HOLI - Hollysys: Umpteenth Time's A Charm

Summary

• Hollysys Automation Technologies Ltd. is on the verge of entering a take-private deal. A deal could be valued as high as $29/sh.
• The buyout story up until this point suggests a binding transaction will materialize between Hollysys and the company's CEO.
• There is a ~50% upside if a deal is reached under the reported terms.
• Therefore, speculative investors should consider adding HOLI to the portfolio.

Hollysys Automation Technologies Ltd. ( HOLI ) is on the verge of entering a take-private deal? The latest news makes it seem so. Seeking Alpha, crediting Reuters, reported that HOLI's current CEO is closing in on making an offer to take the company private for $29/sh. That is a whopping ~50% premium over today's price. While investors have heard this story before ( see previous articles here and here ), this leak seems like a plausible ending to the buyout saga that is HOLI.

Synthesized Buyout Story

December 2020 , HOLI received a take-private proposal from CPE Funds Management Limited, Ace Leads Profits Limited, and Baiqing Shao, former HOLI CEO, ("Shao Consortium") to acquire the company at $15.47/sh in cash.

June 2021 , the Shao Consortium raises proposal to $17.10/sh in cash.

July 2021 , Mr. Changli Wang, HOLI's founder and previous CEO, and Ascendent Capital Partners (“Emerald Consortium”) submitted a non-binding proposal to take HOLI private for $23/sh in cash.

September 2021 , Zhejiang Longsheng Group Co., Ltd. and Loyal Valley Innovation Capital Limited ( “Longshen Consortium“), presented a take-private proposal for $24/sh in cash.

January 3, 2022 , Changli Wang was reappointed as HOLI's CEO and nominated to the board.

January 24, 2022 , Recco Control Technology Pte. Ltd. and Dazheng Group Investment Holdings Company Ltd., ("Recco Consortium") announced it had previously submitted on December 3, 2021 a take-private proposal for $25/sh in cash. The consortium stated in its release, "[o]ver the last seven weeks, we have attempted to engage with [HOLI], your financial advisor and legal counsel in friendly discussions... but so far there has been no substantive progress, and the Proposal has not been made public". Also in its release, the consortium disclosed that it already had debt financing arranged through the Bank of China.

Also on January 24, 2022 , HOLI board decides to suspend its evaluation of all buyout proposals citing it "believes [HOLI] possesses significant value creation potential with its leading position in the automation industry, and that it is important for the Board and the management team to focus on strengthening and optimizing the business operations".

March 11, 2022 , TFI Asset Management Ltd. joins the Recco Consortium.

March 15, 2022 , Bloomberg reports that Beijing Infrastructure Investment Co., the state-owned operator of Beijing’s railway and subway, had " preliminary discussions " to take HOLI private for ~$1.9b (or ~$31/sh ).

April 2022 , HOLI disclosed that CEO Wang purchased 1,055,000 ordinary shares in the open market.

July 2022 , the Recco Consortium, joined by Great Wall Capital Co., reaffirmed its $25/sh in cash take-private proposal. In its release , the consortium stated:

the subsequent announcement by [HOLI] to suspend evaluation of all unsolicited buyout proposals and the board's continuing non-engaging with the consortium is not in the best interest of Hollysys' shareholders, especially in light of the attractive premium... as well as the management's inability to increase shareholders' value.

September 2, 2022 , Reuters reported that CEO Wang received endorsement from the municipal government and is finalizing financing to take HOLI private at $29/sh . According to the article, Wang, "acting under the local government's guidance, has joined hands with a Beijing-based state firm for the potential deal" and was close to securing financing.

Imminent Buyout Theory

The thesis is quite simple really. Changli Wang genuinely wants to acquire HOLI and is in the home stretch of solidifying a deal. After the company received the $24/sh Longshen Consortium and the $25/sh Recco Consortium proposals, which were both superior to his own $23/sh proposal, Wang moved to reinstitute himself as CEO of the company in order to stymie further buyout progression. On the same day that the $25/sh proposal became public (which was concealed from investors for 7 weeks!), Wang persuaded HOLI's board to publicly announce it was suspending evaluation of "all unsolicited buyout proposals". By doing so, he gave himself time to arrange a proposal that would be superior to the increasingly competitive bids for the company.

Combined, the Bloomberg and Reuters reports appear to confirm this theory. Bloomberg reported that a state-owned Beijing entity was interested in acquiring HOLI for ~$31/sh, and there were discussions held between the two parties. Fast forward to the Reuters report confirming that Wang is indeed working towards a proposal and has received endorsement from local authorities by agreeing to partner with a Beijing state-firm (probably the same firm cited in the Bloomberg report) to take HOLI private. Moreover, Wang and his consortium are closing in on securing a $1b+ loan to close the transaction.

The Bloomberg and Reuters reports tie-in nicely together and provide extra credibility to a deal closing considering they likely have differing sources of information.

Risk/Reward

The risk is that inevitably a deal will not coalesce and HOLI will remain undervalued. Before today's headline, HOLI was trading at less than 10x TTM earnings, with a substantial net cash position. The market has very little trust for HOLI's management, rightfully so considering the buyout fiasco over the past nearly 2 years, and it's unlikely value will be unlocked without some type of change-of-control transaction. There is also the geopolitical risk with owning a U.S. exchange-traded Chinese stock.

With that said, the upside is attractive, representing a ~50% return if a deal materializes at $29/sh. Given the events described above, a transaction appears imminent. Therefore, speculative investors should consider adding HOLI to the portfolio.

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