Ladies and gentlemen, thank you for standing by, and welcome to the Hollysys Automation Fiscal 2012 Second Quarter ended December 31, 2011 Earnings Conference Call. [Operator Instructions] Please be advised that this conference is being recorded today, February 21, 2012. I would now like to hand the conference over to Ms. Jennifer Zhang, the Investor Relations Director of Hollysys Automation Technologies. Thank you. Please go ahead, Ms. Zhang.

Good day to everyone, and thank you for joining us. Our speakers today will be Dr. Changli Wang, CEO and Chairman of Hollysys Automation Technologies; Ms. Herriet Qu, CFO of Hollysys; and myself, the IR Director of Hollysys. Before we get started, I would like to remind everyone that this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical facts, including statements relating to the expected growth of Hollysys' future product introductions, the mix of products in future periods and future operating results. Such forward-looking statements, based upon the current beliefs and expectations of Hollysys' management, are subject to risks and uncertainties, which could cause actual results to differ from the forward-looking statements. The following factors, among others could cause actual results to differ from those set forth in these statements: business conditions in China and in Southeast Asia, continued compliance with the government regulations, legislation for regulatory environments, requirements for attendees, and also affecting the businesses in which Hollysys is engaged, decision or changes in company incentive programs, potential trade barriers affecting international expansion, fluctuations in customer demand, measurement of regulatory growth and transition to new markets, intensity of competitions from or introduction of new and superior products by other providers of automation control technology, timing approval and market acceptance of new product introductions, general economic conditions, geopolitical events and regulatory changes, as well as other relevant risks detailed in Hollysys' filings with the Securities and Exchange Commission. The information set forth herein should be read in light of such risks. Hollysys does not assume any obligation to update the information discussed in this conference call or in its filings. Under this call, the CEO and Chairman of Hollysys, Dr. Changli Wang, will provide general overview of our business, including some highlights for the quarter. And then the CFO of Hollysys, Ms. Herriet Qu, will discuss our performance from financial perspectives and financial outlook of fiscal year 2012. Both Changli and Herriet will be available for the Q&A session afterwards. Please note that all amounts noted in this conference call will be in U.S. dollars, unless otherwise noted. I'd now like to turn the call over to Dr. Changli Wang. Please go ahead, Dr. Wang.

Okay, thank you, Jennifer, and greetings to everyone. We are very pleased to report another solid quarter with solid financial and operational performance amid the unfavorable external economic conditions and I feel excited about our achievements and the breakthroughs in several sectors. Here, I would like to take this opportunity to discuss some key events that took place in this quarter. Industrial Automation business is aside [indiscernible] continues its strong growth momentum, thanks to our strategic change of total solution proposition and sales force and network -- sales network expansion. We are pleased that we won 6 660 megawatts ultra-supercritical thermal power generating units in aggregate in 2011 in high-end thermal power automation and control markets, which were used to be dominated by multinational corporations. We will continue to leverage on our proprietary technology and total solution approach to further penetrate into high-end segments of Industrial Automation and consolidate low-end to mid-end markets through expanded sales and service network in the country. In our High-Speed Rail segment, we delivered satisfying financial results despite such high-speed rail environment in China for this quarter, which demonstrates the strength and the breadth of our high-speed rail businesses. We signed a contract of approximately $4.2 million to supply our 200 to 250 kilometer per hour high-speed rail ATP equipment to the Ministry of Railways of China, while the new contract tender with China's high-speed rail was considered to be quiet at the time. Given the intense demand for high-speed rail build-out with China's large population transportation demand and the limited land-use resources together with approximately 15,000 kilometers of high-speed rail tracks currently in construction in China, which will require signaling systems to be installed prior to commercial operation. We believe there is a huge market potential in High-Speed Rail segment market for leading players like Hollysys to realize and capture. Besides, we have obtained European Safety Standard Certification Level 4, the SIL4, for our proprietary signaling products, such as Automatic Train Protection or ATP; Balise Transmission Module, BTM; Line-Side Electronic Unit, LEU; Temporary Train Control System, TSRS; Vital Computer platform, HVC; Train Control Center, TCC; and an interlocking system. With this whole product suite of our proprietary High-Speed Rail Signaling Systems development completed, and have received European Safety Standard Certification, Hollysys is poised to explore the vast international railway market and achieve fruitful results to further create value for our shareholders. In our subway business segment, we are excited to winning the competitive bid to supply our Main Control Systems, MCS, to Hong Kong MTR Corporation for Hong Kong section of the Guangzhou-Shenzhen-Hong Kong Express Rail Link, the XRL, valued at approximately HKD 65.6 million, approximately $8.4 million. This is the first international bid of our proprietary SCADA system with the MTR Corporation against other multinational companies, which is a strong validation of our proprietary technology and implementation capabilities and a remarkable milestone of distributing our footprint in the international subway arena. We have achieved the breakthrough of international market and have laid a solid technology foundation and accumulated in-depth implementation knowledge and experiences. We are expecting more international contracts in pipeline. In addition to the Hong Kong MTR contract, we are also excited of the contract win with Beijing Metro Construction and Administration Corporation to supply the integrated surveillance control and data acquisition system, the SCADA, to Beijing Subway Line 14 at $ 18.8 million. We attribute this important record to the numerous successful applications, such as many Beijing Subway Lines and our strong technology capability, which has been able to stay ahead of competition, while developing along with the industry. We are also very pleased to see continuous smooth integration with our wholly-owned subsidiary, Concord Corporation Pte. Ltd. In this quarter, Concord successfully signed a contract with Sendan International Co., Ltd. to provide electrical, instrumentation and control installation work for Rabigh Power Plant 2 in Rabigh, Saudi Arabia at approximately $16.9 million. This is the first sizable contract win by Concord after the acquisition, and we are glad to see not quite that Concord is continuously winning new business, while its integration into Hollysys has been well underway in both new product development and the business development. We believe the combination of Concord's customer base and the industry know-how with Hollysys' proprietary technology and the products will pave our way to broader market space of rail and industrial automation sectors in Southeast Asia and the Middle East. Another major event took place in this quarter is that we announced the CFO departure and appointment of CFO's replacement. We sincerely appreciate our former CFO, Mr. Peter Li, for his contributions as Hollysys' CFO, and extended our best wishes to his new endeavors. Meanwhile, we are very pleased to see Ms. Herriet Qu, our former Financial Controller, is internally promoted to Chief Finance Officer of Hollysys, overseeing the overall corporate financial management, who has been with the company for more than 4 years, with MBA degree from Oklahoma City University. After this smooth transition of CFO, the transition of the CFO, together with the appointment of a Corporate Senior Executive COO, Mr. Jianfeng He, and the Senior VP Business Development, Mr. Baiqing Shao, our senior management team will remain our strategic vision and continuously devote ourselves into Hollysys' future development and growth to better serve our clients and the shareholders' best interest. With that, I would like to turn the call over to Ms. Ashley Chen, our Investor Relations Manager, who will read the financial results analysis for this quarter on behalf of our CFO, Ms. Herriet Qu. Okay.

Thank you, Dr. Wang, and hello to everyone. In a nutshell of Hollysys' financial and operational results for the fiscal year 2012, second quarter ended December 31, 2011, the company reported robust financial results. Total revenue increased by 8% to $80.3 million from $74.4 million in the prior year period. Amount total revenues, revenue from integrated contracts increased by 6.6% to $75.9 million as compared to $71.2 million for the same period of prior year. The company's integrated contract revenue by segments were: $44.5 million or 58.6% from industrial; $24.3 million or 32% from rail; and $7.1 million or 9.4% from overseas. The Industrial Automation revenue of $44.5 million for the 3 months ended December 31, 2011, is consisted of Industrial Automation revenue of $41.5 million and nuclear revenue of $3 million in the previous breakdown categories. And the Rail Transportation revenue of $24.3 million for 3 months ended December 31, 2011, is consisted of high-speed rail revenue of $17.5 million and Subway Automation revenue of $6.8 million. As a percentage of total revenues, overall gross margin was 38.5% for the 3 months ended December 31, 2011, as compared to 36% for the same period of last year. The gross margin for integrated contracts and product sales were 36.4% and 73.4% for the 3 months ended December 31, 2011, as compared to 35.7% and 42.1% for the same period of last year, respectively. The gross margin increase was mainly due to our fewer higher-margin projects and a portion of projects of high-speed rail being recognized in this quarter. For the 3 months ended December 31, 2011, selling expenses were $8.1 million compared to $7 million quarter-over-quarter, and a $5.4 million year-over-year. The increase was mainly due to the company's expanded sales network and increased selling staff. As a percentage of total revenue, selling expense were 10% compared to 8% quarter-over-quarter and 7.2% year-to-year. G&A expenses. Excluding noncash stock-based compensation expenses, G&A expenses were $7.4 million for the quarter ended December 31, 2011, representing an increase of $2.7 million or 56.7%, as compared to $4.7 million for the same period of prior year. The increase was mainly consisted of an increase of $1.9 million contributed by the newly acquired or set-up subsidiaries and an increase of $0.5 million in allowance for doubtful accounts. As a percentage of total revenues, G&A expenses were 9.2% and 6.3% for 3 months ended December 31, 2011 and 2010, respectively. Including the noncash stock compensation costs recorded on a GAAP basis, G&A expenses were $7.5 million and $4.8 million for 3 months ended December 31, 2011 and 2010, respectively. R&D expenses were $6.8 million for the 3 months ended December 31, 2011, compared to $6.4 million for the same period of last year. As a percentage of total revenue, R&D expenses were 8.6% and 8.7% for 3 months ended December 31, 2011 and 2010, respectively. The VAT refunds and government subsidy amounted to $13.5 million for 3 months ended December 31, 2011, as compared to $5.2 million for the prior year period, representing an increase of $8.3 million or 159.4%. According to the accounting policy, the company only recognizes the VAT refunds upon the completion of government approval process. In this quarter, the PRC government approved and granted total VAT refunds of $11.8 million to the company, of which $5.3 million was related to the sales during January to June 2011, and the remaining $6.5 million was related to the sales during July to December 2011. The income tax expenses were $1.3 million for 3 months ended December 31, 2011, compared to $1.7 million for the prior year period. The effective tax rate was 6.2% and 10.3% for the quarter ended December 31, 2011 and 2010, respectively. The low tax rate for this quarter is mainly due to the large sum of the VAT refunds recognized, which was a nontaxable income. For the 3 months ended December 31, 2011, the non-GAAP net income to Hollysys, excluding noncash stock compensation cost, was $20.4 million or $0.37 per diluted share, based on 55 million shares outstanding. This represents an increase of $5.4 million or 36.4% over the $15 million or $0.27 per share based on 54 million shares outstanding recorded in the prior year period. On a GAAP basis, net income attributable to Hollysys was $20.3 million or $0.36 per diluted share, representing an increase of $0.09 or 33.3% over the $14.9 million or $0.27 per share reported in the prior year period. Hollysys' backlog, as of December 31, 2011, was $332.1 million, compared to $300.1 million on September 30, 2011, and $288.5 million on December 31, 2010. The detailed breakdown of the backlog by segments are: $124.4 million or 37.5% from Industrial Automation; $170.4 million or 51.3% from Rail Transportation; $37.3 million or 11.2% from Overseas. The net cash provided by operating activities was $57.8 million for the 3 months ended December 31, 2011, achieving the historical high, mainly due to the accounts receivable collection of $37.2 million and VAT refunds of $11.8 million received this quarter. Including investing and financing activities, the net -- total net cash inflow for this quarter was $54.4 million, mainly due to a cash outflow of $6.9 million for the repayment of short-term loans and a cash inflow of $44 million for the advanced receipt of disposal of 10% equity interest in Beijing Techenergy. As of December 31, 2011, Hollysys' cash and cash equivalents were $130 million compared to $75.5 million on September 30, 2011. For the 3 months ended December 31, 2011, days of sales outstanding is 150 days, as compared to 104 days year-over-year and 138 days quarter-over-quarter. And inventory turnover was 54 days as compared to 60 days year-over-year and 51 days quarter-over-quarter. And that's for the financial statements.

Thank you, Ashley. At this time, we'd like to open up the Q&A session. Please note that for Chinese-speaking participants we can answer this Q&A in Mandarin, and we will provide translation. [Chinese] Operator, please.

[Operator Instructions] And you have a question from the line of Saiyi He of Macquarie Capital.

[Chinese] This is Saiyi from Macquarie. [Chinese] I have 2 questions. The first question is that I noticed the significant increase in our company's gross profit margin and also significant reduction in our revenue exposure to high-speed rail. And we all know historically, you were able to generate higher gross profit margin from high-speed rail on revenue sales. And has there been a significant increase in gross profit margins from the Industry Automation segment that caused the expansion in gross profit margins? That's my first question. My second question, I would like to know if you can provide a more detailed breakdown of your order backlog, especially in what percentage of that currently come from the Overseas or the Concord exposure?

Okay. For the first question, the gross margin. The gross margin of a Hollysys business is a year-to-date so we're rated, because of the business structure. And so just to mention, [indiscernible], our Railway business has higher-margin and Nuclear has the highest, Railway has the second-highest. And Industrial Automation is on the average and the Subway business is -- has the lowest. But this quarter, we have created a very high gross margin because, first of all, the business structure is very good, and second, we have increased the Subway margin before, as I've mentioned many times, because we've announced -- I mean, when you order contracts, because these have contracts, but we have to evaluate that each contract, so that's a guarantee, the margin is coverage. And the second is, we have been working very hard to maintain our industrial automation segment with gross margin stable, at least. And for this quarter, some of the contract of the rail is really good. So in that case, the overall gross margin is higher than the previous times. But this not indicating that, in the future, we will maintain this 38.8% -- 38.9% because it is [indiscernible], I mean, right away, a little bit up and down. But we're trying -- we are trying to maintain the gross margin on the average, about 35%, at least, that's our target. And about the backlog breakdown, as we can see, that the Industrial side, the Industrial Automation part is $124.4 million for this quarter, and the Rail Transportation is $170 million, and Overseas is $37.3 million for this quarter. So as the overseas is comprised of 11.2% of the whole backlog. Is that okay, Saiyi?

I want to ask, if you don't mind me, I just summarize the answer you gave. So basically, the railway margin was significantly higher, even though the revenue exposure was lower, it was able to help would you lift the overall margin and our Industrial Automation margin was stable. For the second part, the reason I asked about overseas exposure, I wanted to ask is all of our overseas exposure from Concord, right?

Yes, mainly. Almost all of it from Concord.

Your next question comes from the line of Paul Gong of Citigroup.

Actually, I have 2 questions. The first question is about the competitive landscape of metro [indiscernible] market, as well as starter markets. Could you please give us some color on, like how many payers are there in Chinese market for metro [indiscernible] and Metro SCADA? And who are the strongest? And also, previously we heard Unisys has formed a JV with CSR, China Southern Locomotive and Rolling Stock. They want to enter this market and what's the latest, I'd say, do you feel any like competition from them as well? This is the first question. And the second question is on your overseas opportunities. I would have noticed that you have been working hard to try to explore the overseas markets. Could you please give us some color on like where do you start in terms of the products and the geographic locations? Where do it targets? I'll stop here.

Okay. And for the first question, about the metro market, in China, the metro market is a very -- it's very promising. At the same time, it's very confusing. So we have been very hard, at the beginning, first of all, the first SCADA system, that means the automation control system, announces that now signal system was designed by Hollysys in the year 2000. And we delivered that, and we created that market in China, almost. And out of that, a lot of competitors joining in, and we have been improving our systems. At the same time, we're trying to enlarge our percentage of our proprietary systems. First of all, now the total platform was designed by Hollysys. It's 100% owned by Hollysys. And the second part is, for the beginning Line 14, we have replaced the original [indiscernible]. It's our own proprietary PRP systems, which composed a very big part in the contract and we have to increase the amount. And also, some other small composition -- components, we have also, trying very hard to replace them with our local products. Now -- and about the competition scenario in this area in China, there are a quite few players including [indiscernible], who’s very strong and also very good. We respect that competitor very well. And also there are some others, I think around 5 of them. But most of the others, they do not win a lot of contracts per year, and I'm sure they will be our very strong competitor for us in the future in this area. And for the signal part of subway systems, so far, most -- the majority of the project was dominated still by the multinational companies like the Siemens, like Hyosung, and the other, I think it's Akai, now belong to [indiscernible] and a few others. Now the Beijing [indiscernible] have created a company doing this local signal systems. They have studied a few lines, a couple of lines and we'll be happy to see their results as well. And so, the signal competition now is not that fierce of the SCADA systems. And there's no, so far, fully proved local product progressed product yet, and we feel have opportunity. And as you mentioned, Unisys has set up a joint -- JV international group. And I'm sure there's an opportunity for them, and -- but still too early to see how competitive they will be in the, I mean, in the market, because it depends what the product level of Unisys, and also it depends on the experiences [indiscernible] can deliver in this area. But still, as I said, the admin should be a competitor in this field. And for Hollysys, we have, first of all, we have transferred our technology from our high-speed rail systems, which have been fully demonstrated in the rail field. And also we have designed a system so that they're fully proved that the European trade examiners so that our system can not only working for the Chinese market, but also for the international market. Our first target, as you just mentioned, I'm trying very hard with our Concord and also with our local team, which are the Chinese team, that we are touching the overseas markets. First of all, as part of the field markets, opportunities for us in the Asian area, and which one of them I do not want to mention now, because we are working on them, and it's quite sensitive at this time, I don't want to speak that, to say that now. And also in the future, we are working some of the upgraded systems. So far, there are many, many subway systems in the world, in the developed world, that has been in operation for many decades. And most of the systems, they need to be updated and redesigned, I mean, with the new systems. We are, in fact, confident that our signal systems were designed with the most modern technology available now. So I'm sure in the future, our systems will be, after we've finished all the 40 certifications, we haven't done that yet. We are planning to fix that by the end of this year, this calendar year. And after that, I'm sure our system technically, and in the price level, are quite competitive in the international markets. And we were trying newest events, but still too early to say too much about it now. But first of all, as I said, we are targeting the Asian market first, and then we will explore the other developing recycling systems markets, okay, Paul?

Yes. Just a quick follow-up, I seem to recall, you have once won the Metro signaling system on Beijing-Changchun line. What's the latest progress there and what percentage of the work has been finished? Could you please give a little bit idea on that?

Okay. For the in trucking [ph] line, we supply part of the system, the signal system only, because at that time, most of the -- our platform hasn't proved it yet, so we integrated some system platforms from Hitachi and Samsung's other partners. And we do the system integration, and also we did the system designing plan. Also, the installation and testing for the operation of the whole system. So by that, we gained a lot of experience. We -- by that product, out of that project, our engineers start, almost to fully understand, I mean, the rail operational requirements. So that's a very -- and a valuable experience for us.

Okay. So that project has been pretty completed, right? But just to..

Already has, in operation now.

Your next question comes from the line of Chapman Deng of JPMorgan.

I just got 2 questions. The first one is, I would like to get your view on China overall Industrial Automation market outlook. And in particular, what kind of revenue growth do you expect for Hollysys over the next 2 to 3 years? That's the first question. And the second question, I would like to get some update on China high-speed rail new order? What's your revenue growth guidance for that segment for 2012 and '13?

Okay. For the first question, I'm very excited about it because today, I had a whole day meeting -- I mean our COO, [indiscernible] and me, had a whole day meeting with our regional managers over the Industrial Automation. Although -- I mean, we have -- because we made our -- made up our business development plan of this year before the -- I mean the start of this year. And we are being examined, they -- results from the market for this couple of -- more than a month time. And also this time, I've been discussing for all the regionals, we evaluate -- each regional manager about their markets. And so far, although on the general, the Chinese Industrial Automation market is not growing at a very satisfactory growth rate, but we are very confident, I mean, our confidence from our regional managers because we are controlling the operation of each of the business segments. And upon their response that they are very confident still, to maintain our continual growth of Industrial Automation. If we have all agreed that, if the market growth rate, the general market growth rate is very satisfactory and are very optimistic and we are gaining -- or we are going to making a bigger progress. But if the market is not that optimistic, then we are trying very hard to gain market share, in a way, to maintain our business growth. And also, to improve the scope of our suppliers and customers. That's our strategy, I've mentioned it many times. So still, after today, I'm still very confident about the future development of this business segments. Of the second question, about Chinese high-speed rail, I feel so sorry that, I mean, we still haven't got any new contracts yet, although I -- we keep very optimistic about the long-term market. Because in China, as you know that until the spring festival comes, I -- also, I saw some of the people from the MOR, and this will encourage me to keep -- okay, because, I mean, they are still working on more projects in the future. Because this is a Chinese situation that it's a requirement for a large scale high-speed rail network, I mean, it's very necessary, because, especially for this spring festival, you can see that, it's very difficult to get [indiscernible] tickets, railway tickets, for the traffic. So it's a problem that's still there. Also, it's our state policy, in the future, to construct a very sophisticated, high-speed rail network to guarantee the techno transportation. So in the long term, there's no problem. For that, we are confident. And for the short term, that's a problem because, as I mentioned, as I told you, Chapman, I'm sorry to say that, a couple of months -- a month ago, you asked me about this question. I told you that we have to wait until the end of this rush transportation period of the spring festival. And now it's finished, but still, we haven't got a contract rewarded yet -- awarded yet. We consolidate the people from the high-speed rail. And although, as I said, they told us, they encourage us to keep our -- confidence in the construction. And also for Hollysys, after this fully inspection, after -- I mean, after the July 23 accident, Hollysys is bringing up anything, I mean, so the people there have more confidence in our status and they are very pleased with our quality control and the safety of course, manning the procedure. But for them, now, first of all, after the infraction, they have removed some of the personnel from some of the positions. So they need to adjust some of the personnel over the collisions, and especially who taking care of the signaling segments. The second is, after the infraction of this critical accident, the authorities, they have found that they need to improve the safety guaranteed procedure in a way, how to evaluate the FAT [ph] for example, to guarantee, to make sure that, in the future, all the signal systems are fitting, so that -- I'm sure, they are working very hard at this now. But still, as I said, I cannot speak too much -- in a couple of weeks. But still, as I said, in the long run, we are still confident of the market. Okay, Chapman?

And your final question comes from the line of Mark Tobin of Roth Capital Partners.

First, looking at the guidance and, I guess, the -- also looking at the VAT refunds that you had during this quarter, can you give us a sense of what level of VAT refunds you expect for the full year? Or what's assumed within your guidance?

Okay, Mark. I would like Harriet to answer your questions, okay?

Okay.

[Chinese] Mark, to answer your question, you should understand the VAT refund we booked at this quarter, it takes about 30% of our total net income guidance, which is $57 million to $58 million. And for the full year, VAT refund guidance is around $90 million, which include $11.8 million, which we are waiting for in this quarter. And of which, $5.3 million was related to staff, to sales during January to June, and the remaining $6.5 million was related to the sales of the first quarter of fiscal 2012. And there's about approximately $7 million to $8 million of the VAT refund is coming in the second half of this fiscal year.

Okay. And then one follow-up. Looking -- I guess, excluding the VAT refunds and government subsidies that you have, can you discuss your target operating margins? In particular, we saw SG&A, as well as R&D expenses go up. And understandably so, because you're investing in your business. But I guess, can you discuss kind of what your target margin profile is, excluding the refunds and subsidies?

[Chinese] Mark, our G&A itself, and R&D expenses for the second half of this fiscal year is going to stay at, at probably the same level as the first half year's. And speaking of gross margin, you have gross increased significantly than the other previous periods. So exclude the VAT result and government subsidies, we expect there's still 12% margins from -- more than 12% margins for this year.

Okay. And when you say stay at the same level, do you mean on percentage of revenue terms, or in dollar terms?

[Chinese] Both.

Thank you, everyone, for joining us on the call today. If you haven't got a chance to raise your questions, we'll be pleased to answer them through full out contacts. We look forward to speaking with you again in the near future. Thank you. [Chinese]

Thank you.

That does conclude our conference for today. Thank you for participating. You may all disconnect.