Ladies and gentlemen, thank you for standing by, and welcome to the Hollysys Automation Technologies' Fiscal Year 2017 Second Quarter ended on December 31, 2016 Earnings Conference Call. [Operator Instructions] Please be advised that this conference is being recorded today, February 15, 2017, Beijing time. I would now like to hand the conference over to Mr. Arden Xia, the Investor Relations Director of Hollysys Automation Technologies. Please go ahead, Mr. Xia.

Hello, everyone, and thank you for joining us. Today, our speakers will be Mr. Baiqing Shao, CEO of Hollysys Automation Technologies; Ms. Harriet Qu, CFO of Hollysys; and myself, 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 product 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 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. I'd now like to turn the call to 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. Industrial Automation has been developing to the short-term target, which was trying to elevate turns continually declining. Through activity towards our customers' new demand and adjusting circumstance, we got several significant contracts. For example, in power, we signed the contract to provide the products for Yuneng Hengshan 2 megawatt (sic) [ 1,000-megawatt ] power units, Datang Pingluo 2 660-megawatt power units; and Yangmei Xishangzhuang 2 660-megawatt power units. In chemical, we provided DCS and Batch for BASF chemical company. In petrochemical, we won the contract to provide the products to a halite project, which will produce 1 million tons of soda ash per year. In nuclear power, we continued to provide DCS for Hongyanhe #5 and #6 units and Tianwan unit 5 and unit 6. For Factory Automation, after by changing strategies from selling products to provide the solutions to customers, we did have some progress such as Hair project to help the customer improve the level of automation and intelligence of their Tianjin-based factory, which focuses on wash machine, integrated internal resources to improve the production. Others new subvertical trials such as Hai Di Lao Hot Pot project helped the customer to improve the efficiency of the hot pot-based making in the restaurant, which is the first food area project under FA customizations. We also provided the supervisory control and the data analysis software integration solutions to China Model Factory jointly established by the Tsinghua University and McKinsey & Company. The project is to raise the level of factory's productivity, digitalization and intelligence in China. Hollysys aim to make each project into a demonstration project and create value to the customers. In high-speed railway, due to the negative impact from delaying ATP contract, the performance of the high-speed railway for this quarter was less than satisfactory. In addition, since it is the first year for the 13th 5-year plan, the infrastructure of new planned railway is just started. Therefore, in short term, the performance of high-speed rail segment was fluctuated. However, for long run, according to the mid- and long-term plan of high-speed railway and with the increasing of the after-sales and the new products launching, we think the sector will recover in future. For subway, we stick to our strategy to expand new cities. For this quarter, we signed the contract to provide SCADA for Wuhan Subway Line 21. In the mechanical and electrical installation service, although Concord and Bond are facing some difficulties because of the local political and economic uncertainties in Southeast Asia and Middle East area, they are still hard working to develop the businesses. For example, Concord won the contract to provide SCADA for Macau LRT Phase 1. As one of the strategies to expand overseas market, we will ensure a healthy development of Concord and Bond and take use of the 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 read the financial results analysis on behalf of our CFO, Master Harriet Qu.

Thank you, Mr. Shao. I would like to share some highlights for the half year and the second quarter of fiscal year 2017 ended on December 31, 2016. Comparing to the second quarter of the prior fiscal year, the total revenues for the 3 months ended December 31, 2016, decreased from $152.8 million to $99.1 million, representing a decrease of 35.1%. Broken down by the revenue types, service revenue increased by 10.1% to $3.5 million, integrated contracts revenue decreased by 33.3% to $89.5 million and product sales revenue decreased by 60.7% to $6.1 million. In July 2016, the company's interest in Hollycon were diluted from 51% to 30%, and the company lost the control of Hollycon. As a result, Hollycon's financials will not be included in the company's consolidated financials from July 2016 on. If Hollycon's revenue was excluded from the comparable figure for the second quarter of the prior fiscal year, the product sales revenue for the 3 months ended December 31, 2016, should be decreased by 42.2%. The company's total revenues can also be presented in segments: industrial automation, $45.8 million; railway transportation, $23.3 million; mechanical and electrical installation services, $30 million; total, $99.1 million. Overall gross margin, excluding noncash amortization of acquired intangibles, was 28.7% for the second quarter as compared to 39.8% for the same period of prior year. The non-GAAP gross margin for integrated contracts, product sales and service rendered were 24.3%, 72.1% and 64.9% for the second quarter as compared to 37.2%, 57.4% and 65.2% for the same period of prior year, respectively. The gross margin fluctuation was mainly due to the different revenue mix with different margin. The GAAP overall gross margin, which includes noncash amortization of acquired intangibles, was 28.6% for the second quarter as compared to 39.7% for the same period of prior year. The GAAP gross margin for integrated contracts, product sales and service rendered were 24.2%, 72.1% and 64.9% for the second quarter as compared to 37%, 57.4% and 65.2% for the same period of prior year, respectively. Selling expenses were 60. -- was $6.3 million for the second quarter, representing a decrease of $0.8 million or 11.1% compared to $7.1 million for the same quarter of the prior year. Presented as a percentage of total revenues, selling expenses were 6.4% and 4.0% -- 4.6% for the 3 months ended December 31, 2016, and 2015, respectively. G&A expenses, excluding noncash share-based compensation expenses, were $10.8 million and the same number for the quarter ended December 31, 2016, and '15, respectively. Presented as a percentage of total revenues, non-GAAP G&A expenses were 10.9% and 7.1% for the quarters ended December 31, 2016, and '15, respectively. The GAAP G&A expenses, which included noncash share-based compensation expenses, were $11.7 million and $12.1 million for the 3 months ended December 31, 2016, and '15, respectively. R&D expenses were $8.3 million for the second quarter, representing a decrease of $3.6 million or 30.3% compared to $11.9 million for the same quarter of the prior year. Presented as a percentage of total revenues, R&D expenses were 8.4% and 7.8% for the quarter ended December 31, 2016, and '15, respectively. The VAT refunds and government subsidies were $8.2 million for the second quarter as compared to $10.7 million for the same period in prior year, representing a $2.5 million or 23.3% decrease, which was primarily due to decrease of VAT refunds of $3.3 million. The income tax expenses and effective tax rate were $1.6 million and 13.5% for the second quarter as compared to $5.1 million and 13.2% for the comparable prior year period. The non-GAAP net income attributable to Hollysys, which excludes noncash share-based compensation expenses, amortization of acquired intangibles, acquisition-related consideration fair value adjustments and convertible bond-related fair value adjustments was $11 million or $0.18 per diluted share based on 60.9 million shares outstanding for the second quarter. This represents a 70.5% decrease over the $25.8 million or $0.43 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 $10 million or $0.17 per diluted share, representing a decrease of 69.7% over the $32.9 million or $0.55 per diluted share reported in the comparable prior year period. Contracts and backlog highlights. Hollysys achieved $110.2 million new contracts for the second quarter, and the backlog as of December 31, 2016, was $499.4 million. The detailed breakdown of new contracts: Industrial Automation, $46.5 million; Railway Transportation, $47.3 million; M&E, $16.4 million; total, $110.2 million. The backlog by segments: Industrial Automation, $119.8 million; Railway Transportation, $225.4 million; M&E, $154.2 million; total, $499.4 million. Cash flow highlights. For the 3 months ended December 31, 2016, the total net cash outflow was $2.2 million. The net cash provided by operating activities was $36.2 million. The net cash used in investing activities was $30 million, mainly consisted of $54.4 million time deposits placed with banks, which was partially offset by $24.6 million maturity of time deposits. The net cash used in financing activities was $3.9 million, mainly consisted of $12 million payment of dividends, which was partially offset by $5.5 million proceeds from long-term bank loans. Balance sheet highlights. The total amount of cash and cash equivalents and time deposits with original maturities over 3 months were $285.4 million, $260.9 million and $275.6 million as of December 31, 2016, September 30, 2016, and December 31, 2015, respectively. As of December 31, 2016, the company held $210.1 million in cash and cash equivalents and a $75.3 million in time deposits with original maturities over 3 months. For the 3 months ended December 31, 2016, DSO was 208 days as compared to 138 days for the comparable prior year period and 207 days for the last quarter. The inventory turnover was 52 days as compared to 34 days for the comparable prior year period and 48 days for the last quarter. Outlook for fiscal year '17. Consideration on the negative impact from delaying ATP contract, we would like to adjust the guidance from fiscal year 2017 with revenue in range of $480 million to $520 million and non-GAAP net income in the range of $90 million to $100 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 the Q&A in Mandarin and we will provide translation. [Foreign Language] Operator, please.

[Operator Instructions] We will now take our first question from Patrick Xu from Nomura.

My first question is regarding on the net income and financial expense. I see that your net interest income actually declined by about 60% in the first fiscal -- first half of the fiscal year. But on the balance sheet, your net cash position actually increased. Could you explain the [indiscernible] net interest income was going down. And the second question is probably, could you talk about the segments' prospects, like, segment by segment? That's it.

Patrick, sorry, the first question. Can you repeat the first part because it did not sound so very clearly.

Okay. The first question is that if you look at your net interest income, I think it actually declined year-on-year. Last year, you had about $2.1 million -- USD $2.1 million in the first half. And this year, it decreased to less than USD 1 million. But on the balance sheet, your net cash position actually increased year-on-year. So why would your interest income going down while your cash balance was going up?

Okay. [Foreign Language]

Arden, [Foreign Language]

Sorry, this is my misleading.

[Foreign Language]

[Foreign Language]

[Foreign Language]

Okay. Hold on a second. The first question relates to the interest of the bank deposits, but the balance sheet still increased, the interest goes down. This is by 2 reasons. One, is for -- currently -- or most of our cash located in domestic area, but we have to do some changing to raise the money into abroad, so there would be a factor to the deposits. And also, the second reason is for last year, we have our agreement with the international bank for specific interest. But this year, we have no such agreement. These 2 factors account for the interest goes down, but balance sheet still increased, by the cash. [Foreign Language]

[Foreign Language]

And to the segment by segment, the Industrial Automation for the whole fiscal year of 2017, we also want to achieve the target to keep it flat compared to prior year from the revenue side. And the Railway Transportation would be decreased because of the ATP contract delay account for the changes of the high-speed rail revenue. And the M&E segment, we also want to keep that at least a 10% revenue growth for this fiscal year.

[Operator Instructions] It appears there are no further -- oh, we have a question from Alex Chang from Citibank.

[Foreign Language]

Okay. The first question is about the Industrial Automation. To see this quarter relative to the new contract still keep a positive growth. What kind of structure insight to compare with several years ago, what kind of differences? The second question is about the Factory Automation. We could see we provide the solution -- the products and solutions to the higher and also to the Hai Di Lao Hot Pot. So could you please talk about the detail of the gross margin for these 2 projects?

[Foreign Language]

[Foreign Language]

[Foreign Language]

The first question about IA new order. Recently, we could see from the government side that there has regulation to control the coal-fired power new project. However, we're not affected currently. We -- the project already passed by government. We got several new contracts from them. So actually, the coal-fired from our performance side, the new contract is still increasing. This is compared several years ago, relatively, we take a high-end more than before like 600 to 800 megawatts power station and above. The second question for FA, the gross margin is the same within the Industrial Automation in the range of 35% to 40%.

[Foreign Language]

Alex, conclude one thing, it's coal-fired, and because the restriction of the central government so it will lead to a gradual decline from this area. So what about the company's expectation in the next years, especially for fiscal year 2018 and 2019?

[Foreign Language]

Because the overcapacity within the coal-fired and the basic electricity production percentage is going down, so this year, the central government released the regulation limitation within the coal-fired construction new projects. So Hollysys already get involved with the preparing for the limitations. And we have a special team for doing the evaluation and also review the existing customer. From the evaluation, we could saw the customer side, because the new construction speed slowing down, they will focus on the upgrading for the existing power plant. That would be a great opportunity for getting new contracts. And on the other hand, we also strengthened -- reinforced our after-sales revenue from this part. Our special team already review existing customers by provide more in like the spare parts and also change the -- upgrading the system, DCS system, and also the upper-level software packages. So that will be gradually increase in future. And currently, you could see the number is increasing. So we believe, in the future, the coal-fired segment, we still are confident to achieve even flat or single-digit growth.

[Foreign Language]

Another thing I want to emphasize, beyond the coal-fired generators, there are still the other new energy generator to be supported by the central government. That will be the potential opportunity. And also, to use the heat to do the other things and also getting the rated network, electricity-rated network would be the next step. Maybe there are more opportunities within the data analysis and also the other things we could do. And also, One Belt One Road initiative could transfer the electricity to the other area and also transfer the technology, the other new opportunities or the new constructions. That would also -- the potential increased opportunity for us.

The next question is from Hanli Fan from JPMorgan.

[Foreign Language]

The question is about the changing guidance. From the last guidance change to now, $90 million to $100 million, for what kind of section is the ATP contract to achieve what kind of level to achieve this guidance? [Foreign Language]

[Foreign Language]

We changed the guidance down to the net income $90 million to $100 million is not just to focus our ATP contract. Although the ATP contract would be the main reason, because the delaying bidding process, so we recognize revenue followed by percentage of completion. So even we got the ATP contract later, we have no enough time to finish all the recognition of the revenue. So that's why we should consider ATP influence. But to consider the new guidance to $90 million to $100 million also consider the other elements, the high-speed rail side that we also have new contract, the potential new contract from the new products, new technology. And also, after-sales revenue is increasing, especially in the high-speed rail sector. So this is our -- this has come from the -- this result come from all the elements we considered to achieve the guidance, not just a single element of ATP.

[Foreign Language]

[Foreign Language]

The question is about what's the expectation for the MoUs of the ATP contract in the next 6 months. Mr. Shao said that because it's too sensitive about the bidding information, so we cannot disclose the information right now, but we could see the result in future. Thank you. And due to the time constraints, we will now take one last question from the queue.

There are no further questions at this time.

Okay. 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]

Thank you, everyone.

This concludes our conference for today. Thank you for participating, and you may now disconnect.