Ladies and gentlemen, thank you for standing by, and welcome to the Hollysys Automation Technologies Earnings Conference Call for the Fiscal Year 2018 First Quarter Ended September 30, 2017. [Operator Instructions] Please be advised that this conference is being recorded today, November 14, 2017, Beijing time. I would now like to hand the conference over to Mr. Arden Xia, 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 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 fiscal year 2018; and I will on behalf of CFO, Ms. Qu discuss our performance from a financial perspective. The Q&A session will be 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 that are not historical facts, including statements relating to the expected growth of Hollysys' future product introductions, the mix of products in future periods of 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 the 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 the 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 information discussed in this conference call or in 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 to CEO Mr. Baiqing Shao. Please go ahead, Mr. Shao.

Thank you, Arden, and greetings to everyone. I would like to discuss some key events during this quarter. The momentum of recovery in Industrial Automation continued in this quarter as we recorded 27.6% and 18.9% year-on-year growth in revenue and new contract respectively, with revenue achieving year-on-year growth for three consecutive quarters. Our performance in power industry remained stable and dominant as we signed contracts on Datang Dongying 2X1000MW power units and Guohua Yongzhou 2X1000MW power units, et cetera. In chemical, we signed several major contracts, including a DCS contract with Inner Mongolia FuFeng Group on Biology ingredients workshop project and a contract with Zhonganlianhe Coal-chemical Company on 1.9 million ton methyl alcohol and olefin conversion project. In food beverage area, we signed a contract with Xinjiang Kashi Aodu Sugar Industry on 20 million tons per year Beet Sugar DCS project. In nuclear, we continued to provide products for Tianwan #5 and #6 units. In factory automation, we kept focusing on several key industries and renowned players and our demonstration-for-further-application approach has been going smoothly. As we perform these projects, we improve our capability of providing turnkey solutions, accumulate track records and raise brand awareness. In white-goods area, our cooperation with Haier went further as we won new contracts on their Tianjin-based and Qingdao-based washing machine factories. Additionally, breakthrough was achieved in new energy area, as we won contracts from Do-Fluoride Chemicals Corporation, Limited to help improve the interconnection, data collection and management of production equipment in their lithium battery workshop. We believe that these projects will lead to more business opportunities from the current and an increasingly wider customer base. In high speed rail, we signed contract to provide TCC to Longchuan-Shanwei Railway. Our short term performance can be affected by factors such as limited completion of newly planned railway infrastructure in the early years of the 13th five-year-plan and the change in customer procurement timeline. However, we believe that outlook for rail business in the long run remains positive, given an explicit national plan, growing after-sale service demand and launching of our new products. For subway, we adhered to the expansion strategy to win new SCADA contracts in more cities and work closely with subway authorities to promote our SCADA system and subway signaling technologies in future. In mechanical and electrical installation services, with macroeconomic and political circumstances in South East Asia and the Middle East being closely followed, Concord and Bond remained active in exploration and kept executing projects covering various industries. Management and risk control have also been addressed to improve operation efficiency. The strategic value of Concord and Bond as customer resources and international sales channels remains significant and we expect a moderate growth in the future. With that, I'd like to turn the call over to Arden Xia, who will discuss the financial results analysis on behalf of our CFO, Ms. Harriet Qu.

Thank you, Mr. Shao. I want to share some highlights for the fiscal year 2018 and the first quarter ended September 30, 2017. Comparing to the first quarter of the prior fiscal year, the total revenues for the three months ended September 30, 2017 increased from $103.5 million to $115.5 million, representing an increase of 11.6%. Broken down by the revenue types, services revenue increased by 378.7% to $10.4 million, products sales revenue increased by 13.8% to $9.5 million, and integrated contracts revenue increased by 2.8% to $95.6million. The Company's total revenues by segments: Industrial Automation $57.5 million; railway transportation automation, $35.2 million; Mechanical and Electrical solution, $22.8 million; total, $115.5 million. Overall gross margin, excluding non-cash amortization of acquired intangibles, was 36.6% for the first quarter, as compared to 29.6% for the same period of the prior year. The non-GAAP gross margin for integrated contracts, product sales, and services rendered were 29.3%, 71.8% and 71.6% for the first quarter, as compared to 25%, 70.5% and 69.7% for the same period of the 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 36.4% for the first quarter as compared to 29.5% for the same period of the prior year. The GAAP gross margin for integrated contracts, product sales, and service rendered were 29.1%, 71.8% and 71.6% for the first quarter as compared to 24.9%, 70.5%, and 69.7% for the same period of the prior year respectively. Selling expenses were $6.7 million for the first quarter, representing an increase of $1.1 million or 20.6% compared to $5.6 million for the same period of the prior year, mainly due to increased sales activities. Presented as a percentage of total revenues, selling expenses were 5.8% and 5.4% for the three months ended September 30, 2017, and 2016, respectively. G&A expenses, excluding non-cash share-based compensation expenses were $11 million for the first quarter, representing an increase of $1.3 million, or 13.3%, as compared to $9.7 million for the same period of the prior year, mainly due to an increase of $2.1 million in allowance for doubtful accounts. Presented as a percentage of total revenues, non-GAAP G&A expenses were 9.5% and 9.3% for the quarters ended September 30, 2017 and 2016 respectively. The GAAP G&A expenses which include the non-cash share-based compensation expenses was $11.3 million and $10.6 million for the three months ended September 30, 2017 and 2016, respectively. R&D expenses were $8.6 million for the first quarter, an increase of $0.9 million or 11.7% compared to $7.7 million for the same period of the prior year, mainly due to increased R&D activities. Presented as a percentage of total revenues, R&D expenses were 7.5% and 7.4% for the quarter ended September 30, 2017 and 2016, respectively. The VAT refunds and government subsidies were $7.1 million for the first quarter, as compared to $9.6 million for the same period of the prior year, representing a $2.5 million or 26.0% decrease which was primarily due to decrease of the government subsidies for $3.0 million. The income tax expenses and the effective tax rate were $3.7 million and 14.9% for the first quarter, as compared to $3 million and 12.2% for the same period of the prior year. 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 $21.9 million or $0.36 per diluted share based on 61.3 million shares outstanding for the three months ended September 30, 2017. This represents a 3.6% decrease over the $22.7 million or $0.38 per share based on 61.1 million shares outstanding reported in the comparable prior year period. On a GAAP basis, net income attributable to Hollysys was $21.4 million or $0.35 per diluted share representing a decrease of 1.5% over the $21.7 million or $0.36 per diluted share reported in the comparable prior year period. In July 2016, the company's interests in HollyCon were diluted from 51% to 30%, the Company recorded a gain on dilution and divestment of the Company's interests in HollyCon of $6.1 million during the first quarter of fiscal year 2017.Excluding the impact of the above mentioned for the same period of the prior year, the non-GAAP net income attributable to Hollysys for the first quarter should be increased by 31.7%, and the GAAP net income to Hollysys, should be increased by 37%. Hollysys achieved $91.6 million new contracts for the first quarter and the backlog as of September 30, 2017 was $498.3 million. Breaking down by segments: Industrial Automation $73.1 million, Railway Transportation $7.4 million, M&E $11.2 million; total $91.6 million for the new contracts. The backlog, Industrial Automation $168.2, Railway Transportation $210.9 million, M&E $119.1 million; total $498.3 million. Cash flow: the three months ended September 30, 2017, the total net cash inflow was $47.2 million. The net cash provided by operating activities was $36.1 million. The net cash provided by investing activities was $6.6 million, mainly consisted of $38.4 million maturity of time deposits was partially offset by $27.1 million deposits placed with banks. The net cash provided by financing activities was $1 million. Balance sheet: The total amount of cash and cash equivalents and time deposits with original maturities over 3 months were $331.5 million, $293.9 million and $260.8 million as of September 30, 2017, June 30, 2017, and September 30, 2016, respectively. As of September 30, 2017 the company held $244.8 million in cash and cash equivalents and $86.7 million in time deposits with original maturities over 3 months. The fourth quarter DSO was 196 days as compared to 207 days for the comparable prior year period and 153 days for the last quarter. The inventory turnover was 61 days as compared to 48 days for the comparable prior year period and 61 days for the last quarter. Based on our backlog currently on hand and sales topline EBITDA so far, we set our guidance for fiscal year 2018 with revenue in the range of $500 million to $530 million, and non-GAAP net income in the range of $100 million to $110 million. 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 their Q&A in Mandarin and we'll provide a translation. Operator, please.

[Operator Instructions] We'll take our first question from Kevin Luo with Morgan Stanley.

[Foreign Language]

The first question now today, this quarter the Industrial Automation compare increase, but from the revenue or accelerates for the new contract, but the railway transportation compared not too much, so this quarter the need from the railway transportation part, the new contract of what kind of a fact and also we hear about 175 end users trained while being procurement for the 300 how about, where we can sign the contract, this is the first question. The second one is out to international business. What about the net income report for the whole group and also about this fiscal year the potential performance to increase what kind of percentage and also talk about the strategy for this area for the coming years?

[Foreign Language]

The railway transportation new contract for this quarter compare not too much but it mainly comes from the after sale contract like the surveys, and use that now ahead of 75 train for the procurement cut line and we will participate bidding actually when it kind of chase but we have not finished the whole sign contract yet. So we cannot be totally tracking that but we will - we believe it will start to finish bidding ending out of this calendar year and we will disclose it later. And also the couple of factors we also recently of our contract we will disclose later. The second question for the M&A factor international business, beyond all our product sale the M&A factory specially come for last fiscal – it's added some cost for some specific project - so lead the goodwill impairment and also the net income were flat in our performance are good. And right now we are focusing on this area to control improvement of the management field and also the product and because their products are wrapped each to Asia and Middle East because those areas either is economic or political factor they have the potential challenges. So we are focusing on the control of the rate rather than to gain the revenue and contract so this is why the performance is not compared increase but this part we are striving to improve others factor of performance and a filed end of the control. We think it will gradually keep positive to increase sales. Thank you.

[Foreign Language]

[Foreign Language]

The question is, how did that future landscape about the fixed rate 300 kilometer per hour segment and there are three layers how that help in market share and also the price. And the answer is that out from the history whole record which we see whole around 30% of the market share. So this is will continue but not based on each is contract, it's based on yearly total average trains procurement. And also the price is very stable within the cost marketing, [indiscernible] added pressure to three of us, right now. Thank you.

We'll go next to Gary Cheung with Haitong International.

[Foreign Language]

The question is on the gross margin, compare increase and improve a lot, can we talk about the gross margin future trend.

[Foreign Language]

The gross margin is 36% compare increase. The specific background I will let Mr. Arden Xia to introduce and from business factor actually the percentage of that structure are different than before and right now we see after sale revenue is compare increase a lot. This quarter is around 17% of the sale revenues of total revenues from the upper sale and this part of gross margin is higher average so that's why for this quarter the gross margin is better than the last quarter the third period of last year. But right now we want to advertize the - which we had few challenge because right now for example the Industrial Automation gross margin is slowing down because we strategically are focusing on penetration of significant contract. So we will valid the gross margin, try our best between the range of 35 to 40 as what we said before. Thank you.

[Operator Instructions]

Thank you, everyone. It seems like no further questions. I think this quarter performance didn't like what we had before and for the coming quarters we believe it will turn better. Okay, next one Alex.

We'll go next to Alex Chang with Citigroup.

[Foreign Language]

The first question is now to the exchange loss, and also the cost in that piece - what about the items. And the second question is the expenditure increasing and the compared revenue a little bit higher ratio and the revenue increase. So what about the whole fiscal year expenditure trend.

[Foreign Language]

The first question now today - the exchange loss and this part not affect too much because we are related to import and export of our house products right now take very small percentage and from the whole financial port of transportation it always meet the consideration but right now you talk about the exchange loss this quarter will not too much in future. And the second one about the cost investee, actually this is all compared to equity investee. The equity investee and the cost investee all relate to the partially of holding of the company and that 50% is between 30% to 60% it will put in the equity investee and is between 20% to 30% of the shares it will book into the cost investee. So this is the item differences. And the second question about the expenditure is growing and right, the trend is growing right now we create more SG&A like the selling activities but from absolutely value to so see within years around US$85 million and this year from actual value it’s just a little bit maybe 10% increase around, but I feel not so much. Thank you.

Thank you everyone for joining us on the call today.

We have no further questions. Thank you.

We'll go to next one, the last one more question.

We’ll go next to Peter Halesworth with Heng Ren.

I have a quick question for Mr. Shao. Could you please explain the CapEx budget for this new year and also I understand that there should have been a Board vote regarding the dividend, the regular dividend. Could you inform us the result of that vote and also what the pay-out ratio is? Thank you.

[Foreign Language]

[Foreign Language]

I will do the translation. The CapEx each year not too much we are close to a couple of companies, so we could see no more than US$10 million each year. And second question about dividend, the dividend we have a regular dividend policy, the payout ratio is 10% and last year we changed the policy to a regular dividend policy.

So just to follow up the payout ratio is going to remain unchanged at 10% because that seems to be a very low payout ratio relative to the CapEx needs and also to the cash flow you’re generating on an annual basis. So, I am just curious why we are keeping the payout ratio so low when the company is brimming with cash?

[Foreign Language]

[Foreign Language]

From recent years because in China is trending faster for Industrial Automation, so you could see our business focusing on the IA, especially Industrial Automation and also international basic expansion and that’s why we're more glad to put the resources into this area to keep pace with the market in recent years. But from the long term we definitely will consider to raise the payout ratio. Thank you, Peter.

And we’ll go next to Kevin Luo with Morgan Stanley.

[Foreign Language]

The first question is about the track circuit new contract. And we heard from the market that is where our regular speed contract how about the contract that carry to these little bit of information. The second question is about the subway signaling control system because right now the market that you could see it will lead - it has been leaded by the local government and also some construction company. So even to the PBT model, what about your method currently maybe PBT participate or corporate with the local government and that would be better to penetrate the signaling control system.

[Foreign Language]

The first question is about track circuit, we separate by two parts, one is regular speed to light and second one is high-speed rail license above 200. Right now we’re just get regular speed to license and won a contract that’s called [indiscernible] line but the contract size is not very sizeable, it's just less than 10 million China event because currently the regular speed procurement are compare high speed rail procurement of the track circuit have just few contract and I feel we already got the tax inline and for running at least one year. So we will probably get license in the fiscal year 2019 calendar year. And by the way the [indiscernible] line where we won the contract it will be finished the whole contract recognized revenue within this fiscal year. And the second question about PBT project and subway signaling, we are participating in bidding and hopefully we can get the subway signaling within one year, and the PBT project because we really need to do it very cautiously it depends on the PBT model, the project itself because sometimes it’s not just limited with capacity, it’s limited with capability and also put a lot of money, we can just do whatever we have for and it depends on the profit of the products and also depends on the rate control. We do not deny to do PBT project and we are also in discussions with local government right now.

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

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