HALMA (HLMA)

Although China's contribution to Halma's sales is still small, it is growing fast. In the six months to end-September, revenue from China surged 38 per cent to £4.3m. True, Halma's finance director, Kevin Thompson, says that the Chinese authorities are still setting the rules that will demand, say, the installation of fire and smoke detectors in new buildings and will standardise the quality of drinking water. But Halma's management is confident that spending aimed at establishing its gas and fire detection and industrial safety products in China should soon start to pay off. Besides, Halma is helped by western companies setting up joint ventures in China - they often demand the same levels of safety as they employ in their plants back home.

Halma's bosses are now looking at establishing more manufacturing facilities in China to serve the whole Asia Pacific region, not just for health and safety equipment, but also for other group products, such as underwater technology. They took a step in that direction with the acquisition in October of Sonar Research & Development, which makes solid-state sonars for use under water. Halma will use Sonar to make low-cost gas detectors for the Asia Pacific market, and to provide components to go in instruments made by another subsidiary, Tritech International, which makes acoustic sensors, video cameras and mechanical tooling equipment for underwater use.

While Asia should provide its big push in the coming years, Halma is still seeing decent demand in its established markets in Europe and the US. Additionally, management is confident that this will continue through 2008 and beyond. That, say Halma's bosses, is because the group's products are based on advanced technology and are often the market leader in their specialist field. Indeed, in some cases, Halma is the dominant world supplier.

However, with specialist technologies come heavy spending on research and development (R&D). This has pegged back Halma's profits growth and had a bigger effect on cash flow. In 2006-07, after adding back £3.9m-worth of capitalised R&D, spending on product development rose 13 per cent to £15.3m. Halma's bosses say this level of spending is necessary to ensure future growth.

Another negative is that, like many engineers with global businesses, Halma is exposed to many currencies. Over a quarter of its sales are made in the US and the falling dollar - plus the effect of a softer South African rand - cut three percentage points-worth of growth from first-half profits for 2007-08.

Nevertheless, City analysts like the shares. Stockbroker Cazenove thinks it is reasonable that they should be rated a touch higher than average for shares in the electrical equipment sub-sector because of Halma's defensive qualities - its broad spread of customers whose need to buy is often driven by legislation. This also helps to give the group some pricing power.

Halma has a history of making bolt-on acquisitions. In addition to a balance sheet that's almost debt-free, it has a £60m five-year debt facility, so Cazenove believes that it could muster up £200m for a deal. More likely, however, management will stick to the small deals that have usually served it well enough. These, combined with the potential of internal growth, make the shares a good long-term buy.

BULL POINTS:

• Strong growth prospects in China

• Broad range of customers

• Leading position in many markets

• Sound balance sheet

BEAR POINTS:

• Exposed to dollar and rand

• High cost base due to R&D spending

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