Ladies and gentlemen, thank you for standing by, and welcome to the Hollysys Automation Technologies Fiscal Year 2016 Third Quarter Ended on March 31, 2016 Earnings Conference Call. [Operator Instructions] Please be advised that this conference is being recorded today, May 16, 2016. I would now like to hand the conference over to Mr. Arden Xia, the Investor Relations of Hollysys Automation Technologies. Thank you. Please go ahead, Mr. Xia.

Hello, everyone, and thank you for joining us. Today our speakers will be Mr. Baiqing Shao, CEO of Hollysys Automation Technologies; Ms. Harriet Qu, CFO of Hollysys; and myself, from Investor Relations. On today's call, Mr. Shao will provide a general overview of our business, including some highlights for the quarter, and Ms. Qu will discuss our performance from a financial perspective and financial outlook for the third quarter of fiscal year 2016, and the whole senior management will answer questions afterwards. Before getting 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 and the mix of products in future periods and future operating results. Such forward-looking statements based upon the current beliefs and expectations of this 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; continuing with the compliance with government regulations; legislation or regulatory environments; requirements or changes adversely affecting the businesses in which Hollysys is engaged; cessation or changes in government incentive programs; potential trade barriers affecting international expansion; fluctuations in customer demand; management of rapid growth and transitions 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 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 here should be read in light of such risks. Hollysys does not assume any obligation to update information discussed in this conference call or in its filings. Please note that all amounts noted in the conference call will be in U.S. dollar unless otherwise noted. And now I would like to turn the call to Mr. Shao. Please go ahead, Mr. Shao.

Thank you, Arden, and a greeting to everyone. I would like to discuss some key events during this quarter. For industrial automation business, we have insisted in executing our strategy to review the potential needs of the market in upgrading and reforming projects to mitigate the revenue, which is continuously declining from new constructions in current situation. Industries like petrochemical, metallurgy and building materials still performed weaker. However, as supplement, power industry is maintaining stable, we have signed several new DCS contracts in coal-fired power, especially in high levels. The supercritical coal-fired generating units, such as Jiujiang Shenhua 2X1052 megawatts, Guohua Ningdong Tuite 2X660 megawatts and the Xinjiang 2X660 megawatts power units. Nuclear side. We are providing DCS support for Hongyanhe unit 5 and unit 6. In factory automation, we will continue to expand our sales force and allocate more resource to this area and to make an effort raise our uniquely customized turnkey solutions. As mentioned above, even though industrial automation revenue is declining, we will always try our best to minimize the impact, including adjusting internally to better cope with external environment and to keep sustainable long-term healthy development. In high-speed railway, as China is continuously investing a certain scale on supporting high-speed railway sector for the next 5 years, we are still benefiting from the policy of 13th 5-year plan. As new products and technologies contribute in the next, we have confidence that the high-speed railway's performance will be remaining stable. For subway business, we won the new bidding for Chengdu Line 10 and Wuhan Subway Line 8 SCADA contracts. Meanwhile, the SCADA for Beijing Subway Line 14 Middle Section and Beijing Changping Subway Phrase II are both in operating stages, we gained consistent favorable reputation by the customers. This is encouraging us for seeking opportunities to work with more local transportation bureaus from the first tier cities down. We will continue to deliver quality works and work closely with the subway authorities in the future to build up our SCADA and subway signaling businesses. In the mechanical and electrical solutions segment, Concord and Bond have mainly focused in further development of Southeast Asia and Middle East markets. Even they are facing difficulties, such as worsening market competitive environment, the lack of new-built projects and projects delay, rising cost and seasonal lumpiness, they are persevering and hard-working. For this quarter, revenue and backlog are both increased compared to the same quarter last year. For long term, we think the market still have much potential demand, and we will strengthen internal control and adjustment to keep M&E development in the future. Lastly, for extending international business, we are in the process of setting up local service centers in abroad. In India, we won the bidding to provide DCS and SIS to Lanco Solar Power Polycrystalline Silicon Project. In Southeast Asia region, we won the bidding to provide DCS and DEH for Indonesia Qingshan 2X350 megawatts Coal-fired Power Units. Through accumulating track record in the targeting area, we are enhancing our brand name recognition overseas. With our proprietary technologies and products, well industry expertise and customization solution, we will continue to create value for our shareholders. With that, I'd like to turn the call over to Arden Xia, who will read the financial results analysis on behalf of CFO, Ms. Harriet Qu.

Thank you, Mr. Shao. I would like to share some highlights for the third quarter of fiscal year 2016 ended on March 31. Comparing to the quarter of the prior fiscal year, the total revenues for the 3 months ended March 31, 2016, increased from $118.2 million to $118.8 million, representing an increase of 0.5%. Broken down by the revenue types, integrated contracts revenue decreased by 6.2% to $99.8 million, products sales revenue increased by 64.7% to $16.2 million and service revenue increased by 39.6% to $2.9 million. The company's total revenue can be presented in segments: industrial automation $38 million; railway transportation, $56.2 million; M&E, $17.1 million; miscellaneous, $7.5 million; total, $118.8 million. Overall gross margin excluding noncash amortization of acquired intangibles was 31.7% for the third quarter 2016 as compared to 46% for the same period of prior year. The non-GAAP gross margin for integrated contracts, product sales and services rendered were 27.1%, 55.5% and 59.1% for the third quarter as compared to 43.4%, 71.7% and 56% for the same period of prior year, respectively. The gross margin fluctuation was mainly due to the different revenue mix with different margin. The GAAP overall gross margin, which includes noncash amortization of acquired intangibles, was 31.7% for the third quarter as compared to 46% for the same period of prior year. The GAAP gross margin for integrated contracts, product sales and service rendered were 26.9%, 55.5% and 59.1% for the third quarter as compared to 42.8%, 71.7% and 56% for the same period of prior year, respectively. Selling expenses were $5.2 million for this quarter, representing a decrease of $0.5 million or 8.8 -- 8.3%, compared to $5.7 million for the same quarter of the prior year. Presented as a percentage of total revenues, selling expenses were 4.4% and 4.8% for the 3 months ended March 31, 2016 and 2015, respectively. G&A expenses excluding noncash share-based compensation expenses, were $8.7 million for the third quarter, representing a decrease of $0.3 million or 3.2% as compared to $9 million for the same period of prior year. Presented as a percentage of total revenues, non-GAAP G&A expenses were 7.3% and 7.6% for the quarters ended March 31, 2016 and 2015, respectively. The GAAP G&A expenses, which included the noncash share-based compensation expenses, were $9.8 million and $9.7 million for the 3 months ended March 31, 2016 and 2015, respectively. R&D expenses were $8.4 million for this quarter, a decrease of $1 million or 10.7%, compared to $9.4 million for the same quarter of the prior year. Presented as a percentage of total revenues, R&D expenses were 7% and 7.9% for quarter ended March 31, 2016 and 2015, respectively. The VAT refunds and government subsidies were $4.3 million for the third quarter as compared to $6.6 million for the same period in prior year, representing a $2.3 million or 35.1% decrease. For the 9 months ended March 31, 2016, the VAT refunds and government subsidies were $20.1 million, an increase of $2.1 million, compared to $18 million for the same period of prior year, respectively. The income tax expenses and the effective tax rate were $3.4 million and 12.4% for the third quarter as compared to $6.6 million and 16.9% for comparable prior year period. When excluding the impact of non-GAAP adjustments on income before income taxes, the effective tax rate would have been 11.9% for the current quarter and 18.1% for the comparable prior year period. The effective tax rate fluctuation was mainly due to the different pretax income mix with different tax rate, as the company subsidy -- subsidiaries applied to different tax rates. The non-GAAP net income attributable to Hollysys, which excludes noncash share-based compensation expenses, amortization of acquired intangibles and acquisition-related consideration fair value adjustments, was $23.1 million or $0.38 per diluted share based on 60.6 million shares outstanding for the 3 months ended March 31, 2016. This represents a 20.2% decrease over the $29 million or $0.49 per share based on 59.2 million shares outstanding reported in the comparable prior year period. On a GAAP basis, net income attributable to Hollysys was $21.9 million or $0.36 per diluted share, representing a decrease of 31% over the $31.6 million or $0.53 per diluted share reported in the comparable prior year period. Hollysys' backlog for integrated contracts as of March 31, 2016, was $498.5 million, representing a decrease of 5.4%, compared to $527 million as of December 31, 2015, and almost equal to $498.7 million as of March 31, 2015. The detailed breakdown of the backlog for integrated contracts by segments is industrial automation, $107.8 million; rail transportation, $259.8 million; M&E, $130.9 million; total, $498.5 million. For the 3 months ended March 31, 2016, the total net cash inflow was $10.8 million. The net cash used in operating activities was $16.7 million. The net cash provided by investing activities was $29.8 million, mainly consisted of $52.2 million as maturity of time deposits with original maturities over 3 months, which was partially offset by $20.4 million in time deposits over 3 months placed with banks. The net cash used in financing activities was $3.8 million, mainly due to repayment of long-term bank loans of $5.4 million, which was partially offset by proceeds from short-term bank loans and long-term bank loans of $1.2 million. The total amount of cash and cash equivalents and time deposits with original maturities over 3 months were $256.4 million, $275.6 million and $179.7 million as of March 31, 2016, December 31, 2015, and March 31, 2015, respectively. As of March 31, 2016, the company held $199.5 million in cash and cash equivalents and $56.9 million in time deposits with original maturity over 3 months. For 3 months ended March 31, 2016, DSO was 181 days as compared to 228 days for comparable prior year period and 138 days for the last quarter. And inventory turnover was 40 days as compared to 66 days for the comparable prior year period and 34 days for the last quarter. Given our strong backlog currently on hand and sales pipeline envisioned so far, we reiterate our guidance for fiscal year 2016 with revenue in the range of $565 million and $600 million and non-GAAP net income in the range of $110 million to $120 million. At this time, we would like to open up for QA session. Please note that for Chinese-speaking participants, we can also do the QA in Mandarin, and we'll provide translation. [Foreign Language] Operator, please.

[Operator Instructions] Our first question comes from Baiding Rong with Credit Suisse.

[Foreign Language]

The first question is about the gross margin relatively declined. What about the reason? Is it caused by ATP? Last time, the onetime ATP contract have cut off the price, this is maybe one of the reasons, but what about the others? And what about after this quarter, in the next, the trend will affect the future. The second question is about the coal-fired. Right now, we hear about some information that Chinese government in some province stopped to pass the new project, the coal-fired station. What about the fact that with Hollysys in the next fiscal year? And what about the net income? [Foreign Language]

So the third question is in the longer term, are we able to maintain, say, 10% EPS growth in the future, given that the process automations has a lot of headwind going forward?

Thank you.

[Foreign Language]

The gross margin decline for this quarter was mainly due to the different revenue mix with different margin. For example, in IA, the low-margin project take more percentage. In high-speed rail, the onetime reduced price ATP contract, besides that, revenue is increasing, take around 17 to 18 percentage of the total rail transportation revenue, so the gross margin relatively lower than the other business. These factors account for the gross margin temporary falling to like around the 31.7% for this quarter. However, at the whole fiscal year, the gross margin will remain between 35% to 40%. And right now, for 9 months, the gross margin is 37.2%. And also, another question related to that, in future trend, about ATP contract. Last time they reduced the price ATP contract, we already make a recognized revenue in this quarter, much percentage than the others. So in the next quarters, it will affect relatively small. [Foreign Language]

[Foreign Language]

Recently, the news relate to the potential government continue to stop to sign -- pass the new project within the coal-fired power station. This does not affect our business in fiscal year 2017 too much because we already got a lot of projects and contracts within the coal-fired power station. And for long term, this is not sustainable, so we already changed our strategy to focus on the upgrading maintenance to review the customer projects. So we will continue to focus this area. And also, in the new energy, such as new energy, the other industries as supplement to support the whole IA revenue, relatively keep steady in future.

[Foreign Language]

For long term, we still have confidence to achieve the 10% growth of the net income in future. Besides, we will focus on IA high-quality solutions, and also, inside the vertical penetrate in the other industries. And also, in the distributed control, backlog automation, we will continue to reallocate the resources into this area. In addition, we're also sticking to do the expansion international business like we got the contract in India and Indonesia recently. We will continue to do that as supplement to support the whole Hollysys revenue and net income keep a steady growth.

[Foreign Language]

[Foreign Language]

The question is now to the project in India and Indonesia, is this the "one belt one road" opportunities? And the answer is that, in India, the project we based are direct to sale, we set up local center to cooperate with the customer, and we got the contract. For Indonesia, that contract is followed by the EPC project. Thank you.

Your next question will come from the line of Alex Chang with Citigroup.

[Foreign Language]

The first question is about the cash flow. You could see equity invested increased to USD 4.6 million. Where does it come from? The second question is about the revenue structure. We could see product sales increased $16 million, what this part represent?

[Foreign Language]

Your first question...

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

This part is come from the joint venture company with CGNPC and the equity invested of around USD 4.6 million. In the past years, this part is negative. However, from this year, it turns to positive, and the joint venture company get -- already got the government subsidy. So that's why at the 40% of the joint venture company, we got this money as the same.

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

The product sale increase is really because all the business product sale is increasing. For example, like IA is increasing and also railway transportation and also medical automation. And Alex continued to ask about what about IA and rail inside the increase of the product sales. Is it the matter related to the life cycle we see the trend to start? The answer is it's not like that way. Actually, from the product sale is on one hand. On the other hand, we also increased from the spare parts of the projects. Thank you.

Your next question comes from Jacqueline Du with Goldman Sachs.

[Foreign Language]

The question is about -- what about the future new order in the railway transportation within the fiscal year 2017 and 2018. What about the rail transportation segment that will take the percentage of total revenue and how about the SCADA and the new product like Track Circuit trend or contracts signed in the future?

[Foreign Language]

Actually, subway business, we already been for a long time. And each year, we will focus on to penetrate 1 or 2 new cities, and we meet this target. So the subway revenue is increasing. Besides the Track Circuit, the new product that's already in the testing, and we will finish around June in this fiscal year -- this calendar year. And after that, we got the new order. And also, the Subway Signaling, we will try our best to take one -- the first contract in the future. Relate to the number in the future of the whole railway transportation revenue, we will -- we have confidence to keep her increasing. However, it's hard to give you the number, exact number, right now. It's really based on the performance in future. Thank you. At this -- due to the time constraints, we will now take one last question from the queue. Operator?

Your next question will come from Boyong Liu with JPMorgan. It seems Boyong's line has gone out of the question. [Operator Instructions]

Maybe we could wait for...

[Foreign Language]

The first question is about the joint venture company with CGNPC. What about the government subsidy? This is well around the CNY 80 million for the joint venture company. What about the future? Each year, will get the same budget money? Second question about the gross margin is besides the ATP contract, what about IA? It seems like IA gross margin also go down. So what about the trend? The third question is about ATP order seems not to get too much for this quarter. So as a result, the subway revenue will take an even more percentage than before. So what about the next quarters, the trend? Is it will worse than before? And then the DCS -- the last question is about the DCS insight. What about the distributed control factory automation progress right now? It seems like PLC market's still not good, so what about your view of this part?

[Foreign Language]

The first question is about the joint venture company with CGNPC. This is just a onetime government subsidy. It's not guaranteed in the future.

[Foreign Language]

For the IA, gross margin is also declined. This is not for the business itself. It's just for timely -- I mean, onetime for this quarter, relatively, the low-margin projects take more percentage.

[Foreign Language]

Because of the quarterly lumpiness, this is really because what we've said before. Inside of IA, the individual contracts, the projects just relatively 5% in the range of 35% to 40% gross margin. The other half will lower than the 35% and also the other half will higher than 40%. So this is really because the mix of the projects.

[Foreign Language]

So for the long term, the gross margin is still under control, between 35% to 40%, for the whole business. However, the lumpiness in quarterly, this will remain. So back to the subway, you said that will take much more percentage, we also will try our best to increase the gross margin inside of subway. And so, basically, to say, for the whole business, we'll continue to maintain 35% to 40%, this range of gross margin. Thank you.

[Foreign Language]

[Foreign Language]

[Foreign Language]

The IA business will continue to keep the DCS in the profit control to accumulate track records, take more percentage -- take more market share in the future. Back to the factory automation question, in the past years, we just provide PLC as a single product sale. However, we right now want to do the turnkey solution. This will include our PLC product and also, with the other product like motion controller and also the software, and by the industries, we will get involved like the medical pharmaceutical area. So right now -- and also, in the solution, we also provide SCADA. For example, SCADA refers the supervisory control and data acquisition. This platform can also implemented into the factory automation. So in the future, we will continue to give our best to keep -- to help the factory automation increase to contribute to the revenue of the IA, and we also will create new company. And also, Boyong asked us another question about how about the percentage right now for the factory automation take part of inside of IA. And the answer is, right now, the number is not very large -- it's not very large, so still small, but we will continue to reallocate resources into this area, and you could see the new order in recent quarters. Thank you. Thank you, everyone, for joining us on the call today. If you haven't got the chance to raise your questions, we will be pleased to answer them through follow-ups. We look forward to speaking with you again in the near future. Thank you. [Foreign Language]

[Foreign Language]

[Foreign Language]

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