Ladies and gentlemen, thank you for standing by, and welcome to the Hollysys Automation Technologies Fiscal Year 2013 First Quarter Ended on September 30, 2012, Earnings Conference Call. [Operator Instructions] Please be advised that this conference is being recorded today, Wednesday, the 14th of November 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.

Thank you, and good day, everyone. Welcome to Hollysys Automation Fiscal Year 2013 First Quarter Earnings Conference Call. Today, our speakers 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. On today's call, Changli will provide a general overview of our business, including some highlights for the quarter; and Herriet will discuss our performance from financial perspective and our financial outlook for fiscal year 2013. Both Changli and Herriet will answer questions after their remarks. 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 the 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 government regulations, legislation or regulatory environments, requirements or changes adversely affecting the businesses in which Hollysys is engaged, decisions or changes in government incentive programs, potential trade barriers affecting international expansion, fluctuations in customer demand, management of company growth and transition to new markets, intensity of competition from or introduction of new and superior products by other providers of automation and control system technology, timing approval and a market acceptance of new product introductions, general economic conditions, geopolitical events and the 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 its filings. Please note that all amounts noted in this conference call will be in U.S. dollars unless otherwise noted. And now I'd like to turn the call over to Dr. Changli Wang, CEO and Chairman of Hollysys. Please go ahead, Dr. Wang.

Okay. Thank you, Jennifer, and greetings to everyone. We are pleased to report solid financial and operational performance for the first quarter of this fiscal year. Here, I would like to discuss some key events during this quarter. Industrial automation continued its growth momentum in both revenue and backlog compared to the same period of last fiscal year. Besides our strengthened efforts and the enhanced core capabilities, growth is mainly driven by several factors amid the challenging external environment. Firstly, we continue to take market share in industrial automation by our better value proposition and unparalleled advantage of industry leading proprietary technology, more extensive service network, flexible customization, industry expertise and the total solution capabilities. Secondly, we further segmented industrial automation market into detailed niche sections and found a lot of opportunities and designed customized systems to satisfy clients' specific requirements. Thirdly, we are providing more total solutions for the whole plant's automation and control to address customers' buying behavior change and enlarge our business scope. Lastly, we changed our marketing strategy from hunting for projects to cultivating client base to establish long-term close working relationship with customers. All in all, with our brand name recognition, industry-leading technology, better customization and service capabilities and a better value for money proposition, as well as the vast business opportunities we have envisioned so far, we will continue to maintain the stable and sustainable growth and development of this business sector. In the rail sector, we are glad to see that the expedited high-speed construction will continue to bring more opportunities to Hollysys as one of the 2 major high-speed rail signaling system provider in China. In October, we signed a contract to provide the Line-side Electronic Unit, LEU, and our Balise to Chongqing-Lichuan high-speed rail line, which was another major contract we signed in the past few months. Going into the future, we will take on the ride of another round of China's accelerated high-speed construction and take our fair market share. In the subway sector, we are well on track of the subway signaling system development and the certification according to the international standards, which will be finished by the end of this calendar year. Overseas market will be another exciting growth driven -- driver for Hollysys exciting -- stepping towards internationalization. We believe that with our world-class technology and experienced international team, we will make more exciting achievements in the international market in the future. With that, I would like to turn the call over to Jennifer Zhang, who will read the financial results, our result analysis on behalf of our CFO, Ms. Herriet Qu.

Thank you, Dr. Wang. In a nutshell, Hollysys financial and operational results for the fiscal year 2013 first quarter ended at September 30, 2012, the company reported solid financial results. In this quarter, total revenues increased by 1% to $88.1 million from $87.2 million in the prior fiscal year period. Of the total revenues, revenue from integrated contracts was $82.9 million as compared to $83.5 million for the same period of the prior year. Revenue from product sales increased by 41.6% to $4.2 million (sic) [$5.2 million] as compared to $3.7 million for the same period of the prior year. The company's total revenue by segment was as following: industrial automation, $60.1 million; Rail Transportation, $14.9 million; miscellaneous, $13 million. As a percentage of total revenues, overall gross margin was 34.4% for the 3 months ended at September 30, 2012, as compared to 33.8% (sic) [37.8%] for the same period last year. The gross margin for integrated contracts and product sales were 32.4% and at 66% for the 3 months ended September 30, 2012, as compared to 36.6% and 64.4% for the same period last year, respectively. The gross margin fluctuation was mainly due to the different revenue mix with different margins. In this quarter, selling expenses was $6.6 million compared to $7 million year-over-year, representing a decrease of a $0.4 million or 5.6%. As a percentage of total revenues, selling expenses were 7.5% and 8% for the 3 months ended September 30, 2012 and 2011, respectively. General and administrative expenses, excluding noncash stock-based compensation expense, were $5.8 million for the quarter ended in September 30, 2012, representing an increase of $0.9 million or 20% as compared to $4.9 million for the same period of the prior year, mainly due to an increase of $0.6 million of bad debt allowance. As a percentage of total revenues, G&A expenses were 6.6% and 5.6% for the 3 months ended September 30, 2012 and 2011, respectively. Including the noncash stock-based compensation costs recorded on a GAAP basis, G&A expenses were $6.4 million and $5 million for the 3 months ended September 30, 2012 and 2011, respectively. Research and development expenses were $7.7 million for this quarter compared to $6.1 million year-over-year, representing an increase of $1.6 million or 26.4%. Compared to the same period of the prior year, the increase was mainly due to the company's increased R&D activities. As a percentage of total revenues, R&D expenses were 8.7% and 7% for the quarter ended September 30, 2012, and 2011, respectively. The VAT refunds and government subsidies amounted to $4.6 million for the 3 months ended September 30, 2012, as compared to $0.4 million for the comparative prior year period, representing an increase of $4.2 million. No VAT refunds were recognized during the quarter ended September 30, 2011, as the VAT refunds policy was undetermined by then, and all the VAT refunds for the whole calendar year 2011 was recognized during December quarter of fiscal year 2012. The income tax expenses and the effective tax rate were $2 million and 11.4% for this quarter as compared to $1.9 million and 12.7% for the same year -- same period last year. In this quarter, the non-GAAP net income attributable to Hollysys, excluding noncash stock compensation cost, was $15.8 million or $0.28 per diluted share based on 56 million shares outstanding. This represents an increase of $2.9 million or 22.7% over the $12.9 million or $0.23 per share based on 55 million shares outstanding reported in the prior year period. On a GAAP basis, net income attributable to Hollysys was $15.2 million or $0.27 per diluted share, representing an increase of $2.5 million or 20.1% over the $12.7 million or $0.23 per diluted share reported in the prior year period. Hollysys' backlog as of September 30, 2012, was $368.7 million compared to $389.8 million on June 30, 2012, and $300.1 million on September 30, 2011. There is slight decrease compared with last quarter. The large increase compared with prior year was mainly contributed by contracts with Hong Kong MTR Corporation to provide High-Speed Rail Signaling Systems. The detailed breakdown of the backlog by segment is as following: industrial automation, $145.2 million; Rail Transportation, $185.3 million; miscellaneous, $38.2 million. The net cash provided by operating activities was $29.1 million for the 3 months ended September 30, 2012. Including investing and financing activities, the total net cash inflow for this quarter was $24.8 million. The total amount of cash and cash equivalents and time deposits with original maturities over 3 months were $139.2 million, $117.9 million and $75.5 million as of September 30, 2012; June 30, 2012; and September 30, 2011, respectively. Of the total $139.2 million as of September 30, 2012, cash and cash equivalents were $121.2 million, and time deposits with original maturities over 3 months were $18 million. For the 3 months ended at September 30, 2012, days sales outstanding, DSO, is 140 days as compared to 138 days year-over-year and 139 days quarter-over-quarter. And the inventory turnover is 43 days as compared to 51 days year-over-year and 53 days quarter-over-quarter. Given our strong backlog currently on hand and sales pipeline envisioned so far, we reiterate our guidance of fiscal year 2013 with revenue in the range of $385 million to $410 million and non-GAAP net income in the range of $63 million to $67 million unchanged. At this time, we'd like to open up for the Q&A session. Please note that for Chinese-speaking participants, we can also do the QA in Mandarin, and we will provide translation. [Chinese] Operator, please.

[Operator Instructions] Our first question comes from the line of Chapman Deng from JPMorgan.

I actually got 2 questions. The first question is actually on the revenue. I noticed that the Railway Transportation segment work caught a rather sharp decline in this quarter. May I know the reason why? And what's your view on the full year revenue from the segment in FY '13? So that's the first question. The second question is for industrial automation. I also noticed that 30% growth, year-on-year growth, that is actually slightly behind your 20% to 25% growth guidance for FY '13. So what's your view on the industrial automation revenue in the coming quarter? And did you notice any demand pickup in the recent months in China? And then a second question on cash flow. I noticed that on the company, you recorded strong cash flow in the quarter. May I know what was the reason behind and your cash flow outlook for FY '13? So basically, why now -- if you look at the cash balance for the company, whereas around USD 140 million, I think it's actually historical high. So do you have plan to pay a dividend to shareholders? Do you optimize your capital structure? And lastly, what was the optimal cash balance, in your view, for the company to operate?

Okay, thank you, Chapman. Okay, as you noticed that the revenue of this quarter is not that exciting [indiscernible] compared to the -- the main reason is high-speed rail, as you notice, that has dropped a lot because last year, the tragic accident happened and then almost whole year without any new contract. So we have finished the most of the contracts in the last quarter. This quarter, we have some new contracts, but they haven't started yet, some of them. And although we have some work carried on, but the volume compared to this last year, the last -- the same period the last quarter has dropped because at this time of last year, they're still having the last effect of the high-speed -- the Russian construction of high-speed rail at that time so -- and the whole of last year was not very good. But in the future, unfortunately, we have seen that the high-speed rail construction has recovered. We have a few occasions, a lot of discussions with MOR, and in fact, there are quite a lot of work and preparation. So we are quite confident that in the next year, in the whole year period, we are going to recover quite a lot. But how much a lot? Not sure yet, but definitely the better than this time now. And for the industrial automation part, it's not satisfying as well, not because it's not exciting but because the first quarter of last year was -- especially well, is too good. Well, we made a very big jump, in fact, to the quarter last year. And this year, we didn't have that kind of jump anymore, so recovered to normal. And so -- but although the environment is not very good, as I had just read in the letter -- I mean, I discussed just a couple of minutes ago, I told the investors that we still carry on the new very effective policies and the strategies are still working. So consider the whole year, we feel confident that we are going to make a very good progress in the industrial automation segment as well. And for the cash flow, it's true that this quarter, we have done very well. And because from last year, since the environment was not very good, haven't been very good, so we have been working very hard to collect cash because that's very important. So hard work of our people and also, based on our customers' good response, so we have done quite well, in fact, compared these -- the other companies in China in this environment. So we have a lot of cash. And for the usage of the cash, in fact, we have been considering to pay some dividends to investors for quite a while. And in fact, we're still looking for some -- at the same time, we are still looking for some opportunities for acquisition, and we have discussed with the Board of Directors. And -- but under this year, if we cannot find a very good candidate to acquire in the near future, in the next quarter, we may consider to discuss with the Directors and also with our management to pay some spare dividends to our investors. Okay, Chapman?

Yes. Yes, that's very clear. Just one quick follow-up, so for industrial automation, do you maintain the revenue growth guidance of 20% to 25% for FY '13?

We are working for 15% to 20% instead of 20% to 25%. But because -- although we still -- we have found a lot of new opportunities. In fact, the last year hasn't been very well, and we will wait up this 18th Party Congress how much the industry will recover. But of course, we will work very hard to get higher. But year end, I will tend to tell the investors not too optimistic and we work better.

Your next question comes from the line of Saiyi He from Macquarie Capital.

I have 2 questions. One question is about our VAT refund for this quarter and which has recovered to about USD 4.6 million. And we just want to check that this year -- or in this financial year, FY '13, we -- should we expecting around $4 million to $5 million of U.S. dollar, which you refund each quarter? Or do you think that this year is likely to be fluctuation as we have seen in last year? And then my second question is about the margins. We have saw the margins contract. I think partly it was because the railway portion continue to drop, and we now have more than 60% of our revenue come from industrial automation. So for FY '13, should we assume that the company's overall gross profit margin is likely to be around 35%? This is the general gross profit margin we can achieve on our industrial automation business, 30%, 35%? I just have a follow-up question from the previous person. I look at our industrial automation order book growth, do you -- Dr. Wang, do you think the growth, the industrial automation order book is going to pick up as we go into calendar year FY '13? Or do you think it's likely to stay weak?

Okay. So Saiyi, I want Ms. Qu to answer your first question. I will answer your last question. Okay? Okay, Qu.

[Chinese] U.S. dollars [Chinese]

[Chinese]

[Chinese] quarter.

[Chinese] order book [Chinese]

Sure.

Lump sum. Okay [Chinese] Sorry, Qu [Chinese]

[Chinese] subsidy [Chinese]

Okay. So Saiyi, for the second question, the margin, as you noticed, that is -- the main reason is the mix. The business mix is different a little bit and we -- in fact, in the year period, we are quite confident that we will maintain the normal margin, about 35% around. Okay? And for the industrial automation segment, in fact, we expect the -- we can -- the environment will be better next year because a lot of customers, I mean, their situation is even worse than us. So we have been working for many different segments, and we found that, gradually, the market will recover again. Okay.

Sure. So Dr. Wang, you're basically saying that there's no margin contraction in our individual business segment, such as industrial automation or railway, and they're still...

Not, not very apparent drop in that area, no.

Okay. So as we push our new industrial initiatives, it doesn't depress our margins, which you're [indiscernible] ...

We never sacrifice margin to gain market share.

Understand.

That's a basic policy for Hollysys.

Sorry, Dr. Wang, I have a question about the order book growth, and you said that's going to be stronger next year, right? Calendar year?

We think so.

Our your next question comes from the line of Paul Gong from Citigroup.

Actually, I have 2 questions. The first question is on the industrial automation. I see during this quarter, actually, that the order is lower than the revenue, i.e. the backlog actually dropped vis-à-vis compared with 3 months ago. I understand it's already quite difficult to achieve such new order, in such a difficult macro environment, but my question is do you have any fade [ph] in, like how are your competitors doing during the past 1 or 2 quarters, like the foreign suppliers of DCS products, as well as some domestic competitors? How is like the overall market of this industrial automation is doing and so versus what you are doing? And in October, do you see any sequential improvement from the first quarter of this fiscal year? This is my first question. My second question is on your subway signaling system. I know you have seen some late-stage on these developments, but do you have any updates on the current market competition or in domestic market, like how many players? And so far as I know, there is one company under Beijing Jiaotong University. They have been developed their own subway signaling system. And I also heard another Jiujiang-based company also doing the R&D on subway signaling. How are they doing? And what is the like competition scenario at this moment? And you also mentioned your target to some overseas metro project or subway projects for your first signaling projects. Any progress in this aspect I talk here?

Okay, thank you, Paul. First of all, about the industrial automation, as you see, we are being -- the environment has been quite harsh, in fact, but we have been working hard to gain market and make progress. In general, we still do not have any exact data yet, but from our examination, it seems that they must -- a lot of segments of the market not growing, in fact, at all. Some of them even decreasing like a power plant, for example. They're decreasing these couple years has been. And we have been gaining market share, and we have been exploring new opportunities in this area as well to make progress. So although the market is not growing as before, but we still make quite a lot of progress. And according to our employee -- our colleagues, it seems quite a lot of factories is still waiting for this important Congress and also for the government new policies, in fact. So in October, there's no very apparent transform, I mean big -- big transforming, in fact, but still similar to before. But after this Congress or especially maybe a couple of months later, we will expect more opportunities, more new projects in fact. But as you see that, although the new project market is not growing as fast as before that this in China, the industrial automation has such a big incumbent base, too many projects is under operation, with not so up to standard DCS systems or not up standard or up to the modern level technologies. So a lot of factories, in fact, they need to be updated, even replaced by new systems. The old systems need to be replaced. So we find a lot of opportunities in this area as well. So that's why we're still confident to make a progress in the future in this area. And for the subway, our R&D work quite normal, and it's working under plan. But you asked the second question is we know that, in China, there are a lot of companies doing -- the local companies, doing this research that -- I mean, Jiaotong University is one of them in fact, and a lot of others, I'm sure they are working on this area because everyone noticed that in China, in the future, the subway signal system is quite a big market, although it's not very big compared with others, but still, it's quite exciting, in fact, because although every year there are not many lines, but still in the long run, quite a few lines to be constructed in the future. So this attracted a lot of people doing research in this area. Plus, signal system is very critical, although a lot of people doing this kind of research, but who can survive? We really don't know in the future. And Hollysys is not in a hurry. We are working according to international standards. We are working strictly, following the procedure because we cannot afford any accident or any, I mean, missed operation cost by Hollysys. So in this way, in the future, in the next few years, in the near future, the scenario will be very interesting in China. I'm sure a lot of companies, based on different background, they can get a couple of projects maybe. But in the long run, we really don't know because like before, many companies rush into one area, but because the area is not that easy and also because the area is not that big as expected, so later on, some companies drop out. So in this case, Hollysys, since we do have a big market in high-speed rail, it can support a long-run competition. So we are not in a hurry, not consider 1 or 2 years win or lose. We will still be working on the long run. Now secondly, this we working -- our R&D work and our system designing strictly follow the international safety rules and also the procedures and especially when we started this, the Hong Kong MTR project, although it's not high-speed rail, but the operation and the management chosen by the MTR people, they are the same people running the subway systems as well. So the management, and especially project management, is very strict, so we can learn a lot from that experience. We gained a lot from this experience. So in this way, we found that after we have finished all the designing and also the cost certified, so we would explore the international market under the marketing market at the same time. But we will pick up, at first, a good opportunity, a proper opportunity to do excellent work. We are not in a rush, I mean, to do -- just to pick up projects, whatever. Maybe some people may suspect that we will just drop the price and to jump in to compete with others. That will not be our policy. That's why be would be very careful. We supply -- we guarantee that our technology is mature enough, and also our work, our engineers are up to the standard, to the level. And we still have time and also we still have more opportunities in other businesses to maintain the company growth. But with the subway signal system, we will do at the right time, do the right thing. Is that okay?

Just a quick follow-up on the industrial automation, this side, you have mentioned a lot of the segments are not growing and, like power, it was even declining. Is it correct to assume some of your competitors actually noted year-over-year decline in these segments? And this is number one. Number two is this is actually the first quarter after you released the fifth-generation of DCS products. Actually, I was expecting -- frankly speaking, I was expecting higher new orders from this segment. Is there anything going on with this DCS fifth generation? And how is the market initial feedback on this new product?

Good question, Paul, very good question. Okay, for the -- for some industries, like power, for example, I know quite -- most of the companies are decreasing because there are not many -- so many projects -- not so many projects or competition. So they've got quite a lot and I know some companies got 1 or 2. Maybe some companies weakened. They haven't got any product at all in this area. But you'll -- I mean they're still struggling. Some of the companies still struggling in this area as well. But anyway, we cannot judge the others, so we can only work on our own selves, okay? And for the fifth-generation DCS, now end of the time, now, we are trialing system results quite a lot of projects, in fact, a few projects in the field, in the rail field. And -- but end of this year, all this trial will be finished, and so far, the system is very good and the customer welcome is very much. So next year, we will begin the mass production of the system.

And next year, you are talking about the calendar year of 2013, right?

The calendar year.

And now it's just some like on initial trial stage. You haven't really like sold the product. It's still in some testing stage? Or how should I understand that? Or is there in the installation of progress of where the projects ...

The system is in -- it's already in rail project already. The system has been installed in the field projects, rail projects, top-class chemical process. We just pick up a field in every industry projects, pick up a field of projects for the testing of the system, against the media [ph] with that. But so far, the application is very good.

Am I right to say the installation of the first batch of projects will be finished maybe earlier 2013?

Yes.

Then, that would be some like of any stage. Then, you could see the event of how was the performance of this new quarter. Is that correct?

Yes. Exactly, yes. But end of this calendar year, it will be ready.

Okay. 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 follow-up contacts. We look forward to speaking with you again in the near future. Thank you. [Chinese]

[Chinese]

Thank you.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.