Ladies and gentlemen, thank you for standing by, and welcome to the HollySys Automation Technologies Fiscal Year 2017, the Third Quarter Ended on March 31, 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be presentation followed by a question-and-answer session. [Operator Instructions] Please be advised that this conference is being recorded May 12, 2017 Beijing Time. I would now like to hand the conference over to Mr. Arden Xia, the Investor Relations Director of HollySys Automation Technologies. Thank you. Please go ahead, Mr. Xia.

Hello, everyone, and thank you for joining us. Today our speakers will be Mr. Baiqing Shao, CEO of HollySys Automation Technologies; Ms. Herriet Qu, CFO of HollySys; and myself, the IR Director of HollySys. On today's call, Mr. Shao will provide a general overview of 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’d like to remind everyone that this conference call may contain forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical facts, including statements relating to the expected growth of Hollysys' future product introductions, the mix of products in future periods, and future operating results. Such forward-looking statements, based upon the current beliefs and expectations of Hollysys' management, are subject to risks and uncertainties which could cause actual results to differ from the forward-looking statements. The following factors, among others, could cause actual results to differ from those set forth in these statements. Business conditions in China and in Southeast Asia; continued compliance with government regulations; legislation or regulatory environments, requirements or changes adversely affecting the businesses in which Hollysys is engaged; cessation or changes in government incentive programs; potential trade barriers affecting international expansion; fluctuations in customer demand; management of rapid growth and transitions to new markets; intensity of competition from or introduction of new and superior products by other providers of automation and control system technology; timing, approval and market acceptance of new product introductions; general economic conditions; geopolitical events and regulatory changes; as well as other relevant risks detailed in Hollysys' filings with the Securities and Exchange Commission. The information set forth herein should be read in light of such risks. HollySys does not assume any obligation to update the information discussed in this conference call or in its filings. Please note that all amounts noted in this conference call will be US dollars unless otherwise noted. And now, I'd like to turn the call to Mr. 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. With market stabilization in parts of process industries, the performance of Industrial Automation has been getting better, especially recent order trend reflecting a positive momentum. Through actively traced our customers' new demands under adjusting circumstance, we got several significant contracts. For example, in power, we signed the contract to provide products for Sichuan Jiangyou 2X1000MW power units, Shanxi Yangmei 2X660MW power units. In chemical, we provided DCS and SIS for producing polycarbonate of Luxi Chemical Company. In petrochemical, we won the contract to provide DCS to Shengli oilfield Gudong production plant. In nuclear power, we are continuing providing DCS for Hongyanhe number 5 and number 6 units and Tianwan number 5 and number 6 units. For Factory Automation, after changing strategies from selling products to providing 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 washing machines; integrated internal resources to provide the production; and Hai Di Lao Hot Pot project to help the customer improve their efficiency of hot pot based making in the restaurant. Hollysys aims to make each project into a demonstration project to create values to the customers and explore more opportunities in sub-industries. In high-speed railway, we won 106 C2-ATPs & 10 C3-ATPs, but since the customer is changing the procurement timeline, it increases uncertainty and volatility of the performance of the high-speed railway. In addition, since it is the beginning of the 13 five-year plan, the finished infrastructure of new planned railway is limited. Therefore, in short-term, the performance of high-speed rail segment was unfavorable. However, from long run, according to the mid and long-term plan of high-speed railway and with the increase of the after sell and replacement, as well as new products launch. We expect the sector will gradually recover in the future. For subway, we won the contract to provide power SCADA for Dalian intercity line from Jinzhou to Pulandianwan. In the mechanical and electrical installation services, although Concord and Bond are facing some difficulties because of the local political and economic uncertainties in South East Asia and Middle East area, they are still working hard to develop businesses. As one of the strategies to expand overseas market, we will ensure a healthy development of Concord and Bond and take use of their advantages such as good customer relations and sales channels to find more international opportunities. With that, I would like to turn the call over to Arden Xia, who will read the financial results analysis on behalf of our CFO Ms. Herriet Qu.

Thank you, Mr. Shao. I would like to share some highlights for the first nine months and the third quarter of fiscal year 2017 ending March 31. Compared to the third quarter of prior fiscal year, the total revenues for the third quarter decreased from $118.8 million to $91.3 million, representing a decrease of 23.1%. Broken down by the revenue types, services revenue increased by 17.7% to $3.4 million, integrated contracts revenue decreased by 21.6% to $78.2 million, and products sales revenue decreased by 39.7% to $9.7 million. In July 2016, the Company's interests in Hollycon were diluted from 51.0% to 30.0% and the Company lost the control of Hollycon. As a result, Hollycon's financials would not be included in the Company's consolidated financials from July 2016 on. If Hollycon's revenue was excluded from the comparable figure for the third quarter of the prior fiscal year, the products sales revenue for the third quarter should be increased by 17.8%. The Company's total revenues can also be presented in segments three months ended March 31. Industrial Automation, $38.1 million, Rail Transportation $34.8 million, M&E $18.5 million, Total $91.3 million, nine months ended March 31, Industrial Automation $128.9 million, Railway Transportation $91.1 million, M&E $74 million, total $294 million. Overall gross margin, excluding non-cash amortization of acquired intangibles, was 30.7% for the third quarter, as compared to 31.7% for the same period of the prior year. The non-GAAP gross margin for integrated contracts, product sales, and services rendered were 24.4%, 65.2% and 78.8% for the third quarter, as compared to 27.1%, 55.5% and 59.1% 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 30.7% for the third quarter, as compared to 31.6% for the same period of the prior year. The GAAP gross margin for integrated contracts, product sales, and service rendered were 24.4%, 65.2% and 78.8% for the third quarter, as compared to 26.9%, 55.5% and 59.1% for the same period of the prior year respectively. Selling expenses were $6 million for the third quarter, representing an increase of $0.8 million or 13.8% compared to $5.2 million for the same quarter of the prior year. Presented as a percentage of total revenues, selling expenses were 6.5% and 4.4% for the three months ended March 31, 2017, and 2016, respectively. G&A expenses, excluding non-cash share-based compensation expenses, were $8.8 million and $8.7 million for the quarter ended March 31, 2017, and 2016, respectively. Presented as a percentage of total revenues, non-GAAP G&A expenses were 9.6% and 7.3% for the quarters ended March 31, 2017 and 2016 respectively. The GAAP G&A expenses which include the non-cash share-based compensation expenses were $6.8 million and $9.8 million for the three months ended March 31, 2017 and 2016, respectively. R&D expenses were $6.1 million for the third quarter, representing a decrease of $2.3 million or 27.2% compared to $8.4 million for the same quarter of the prior year. Presented as a percentage of total revenues, R&D expenses were 6.7% and 7% for the quarter ended March 31, 2017 and 2016, respectively. The VAT refunds and government subsidies were $5.5 million for the third quarter, as compared to $4.3 million for the same period in the prior year, representing a $1.2 million or 27.9% increase. The income tax expenses and the effective tax rate were $4.4 million and 22.1% for the three months ended March 31, 2017, as compared to $3.4 million and 12.4% for comparable prior year period. The fluctuation of the effective tax rate was mainly due to the different pre-tax income mix with different tax rates, as the Company's subsidiaries apply to different tax rates. For the nine months ended March 31, 2017, the effective tax rate was 16%. 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 $13.7 million or $0.22 per diluted share based on 61.2 million shares outstanding for the third quarter. This represents a 40.7% decrease over the $23.1 million or $0.38 per share based on 60.6 million shares outstanding reported in the comparable prior year period. On a GAAP basis, net income attributable to Hollysys was $15.6 million or $0.26 per diluted share representing a decrease of 28.5% over the $21.9 million or $0.36 per diluted share reported in the comparable prior year period. Contracts and Backlog, Hollysys achieved $108.4 million new contracts for the third quarter. And the backlog as of March 31, 2017 was $509.8 million. The detailed breakdown by new contracts and backlog by segments: New contracts, Industrial Automation $52.8 million, and M&E $5.3 million, total $108.4 million. Backlog, Industrial Automation $127.6, Railway Transportation $238.5 million, M&E $143.7 million; total $509.8 million. Cash flow: For the three months ended March 31, 2017, the total net cash outflow was $27.6 million. The net cash used in operating activities was $12.5 million. The net cash used in investing activities was $10 million, mainly consisted of $22.8 million time deposits placed with banks, which was partially offset by $12.5 million maturity of the deposits. The net cash used in financing activities was $3.5 million, mainly consisted of $4.9 million repayments of long-term bank loans, which was partially offset by $1.1 million for proceeds from short-term bank loans. Balance sheet: The total amount of cash and cash equivalents and time deposits with original maturities over three months were $268.8 million, $285.4 million, and $256.4 million as of March 31, 2017, December 31, 2016 and March 31, 2016, respectively. As of March 31, 2017, the company held $182.5 million in cash and cash equivalents and $86.4 million in time deposits with original maturities over three months. For the three months ended March 31, 2017, DSO was 219 days, as compared to 181 days for the comparable prior year period and 208 days for the last quarter; and inventory turnover was 61 days, as compared to 40 days for the comparable prior year period and 52 days for the last quarter. Outlook for fiscal year 2017, consideration on the volatility of high-speed railway performance, we would like to keep the guidance even though with meet the potential challenges, for fiscal year 2017 with revenue in the range of $480 million to $520 million and non-GAAP net income in the range of US$90 million to US$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'll provide translation, operator please.

Thank you, Mr. Arden Xia. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Alex Chang. Please ask your questions.

And the first question about the new order, the third quarter, we found it is recovered very good, so can you talk about the structure of the new orders, especially the railway transportation. And we estimated eight from the number of ATP's procurement, it should be US$220 million, but it seems like US$50 million right now. So what about distribution? And also I want to ask the formal days from the official CRC procurement website, we could see the new order for C3, and there are three companies won the bidding. So how about Hollysys – how much Hollysys could get? The second question is about the share-based compensation and this quarter, we saw this number is positive. Can you explain about it?

Okay, the first question about the Railway Transportation structure, the distribution, you can see, if compare your prediction is larger. But actually, we just announced a significant contract. We gained a lot of supplement contract in this quarter. For example, like Hong Kong MTR project, because this project is delaying, so we get some payment from the customer. And also, the small TCC project and also including the other supplemented project for the former larger projects. The share-based compensation is based on the guidance. Last time, we – the disclosure, based on this guidance, the management team cannot achieve the target. So they cannot get the options. The options based on the performance of the EPS, for example. So this quarter, the cost of amortization, we do adjustment, so we could see gain from the value. And next quarter, we have continued the same thing, booking into the financials, but the number will be smaller than this quarter. Let me translate the last one Mr. Shao said, because several days ago, the official website disclosed the bidding won for three companies, but the number – we not signed the contract yet, so we cannot disclose that at this time. And back the last question of Alex, he asked about the ATP contract, currently, the ASP for the C2 and C3. Are there any changes? And the answer is just last fiscal year; the C3 segment had a one-time discount for the ASP within 300-kilometer for our segment, but right now, when we won the contract, our recover for the regular price. Thank you, Alex.

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

The question is about the guidance. Based on the first nine months of the performance, we not changed the guidance. So does this means that fourth quarter, we have to achieve more than $200 million revenue to meet the guidance. So can you explain about the – because this has not happened in the history, so can you explain more about the guidance?

In current situation, the guidance is really meet the challenge, but this is not as you mentioned that it will bring the revenue treatment by the new businesses. We especially focused on the high-speed rail. And this part, the performance is uncertainty and it will affect the revenue and net income sharply. So that's why – because currently, the CRC side, not very transparency, so it's hard for us to make the precise prediction for the guidance. That is to say the performance is really based on the high-speed rail performance at the end of this fiscal year.

So for the Factory Automation, what about the progress and – within the new businesses? And also, relate to the revenue contribution, how we could expect the timeline?

For the new business or technology, looking at them like the traction, okay, we will have the order. But the topline, hardly to give you right now. And for Factory Automation, from – we changed the strategy from single-product sales to the total solutions provide. And we based on several sub-industries to do appraised demonstration projects. Right now, everything is – goes well, but from the contract or revenue to see, it cannot make even of the declining. I mean, it is not very – too large contract size cannot support right now. For the long-term, we have confidence to develop this area, keep a very high growth rate.

The first question is about some risks control that – from our side, we think that there are some risks, for example, like the ATP bidding procurement. We can see the C3 segment, the – can we grow the size – the company, can grow the size. It's the first time to join this area, so is this will affect the market share in the future? And the second question about the mechanical and electrical installation services, there are some uncertainties. Can you explain more about this [indiscernible]?

From the Hollysys high-speed rail revenue aspect as compared to 2016 and 2017, the sharp decrease is a one-time problem, not structural. For the short-term to see, it is hard to achieve the performance of fiscal year 2016, because the year based at the end of 12th five-year plan and there was – were a lot of ATPs. So from the market share aspect, this is a long-term issue. We cannot maintain 50% market share in 200 kilometer segment, but we will keep at least the 30% for both C2 and C3. And also can we real-time new player joining, we are disclosed to the institutional investors before. And meanwhile I mean – at last, I want to measure some good areas from the mid long-term to see the high-speed railway after-sale revenue will keep steady growth. And also new products, new technology, like the track circuit will join. And the very important thing is replacement cycle or treatment life cycle with 10 years now just to meet the cycle. So what we sold the ATP, we'll sell again. All of this will secure high-speed rail revenue; keep a steady performance in the future. The Mechanical and Electrical Installation Services segment because this area focus – the business focuses on Southeast Asia and those local economic not very good in recent years, so we meet a lot of competition and especially from the new orders to see still have challenge. But we are trying our best to do the business right now. You could see the M&E sector of the revenue growth came out is 10%. But no matter what, just add to the fact that the potential risk for those areas still exists; especially we mentioned the new orders side. Thank you. Operator, next one.

[Operator Instructions] Your next question comes from the line of Thomas Zhang from Morgan Stanley. Please ask your question.

The first question about the P&L, which we see the share net income after the investee. That item was inside, especially the Hollycon, how much performance by the Hollycon? And of course, last fiscal year, we could see our government subsidy from the nuclear power JV also included data within this item. So can you explain how much about the net subsidy? And the second question, about the Industrial Automation new order. Right now, we see the trend is very good and compare increase, but it's separated by the DCS demand. Which industry performance is better? And can you explain based on industries? Thank you.

The first question, about the net income equity investee. This part was based on equity matters. And inside, there has mainly two companies. One is Hollycon, and that company will hold around 30% shares and the JV with CGNPC, that company hold around 40%. And this time $2.4 million, we could see $0.6 million from Hollycon. And also, you said right, last year, we have subsidy from the JV, CGNPC. That total number would be CNY30 million. If transferred to the U.S. dollar, it would be $6 million, around.

And the question is about the – so that is to say in the last nine months' performance of JV with CGNPC, that company is positive.

The answer is yes. The Industry Automation side, too, are hardworking. From [mainland] to see right now the new contract compare increased a lot. And this is based on we received our existing projects and large customers to do the upgrading, those kind of things, and we found a lot of new opportunities. And from the whole industry to see, it is based on the large industries, what we gained before like the thermal power, like the chemical, petrochemical, those industries increasing and also new energy. And we do that – but right now, the total environment is still hard to say, but we do it very cautious and optimistic. And next quarter, to be frank, the revenue would be turn to positive compares and we have confident to maintain and Industrial Automation gradually recover in the future, because the timeline constraint. So the last question, please operator.

Thank you, sir. Your last question comes from the line of Patrick Xu from Nomura. Please ask your question.

The first question is about the order within the high-speed rail sector, from the backlog to see, it is compare not goes down very fast. So – but the high-speed rail revenue is continue declining, so can you explain about this trend? I mean especially the backlog is going down, what's the reason behind? The second question about the working capital, we could see the DSO days and inventory days goes up, can you explain about that? The third one is miscellaneous. It seems like compare last fiscal year, the miscellaneous items have not been right now. So is there anything changed behind or can you please explain about this item?

The first question about the new order within the high-speed rail is to see the backlog structure; actually it contains less ATP than before. However, our ATP contract recognized revenue compared TCC is shorter. For example, normally it would be six to 12 months finished recognized revenue, but TCC will be one or two year. But right now, our – because we – the ATP contract is delaying, so we have last ATP contract within the backlog. But relatively, the high base belongs to after sale TCC, those contracts. But average, the recognized revenue period would be one or two years. The DSO days goes up, is not means the AR getting larger. Actually, you could see the absolutely – value for the account receivable is still stable. And at this time, it's because the revenue goes down, so that's why DSO day goes up. And inventory, because we are right now preparing the goods for the potential contracts, so that's why the inventory is increasing. The miscellaneous, because last fiscal year, that one represented the large percentage of Hollycon. But Hollycon diluted from 51% to 30%, and right now, we lost control of Hollycon, so not consolidated with the financials. That's why this time, the miscellaneous, you could see, have no things. And this part, right now, you could see from the P&L the equity investee area. Thank you.

The question is about – you said the inventory goes up, can you explain which part of the business prepare for the inventory?

The answer is high-speed rail would be much – the larger percentage than the others. Thank you, Patrick. End of Q&A

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

Thank you. This does conclude your conference. Thank you all for your participation.