  7
  8
  9
  10
  11
  12
  13
  14
  15
  16
  17
  18
  19
  21
  22
  23
  25
  26
  27
  29
  31
  32
  34
  36
  38
  40
  42
  44
  46
  49
Issuance/(repurchase) of shares, $m
  13
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -7
  7
  8
  9
  10
  11
  12
  13
  14
  15
  16
  17
  18
  19
  21
  22
  23
  25
  26
  27
  29
  31
  32
  34
  36
  38
  40
  42
  44
  46
  49
Total cash flow (excl. dividends), $m
  21
  104
  106
  108
  111
  114
  117
  121
  125
  129
  133
  137
  142
  147
  153
  160
  166
  173
  181
  188
  197
  205
  215
  224
  235
  245
  257
  269
  281
  295
  309
Retained Cash Flow (-), $m
  -95
  -8
  -10
  -11
  -12
  -14
  -15
  -16
  -18
  -19
  -21
  -22
  -24
  -25
  -27
  -28
  -30
  -32
  -33
  -35
  -37
  -39
  -42
  -44
  -46
  -49
  -51
  -54
  -57
  -60
  -63
Prev. year cash balance distribution, $m
 
  261
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  357
  96
  97
  98
  100
  102
  104
  107
  110
  113
  115
  118
  122
  127
  131
  136
  141
  147
  153
  159
  166
  173
  181
  188
  197
  206
  215
  225
  235
  246
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  342
  88
  84
  81
  78
  74
  70
  67
  63
  59
  54
  50
  47
  43
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  35
  31
  27
  24
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  17
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Current shareholders' claim on cash, %
  100
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  100.0
  100.0
  100.0
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  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
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  100.0
  100.0
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  100.0
  100.0

Hollysys Automation Technologies Ltd. provides automation and control technologies and products to customers in industrial, railway, subway, nuclear power, and mechanical and electronic industries in China, Southeast Asia, India, Europe, and the Middle East. The company offers a suite of industrial automation solutions comprising third-party hardware-centric products, such as instrumentation and actuators; proprietary software-centric distributed control systems/programmable logic controllers; and valued-added software packages that include real-time management information system, HolliAS asset management system, operator training system, HolliAS batch application package, HolliAS advanced process control package, and safety instrumentation system, as well as HOLLiAS-NMS DCS, a proprietary nuclear power non-safety automation and control system. It also provides train control center that monitors route condition, track status, train schedules, distance between trains, and the working status of other function devices, as well as generates control instructions and commands. In addition, the company offers automation train protection that operates as a train over-speed protection mechanism; supervisory control and data acquisition system, an open software platform; and subway supervisory and control platform. Additionally, the company engages in research and development activities; manufactures and sells medical automation equipment; and provides integrated automation products and services, and mechanical and electrical solutions. The company was formerly known as HLS Systems International Ltd. and changed its name to Hollysys Automation Technologies Ltd. in July 2009. Hollysys Automation Technologies Ltd. was founded in 1993 and is headquartered in Beijing, the People’s Republic China.

FINANCIAL RATIOS  of  Hollysys Automation Technologies (HOLI)

Valuation Ratios
P/E Ratio 9.8
Price to Sales 2.1
Price to Book 1.7
Price to Tangible Book
Price to Cash Flow 24.7
Price to Free Cash Flow 29.7
Growth Rates
Sales Growth Rate 2.4%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 60%
Cap. Spend. - 3 Yr. Gr. Rate -2.3%
Financial Strength
Quick Ratio 27
Current Ratio 0.8
LT Debt to Equity 3.6%
Total Debt to Equity 5%
Interest Coverage 139
Management Effectiveness
Return On Assets 12%
Ret/ On Assets - 3 Yr. Avg. 10.3%
Return On Total Capital 17.6%
Ret/ On T. Cap. - 3 Yr. Avg. 16.3%
Return On Equity 18.8%
Return On Equity - 3 Yr. Avg. 17.5%
Asset Turnover 0.5
Profitability Ratios
Gross Margin 37.9%
Gross Margin - 3 Yr. Avg. 37.3%
EBITDA Margin 26.8%
EBITDA Margin - 3 Yr. Avg. 24.6%
Operating Margin 21.9%
Oper. Margin - 3 Yr. Avg. 22.3%
Pre-Tax Margin 25.4%
Pre-Tax Margin - 3 Yr. Avg. 22.1%
Net Profit Margin 21.7%
Net Profit Margin - 3 Yr. Avg. 17.8%
Effective Tax Rate 10.1%
Eff/ Tax Rate - 3 Yr. Avg. 17.6%
Payout Ratio 0%

HOLI stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the HOLI stock intrinsic value calculation we used $544 million for the last fiscal year's total revenue generated by Hollysys Automation Technologies. The default revenue input number comes from 2016 income statement of Hollysys Automation Technologies. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our HOLI stock valuation model: a) initial revenue growth rate of 2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for HOLI is calculated based on our internal credit rating of Hollysys Automation Technologies, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Hollysys Automation Technologies.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of HOLI stock the variable cost ratio is equal to 75.6%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for HOLI stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Hollysys Automation Technologies.

Corporate tax rate of 27% is the nominal tax rate for Hollysys Automation Technologies. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the HOLI stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for HOLI are equal to 17.1%.

Life of production assets of 21.9 years is the average useful life of capital assets used in Hollysys Automation Technologies operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for HOLI is equal to 49.4%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $674 million for Hollysys Automation Technologies - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 60.64 million for Hollysys Automation Technologies is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Hollysys Automation Technologies at the current share price and the inputted number of shares is $1.2 billion.

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COMPANY NEWS

▶ Hollysys Automation posts 4Q profit   [Aug-14-17 11:22PM  Associated Press]
▶ New Strong Sell Stocks for May 16th   [May-16-17 10:29AM  Zacks]
▶ Hollysys Automation posts 3Q profit   [May-11-17 05:51PM  Associated Press]
▶ Hollysys Automation posts 2Q profit   [Feb-14-17 05:51PM  Associated Press]
Stock chart of HOLI Financial statements of HOLI
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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