Ladies and gentlemen, thank you for standing by, and welcome to the Hollysys Automation Technologies Earnings Conference Call for the Fiscal Year 2017 and the Fourth Quarter Ended on June 30, 2017. [Operator Instructions] Please be advised that this conference is being recorded today, August 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. 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. 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 fiscal year 2017; and Ms. Qu will discuss our performance from a financial perspective. And the whole senior management team 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 and 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 the statements: business conditions in China and in Southeast Asia; continued compliance with government regulations; legislation or regulatory environments; requirements or changes adversely affecting the businesses in which Hollysys is engaged; cessation or changes in government incentive programs; potential trade barriers affecting international expansion; fluctuations in customer demand; management of rapid growth and transitions to new markets; intensity of competition from or introduction of new and superior products by other providers of automation and control system technology; timing, approval and the market acceptance of new product introductions; general economic conditions; geopolitical events and regulatory changes; as well as other relevant risks detailed in Hollysys' filings with the Securities and Exchange Commission. The information set forth herein should be read in light of such risks. Hollysys does not assume any obligation to update information discussed in this conference call or in its filings. Please note that all amounts noted in this conference call will be in U.S. dollars, unless otherwise noted. 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 year. Industrial automation presented signal of the stabilization starting from the second half of the fiscal year. Our third quarter revenue achieved year-on-year growth for the first time in the last 2 years, recorded at 0.1%. The growth went further up to 6.5% in the fourth quarter, driving fiscal year revenue decline down to a single digit while new contracts was recovering. Performance in power remained prominent. We signed contracts to provide products for large power units, including Sichuan Jiangyou 2 gigawatt power units, Xinjiang East Hope 4 660 megawatts power units, Guohua Yongzhou 2 gigawatts power units and Datang Pingluo 2 660 megawatts power units. In chemical, several major contracts we signed include DCS and SIS contract for the polysilicon of Xinjiang East Hope Company, DCS and Batch contract for ASIA CUANON in its Waterborne Coatings Project and DCS, AMS and SIS contract for Bosheng Clean Energy Company. In nuclear, we continued to provide products for Tianwan, Fangchenggang and Hongyanhe Nuclear Stations. In Factory Automation, under the transition from an equipment provider to be a total solution provider, we are developing demonstration projects whose practice and model can be transferable for future application in related industries. We are currently running testing products -- projects for some renowned domestic enterprises, including an automation-and-intelligence boosting project for Haier's Tianjin-based and Qingdao-based wash machine factories, and another product -- project for Hai Di Lao, the famous hot pot chain, to improve efficiency in hot pot base material making. In high-speed railway, a flat fourth quarter performance was not enough to offset the 48% decline accumulated in the first 3 quarters. Weakness persisted throughout the year. Limited completion of the newly planned railway infrastructure in the early years of the 13th 5-year plan, coupled with change in customer procurement time line presented unfavorable short-term outlook and rendered uncertainties and volatilities in the performance of ATP contracts. For ground-based control, we signed contracts to provide TTC to Jinan-Qingdao Line, Haerbin-Jiamusi Line and Jiujingqu Line. For subway, we adhered to the expansion strategy, winning new SCADA contracts in more cities, such as Wuhan Line 21 and Dalian intercity line from Jinzhou to Pulandianwan. Even with the short-term uncertainty, however, outlook for our rail business in the long run remains positive. National mid- and long-term plan for the high-speed railway describes a sizable market, while we are paying adhered -- adequate attention to after sale and replacement demand and expanding our products range. In the mechanical and electrical installation services, although facing uncertain macroeconomic condition in Singapore and Southeast Asia and as well as the political tensions in Middle East, M&E recorded a high single-digit growth at 9%. Concord, for example, signed a contract to provide electrical installation services for Macau LRT Phase 1 project. Ongoing economic and political situation in these areas raised concern on performance and should be closely followed. Moreover, management and risk control can be addressed to improve operation efficiency as a counter measure. The strategic value of Concord and Bond as customer resources and international sales channels remains significant and we expect a moderate growth in the future. With that, I'd like to turn the call over to Arden Xia, who will discuss the financial results analysis on behalf of our CFO, Ms. Harriet Qu.

Thank you, Mr. Shao. I would like to share some highlights for this fiscal year 2017 and the fourth quarter ending on June 30 2017. Comparing the prior fiscal year, the total revenue for fiscal year 2017 decreased from $544.3 million to $431.9 million, representing a decrease of 20.6%. Broken down by the revenue types, service revenues increased by 14.9% to $13.8 million, integrated contracts revenue decreased by 19.3% to $385.5 million and product sales revenue decreased by 40.1% to $32.7 million. In July 2016, the company's interests in Hollycon were diluted from 51% to 30%, 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 prior fiscal year, the product sales revenue for the fiscal year 2017 should be increased by 13.8%, and the total revenues for the fiscal year 2017 should be decreased by 16.7%. The company's total revenue in segments: Industrial automation, $172.7 million; railway transportation, $155.7 million; M&E, $103.5 million; total, $431.9 million. Overall gross margin, excluding noncash amortization of acquired intangibles, was 32.7% for the fiscal year 2017 as compared to 37.9% for the prior year. The non-GAAP gross margin for integrated contracts, product sales and services rendered were 28.2%, 69.5% and 70.8% for the fiscal year 2017 as compared to 35.2%, 56% and 66.4% 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 noncash amortization of acquired intangibles was 32.5% for the fiscal year 2017 as compared to 37.8% for the prior year. The GAAP gross margin for integrated contracts, product sales and services rendered were 28%, 69.5% and 70.8% for the fiscal year 2017 as compared to 35%, 56%, 66.4% for the prior year, respectively. Selling expenses were $24.4 million for the fiscal year 2017, representing a decrease of $1.2 million or 4.8% compared to $25.6 million for the prior year. Presented as a percentage of total revenues, selling expenses were 5.7% and 4.7% for the fiscal year 2017 and '16, respectively. G&A expenses, excluding noncash share-based compensation expenses, were $43.8 million for the fourth -- for the fiscal year, representing an increase of $1.8 million or 4.4% as compared to $42 million for the prior year. Presented as a percentage of total revenues, non-GAAP G&A expenses were 10.1% and 7.7% for fiscal year 2017 and '16, respectively. The GAAP G&A expenses, which included noncash share-based compensation expenses, were $44.3 million and $45.8 million for fiscal year 2017 and '16, respectively. Goodwill impairment charge was $11.2 million for the fiscal year 2017. Concord's operating results deviated from previous expectation, and the management estimation was made in forecast of Concord's performances, which led the company to make an estimation of impairment of goodwill related to Concord acquisition. R&D expenses were $30.1 million for the fiscal year, a decrease of $6.5 million or 17.7% compared to $36.6 million for the prior year. Presented as a percentage of total revenues, R&D expenses were 7% and 6.7% for the fiscal year 2017 and '16, respectively. If Hollycon's R&D expenses were excluded from the comparable figure for the prior fiscal year, the R&D expenses for the fiscal year 2017 should be decreased by 12.6%. The VAT refunds and government subsidies were $29.9 million for the fiscal year as compared to $22.9 million for the prior year, representing a $7 million or 30.3% increase which was primarily due to increase of the government subsidies for the $10 million. The income tax expenses and the effective tax rate were $14.4 million and 17.2% for the fiscal year 2017, as compared to $14.2 million and 10.3% for the prior year. During the fourth quarter of fiscal year 2017, the company recorded a deferred tax expense of $5.4 million related to dilution of the company's interest in Hollycon. Excluding the impact of above-mentioned tax expenses, the effective tax rate for fiscal year 2017 should be 10.8%. 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 the convertible bond related fair value adjustments was $70.1 million or $1.16 per diluted share based on 61 million shares outstanding for fiscal year 2017. This represents a 42.3% decrease over the $121.5 million or $2.02 per share based on 60.6 million shares outstanding reported in prior year. On a GAAP basis, net income attributable to Hollysys was $68.9 million or $1.14 per diluted share, representing a decrease of 41.8% over the $118.5 million or $1.97 per diluted share reported in the prior year. The following are introduced related to fourth quarter numbers. Comparing the fourth quarter of the prior fiscal year, the total revenues for the 3 months ended June 30, 2017, decreased from $147.7 million to $138 million, representing a decrease of 6.6%. Broken down by the revenue types, service revenue increased by 43.8% to $4.7 million, integrated contracts revenue decreased by 6.1% to $124.7 million and product sales revenue decreased by 26% to $8.5 million. If Hollycon's revenue was excluded from the comparable figure for the fourth quarter of the prior fiscal year, the product sales revenue for the fourth quarter should be increased by 101.5% and the total revenues for the fourth quarter should be decreased by 1.7%. The company's total revenue in segments: Industrial automation, $43.8 million; rail transportation, $64.6 million; M&E, $29.5 million; total, $138 million. Overall gross margin excluding noncash amortization of acquired intangibles was 39.1% for the fourth quarter as compared to 39.9% for the same period of prior year. The non-GAAP gross margin for integrated contracts, product sales and services rendered were 35.7%, 71.5% and 69.9% for the fourth quarter as compared to 37.4%, 85 -- 58% and 74.7% 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 38.8% for the fourth quarter as compared to 39.8% for the same period of prior year. The GAAP gross margin for integrated contract, product sales and service rendered were 35.4%, 71.5% and 69.9% for the fourth quarter as compared to 37.3%, 58% and 74.7% for the same period of prior year, respectively. Selling expenses were $6.6 million for the fourth quarter, representing a decrease of $0.1 million or 1.3% compared to $6.7 million for the same quarter of the prior year. Presented as a percentage of total revenues, selling expenses were 4.8% and 4.5% for the fourth quarter of 2017 and '16, respectively. G&A expenses, excluding noncash share-based compensation expenses, were $14.6 million for the fourth quarter, representing an increase of $1.1 million or 7.8% compared to $13.5 million for the same quarter of the prior year. Presented as a percentage of total revenues, non-GAAP G&A expenses were 10.6% and 9.2% for quarters ended June 30, 2017, and '16, respectively. The GAAP G&A expenses, which include the noncash share-based compensation expenses were $15.1 million and $14.1 million for the 3 months ended June 30, 2017, and '16, respectively. R&D expenses were $8 million for the fourth quarter, representing a decrease of $0.6 million or 6.6% compared to $8.6 million for the same quarter of the prior year. Presented as a percentage of total revenues, R&D expenses were 5.8% for the quarter ended June 30, 2017, and '16, respectively. The VAT refunds and government subsidies were $6.5 million for the fourth quarter as compared to $2.8 million for the same period in prior year, representing a $3.7 million or 131.4% increase which was primarily due to the increase of the government subsidies for $4.5 million. The income tax expenses and the effective tax rate were $5.4 million and 19.9% for the fourth quarter as compared to $1.1 million and 3.1% for the comparable prior year period. During the fourth quarter of the fiscal year 2017, the company recorded a deferred tax expense of $5.4 million related to the dilution of the company's interest in Hollycon. In addition, the process of Settlement and Payment of Enterprise Income Tax for calendar year 2016 in May 2017, Beijing Hollysys and Hangzhou Hollysys satisfied to a preferential income tax rate of 10% for calendar year 2016 due to its Key Software Enterprise status, instead of 15% used by the company in calendar year 2016. As a result, the company recorded a tax benefit of $4.4 million during the fourth quarter of fiscal year 2017. Excluding the impact of the above-mentioned tax expenses and tax benefit, the effective tax rate for the 3 months ended June 30, 2017, should be 16.2%. 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 $22.6 million or $0.37 per diluted share based on 61.3 million shares outstanding for the fourth quarter. This represents a 34% decrease over the $34.3 million or $0.57 per share based on 60.7 million shares outstanding reported in the comparable prior year period. On a GAAP basis, net income attributable to Hollysys was $21.7 million or $0.36 per diluted share, representing a decrease of 35.2% over the $33.4 million or $0.55 per diluted share reported in the comparable prior year period. Contracts and backlogs. Hollysys achieved $169.9 million new contracts for the fourth quarter. And the backlog as of June 30, 2017, was $524 million. The new contracts by breaking down: IA, $84.1 million; railway transportation, $69.9 million; M&E, $15.9 million; total, $169.9 million. The backlog as of June 30, 2017, by segment; IA, $158.7 million; railway transportation, $235.6 million; M&E, $129.7 million; total, $524 million. Cash flow. For the fiscal year ended June 30, 2017, the total net cash outflow was $31.5 million. The net cash provided by operating activities was $69.8 million. The net cash used in investing activities was $89.6 million, mainly consisted of $154.8 million time deposits with original maturities over 3 months placed with banks, and the $16.7 million cash reduced upon deconsolidation of subsidiary, which was partially offset by $89.3 million generated from the matured time deposits with original maturities over the 3 months. The net cash used in financing activities was $7.4 million, mainly consisted of $12 million used for payment of dividends, $7.4 million used for repayments of long-term loans, $4.9 million used for repayments of short-term loans, which was partially offset by $10.1 million proceeds from short-term bank loans and $6.3 million proceeds from exercise of options. For the 3 months ended June 30, 2017, the total net cash inflow was $15.2 million. The net cash provided by operating activities was $23.8 million. The net cash used in investing activities was $13.1 million, mainly consisted of $57.3 million time deposits placed with banks, which was partially offset by $48.8 million maturity of time deposits. The net cash provided by financing activities was $2 million. Balance sheet. The total amount of cash and cash equivalents and time deposits with original maturities over 3 months were $293.9 million, $268.8 million and $271.5 million as of June 30, 2017, March 30, 2017, and June 30, 2016, respectively. As of June 30, 2016, (sic) [ 2017 ] the company held $197.6 million in cash and cash equivalents and $96.3 million in time deposits with original maturities over 3 months. For the fiscal year ended June 30, 2017, DSO was 201 days as compared to 162 days from the prior year. The inventory turnover was 51 days as compared to 38 days from the prior year. The fourth quarter DSO day was 153 days as compared to 146 days for the comparable prior year period and 219 days for the last quarter. The inventory turnover was 50 days as compared to 37 days for the comparable prior year period and 61 days for the last quarter. Outlook for fiscal year 2018. Based on our backlog currently on hand and sales pipeline envisioned so far, we set our guidance for fiscal year 2018 with revenue in the range of $500 million and $530 million, and non-GAAP net income in the range of $100 million and $110 million. At this time, we'd like to open up for the Q&A session. Please note that for Chinese-speaking participants, we can also do their Q&A in Mandarin and we'll provide translation. Operator, please.

[Operator Instructions] And our first question will come from Patrick Xu with Nomura.

[Foreign Language]

Okay. The first question is about the railway transportation. The high-speed rail sector, the end customer, CRC, recently announced 104 trains for the new generation Fuxing Hao procurement and how much percentage we can get from this procurement. The second question is about the dividend. How much dividend for this fiscal year we will pay? The third one is for the guidance of 2018. Because last fiscal year, on the beginning -- in the beginning of the year, we received roughly high expectation. But after that, we changed the guidance. What about this fiscal year? How much confidence we have for this fiscal year, because right now, currently, we can see the backlog just comparing increase 3 points. So can you talk more about this?

[Foreign Language]

And the railway transportation high-speed rail, about the new generation Fuxing Hao, we all participated the R&D, the whole work, 3 of us, Hollysys and CRC and Academy of Railway Science. So we absolutely will get the shares from the new procurement. But right now, because we have no results, so we cannot disclose it here. But this is related to the 300 kilometers for our segment. Originally, we have 1/3 of the market share.

[Foreign Language]

About dividend, last year, we changed our dividend policy from -- to a regular dividend policy. So the payout ratio is 10%, so we will intend to do that. But the final results will depend on the approval of the Board of Director meeting.

[Foreign Language]

About the guidance. Last year, at the beginning, we changed our -- we give a rough -- high estimation. And later, we changed our guidance because we overestimated the business from high-speed rail and the industrial automation. And you could see in the whole year, the CRC side changed a lot, so the high-speed rail procurement lag. And what we see, frankly, the industrial automation also not recovered with very [indiscernible], so also achieved the final result. And the guidance beyond what I mentioned, also included one [ phase ], it's M&E, mechanical and electrical installation services. This part, the Concord adding some selling cost expenditure, so it leads to have a loss. And also, the goodwill impairment. So this part, it was the net income either. So that's why these factors account for the -- we didn't achieve the guidance. But for fiscal year 2018, we have confidence because from each segment, we could see the recover. Industrial automation, you could see the new contract is either recovering. And also the recent 2 quarters, last quarter, the first time flat from the revenue side, and this quarter compare increase more than 6%. And with the high-speed rail sector, we think the bottom has gone and -- sorry, the Industrial Automation, we expected that the fiscal year 2018, the growth rate revenue should be 15 to 25. And the rail sector, the bottom has gone, and we think this fiscal year 2018 should -- the revenue growth should be between 15 to 25. The subway factor, the existing backlog to see, we could achieve single-digit growth for the fiscal year 2018. And the mechanical and electric installation services, M&E sector, the 2017 fiscal year, it influenced the net income. So this fiscal year 2018, we are focusing on the recover -- focusing on the operating management for the business and also the projects. The current backlog is still okay, so we give the revenue growth should be between 10% to 20%. And also, we will focus on the net profit of M&E performance for this fiscal year, so that's why we gave this guidance.

Our next question will come from Kevin Luo with Morgan Stanley.

[Foreign Language]

The first question is from the guidance, the industrial automation, we did 15 to 25 revenue growth. But from the -- we can understand that the new contract is recovering. But this percentage is like more aggressive. I mean, it can hardly support the growth from the revenue side. Even the new contract is increasing. So how you consider about this sector, industrial automation. It will -- the coming revenue is from the traditional business or the new business. The second question is about the subway. We did single-digit growth rate. But in China, currently, everything is very promising within the subway sector. So why you give such a conservative number? Can you provide some detail?

[Foreign Language]

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[Foreign Language] Industrial automation revenue from 2 effects, the traditional related to DCS and the new business from the [ express ] factory automation. And currently, we can see the backlog with the DCS is relatively strong than before years. So the fiscal year 2018, it will mainly coming from the traditional DCS business. But the [ express ] right now have very good improvement. So compared the increased speed, we think the [ express ] growth rate would be higher than DCS growth rate. About the subway sector, yes, you said right. Currently, in China, everything in this area is very strong. But what we talk is about performance of 2018 fiscal year, we just focus on the current orders on hand, the backlog are all from SCADA. And relatively, the SCADA will be implemented within 1 or 2 years, [indiscernible] longer. So we recognize revenue, it will not bring very strong growth rate. So that's why we give such a conservative number. But to see the long term, subway will be a very good market in China right now. And Kevin also asking a question about the -- is the IA, traditional DCS, is increasing, for example, especially focus on integrated contracts, it will influence the gross margin of IA, right? And the CFO said, yes, it will influence the gross margin, but not too much, just 1 or 2 points for the industrial automation gross margin. Kevin? [Foreign Language]

[Foreign Language]

[Foreign Language]

The question is a...

[Foreign Language]

When it could find a signaling contract. And we are striving to penetrate this market, and we want to get the subway signaling contract, but it's hardly to guarantee here. We already have plans in the fiscal year 2018. Thank you, Kevin.

[Foreign Language]

Because of time constraint, so we just have enough for 1 or 2 questions.

And the question here from Alex Chang with Citi.

[Foreign Language]

The first question is about can you give us some broken down number for the IA, for example, the revenue by different areas, the power, the chemical, petrochemical, et cetera? And the second -- and also, the railway transportation. Please give us some broken down number for the high-speed rail and subway. And the second question is about the gross margin. What about the range for the fiscal year 2018? This question is about Hollycon. And what is this total gain? And I remember last year, you've already have this one, but why this quarter still have? And is there any new changes related to Hollycon share changes?

[Foreign Language]

[Foreign Language] The first question, the industrial automation or rail, we do not have such or specific number or not -- we do not separate for such a specific detail of numbers, because what we can see right now within the financial report is just see the IA, rail and M&E, not like the -- from the production line side like [indiscernible], like the power, like chemical, petrochemical or within the rail, ATP, TCC. So we cannot provide you a number right now. Okay, just a second.

[Foreign Language]

About the gross margin [indiscernible] about within several segments. Industrial Automation, for this fiscal year 2017, we can achieve around 38% and the coming year 2018, we have -- it will a little bit decrease because of the integrated contract and also some of the specific projects influence, we think it will reduce a little bit. For example, 1 or 2 points. And the railway transportation, if we separate it by the high-speed rail and the subway -- sorry, the whole railway transportation for the fiscal year 2017, the gross margin should be around 44.7%. If we separated by the high-speed rail and subway, the high-speed rail is around 55% and subway around 15%. For the coming fiscal year 2018, we think the high-speed rail and subway should be maintained the same level. But the whole railway transportation for the 2018, it will depend on the mix of the final result. And the M&E sector, this fiscal year 2017 a little bit special because it has several projects adding expenditure cost. It will lead to this fiscal year 2017, the M&E sector gross margin just went down to 4.6 to 4.7 around. But the upcoming 2018, we should expect -- we are focusing on changes -- operating -- improved the operating management. So we think it will recover to the normal, around 15.

[Foreign Language]

About the Hollycon, we adopt the equity method. So it has some equity cost at the beginning. You said the last year is the fourth quarter of the fiscal year 2017. So at the end fiscal year, we had to recalculate the whole phase. And finally, from the share change expenditure or benefit to calculate from Hollycon, we have a gain finally. Thank you, Alex.

That question will come from Jacqueline Du with Goldman Sachs.

[Foreign Language]

The question is about the goodwill impairment of Concord. We made acquisition in 2011. And this fiscal year, we could see about $11.1 million goodwill impairment. So can you explain more about the future business of Concord?

[Foreign Language]

[Foreign Language]

From [indiscernible] you see this figure, we have around $11 million goodwill impairment. And also 2 years ago, you could see we also have $2 million from the Concord goodwill impairment. So [ call it ] total together, around USD 13 million. And the rest of the goodwill of Concord should also around $13 million. This time, we do the goodwill impairment more than [ 15 ] of the Concord. And from the business you see, because this was -- the Concord is focused on the mechanical and electrical utility services for the railway sector. And this year, because some of the projects, we did not control very well for the project execution, so it will lead to -- it's added some cost. That's why this year, performance is not good. But from the backlog you see it's still large enough to support the Concord to have good performance in future. And the current management team already see the problem and we are changing the operating management, the whole phase within the Concord. So we will strengthen the control, strengthen the project execution. We believe the coming year 2018 should have a positive number and it will recover to normal. Thank you, Jacqueline. Okay. Thank you, everyone, for joining us on today's call. If you haven't got a 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.

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