Ladies and gentlemen, thank you for standing by, and welcome to the Hollysys Automation Technologies Earnings Conference Call for First Quarter of Fiscal Year 2020 Ended September 30, 2019. At this time all participants are in a listen-only mode. There will be a presentation followed by a question and answer session. [Operator Instructions] Please be advised that this conference is being recorded today, November 14, 2019, Beijing time.I would now like to have 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; Mr. Steven Wang, CFO 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 first quarter of fiscal year 2020. Mr. Steven Wang will discuss our performance from a financial perspective, and we 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 the statements that are not historical facts, including statements relating to the expectation, 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 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 business 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 systems technology; timing, approval and market acceptance of new product introductions; general economic conditions, geopolitical events, our 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 would like to turn the call to Mr. Baiqing Shao. Please go-ahead sir, Mr. Shao.

Thank you, Arden. And greetings for everyone. I would like to discuss some events during this quarter. IA business finished the quarter with a revenue and contract at $64.6 million and $80.0 million, achieving 12.0% and 4.6% year-over-year growth, respectively. Under the guidance of our ‘3+1+N’ strategy, we continued our effort in market penetration in different industries.In our power business, we signed a contract to provide control solution to urban heat supply network, which is the first project of this kind for Hollysys. In chemical business, we have officially completed the milestone Zhong'an coal-chemical project and will continue to provide maintenance and other services afterwards.The project is one of the largest MAV-DCS projects for Hollysys and we provided total solution covering the integration of up to 10 systems including control system, asset management systems, alarm system, gas detection system, etcetera. In the petrochemical industry, with our DCS and SIS being certified by CCS, China Classification Society, earlier this year, we are better qualified in providing control solution in offshore oil related business.Our strategic relationship with CNOOC, China National Offshore Oil Corporation, proceeded further as we signed several contracts with them in providing control solution to their offshore oil platform this quarter. Besides market penetration through the newly-built projects, we have kept leveraging on our nation-wide network to respond to the aftersales demand of different industries, especially as the control products are approaching the end of life cycle.We maintained close relationship with our existing customers through various types of aftersales service, while also exploited the opportunities in obtaining new clients through replacement and upgrade project, especially in the chemical and petrochemical industries. We are also building up our capability in providing more comprehensive solution covering full life cycle of the project.With the recent completion of the acquisition of a small pharmaceutical and chemical design institute, we are able to get involved in potential projects at earlier stage in the future for better opportunities. In our smart factory solution, following our previous breakthrough contract in the power industry, we have signed several contracts this quarter with both existing and new customers from the chemical industry.Such will be long term cooperation so as to turn their production smart comprehensively step by step. We have also broadened with our industrial software solution matrix, as we launched a new solution that help to optimization emission control and signed the first contract with a client from the power industry.Rail business finished the quarter with revenue and contract at $44.6 million and $21.0 million, recording 11.5% and 70.6% year-over-year decrease respectively. In the high-speed rail business, the bidding pace of CRC has not met the expectation of the market. We continued to provide aftersales service on our high-speed rail signaling products covering software upgrade, spare parts sales, maintenance and replacement.Meanwhile, we are also actively preparing ourselves for new products and services in the aftersales high-speed rail market. In the inter-city high-speed rail business, we signed contracts to provide ATP with automatic train operation function to the Pearl River Delta region. In subway business, the subway line for the new Beijing Daxing Airport commenced business operation in September, with Hollysys being the provider of SCADA solution that supports driverless operation.Going forward, our rail business will continue to adhere to the diversity strategy for stable and healthy growth and to improve our local service network for more value-adding and differentiated services. With urbanization as an ongoing process, we will keep leveraging our strong R&D capacity and prepare for the application of various types of railway transportation systems in the future.M&E business finished the quarter with revenue and contract at $14.0 million and $33.6 million, recording 54.2% year-over-year decrease and 128.0% year-over-year increase respectively. Given the macro economy in Southeast Asia and the Middle East, risk control remains to be the key focus of our M&E business.In IA overseas business, progress is constantly made in terms of establishment of new cooperation with new key EPC players, as well as ongoing cooperation with existing partners. Going forward, we will continue our effort in developing partnership with key EPC players, and strengthening localization in manufacture, marketing and services in overseas business.With that, I would like to turn the call over to Steven Wang who will read the financial results analysis.

Thank you, Mr. Shao. I would like to share some highlights for the first quarter ended September 30, 2019. Comparing to the first quarter of the prior fiscal year, the total revenues for the three months ended September 30, 2019 decreased from $138.7 million to $123.2 million, representing a decrease of 11.2%. Integrated contracts revenue decreased by 10.4% to $104.5 million, products sales revenue decreased by 23.8% to $6.1 million, and services revenue decreased by 9.9% to $12.6 million.The company's total revenues can also be presented in segments as follows: For the first quarter Industrial Automation revenue achieved $64.6 million, Rail Transportation Automation revenue $44.6 million, Mechanical and Electrical Solution revenue $14 million.Overall, non-GAAP gross margin was 37.7% for the three months ended September 30, 2019, as compared to 37.2% for the same period of the prior year. The non-GAAP gross margin for integrated contracts, product sales, and services were 32.6%, 79.9% and 59.5% for the first quarter compared to 30.8%, 75% and 67.9% for the same period of the prior year, respectively. The gross margin fluctuation was mainly due to the different revenue mix with different margins.Selling expenses were $7.3 million for the first quarter, representing a decrease of $0.4 million or 5.6%, compared to $7.7 million for the same quarter of the prior year. Selling expenses were 5.9% and 5.6% for the three months ended September 30, 2019, and 2018, respectively.Non-GAAP G&A expenses were $10.6 million for the first quarter representing an increase of $2 million or 23.6%, compared to $8.6 million for the same quarter of the prior year. Non-GAAP G&A expenses were 8.6% and 6.2% for quarters ended September 30, 2019 and 2018, respectively.R&D expenses were $8.9 million for the first quarter representing an increase of $0.1 million or 2%, compared to $8.8 million for the same quarter of the prior year. Presented as a percentage of total revenues, R&D expenses were 7.3% and 6.3% for the quarter ended September 30, 2019 and 2018, respectively.The VAT refunds and government subsidies were $3.5 million and $3.5 million for the quarter ended September 30, 2019 and 2018, respectively. The income tax expenses and the effective tax rate were $6.2 million and 17.3% for the first quarter as compared to $5.5 million and 16.3% for comparable prior year period. The effective tax rate fluctuation was mainly due to the different pre-tax income mix with different tax rates, as the company's subsidiaries are subject to different tax rates in various jurisdictions.The non-GAAP net income attributable to Hollysys was $29.8 million or $0.49 per diluted share. This represents a 6.1% increase over $28.1 million or $0.46 per share for the comparable prior year period. On a GAAP basis, net income attributable to Hollysys was $29.7 million or $0.49 per diluted share, representing an increase of 6.4% over $27.9 million or $0.46 per diluted share reported in the comparable prior year period.Contracts and Backlog highlights. Hollysys achieved $138.6 million of new contracts for the first quarter ended September 30, 2019. The backlog of September 30, 2019 was $578.9 million. The detailed breakdown of new contracts and backlog by segments is as follows: The new contract achieved the first quarter ended September 30, 2019, Industrial Automation new contract, $84 million; Rail Transportation, $21 million; Mechanical and Electrical Solutions, $33.6 million; Backlog as of September 30, 2019, Industrial Automation backlog, $185 million; Rail Transportation, $288.9 million; Mechanical and Electrical Solutions, $94.6 million.Cash flow highlights. For the first quarter ended September 30, 2019, the total net cash inflows was $15.3 million. The operating cash flow was $39 million. The investing cash flow was $8.1 million and mainly consisted of $31.9 million of matured time deposits, and $4.5 million of proceeds received for the disposal of an equity investment, which were partially offset by $27.8 million of time deposits placed with banks. The net cash used in the financing activities was $20.3 million and mainly consisted of $20 million repayments of bonds payables.Balance sheet highlights. The total amount of cash and cash equivalents were $340 million, $332.5 million, and $276.9 million as of September 30, 2019, June 30, 2019, and September 30, 2018, respectively. For the three months ended September 30, 2019, DSO was 204 days, as compared to 170 days for the comparable prior year period and 160 days for the last quarter. The inventory turnover was 56 days, as compared to 51 days for the comparable prior year period and 40 days for the last quarter.

Operator, please.

Thank you. [Operator Instructions] Your first question comes from the line of Kevin Luo from Morgan Stanley. Please ask the question.

[Foreign Language] And the first question for – about this quarter compared the Railway Transportation compare decreased. So, what about this quarter will deliver of the ATP contract and also at end of this year in December around it, could you give us some hint about the delivering top line winning from your side of ATP on the rolling stock timeline. And also, the differences between the rolling stock delivering and your ATP signaling control system delivering differences, I mean, it's well after for one month after delivering of the rolling stock or what kind of timeline? And the second question for Industrial Automation backlog and current position is compared high within history. And could you give us the proposition breaking down by different sub verticals like in the thermal, the coal power, the chemical and petrochemical etc. And also, please give us the prediction for the future trend within IA of the backlog. Thank you.

[Foreign Language] The first question about ATP and actually it really depends on the CRC China Railway Corporation speed to require us to deliver sometimes at end of this year would catch up, sometimes not. So, this really depends on the situation. And currently this year, we – the CRC open bidding for 146 SaaS of ATP and we get 40 SaaS ATP 30% and also it will be delivering for the coming months. The Industrial Automation actually will not provide the breaking down proportion for the backlog, but generally speaking for the new contract to separate by different industry like the power we take around 40% to 45%, chemical, petrochemical take around 40% to 45%.And in future trend, we still think the Industrial Automation will keep growth. And also, we discussed just about the ATP whether or not will finish the delivering for the 40 SaaS of this time, but it still depends. And then finally CFO mentioned about, if considering the first quarter of this year and the second quarter together, we think the first half year of fiscal year 2020, the Railway Transportation should be compared increase because based on current backlog and the potential delivery, we think the revenue could catch up a positive growth.Thank you, Kevin.

Operator, next one please.

Your next question comes from the line of Alex Chang from Citi. Please ask the question.

[Foreign Language] The question is for – about Railway Transportation segment and also mentioned by Kevin, I want to continue to ask about the prediction for the performance of Rail Transportation for fiscal year 2020 because currently the CRC bidding process ended the market expectation. So, what about the prediction for this fiscal year performance of Rail Transportation?

[Foreign Language] At end of this calendar year and the beginning of next calendar year it will – would have the ATP bidding for the new SaaS of the high-speed rail signaling control system. And based on current backlog and the prediction, we're thinking the whole fiscal year performance for the Rail Transportation could keep I mean compare – just making – to compare the same or just a little bit increase, we will through the after-sale services – after sale revenue to catch up the potential and expectation of the bidding process. So, the Rail Transportation still – the performance is good.

[Foreign Language] I still want to ask about the new products, like the track circuit, like the subway CPCC system and for the future – for this whole fiscal year, how much percentage within the backlog contribute come from these new products? And also, when the subway CPCC system could start the first contract?

[Foreign Language] The [track circuit] still – we didn't test a procedure, so it will not contribute too much within the backlog for the fiscal year 2020. And CPCC system still on the rail side for – there is more project, but not too large contract. So, it is either not to contribute to the railway transportation revenue within 2020. But we will try our best to get the first large contract from the CPCC system.

[Foreign Language] The last one more question related to the P&L, the P&L shows two new items gain, one is gains on disposal of investments, the equity investee around $5.8 million and another one for the equity investee also racked booking around $1.5 million, what about the themes behind of these two items?

[Foreign Language] The first one for the $5.7 million about gain on disposal net – equity investee, that represent the IPE company. We sold our shares in one of our joint stock company called IPE. And the difference between the price sold and our share original book value is recognized as gain.And also, Alex asked – further asked about the – what kind of background of this company and this company is focused on the Biotech related testing. And also, Alex asked about why you sold this company, because you announced, you also get our pharmaceutical design institution, is this any conflict between two, each other?The answer is no, because the IPE is really focused on the bio testing. But what we – the new acquired, the pharmaceutical design institution is for our bid comprehensive solution, because this can take the full cycle of the pharmaceutical industry process control and it can support the business synergy for the future. But the IPE joint stock company is not, so this is the first one.The second question related to the $1.5 million, that would be cost to equity investee and we get the dividend is a kind of investment gain. And also, Alex asked about whether or not it's sustainable? It's not sustainable, it just depends on different quarter performance by the companies itself. So, it can fluctuate all the time. Thank you.

Your next question comes from the line of Jacqueline Du from Goldman Sachs. Please ask your question.

[Foreign Language] The question is about Industrial Automation and we could see the company approved a lot of resources within the chemical, petrochemical industry. And I also – we mentioned about Zhong'an coal project. And this time, you mentioned about the new project for the CNOOC and it is it the same product? And also, I want to know about what capability you are increasing within the chemical, petrochemical. And for the fiscal year 2020, is there any other new large project that will join?

[Foreign Language] And thank you all for your questions. Actually, we really put a lot of resources within the chemical, petrochemical. We're hired express and also even the very famous ones within the industry and to increase set up our brand name and let the customer know us. And right now, the Zhong'an project is not the same as – at this time we said about the CNOOC project.The Zhong'an project that is the largest one chemical project within China and we finished whole project right now and get the admission by the customers. And this can demonstrate the Hollysys capability. And then the CNOOC project is also very important, because we finished it by CCS. If you are certified by CCS, you can participate the offshore oil platform project.So, this is a pretty new one for the Hollysys. And we will continue to sign the large project with the large state-owned enterprises within the chemical, petrochemical industry for this year. And we think the next step we could contribute more to this industry.

[Foreign Language] I want to make supplement to ask question about if – from the competitive thinking, what about the current market share for the chemical, petrochemical and what about the future – the market share you want to achieve?

[Foreign Language] The chemical, [petrochemical pair] competitors actually for the former years, we were focused on the power and not to put more enough resources within chemical, petrochemical, so we're behind this. And right now, we are catching up and we think we will very quickly to the – to penetrate the market. But from the market share, to say, it's hard to give you the data, because there has been no statistical bureau and also is very fragmenting within the sub industry. So, I mean, maybe in future, but right now we have no data in hand. Thank you.

[Foreign Language]

Because of the time constraint, the last one question. Thank you, operator.

Your final question today comes from the line of Kong Lingxin from CICC. Please ask the question.

[Foreign Language] Okay. The first question I want to ask a detail about your side of the ATP when 40 SaaS. The 40 SaaS means how [many price], actually?

And this answer, the SaaS, each train rolling sub train have two SaaS of ATP, so it should be 20 rolling stocks.

Okay. [Foreign Language]

This question about the – Mr. Kong said actually the CRC open bidding for the trains, more than 100 trains. So, if calculated by your side, you have 20 is not one-third of market share. And I want to make it clarify that we see the one-third market share no problem, but maybe the – whether or not 20 rolling stock or 40 rolling stock we have to double-check, because the data right now will not – as the same, but we – based on the press release by the CRC. So, no matter what kind of numbers we get one-third, this – the market share have no doubt.

Okay. Thanks, Baiqing. [Foreign Language] The second question about the railway transportation new contract, CFO Mr. Wang said the performance revenue for the Railway Transportation for the Q1 and the Q2 terms positive. But I want to ask that from the new contract stack, could you give us some prediction for the new contract of Railway Transportation for the first-half fiscal year compared increase or decrease?

[Foreign Language] And in revenue, we give – the prediction is based on the execution of the projects and backlog. So, this is true to achieve. But based on the new contract, it's hard to say, it really depends on the CRC bidding process.

Okay. [Foreign Language] And for the gross margin, the last question for the gross margin. I saw the first quarter gross margin increased 0.5%. And also, I noticed that the structure like three different types of contracts – the integrated contract, the product sale [at this trend] and internally the integrated contract compared increased 2.6%. So, could you talk more about the integrated contract internal what kind of is changing?

[Foreign Language]

[Foreign Language] Mr. Shao said from the operation business effect, the company always focused on control, the gross margin and to improve the contracted show at first time and the delivery and quality to manage the range. And you could see our range prediction for the gross margin always within the range of what we said, like the whole business 35% to 40%. And the fluctuation specific like a 1% for example, it's hard to say internally is hard to contribute. So – but what we can focus is the whole management efficiency improvement.So, this part is what do we want to emphasize. And then we will continue to control the expense, everything to improve the gross margin and to lock up the net income. And CFO mentioned about the gross margin, we will lock up, we've been a health range. And if you see the Railway Transportation itself, it's hard to use one quarter to show about the whole performance, represent the whole gross margin. Actually, we recommend that you see the Railway Transportation should – based on a whole year because the quarterly fluctuation would – very sharply. Thank you.

Okay, thank you. [Foreign Speech]

Okay. Thank you everyone for joining us on the call today. If you haven't got the chance to raise your questions, we'll be pleased to answer them after the call. We're looking forward to speaking with you again in near future. Thank you.

[Foreign Speech]

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