Intrinsic value of Hollysys Automation Technologies - HOLI

Previous Close

$22.51

  Intrinsic Value

$13.70

stock screener

  Rating & Target

sell

-39%

  Value-price divergence*

-46%

Previous close

$22.51

 
Intrinsic value

$13.70

 
Up/down potential

-39%

 
Rating

sell

 
Value-price divergence*

-46%

*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 2017), $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 1.4

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2017(a)
   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
   2047

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -20.59
  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
  432
  441
  451
  462
  475
  490
  506
  523
  541
  562
  583
  606
  631
  657
  685
  714
  746
  779
  814
  851
  890
  931
  975
  1,020
  1,069
  1,120
  1,173
  1,230
  1,289
  1,351
  1,417
Variable operating expenses, $m
 
  208
  213
  218
  224
  231
  238
  246
  254
  264
  274
  279
  291
  303
  316
  329
  344
  359
  375
  392
  410
  429
  449
  471
  493
  516
  541
  567
  594
  623
  653
Fixed operating expenses, $m
 
  176
  181
  185
  190
  195
  199
  204
  210
  215
  220
  226
  231
  237
  243
  249
  255
  262
  268
  275
  282
  289
  296
  304
  311
  319
  327
  335
  343
  352
  361
Total operating expenses, $m
  372
  384
  394
  403
  414
  426
  437
  450
  464
  479
  494
  505
  522
  540
  559
  578
  599
  621
  643
  667
  692
  718
  745
  775
  804
  835
  868
  902
  937
  975
  1,014
Operating income, $m
  60
  56
  58
  59
  62
  65
  68
  73
  78
  83
  89
  101
  109
  117
  126
  136
  146
  158
  170
  184
  198
  213
  229
  246
  265
  285
  305
  328
  351
  376
  403
EBITDA, $m
  67
  64
  66
  67
  70
  73
  77
  81
  86
  92
  98
  106
  113
  122
  131
  141
  152
  164
  176
  190
  204
  220
  236
  254
  273
  293
  314
  337
  361
  386
  414
Interest expense (income), $m
  0
  1
  1
  1
  2
  2
  2
  3
  3
  4
  4
  5
  5
  6
  7
  8
  8
  9
  10
  11
  12
  13
  14
  15
  16
  18
  19
  20
  22
  24
  25
Earnings before tax, $m
  83
  56
  56
  58
  60
  63
  66
  70
  74
  79
  85
  96
  103
  111
  119
  128
  138
  149
  160
  173
  186
  200
  215
  231
  248
  267
  286
  307
  329
  353
  378
Tax expense, $m
  14
  15
  15
  16
  16
  17
  18
  19
  20
  21
  23
  26
  28
  30
  32
  35
  37
  40
  43
  47
  50
  54
  58
  62
  67
  72
  77
  83
  89
  95
  102
Net income, $m
  69
  41
  41
  42
  44
  46
  48
  51
  54
  58
  62
  70
  75
  81
  87
  94
  101
  109
  117
  126
  136
  146
  157
  169
  181
  195
  209
  224
  240
  257
  276

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  294
  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
  1,060
  781
  799
  820
  843
  868
  896
  927
  960
  996
  1,034
  1,075
  1,118
  1,165
  1,214
  1,266
  1,322
  1,381
  1,443
  1,509
  1,578
  1,651
  1,728
  1,809
  1,895
  1,985
  2,080
  2,180
  2,285
  2,396
  2,513
Adjusted assets (=assets-cash), $m
  766
  781
  799
  820
  843
  868
  896
  927
  960
  996
  1,034
  1,075
  1,118
  1,165
  1,214
  1,266
  1,322
  1,381
  1,443
  1,509
  1,578
  1,651
  1,728
  1,809
  1,895
  1,985
  2,080
  2,180
  2,285
  2,396
  2,513
Revenue / Adjusted assets
  0.564
  0.565
  0.564
  0.563
  0.563
  0.565
  0.565
  0.564
  0.564
  0.564
  0.564
  0.564
  0.564
  0.564
  0.564
  0.564
  0.564
  0.564
  0.564
  0.564
  0.564
  0.564
  0.564
  0.564
  0.564
  0.564
  0.564
  0.564
  0.564
  0.564
  0.564
Average production assets, $m
  47
  48
  49
  50
  51
  53
  55
  56
  58
  61
  63
  65
  68
  71
  74
  77
  81
  84
  88
  92
  96
  101
  105
  110
  115
  121
  127
  133
  139
  146
  153
Working capital, $m
  563
  220
  225
  231
  238
  245
  253
  261
  271
  281
  292
  303
  315
  328
  342
  357
  373
  389
  407
  425
  445
  466
  487
  510
  534
  560
  587
  615
  644
  676
  709
Total debt, $m
  31
  29
  37
  46
  56
  67
  79
  92
  106
  121
  137
  155
  174
  194
  215
  237
  261
  286
  313
  341
  370
  402
  435
  469
  506
  545
  585
  628
  673
  721
  770
Total liabilities, $m
  336
  334
  342
  351
  361
  372
  384
  397
  411
  426
  442
  460
  479
  499
  520
  542
  566
  591
  618
  646
  675
  707
  740
  774
  811
  850
  890
  933
  978
  1,026
  1,075
Total equity, $m
  724
  447
  457
  469
  482
  497
  513
  530
  549
  569
  591
  615
  640
  666
  694
  724
  756
  790
  825
  863
  903
  944
  988
  1,035
  1,084
  1,136
  1,190
  1,247
  1,307
  1,371
  1,437
Total liabilities and equity, $m
  1,060
  781
  799
  820
  843
  869
  897
  927
  960
  995
  1,033
  1,075
  1,119
  1,165
  1,214
  1,266
  1,322
  1,381
  1,443
  1,509
  1,578
  1,651
  1,728
  1,809
  1,895
  1,986
  2,080
  2,180
  2,285
  2,397
  2,512
Debt-to-equity ratio
  0.043
  0.070
  0.080
  0.100
  0.120
  0.130
  0.150
  0.170
  0.190
  0.210
  0.230
  0.250
  0.270
  0.290
  0.310
  0.330
  0.340
  0.360
  0.380
  0.390
  0.410
  0.430
  0.440
  0.450
  0.470
  0.480
  0.490
  0.500
  0.510
  0.530
  0.540
Adjusted equity ratio
  0.572
  0.572
  0.572
  0.572
  0.572
  0.572
  0.572
  0.572
  0.572
  0.572
  0.572
  0.572
  0.572
  0.572
  0.572
  0.572
  0.572
  0.572
  0.572
  0.572
  0.572
  0.572
  0.572
  0.572
  0.572
  0.572
  0.572
  0.572
  0.572
  0.572
  0.572

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  69
  41
  41
  42
  44
  46
  48
  51
  54
  58
  62
  70
  75
  81
  87
  94
  101
  109
  117
  126
  136
  146
  157
  169
  181
  195
  209
  224
  240
  257
  276
Depreciation, amort., depletion, $m
  7
  8
  8
  8
  8
  8
  9
  9
  9
  9
  9
  5
  5
  5
  5
  5
  6
  6
  6
  6
  7
  7
  7
  8
  8
  8
  9
  9
  10
  10
  11
Funds from operations, $m
  58
  49
  49
  50
  52
  54
  57
  60
  63
  67
  71
  75
  80
  86
  92
  99
  106
  115
  123
  132
  142
  153
  164
  176
  189
  203
  218
  233
  250
  268
  286
Change in working capital, $m
  -12
  4
  5
  6
  7
  7
  8
  9
  9
  10
  11
  12
  12
  13
  14
  15
  16
  17
  18
  19
  20
  21
  22
  23
  24
  25
  27
  28
  30
  31
  33
Cash from operations, $m
  70
  44
  44
  45
  46
  47
  49
  51
  54
  57
  60
  63
  68
  73
  78
  84
  91
  98
  106
  114
  123
  132
  143
  154
  165
  178
  191
  205
  220
  236
  254
Maintenance CAPEX, $m
  0
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -6
  -7
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -10
  -10
New CAPEX, $m
  -4
  -1
  -1
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -7
  -7
Cash from investing activities, $m
  -90
  -4
  -4
  -4
  -4
  -6
  -6
  -6
  -6
  -6
  -6
  -6
  -8
  -8
  -8
  -8
  -8
  -10
  -10
  -10
  -10
  -11
  -12
  -12
  -13
  -13
  -14
  -15
  -15
  -17
  -17
Free cash flow, $m
  -20
  40
  40
  40
  41
  42
  43
  45
  48
  51
  54
  56
  61
  65
  70
  76
  82
  89
  96
  104
  112
  121
  131
  141
  152
  164
  177
  190
  205
  220
  236
Issuance/(repayment) of debt, $m
  -2
  6
  8
  9
  10
  11
  12
  13
  14
  15
  16
  17
  19
  20
  21
  22
  24
  25
  27
  28
  30
  31
  33
  35
  37
  39
  41
  43
  45
  47
  50
Issuance/(repurchase) of shares, $m
  6
  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  
  5
  6
  8
  9
  10
  11
  12
  13
  14
  15
  16
  17
  19
  20
  21
  22
  24
  25
  27
  28
  30
  31
  33
  35
  37
  39
  41
  43
  45
  47
  50
Total cash flow (excl. dividends), $m
  -19
  46
  48
  49
  51
  53
  55
  58
  62
  66
  70
  74
  79
  85
  91
  98
  106
  114
  123
  132
  142
  152
  164
  176
  189
  203
  218
  233
  250
  267
  286
Retained Cash Flow (-), $m
  -50
  -9
  -10
  -12
  -13
  -15
  -16
  -17
  -19
  -20
  -22
  -23
  -25
  -27
  -28
  -30
  -32
  -34
  -36
  -38
  -40
  -42
  -44
  -47
  -49
  -52
  -54
  -57
  -60
  -63
  -67
Prev. year cash balance distribution, $m
 
  286
  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
 
  323
  37
  37
  37
  38
  39
  41
  43
  45
  48
  50
  54
  58
  63
  68
  74
  80
  87
  94
  102
  111
  120
  130
  140
  151
  163
  176
  190
  204
  219
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
 
  310
  34
  32
  31
  30
  29
  28
  27
  26
  25
  24
  23
  22
  21
  20
  19
  17
  16
  15
  13
  11
  10
  8
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Current shareholders' claim on cash, %
  100
  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
  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. is a provider of automation and control technologies, and products. The Company's segments include Industrial Automation (IA), Rail Transportation (rail), Mechanical and Electrical (M&E), and Miscellaneous. Its technologies are applied through its industrial automation solution suite, including the Distributed Control Systems, Programmable Logic Controller, Real-time Management Information System, HolliAS Asset Management System, Operator Training System, Batch Application Package, Advanced Process Control Package (HolliAS APC Suite), Safety Instrumentation System (SIS), railway signaling system of Train Control Center, Automatic Train Protection, Subway Supervisory and Control platform, nuclear power non-safety automation and control system HolliAs-NMS DCS and other products. It serves customers in the industrial, railway, subway, nuclear power, and mechanical and electronic industries in China, Southeast Asia, India, Europe and the Middle East.

FINANCIAL RATIOS  of  Hollysys Automation Technologies (HOLI)

Valuation Ratios
P/E Ratio 19.7
Price to Sales 3.1
Price to Book 1.9
Price to Tangible Book
Price to Cash Flow 19.4
Price to Free Cash Flow 20.6
Growth Rates
Sales Growth Rate -20.6%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -50%
Cap. Spend. - 3 Yr. Gr. Rate -12.9%
Financial Strength
Quick Ratio 37
Current Ratio 0.7
LT Debt to Equity 3.2%
Total Debt to Equity 4.3%
Interest Coverage 0
Management Effectiveness
Return On Assets 6.7%
Ret/ On Assets - 3 Yr. Avg. 9.7%
Return On Total Capital 9.4%
Ret/ On T. Cap. - 3 Yr. Avg. 14.6%
Return On Equity 9.9%
Return On Equity - 3 Yr. Avg. 15.6%
Asset Turnover 0.4
Profitability Ratios
Gross Margin 32.4%
Gross Margin - 3 Yr. Avg. 36.9%
EBITDA Margin 20.8%
EBITDA Margin - 3 Yr. Avg. 24.7%
Operating Margin 13.9%
Oper. Margin - 3 Yr. Avg. 20.1%
Pre-Tax Margin 19.2%
Pre-Tax Margin - 3 Yr. Avg. 22.7%
Net Profit Margin 16%
Net Profit Margin - 3 Yr. Avg. 18.6%
Effective Tax Rate 16.9%
Eff/ Tax Rate - 3 Yr. Avg. 15.9%
Payout Ratio 17.4%

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 $432 million for the last fiscal year's total revenue generated by Hollysys Automation Technologies. The default revenue input number comes from 2017 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 47.2%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $172 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 10.8%.

Life of production assets of 14.3 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 50%. 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 - $724 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 60.139 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 $1.4 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]
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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