Ladies and gentlemen, thank you for standing by and welcome to the Hollysys Automation Technologies Fiscal Year 2016 Fourth Quarter and Fiscal Year Ending on June 30, 2016 Earnings Conference Call. 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, August 15, 2016 Beijing Time. 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. Herriet Qu, CFO of Hollysys; and myself from the Investor Relations. On today’s call, Mr. Shao will provide a general overview of our business including some highlights for the quarter and the fiscal year, and Ms. Qu will discuss our performance from financial perspective and the financial outlook for fiscal year 2017 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 - the statements are the statements that are not historical facts is 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 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, succession or changes in government incentive programs, potential trade barriers affecting international expansion, fluctuation 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 U.S. dollars unless otherwise noted. I’d now like to turn the call to Mr. Baiqing Shao. Please go ahead, Mr. Shao.

Thank you, Arden, and greeting to everyone. I would like to discuss some key events during this year. In fiscal year 2016, we kept a steady revenue growth and outperformed the challenging earnings guidance that’s announced previously, as well as cash flow, despite a difficulty in macro-economy. When we’re delighted with the achievements, we calmly evaluated the future opportunities and the challenges, and also carefully planned for the future growth. Here, we would like to discuss some achievements in the past fiscal year and the strategies in future. Industrial automation, the soft performance was mainly because of the influence of general economic environment. During the past fiscal year, China continued adjusting its industry structure and reducing the capacity in some industries such as petrochemical, metallurgy and building materials. However, Hollysys took several strategies to mitigate the impact our market headwinds. We gained more market this year from rising industries to make up for the loss from decreasing industries. We were doing well in power and the chemical, which took up the largest portion of our revenue in industrial automation. We further penetrated into high-end market. For instance, we won several bids to provide DCS for supercritical coal fire generating units such as Funeng Luoyuanwan double 1 gigawatts, Jiujiang Shenhua double 1 gigawatts, Guohua Ningdong double 660 megawatts, and the Xinjiang TBEA double 660 megawatts power units. In nuclear sector, we supplied DCS for Hongyanhe 5# and 6# units. In addition, after-sale revenue was still reinforced for fiscal year 2016. With our special team kept reviewing existing customers, the demand of upgrade and the maintenance continued growing. Besides, company has actively expanded in abroad. We signed some contracts which delivered our own proprietary products in overseas market. In India, for example, Lanco Solar Power Polycrystalline Silicon Project will be implemented our DCS and SIS. In Indonesia Qingshan double 350MW Coal-fire Power Units will use our DCS and DEH. We will continue to win more customers and enlarge overseas business scale to support long-term growth of IA. In factory automation sector of IA, we are changing the strategy from providing single products to providing customized turnkey solutions, like what we are doing in the process control to help the customers solve their problems and satisfy their needs. We expect this sector has a good performance in the near future. The performance of railway transportation was prominent. In high-speed rail sector, we won some contracts as to provide the Train Control Centers and other related ground-based products, such as Chongqing to Wanzhou Line and Xi’an to Chengdu Line; we also won several contracts in Automatic Train Protection. In the future, according to the new five-year plan and even longer, the investment scale of the central government in high-speed rail will be still sizable. At the same time, track circuit has finished the second test in June 2016. This new product could make revenue contribution in upcoming years. Another strong driver of railway transportation sector for this fiscal year was subway business. We signed the contracts to provide SCADA system for Qingdao Line R3, Kunming Line 3, Chengdu Line 10, Lanzhou Line 1, Wuhan Line 8, et cetera. We will continue working closely with local subway authorities to expand our SCADA business for better marketing our subway signaling control system. In the mechanical and electrical solution segment, although Concord and Bond are facing some difficulties like projects delayed and depreciation of local currency, they are still working hard to expand their businesses. Concord, for example, signed a very large contract to provide electrical installation services for Doha Metro Phase 1. As one of the strategies to expand the overseas market, we will ensure a healthy development of Concord and Bond, and take use of the advantages of these two companies such as good customer relations and sales channels to ink more international opportunities. With that, I’d like to turn the call over to Arden Xia, who will read us the financial results analysis on behalf of our CFO, Ms. Herriet Qu.

Thank you, Mr. Xia. I would like to share some highlights for the quarter, for the fourth quarter of fiscal year 2016 and fiscal year ended June 30, 2016. Comparing to the prior fiscal year, the total revenues for fiscal year 2016 increased from $531.4 million to $544.3 million, representing an increase of 2.4%. Broken down by the revenue types, integrated contracts revenue decreased by 0.7% to $477.8 million, product sales revenue increased by 37.2% to $54.5 million, and services revenue increased by 13% to $12 million. The revenues in categories: Industrial Automation $182.9 million; Rail Transportation $240.3 million; Mechanical and Electrical Solution $95.3 million; Miscellaneous $25.8 million; total $544.3 million. Overall gross margin excluding non-cash amortization of acquired intangibles was 37.9% for the fiscal year 2016, as compared to 41.2% for the prior year. The non-GAAP gross margin for integrated contracts, product sales and services rendered were 35.2%, 56% and 66.4% for fiscal year 2016, as compared to 38.5%, 68.4%, and 61.4% for 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 37.8% for fiscal year 2016 as compared to 40.3% for the prior year. The GAAP gross margin for integrated contracts, product sales, and service rendered were 35%, 56% and 66.4% for the fiscal year 2016, as compared to 37.6%, 68.4%, and 61.4% for the prior year respectively. Selling expenses were $25.6 million for the fiscal year 2016, representing a decrease of $0.7 million or 2.4% compared to $26.3 million for the prior year. Presented as a percentage of total revenues, selling expenses were 4.7% and 4.9% for the fiscal year 2016 and 2015 respectively. G&A expenses, excluding non-cash share-based compensation expenses were $42 million for the fiscal year 2016, representing a decrease of $6.3 million or 13.1%, as compared to $48.3 million for the prior year. The decrease was mainly due to a decrease of $7.4 million in bad debt provision. Presented as a percentage of total revenues, non-GAAP G&A expenses were 7.7% and 9.1% for fiscal year 2016 and 2015 respectively. The GAAP G&A expenses which include the non-cash share-based compensation expenses were $45.8 million and $50.8 million for the fiscal year 2016 and 2015 respectively. Research and development expenses were $36.6 million for fiscal year 2016, an increase of $0.8 million or 2.2% compared to $35.8 million for the prior year. Presented as a percentage of total revenues, R&D expenses were both 6.7% and 6.7% for fiscal year 2016 and 2015 respectively. The VAT refunds and government subsidies were $22.9 million for the fiscal year 2016 as compared to $30.4 million for the prior year, representing a $7.5 million or 24.7% decrease which was primarily due to decrease of the VAT refunds of $5.5 million and the government subsidies for $2 million. The income tax expenses and the effective tax rate were $14.2 million and 10.3% for fiscal year 2016, as compared to $26 million and 20.8% for the prior year. According to the Notification on Preferential Enterprise Income Tax of Software and Integrated Circuit Industry, Finance and Tax Policy 2016, the 49th Article, which was issued in May 2016 by the China State Administration of Tax and the Ministry Of Finance, Beijing Hollysys and Hangzhou Hollysys satisfied the definitions of Key Software Enterprise, and applied to a preferential tax rate of 10% effective for the year from January 1, 2015 to December 31, 2015, instead of the 15% used by the company in calendar year 2015. As a result, the company recorded a tax benefit of $7 million during the fourth quarter of fiscal year 2016. In addition, during the fourth quarter of fiscal year 2016, $3.1 million withholding tax expenses were accrued for the potential profits distribution from PRC to overseas. Excluding the impact of the abovementioned tax benefit and withholding tax expenses, the effective tax rate for fiscal year 2016 should be 13.2%. 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 $121.5 million or $2.02 per diluted share based on 60.6 million shares outstanding for fiscal year 2016. This represents a 17.6% increase over the $103.3 million or $1.72 per share based on 60.1 million shares outstanding reported in prior year. On a GAAP basis, net income attributable to Hollysys was $118.5 million or $1.97 per diluted share representing an increase 22.7% over the $96.5 million or $1.61 per diluted share reported in prior year. The quarter results ended June 30, 2016 is as follows. Comparing to the fourth quarter of the prior fiscal year, the total revenues for the three months ended June 30, 2016 increased from $142.2 million to $147.7 million, representing an increase of 3.9%. Broken down by the revenue types, integrated contracts revenue increased by 4.5% to $132.9 million, product sales revenue increased by 7.3% to $11.6 million, and services revenue decreased by 24% to $3.3 million. The revenue in categories: Industrial Automation $41.3 million; Rail Transportation $65.9 million; M&E $32.9 million; Miscellaneous $7.7 million; total $147.7 million. Overall gross margin excluding non-cash amortization of acquired intangibles was 39.9% for the fourth quarter as compared to 41.4% for the same period of the prior year. The non-GAAP gross margin for integrated contracts, product sales, and services rendered were 37.4%, 58% and 74.7% for the fourth quarter as compared to 39.2%, 61.1% and 59.4% 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 39.8% for the fourth quarter, as compared to 41.2% for the same period of the prior year. The GAAP gross margin for integrated contracts, product sales, and service rendered were 37.3%, 58% and 74.7% for the fourth quarter as compared to 38.9%, 61.1% and 59.4% for the same period of prior year respectively. Selling expenses were $6.7 million for fourth quarter, representing an increase of $0.1 million or 1.6% compared to $6.6 million for the same quarter of the prior year. Presented as a percentage of total revenues, selling expenses were 4.5% and 4.6% for the three months ended June 30, 2016 and 2015 respectively. G&A expenses, excluding non-cash share-based compensation expenses were $13.5 million for the fourth quarter, representing a decrease of 1 million, or 6.9% as compared to $14.5 million for the same period of the prior year. Presented as percentage of total revenues, non-GAAP G&A expenses were 9.2% and 10.2% for the quarters ended June 30, 2016 and 2015 respectively. The GAAP G&A expenses which included non-cash share-based compensation expenses were $14.1 million and $15.4 million for the three months ended June 30, 2016 and 2015 respectively. R&D expenses were $8.6 million for the fourth quarter, an increase of $1.1 million or 14.3% compared to $7.5 million for the same quarter of prior year. Presented as a percentage of total revenues, R&D expenses were 5.8% and 5.3% for the quarter ended June 30, 2016 and 2015 respectively. The VAT refunds and government subsidies were $2.8 million for the fourth quarter as compared to $12.4 million for the same period in prior year, representing a $9.6 million or 77.2% decrease, primarily due to a decrease of the VAT refund of $7.1 million. The income tax expenses and the effective tax rate were $1.1 million and 3.1% for fourth quarter as compared to $12.3 million and 38.5% for comparable prior-year period. During the fourth quarter of fiscal 2016, the company recorded a tax benefit of $7 million according to the newly issued Notification withholding tax - Notification on Preferential Enterprise Income Tax of Software and Integrated Circuit Industry, Finance and Tax Policy 2016, the 49th Article, and a withholding tax expenses of $3.1 million for the potential profits distribution from PRC to overseas. Excluding the abovementioned impact, the effective tax rate for the fourth quarter should be 14%. 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 the convertible bond related fair value adjustments was $34.3 million or $0.57 per diluted share based on 60.7 million shares outstanding for the fourth quarter. This represents a 48.8% increase over the $23 million or $0.38 per diluted based - 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 $33.4 million or $0.55 per diluted share representing an increase of 78.9% over the $18.7 million or $0.31 per diluted share reported in comparable prior year period. Hollysys’ backlog for integrated contracts as of June of 2016 was $527.2 million, representing an increase of 5.8% compared to $498.5 million as of March 31, 2016 and a decrease of 7.3% compared to $568.5 million as of June 30, 2015. The detailed breakdown of backlog for integrated contracts by segments is shown below: Industrial Automation, $112.1 million; Rail Transportation, $216.5 million; M&E, $198.6 million; total, $527.2 million. For the fourth quarter, the total net cash inflow was $21.3 million. The net cash provided by operating activities was $46.7 million. The net cash used in investing activities was $2.5 million, mainly consisted of $107.1 million time deposit with original maturities over three months placed with banks, and $7.9 million used for purchases of property, plant and equipment, which was partially offset by $112 million generated from matured time deposits with original maturities over three months. The net cash used in financing activities was $6.8 million, mainly consisted of $17 million used for repayments of short-term loans, $9.7 million used for repayments of long-term loans, which was partially offset by $7.7 million proceeds from issuance of shares of a subsidiary, $5.4 million proceeds from exercise of options, and $4.1 million proceeds from short-term bank loans. For the fourth quarter of 2016, the total net cash inflow was $29.6 million. The net cash provided by operating activities was $9.9 million. The net cash provided by investing activities was $11.6 million. The net cash provided by financing activities was $12.2 million, mainly consisted of $7.7 million proceeds from issuance of shares of a subsidiary and $5.1 proceeds from exercise of share options. The total amount of cash and cash equivalents and time deposits with original maturities over three months were $271.5 million, $256.4 million and $257.5 million as of June 30, 2016, March 31, 2016 and June 30, 2015 respectively. As of June 30, 2016, the company held $229.1 million in cash and cash equivalents and $42.4 million in time deposits with original maturities over three months. Fiscal year ended June 30, 2016 DSO was 162 days, as compared to 176 days from the prior year. The inventory turnover was 38 days, as compared to 41 days from the prior year. For the fourth quarter, DSO was 147 days as compared to 176 days for the comparable prior year period and 181 days for the last quarter; and inventory turnover was 37 days, as compared to 43 days for the comparable prior-year period and 40 days for the last quarter. Outlook for fiscal year 2017, given our strong backlog currently on-hand and sales pipeline envisioned so far, we set our guidance for fiscal year 2017 with revenue in range of $565 million to $600 million and non-GAAP net income in range of $130 million to $140 million. At this time, we’d like to open up for QA session. Please note that for Chinese speaker participants we can also do the QA in Mandarin and will provide translation. [Foreign Language] Operator, please.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Patrick Xu from Nomura. Please go ahead, the line is open.

[Interpreted] The first is about the regular dividend for the 2016 is there any plans right now. And the second question is about the cash flow and we saw last year financial report, it has no cash flow related to the dividend. And the third question is about the Southeast Asia performance relatively good. What kind of project or what kind of business in there? And what about the cash flow circumstances; is there any account receivable, account payable related top situation. And the fourth quarter is about the translation adjustment.

[Interpreted] The company has no regular dividend policy that’s on the year, so that’s why the last year cash flow financial report where you couldn’t see any about this. But this fiscal year 2016 it really depends on the final decision of meeting Board of Directors’ resolutions.

[Foreign Language]

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[Interpreted] Okay. The third question is about the income in the P&L financial report that the translational adjustment is related to the convert from the balance sheet, not for the P&L, so it is not a factor at the equity.

[Interpreted] In the Southeast Asia, our business including the M&E part and besides that we also provide our own products like in Rail and Industrial Automation. And also, for example, like the Industrial Automation, we have two directions. One is EPC project like the Qingshan, about the coal fire station in Indonesia and also like the second direction is the local sales; we already set up a local team to sell our products like the project in India, Lanco project. And currently the cash flow is also very healthy and we have don’t have any problem with this situation. Patrick?

[Interpreted] Thank you.

Operator, next one, please?

Your next question comes from Kevin Luo from Morgan Stanley. Please go ahead, the line is open.

Hey…

Hi, Kevin.

[Foreign Language] I have three questions. The first one is why did the VAT refunds and government subsidies decreased by 25% in fiscal year 2016. And my second question is why did - we find that our earnings contribution from the equity investment turnaround and contributed $8 million in fiscal year 2016, can you explain why? The third question is that we find the company’s effective income tax rate dropped by only 10% in fiscal year 2016; will this be sustainable in fiscal year 2017 and future? Thank you.

[Interpreted] And the first question is about the VAT refund and subsidy decline and this fiscal year compared to last fiscal year goes down. And the first is about the VAT. VAT goes down because we have a one-time discount for the railway contract in 300 this fiscal year. So we pay less and we pay less tax and then we get less refund. That’s the reason for the VAT and the subsidy is also in the healthy range of up and down. So it got cheaper in future. And the government subsidy is really relates to the final close of the project. This does not mean we get less subsidy. Just this fiscal year we have less project, we still have implementing projects, not finished yet. So that’s why not got this final subsidy. The second question is about the share of net income of equity investees, this part represent the company of China Technology Corporation. And in the past, the first reason is to get us a government subsidy around the CNY80 million and versus the 40% of our shares. We get around CNY30 million, besides their performance turns to positive this fiscal year. You could see in the financial reports and in the past years that part is lost. But this fiscal turns to gain. That’s why represented at the spreadsheet we could see 7.8 million increase from this part. The third question is about the tax. This fiscal year we get a certificate of Key Software Enterprise and this is related to the policy of finance and tax with the Number 49 Article of Tax of Software and the Integrated Circuit Industry. Actually that part, we just paid 10% of the income tax versus 15% as before, and this part renew each year and we believe we could continue get the license.

Kevin?

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Operator, next one?

Your next question comes from Alex Chang from Citigroup. Please ask your question, the line is open.

[Foreign Language]

Hi, Alex.

[Foreign Language]

Hello, operator, Alex?

Pardon the interruption. The line has disconnected the line of the participant.

Okay, no…

If you wish, I can take our…

Okay, no problem, we can be waiting for the reconnect. And I’ll translate the first question right now. The first question from Alex is about the, please share the information about the gross margin in each category within IA, Rail, M&E and also what the trend in next fiscal year 2017. And maybe we could answer the first question right now? [Foreign Language]

[Interpreted] Okay. About the gross margin, in last fiscal year, the fourth quarter we already said, for the gross margin we have different mix of different products and also the structure right now is changing. That’s why these two manufacturers account for different gross margin and also the influence. So we believe the next fiscal year just like this fiscal year, the gross margin will depend on the different project mix and also different revenue structure. Currently, the IA is still okay and Rail, M&E is still in the range of what we said. So we will keep the gross margin in the next fiscal year. Hi, Alex?

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[Interpreted] The second question is about we saw the guidance for the next fiscal year is the same as before, but just like this fiscal year 2016 the net income is performing very good. So could you break it down the number that which part contributed the net income? And also, in future the three segments, IA, Rail and M&E, what about their performance or predict - or performance in future, and also what about the control of the expenditure in future?

[Interpreted] So the breaking down in future, the IA will we - our targets in the fiscal year 2017 will keep flat. This is because one is from the factory automation that we will focus on the intelligent turn-key solutions and also have the overseas revenue contribution will continue to extend oversea market. And also in domestic areas, the market currently seems not goes down any more. And from the new orders sites, this fiscal year turns to good than last fiscal year. For example, last fiscal year each quarter have more than 30% decline, but this fiscal year turns to flat and besides the revenue structure is changing, after sales is increasing, so the IA our target is to keep flat for the next fiscal year. And the railway transportation, because the subway side, we continue to expand the SCADA business and also we have potential chance to get some of signal in the new product, the CBTC and in high-speed rail our track circuit everything is ready and we will get the contract. So that’s why for railway transportation, generally speaking, for the next fiscal year we will achieve at least 5% to 10% revenue growth. The last one is M&E segment, because we already got a very large contract $60 million, so that is to say in the next fiscal year this part will keep a very good performance. So we will try our best to achieve growth as we can. And from the gross margin side, because after sale revenue for example is increasing and also we control the expenditure, the expenditure from the marketing, selling and everything, that part will keep the thing as this fiscal year and also the R&D expenditure will keep at the same. This will not affect any operating expenditure. And also we will control bad debt provision and the effective tax rate will keep relatively lower and we will continue to do that.

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[Interpreted] The question is about could you please tell us the size of the contract for the track circuit and the CBTC system or any planning for the fiscal year 2017?

[Interpreted] The answer is we have no - we cannot disclose the timeline currently and maybe when we had first contract we can better give you landscape about the process side in future.

With the time constraint the last question, please, operator. Hello, operator, please?

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

[Foreign Language]

[Foreign Language]

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[Interpreted] Okay, okay. The first question is about the first quarter, the result from the high-speed rail, it seems performance is very strong, but last fiscal - last calendar year we get the contract and it seems like it will - it’s already decreased in the last quarter. And also the gross margin is still high above 45%. So could you explain where it’s from? And the second part is about the effective tax rate. Is it possible that we can just calculate effective tax rate at 10% even last fiscal year?

[Interpreted] The real rail transport - high-speed rail for this quarter is because we have implemented the - we based on percentage of completion. The ATP contract would be decreased in nine to 12 months. So actually this quarter we still have the ATP contract. Besides, the gross margin is relatively high, because we get the supplement of the ATP project. So not just this quarter and even that quarter we still have ATP on hand. So that’s why not either from the revenue and that the gross margin, high-speed rail is still very strong. And the second question about the effective tax rate. About the effective tax rate, it is better not to calculate it at just 10%, because 10% is just implemented within two companies in Beijing. And the other companies’ subsidy raises in China still implemented some of them are around 15% and some of them are still 25%. And in abroad, the subsidiaries they implemented effective tax rates are currently is about 17%. So it’s better calculated at the comprehensive and also it depends on the revenue structure. So we think it’s going to around 13% from effective tax rate, and also like the same for the next fiscal year.

[Foreign Language]

[Foreign Language] 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-up contacts. We look forward to speaking with you again in the near future. Thank you. [Foreign Language]

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