Ladies and gentlemen, thank you for standing by, and welcome to the Hollysys Automation Technologies' Fiscal Year 2017 First Quarter Ended on September 30, 2016 Earnings Conference Call. [Operator Instructions] Please be advised that this conference is being recorded today, November 15, 2016, Beijing Time. I would now like to hand the conference over to Mr. Arden Xia, the Investor Relations Director 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. Herriet Qu, CFO of Hollysys; and myself, the IR Director of Hollysys. 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 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 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 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 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. Please note that all amounts noted in this conference call will be US dollars unless otherwise noted. And now I'd like to turn the call to Mr. Shao. Please go ahead, Mr. Shao.

Thank you, Arden, and greeting to everyone. I would like to discuss some key events during this quarter. Due to continued uncertainties of macroeconomic, the pace of industrial automation is still slow. However, we are actively taking actions to dampen the impact of challenging markets, the new contract turns to be positive. We got several significant contracts from power and chemical sectors. For example, in power, we signed the contract to provide products for Fujian Luoyuanwan two 1-gigawatt power units and Guohua Ningdong two 660-megawatt power units. In chemical, we will provide DCS and SIS for Xinjiang East Hope Company, as well as DCS and Batch for ASIA CUANON in its Waterborne Coatings Project. In after sale, we signed some upgrading contracts for power units like Guohua Jinjie two 600-megawatt power units. Additionally, we signed DCS contracts to #5 and #6 units of Tianwan Nuclear Station, as well as #3 and #4 units of Fangchenggang Nuclear Station. In abroad, we signed a contract with Indonesia Qingshan to provide products for their two 350-megawatt coal-fired power units. We also got a contract from Lanco to provide PLC to them in India. For factory automation, we integrated internal resources to do customized turnkey solutions. In this quarter, we signed a contract with Haier to help them improve the level of automation and intelligence of their Tianjin-based factory which focuses on washing machine. Our goal is to make each project into a demonstration project to create value for the customers. In high-speed railway, as it is the first year for the 13th five-year plan, the infrastructure of the new planned railway just starts. In short term, there will be fluctuation both on order and revenue. However, for long run, we are confident that the high-speed railway's performance will as good as before since China is continuously investing a certain scale on supporting high-speed railway sector for the next even ten years, plus the increasing in after sell and the expanding of rail products such as track circuit, we believe to achieve the yearly target and maintain steady revenue contribution in railway. For subway business, we will continue to actively expand domestic market and looking for opportunities to keep steady growth. In the mechanical and electrical installation services, although Concord and Bond are facing some difficulties because of the local political and economics uncertainties in South East Asia and Middle East area, they are still hard working to develop the businesses. As one of the strategies to expanding overseas market, we will ensure a healthy development of Concord and Bond and take use of their advantages such as good customer relations and sales channels to find more international opportunities. With that, I'd like to turn the call over to Arden Xia who will [go through] the financial results analysis on behalf of CFO, Ms. Herriet Qu.

Thank you, Mr. Shao. I would like to share some highlights for the first quarter of fiscal year 2017 ended on September 30, 2016. Comparing to the first quarter of the prior fiscal year, the total revenues for the three months ended September 30, 2016 decreased from $125.1 million to $103.5 million, representing a decrease of 17.2%. Breaking down by the revenue types, integrated contracts revenue decreased by 16.2% to $93.1 million; products sales revenue decreased by 27.3% to $8.3 million; and services revenue decreased by 17.9% to $2.1 million. In July 2016, the Company's interests in Hollycon were diluted from 51% to 30% and the Company lost the control of Hollycon. As a result, Hollycon's financials would not be included in the Company's consolidated financials from July 2016. If Hollycon's revenue was excluded from the comparable figure for the first quarter of the prior fiscal year, the products sales revenue for the three months ended September 30, 2016 should be increased by 45.7%. The Company's total revenues can also be presented in segments. Industrial automation $45 million, railway transportation $33 million, M&E Solutions $25.3 million; miscellaneous $0.1 million. Total $103.5 million. Overall gross margin excluding non-cash amortization of acquired intangibles was 29.6% for the first quarter, as compared to 39.3% for the same period of prior year. The non-GAAP gross margin for integrated contracts, product sales, and services rendered were 25%, 70.5% and 69.7% for the first quarter, as compared to 37.3%, 52.6% and 65.5% 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 non-cash amortization of acquired intangibles, was 29.5% for the first quarter, as compared to 39.1% for the same period of prior year. The GAAP gross margin for integrated contracts, product sales, and service rendered were 24.9%, 70.5% and 69.7% for the first quarter, as compared to 37.1%, 52.6% and 65.5% for the same period of prior year, respectively. Selling expenses were $5.6 million for the first quarter, representing a decrease of $1 million or 16.2% compared to $6.6 million for the same quarter of prior year. Presented as a percentage of total revenues, selling expenses were 5.4% and 5.3% for the three months ended September 30, 2016 and 2015, respectively. G&A, excluding non-cash share-based compensation expenses, were $9.7 million for the first quarter, representing an increase of $0.8 million or 9%, as compared to $8.9 million for the same period of prior year. Presented as a percentage of total revenues, non-GAAP G&A expenses were 9.3% and 7.1% for quarters ended September 30, 2016 and 2015, respectively. The GAAP G&A expenses, which include the non-cash share-based compensation expenses, were $10.6 million and $9.8 million for the three months ended September 30, 2016 and 2015, respectively. R&D expenses were $7.7 million for the respective quarters ended September 30, 2016 and 2015. Presented as a percentage of total revenues, R&D expenses were 7.4% and 6.2% for the quarter ended September 30, 2016 and 2015, respectively. The VAT refunds and government subsidies were $9.6 million for the first quarter, as compared to $5.1 million for the same period in prior year, representing a $4.5 million or 88.7% increase, which was primarily due to increase of VAT refunds of $2.2 million and the government subsidies of $2.3 million. Gains on dilution and divestment of the Company's interests in Hollycon was $6.1 million for three months ended September 30, 2016. During the period from June to July 2016, Hollycon received cash injections of $30.9 million from two outside shareholders, and the Company decided not to make the additional cash investment proportionally. As a result, the Company interests in Hollycon were diluted from 51% to 30.6%. Then, the Company sold 0.6% interests of Hollycon to one of Hollycon's shareholders in a cash consideration of $464,000, and the Company interests in Hollycon were further decreased to 30%. The Company recorded a gain of $6.1 million for the series of the transactions. As the Company lost the control of Hollycon, Hollycon's financials would not be included in the Company's consolidated financials from July 2016 on. The income tax expenses and the effective tax rate were $3 million and 12.2% for the first quarter, as compared to a $4.7 million and 12.9% for comparable prior-year period. The non-GAAP net income attributable to Hollysys, which excludes non-cash share-based compensation expenses, amortization of acquired intangibles, acquisition-related consideration fair value adjustments, and convertible bond related fair value adjustments, was $22.7 million or $0.37 per diluted share based on 61.1 million shares outstanding for the first quarter. This represents a 16.7% decrease over the $27.3 million or $0.45 per share based on 60.6 million shares outstanding reported in comparable prior-year period. On a GAAP basis, net income attributable to Hollysys was $21.7 million or $0.36 per diluted share, representing a decrease of 28.3% over the $30.3 million or $0.5 per diluted share reported in comparable prior-year period. Contracts and backlog. Hollysys achieved $116.2 million (sic - see press release '$99.2 million') new contracts for the first quarter. And the backlog as of September 30, 2016 was $525.2 million. The detailed breakdown of the new contracts and backlog by segments. Industrial -- new contracts. Industrial automation, $61.5 million, railway transportation $31.5 million, M&E solutions $6.2 million. Total $99.2 million. Backlog. Industrial automation $132 million, railway transportation $218.7 million, M&E $174.6 million. Total $525.2 million. Cash flow. For the first quarter, the total net cash outflow was $16.8 million. The net cash provided by operating activities was $17.8 million. The net cash used in investing activities was $34 million, mainly consisted of $20.4 million time deposits placed with banks, and $16.7 million outflow as a result of that Hollycon would not be included in the consolidated financials from July 2016. The net cash provided by financing activities was $0.4 million. The total amount of cash and cash equivalents and time deposits with original maturities over three months were $260.9 million, $271.5 million, and $234.9 million as of September 30, 2016, June 30, 2016 and September 30, 2015, respectively. As of September 30, 2016, the Company held $212.3 million in cash and cash equivalents and $48.6 million in time deposits with original maturities over three months. For the first quarter, DSO was 207 days, as compared to 179 days for the comparable prior-year period and 147 days for the last quarter; and inventory turnover was 48 days, as compared to 42 days for the comparable prior year period and 37 days for the last quarter. Outlook for fiscal year 2017. Given our strong backlog currently on hand and sales pipeline envisioned so far, we reiterate our guidance for fiscal year 2017 with revenue in the range of $565 million to $600 million and non-GAAP net income in the range of $130 million to $140 million. At this time we'd like to open up for Q&A session. Please note that for Chinese-speaking participants, we can also do the Q&A in Mandarin and we'll provide translation. [Chinese language spoken] Operator, please.

We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Alex Chang from Citigroup. Please ask your questions.

[Chinese language spoken]

The first question is about, first, the IA new order is increasing. Is there any -- please introduce by industries which areas we see the recovery and how much percentage. The second question is about the railway. The revenue is declining, but the after-sell revenue is also decline. In [my perspective], the installation base, and the after-sell revenue based on installation base, the rail sector you have very good installation base. Why the after-sell revenue is still declining? The third question is about Hollycon. The Hollycon business is what kind of specific business? And why management team considered not control for Hollycon?

[Chinese language spoken]

The first question is about the power industry, coal-fired, is still very strong, even there will regulations of limitations from the government, but this part is still increased very good. We fund a lot of chances, opportunities to raise large CapEx city projects. And also after-sell revenues increased within this part. But, however, it is not a kind of recovery --

[Chinese language spoken]

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Pardon the interruption, ladies and gentlemen. It appears the moderator's line is disconnected. Please stand by while we reconnect them.

Hi. Jessica, this is Arden. Sorry, the line was off. And I will translate again. The first question, the answer is also beyond the coal-fired industry is increasing, and also after-sell revenue is increasing. But it is not bad [ph] as the recover. We think there are still a lot of uncertainty. So we have to see in future.

[Chinese language spoken]

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The second question changed to focus on not just the rail, at the whole business, why the revenue and also after-sell revenue declined. The integrated contract revenue has been affected a lot by the decline in rail transportation revenue, the products sales decrease was due to the Hollycon company's revenue excluding. If eliminated these factors, the first quarter of product sales should be increased, even more than 45%. And services revenue decrease was because of the time difference on the point of recognized revenue. Some of our service contracts, for example, are based on completed contracts method. So there will be lumpiness by quarterly, but no disruptive effect on a yearly base. [Chinese language spoken]

[Chinese language spoken]

Hollycon's main revenue stream is come from PCM [ph] expansion machines. And the business is too unitary. So, better develop market businesses, especially the ones closed to machine or healthcare rather than automation which is to cooperate with new partners which are more professional in medicine or healthcare areas. New business developed will also bring more risks or uncertainties. Develop the risks and [inaudible] partners, we adjust the aggregate from 51% to 30%. The last one I want to emphasize, this is not means we jeopardize the medical automation, but define more clearly. If the business picture [ph] close to medicine or healthcare, we will do it like Hollycon. If the businesses circused [ph] on automation, we will let the relevant team to do that. There are also example that we currently do in industrial automation like on Chinese medicine extraction [inaudible] PCF [ph] pharmaceutical factory [inaudible] a contact provided automation side control products and solutions.

Xie-xie.

Operator, next one.

Your next question comes from Kevin Luo from Morgan Stanley. Please go ahead, sir.

[Chinese language spoken]

The first question is down to the revenue structure. Is it possible to divide by IA, rail and M&E separately to provide the proportion of the revenue? And also, compare the prior year of the same period, increase or decline, and how much. The second question is about the gross margin. The gross margin dropped down a lot. This is because of the last year, the one-time discount within the high-speed rail ATP [ph] contract, is that for this one? If yes, what about the effect in the next quarter? And the third question is about Hollycon. The TCM traditional dispensing machine, this machine currently is within the Hollycon or within the Hollysys automation side.

[Chinese language spoken]

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The first question [inaudible] and combine together to answer. Industrial automation taper this quarter around $45 million, take around 43.5% of total revenue; railway transportation $33 million, take around 31.9% of total revenue; M&E $25.3 million, take around 24.5% of total revenue. Compared same period of last year, the industrial automation take around 39.6% of total revenue, rail take around 43.4% of total revenue -- 12.4% of total revenue. So [inaudible] about the gross margin, it's not because the one-time ATP [ph] contract, the discount contract, because that one already close to [inaudible]. And actual, the dropdown of gross margin reason is bad mix result. You can see this quarter the mix result [inaudible] rail transportation take less percentage of total revenue but it contribute the gross margin higher than the others. And we recognize M&E and also the subway sector the other things take more than the same period of prior year. So that's why the gross margin goes down to 30%. This is the mix.

[Chinese language spoken]

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The second question, let me -- the contribution of this quarter revenue, 40% from the subway and M&E sector. So this part of the gross margin relatively lower than the average. But I want to emphasize, for each segment, IA or rail or M&E, there has no change within the gross margin. But the whole gross margin for this quarter down to 30% is really because of the mix result, a large percentage recognized revenue from subway and M&E sector. But this is just a quarterly lumpiness. For the yearly base, we think it's going to as that what we announced, between 35% to 40%, for the total business, of the gross margin.

[Chinese language spoken]

The last question, about the TCM, traditional dispensing machine, is belongs to joint venture, not just Hollycon.

[Chinese language spoken]

[Chinese language spoken]

The question is about the dispensing machine, the gross margin is what kind of level. The answer is about close to the product sales, more than average gross margin. [Chinese language spoken]

Your next question comes from Boyong Liu. Please ask your question.

[Chinese language spoken]

The first question is about the 2017 fiscal year second quarter passed, so what about the landscape about right now revenue? Can you introduce a little visibility about this part? And also, during the Investor Day, it seems like the whole management had very good confidence with the Company, so, what about the next revenue or the other performance? And the second question, about Hollycon. The other partners, the background, it seems like not relate too close to the medicine area. So, how about to explain? And the third one is about the coal fire. Coal fire, even you get a lot of new contracts and orders, but the central government regulation is still very tough on this area. Do you meet any difficulty or delay on the implementing projects?

[Chinese language spoken]

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CFO focused on first and third questions. The revenue recognition we follow by percentage of completion. So it is really hard to give you the reason on the current performance based on Q2 2017 fiscal year. But from the new order side, we think this is a good sign at least. The third question about coal fire, there will be delay or even extend the period of exclusion time. This is not just happen within the coal fire, also happen with the other industries like petrochemical, metallurgy [ph], those kind of areas. So the analyst concern about it, even new order is increasing, but if the period of time of execution of contract extends, that will be affecting the recognized revenue. So this part we said the large part -- currently the after-sell revenue is increasing, the new contract from after-sell, like product sales for this vendor is increasing. The structure is changing. So that will be reasonable, we could think in the next 10 to 12 months the contract is still okay to secure the revenue contribution. But also there are a lot of uncertainties within IA, but at least with good performance, better than the last fiscal year 2016. [Chinese language spoken]

[Chinese language spoken]

Xie-xie.

The second question is about the partners' background, actually they have the [inaudible] inside focused on the medicine area, and also they have the resources to introduce to us not just the [inaudible] background, and also one of the partner can help us to expand our current product to abroad. They have very good resources in abroad. So this is a good chance for our product to deliver to that area, so that's why we cooperate with the new partners. Thank you, Boyong.

Thank you.

All right. Due to the time constraint, the last question, operator, please.

Your last question comes from Patrick Xu from Nomura. Please ask your question.

Hey, good morning. My first question is regarding the Southeast Asia business. You mentioned that it is seeing some difficulty, but we are not really seeing any weakness in the numbers. It seems that the revenue, new contracts, backlog all up fairly good. So, why are you saying Southeast Asia is seeing some difficulties? Could you just elaborate on that please? That's the first question. The second question is Haier project. You mentioned that you're doing automation project for Haier. Could you tell us probably the revenue, margin or return of the project please? Thanks.

[Chinese language spoken]

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The first question is about M&E sector. Their business focused on Southeast Asia, Middle East especially, for example, Singapore, Malaysia. And recently, for example, Bond, their business in Malaysia, Johor area, the contract and new order and also project execution relatively good. And also the Concord recently got their large contract [inaudible] Doha project. So that's why the performance currently with the M&E is good than before. However, the difficulties, for example, the Singapore economic slowing down very sharply, and right now we [inaudible] the new order, everything delayed or even tough -- the environment in bidding process tough than before. So also the [inaudible] rate, everything would affect our business. So there will be a lot of uncertainties or potential risks for this area. The second one, about Haier, we provide -- we sign a contract with Haier to help them improve the level of automation intelligence of their production line and we want to -- they are useful exploring the Hollysys rail digital and intellectual abilities. But the contract size is not very large. It's just several million China yuan level. So we want to -- this part will not bring very supportive contribution for the revenue, but this part we hope to make achievement to satisfy customer needs to continue find more projects to do it into a demonstration project, to get more contracts or potential opportunities, cooperate with the customers. Thank you.

Thank you.

Thank you everyone for joining us on the call today. If you haven't got a chance to raise your questions, we're pleased to answer them through follow-up contact. We look forward to speaking with you again in the near future. Thank you.

Thanks.

This concludes our conference for today. Thank you for participation. You may now disconnect.