(*Disclosure: I am short.)
Hollysys is a Chinese company that designs high-tech stuff. Interestingly enough, they were able to grow revenues, profits, and operating cash flow without having to increase capex. See the chart on the left from page 31 from the latest investor presentation:
(*Ignore the typo highlighted by the red arrows and the green line.)
Looking at the capex, we can see the downward trend over the past 6 years. Despite the lower capex spending, their state-of-the-art production line continued to be state-of-the-art. Here is page 23 of the investor presentation:
These guys must be really good at getting deals on cutting-edge manufacturing equipment. Not only that, their in-house production has “enough capacity for accelerated growth” despite the low level of capex spending.
Brilliant capital allocation
These guys are so good at what they do and are swimming in so much cash that they can afford to borrow money and pay interest on it. Refer to page 31 of the investor presentation shown at the beginning of this post. The Hollysys guys are so much smarter than I am that I do not understand their capital allocation strategy at all. It is too brilliant for my puny brain to comprehend.
Not just China
These guys aren’t just good at making money in China… they also bought companies outside of China and seem to be really good at making money outside their home country. They aren’t limited by their core competencies. They are good at this “platform company” thing.
I also have to take some time to admire Hollysys’ cost-cutting culture. Whereas a company like Berkshire Hathaway has its subsidiaries actually update their website and talk about their new owner (e.g. Google site search for Pampered Chef), Hollysys’ Bond M&E (Google site search) and Concord (Google site search) subsidiaries did not update their websites to the same degree. Hollysys’ cost cutting is far savvier than Berkshire Hathaway’s because they minimize web design costs.
Granted, I understand that Berkshire Hathaway’s subsidiaries like to associate themselves with Berkshire Hathaway so that that Berkshire Hathaway brand rubs off on them. Hollysys arguably has a valuable brand too, as discussed on page 22 of the latest investor presentation.
So why doesn’t Hollysys associate its brand with its subsidiaries?
I would say that this management team is savvy and sophisticated. They likely already considered the benefits of associating its subsidiaries with the Hollysys brand name versus the web design costs. While Hollysys’ labour force is cheap, web design is not. God forbid you pay a company like hollysys.investorroom.com for web design and IR site services- a service like that would cost an arm and a leg in comparison to updating 2 subsidiary websites. Keeping costs contained is one of the ways this management team maximizes shareholders’ return on capital. While this company has 6,000 customers, 20,000 projects, and 3,600 employees world wide… management likely realized that updating the subsidiaries’ websites to reflect the Hollysys brand would not generate a positive ROI. Warren Buffett is clearly an old fogey who isn’t as sharp as Mr. SHAO Baiqing.
*Disclosure: This Glenn Chan guy is short HOLI and must be really stupid for shorting the stock.
Links
Hollysys – a blog post inspired by the railway crash – A blog post written in 2011 by this John Hempton guy.
Hollysys: Office Space – A blog post written by this really dumb Glenn Chan guy.
Some company webpage that was updated to reflect the acquisition of Bond and Concord