Ladies and gentlemen, thank you for standing by, and welcome to the Hollysys Automation Technologies Earnings Conference Call for the Fiscal Year 2018 Second Quarter Ended December 31, 2017. [Operator Instructions] Please be advised that this conference is being recorded today, February 9, 2018, Beijing time. I would now like to hand the conference over to Mr. Arden Xia, 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 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 second quarter of fiscal year 2018 and I will on behalf of CFO, Ms. Herriet Qu discuss our performance from a financial perspective and then we will answer questions afterwards. Before getting started, I would like to remind everyone that this conference call may contain forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical facts, including statements relating to the expected growth of Hollysys' future product introductions and the statements are not historical facts 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 as forced 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 or competition 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 US dollars, unless otherwise noted. And now I'd like to turn the call to Mr. 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 remained on the track of recovery with revenue recording at 25.9% year-on-year growth. At $57.6 million management teams had adhered to the low-to-high end market expansion strategy in industries such as chemical and petro-chemical, etc. while building comprehensive service capacity to address the substantial aftersales potential from the entire customer base and seeking new opportunities from existing end-users. On the chemical industry, we signed a contract with Jinan Taixing Fine Chemicals Company to provide system for their polyphosphazene project, a contract with Jiangsu Jingshen Salt & Chemical Industry Corporation Limited to provide Manufacturing Execution System for information integration of their salt packaging and distribution center. On the petro-chemical industry, we signed a contract with China Petroleum & Chemical Corporation to provide DCS and instruments for their liquid chemical wharf project. We entered into a strategic cooperation agreement with CEET, a wholly-owned subsidiary of China National Offshore Oil Corporation to collectively push forward the localization of core equipment on offshore oil platform. In the new energy and food-beverage area, we signed a contract to provide system for Chia Tai Group's recycling of waste project and a contract with Lihua Starch Corporation Limited for their sorbitol project. Our demonstration-for-further-application strategy in factory automation has brought us more market recognition. We earned government level recognition as we were listed as one of the 23 intelligent manufacturing system solution providers recommended by the Ministry of Industry and Information Technology. We continued to focus on several key industries and cooperate with famous players. On white-goods, our cooperation with Haier went further as we signed contracts on their Tianjin-based and Qingdao-based washing machine factories. On food beverage area, we are dedicated to provide innovative solution to address safety and efficiency issues. Upon the successful delivery of the first project, our relationship with Hai Di Lao went deeper, with regular communication mechanism set. We expect broader cooperation with them and more clients in the future. The performance of high speed rail was prominent in this quarter, with revenue recording a 199.0% year-over-year growth at $69.6 million. One of the contributors is the significant increase in aftersales order, including ATP maintenance and replacement contracts. Signing 80 sets of automatic train protection the ATP to high speed trains in 300 to 350 kilometer per hour also contributed greatly to the revenue because of the tightening delivery schedule to secure the Spring Festival Travel. Breakthrough has been made in our new product as we signed our first tract circuit contract for Chengdu-Ya'an regular speed railway line. In subway, we signed SCADA contract for Chengdu Subway Line 5. We will adhere to the expansion strategy to win SCADA contracts in more cities and work closer with subway authorities to promote our SCADA system and subway signaling technologies in future. Management team will adhere to the diversity strategy to create revenue stream from more new products and services, and to maintain a stable and healthy growth into the future. In oversea business, we signed several EPC contracts with domestic companies, including a contract with Shandong Ludian Corporation Limited to provide DCS for 2X350 Megawatt power station in Indonesia. Mechanical and electrical installation services recorded at 0.4% revenue growth at $30.2 million. We continued to address operation, management and risk control issue to ensure that projects can be delivered in good quality, while closely following economic and political circumstances in South East Asia and Middle East. Concord and Bond remained active in seeking business opportunities and we believe that their strategic value as customer resources and international sales channels remains significant. With that I'd like to turn the call over to Arden Xia, who will read us the financial result analysis on behalf of CFO, Ms. Herriet Qu?

Thank you Mr. Shao. I would like to share some highlights for this fiscal year 2018 second quarter and December 31, 2017. Comparing the second quarter of the prior fiscal year the revenue for the second quarter increased from $99.1 million to $157.4 million representing, an increase of 58.8% broken down by the revenue types, services revenue increased by 274.3% to $13.3 million, products sales revenue increased by 60.4% to $9.7 million, and integrated contracts revenue increased by 50% to $134.4 million. The company total revenue presented in segment by three months. Industrial automation $56 million, railway transportation $69.6 million, M&E $30.2 million and total $157.4 million. Overall gross margin excluding non-cash amortization of acquired intangibles was 39.4% for the second quarter as compared to 28.7% for the same period of the prior year. The non-GAAP gross margin for integrated contracts, product sales, and services rendered were 34.5%, 67.4% and 68.6% for the second quarter as compared to 24.3%, 72.1% and 64.9% 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 39.3% for the second quarter as compared to 28.6% for the same period of the prior year. The GAAP gross margin for integrated contracts, product sales, and service rendered were 34.4%, 67.4% and 68.6% for the second quarter as compared to 24.2%, 72.1% and 64.9% for the same period of the prior year respectively. Selling expenses were $7.7 million for the second quarter representing an increase of $1.4 million or 22.7% compared to $6.3 million for the same quarter of the prior year. Presented as a percentage of total revenues, selling expenses were 4.9% and 6.4% for the three months ended December 31, 2017 and 2016, respectively. G&A expenses, excluding non-cash share-based compensation expenses were $12.2 million and $10.8 million for the second quarter and same quarter with 2016, respectively. Presented as a percentage of total revenues, non-GAAP G&A expenses were 7.7% and 10.9% for quarters ended December 31, 2017 and 2016 respectively. The GAAP G&A expenses which include the non-cash share-based compensation expenses were $12.1 million and $11.7 million for the three months ended December 31, 2017 and 2016, respectively. R&D expenses were $10.6 million for the second quarter representing an increase of $2.3 million or 27.6% compared to $8.3 million for the same quarter of the prior year. Presented as a percentage of total revenues. R&D expenses were 6.7% and 8.4% for the quarter ended December 31, 2017 and 2016, respectively. The VAT refunds and government subsidies were $9.4 million for the second quarter as compared to $8.2 million for the same period in the prior year, representing a $1.2 million or 15.2% increase. The income tax expenses and the effective tax rate were $9.3 million and 20.4% for the second quarter as compared to $1.6 million and 13.5% for comparable prior year period. The effective tax rate fluctuation was mainly due to the different pre-tax income mix with different tax rates, as the Company's subsidiaries apply to different tax rates. The non-GAAP net income attributable to Hollysys, which excludes the non-cash share-based compensation expenses, which is calculated based on the number of shares or options granted and the fair value as of the granted date, amortization of acquired intangible assets, fair value adjustments of acquired [ph] acquisition-related consideration, and fair value adjustments of a bifurcated derivative was $36.3 million or $0.60 per diluted share based on 61.3 million shares outstanding for the second quarter. This represents a 229.4% increase over the $11 million or $0.18 per share based on 60.9 million shares outstanding reported in the comparable prior year period. On a GAAP basis, net income attributable to Hollysys was $36.2 million or $0.60 per diluted share representing an increase of 263.4% over the $10 million or $0.17 per diluted share reported in the comparable prior year period. Contracts and backlog highlights; Hollysys achieved $220.0 million new contracts for the second quarter. And the backlog as of December 31, 2017 was $547.6 million. The detailed breakdown of the new contracts and backlog. Industrial Automation $45.8 million, Railway Transportation $143.8 million, M&E $30.4 million; total $220 million. Backlog as of December 31, 2017 Industrial Automation $152.6, Railway Transportation $272.2 million, M&E $122.8 million; total $547.6 million. The cash flow was $13.8 million for the second quarter. The total net cash outflow for the second quarter was $13.8 million. The net cash provided the operating activities was $36.1 million. The net cash used in investing activities was $45.5 million, mainly consisted of $92.6 million time deposits placed with banks, which was partially offset by $47.8 million maturity of time deposits. The net cash used in financing activities was $7.2 million, mainly consisted of $7.2 million payment of dividends. The total amount of cash and cash equivalents and time deposits with original maturities over three months were $365.4 million, $331.5 million and $285.4 million as of December 31, 2017, September 30, 2017 and December 31, 2016, respectively. As of December 31, 2017, the company held $231 million in cash and cash equivalents and $134.4 million in time deposits with original maturities over three months. For the three months ended December 31, 2017, DSO was 147 days as compared to 208 days for the comparable prior year period and 196 days for the last quarter and inventory turnover was 48 days, as compared to 52 days for the comparable prior year period and 61 days for the last quarter. The management concluded that the guidance will reiterate fiscal year 2018 with revenue in the range of $500 million to $530 million and non-GAAP net income in the range of $100 million to $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 the Q&A in mandarin and will provide translation. Operator, please.

[Operator Instructions] we'll go first to Sky Hong with Deutsche Bank.

[Foreign Language]

The first question is about the factory automation, is there any progress within recent months for the factory automation we also seen from the government side, we answer the first and right person. Within our standard to establish new standard for the industry focus on the intelligent.

[Foreign Language]

We focus on the straight demand to do the factory automation. The first is focus on the cooperate with the large area or industry or cooperate with the companies like Haier or Hai Di Lao. We signed the contract to do the project and they expect us to [indiscernible] with the final results. So we find the further the larger contract than before. And this by the recognition of different vertical and also recognition by the potential customers. The second one is for focus on the inter-intelligence area because we all meet the same situation the factory automation the traditional industry wants to upgrade so to focus on the digital and intelligence is the next step and beyond the cooperate with the customers focused on the products. We also have to raise a solution to focus on the whole area and that's why we provide a way put this is also including our own products, new products and new technology to support the potential end markets. And the third one is to enlarge our broadening within the whole industry within China especially to participate some activities. Especially like to raise the standards of the Central Government. We earned at the government level recognition as listed one of the 23 intelligent manufacturing system solution provider recommended by the Ministry of Industry and Information Technology. So these activities what we're doing for the factory automation and we hope it will bring to you the new product and new technology in the coming months. Thank you.

Thank you.

And we'll go next to Alex Chang with Citi.

[Foreign Language]

Okay, the first question have included a managed sub-verticals. The first one is for the - can we provide the percentage for the high-speed rail and subway the proportion for this quarter. And the second vertical is for the aftersales replica for the service contract that we could see our large increase. And this part was recognized revenue is booking into the aftersales for booking into the integrated contract revenue. And the third one is the proportion of aftersales revenue for the high-speed rail, right now.

[Foreign Language]

The first question for the proportion of the high-speed rail and the subway revenue. The proportion will disclosed at end of this fiscal year. Currently we have no data at hand. But it's probably like more than 80% from the high-speed rail revenue at hand. And the second is about recognition of the service contract within the high-speed rail. We will incorporate [ph] into the other sale revenue not integrate that revenue. And the third one, the aftersales proportion for the high-speed rail we not disclosed number, we just provided total aftersales revenue right now currently by total around more than 15%. But from another factor, the high-speed rail, after sale revenue is increasing very fast original single-digit of high-speed rail revenue to right now two digits.

[Foreign Language]

[Foreign Language]

The question is for the replacement is for what kind of level of the repairmen's find [ph] or what kind other name. And the answer is, if not very directly equal to the five level repairmen's actually right now a lot of repairmen's from the level four and the replacement is not named at the level five.

[Foreign Language]

The first question is, 80 unused on the ATP contracts and how many recognized by the end of December 1. And also the second question is about ASP trends for these contracts. And the third question is about D2 [ph] area 300-350 kilometer power segment. What about the future trend for the procurement?

[Foreign Language]

[Foreign Language]

[Foreign Language] I cracked at the first question is now for recognized how many trains. Actually the question is for 80 sets or unused contracts that is contract or run by the first half year of 2017 or the second half year 2017. The after second half of 2017 especially within the second quarter of fiscal year 2018. The second question about ASP trend, the ASP note and exchange compared before because in this area, we all provide the signaling system, so the CRC not gives any free of cost pressure within the price. And the third one for the 350 kilometer train complement. It still have to wait from the information of CRC after train [indiscernible] currently we can just know from the CRC like until Transit 18 there will be 900 trains unused for the 200 still need to wait for the information. Thank you Alex.

[Foreign Language]

The first question is now for the trend because we can see the second quarter of the industrial automation new contract just flat. So what about the trend for the coming next two quarters. And the second question is focused on the, if not disclose the breaking down industry that revenue of IA [ph], can you give us sense of which special industry report were generated that the revenue increase?

[Foreign Language]

We combine these two questions together to answer. The industrial automation revenue made from the industry from power and chemical, petro-chemical and the power including the co-fire [ph], thermal and new energy and this area is increasing and the trend for the whole fiscal year we will keep the compared increased. Within the quarter maybe have fluctuated, but the whole trend is positive and we believe at the end of fiscal year we still can keep more than two digits growth, either from the revenue and the new contracts. Thank you Alex.

Thank you.

We'll go next to Jacqueline Du with Goldman Sachs.

[Foreign Language]

The question for the procurement, one the AT trains for ATP, what about the delivery? It's all focused on the [indiscernible]. [Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

Okay the answer for the AT train after complement ATP were one, partially we deliver for the strength factual not to all for strength factual need and also the second question for ask doubted new procurement type line for recent demands. Is it well within the third quarter or after March? It's hard to say the type line because it's our dominated by CRC. The only customer, so we really have to wait for their information. Thank you.

We'll go next to Patrick Xu with Nomura.

[Foreign Language]

The first question is high-speed rail factor recently delay - accident for the [indiscernible] within the Chengdu-Ya'an line and can you describe some information this accident? And the second one is for, we granted by the industry intellectual program by Central Government is any subsidiary or any award by from this grant?

[Foreign Language]

Okay and the first related accident actually it is just a single equipment problem within the train, is not too much a fact by the complement line. Everything right now just to go in place, so it's not a very large lead to any bad results. It's just an equipment fault, so not to relate signal-controlled products. And the second is for the 23 intelligent manufacturing system solution provider recommended by Ministry of Central Government. We will benefit from the - like we can carry on the large Central Government program and also we can - we have same recognition by the industry can easily to expansion or transformation business.

[Foreign Language]

Because the time restraint, so the one last question.

We'll take our last question from Thomas [indiscernible] with Morgan Stanley.

[Foreign Language]

The first question is about here I want to clarify two things, the 80 sets means the 80 sets of ATP, it was 40 trains not 80 trains. The second one and back to the question. The first question is doubt 80 sets of the ATP contract is all from the 300, so we do not see 200 area of procurement and especially the replacement equipment. If all come from the 300, is that means there had no replacement for the 200? [Foreign Language]

[Foreign Language]

And also the question is focused on the 80 sets, ATP's all for the new generation of 300, is there any old ones? The answer is yes, all come from the new of the 300, no old ones and also the replacement we have but not within this 80 sets. Actually it's also booking to the aftersales revenue. Right now not too much replacement and maybe the cycle will start to from several years later. Yes this is the first question and the second question is about the R&D distribution. Right now we also focus on the factory automation development and also the high-speed rail, we have the new product like track circuit [ph] so how you allocated resource within R&D and balance the advantage. [Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

Actually the R&D expenditure from the numbers to see, it will have a little bit increase but not too much, this is as before I mean 6% to 8% of total revenues. But we want to emphasize from the R&D itself will focus on the over lacking pack of the shared the platform like and also we emphasize the platform not a single product. The platform is for the solutions, but when we do the R&D in the near and over lacking part, for example if electronic company want to use part of SCADA it also can use the - to share with the rail factor and also IA [ph] can also do the SCADA, so they can share the SCADA by the rail and IA [ph]. So we emphasize the efficiency of the R&D to - after this like the overlapping part can reduce the R&D expenditure. And also we want to say I want to explain more about what we'll do within the R&D right now. Beyond the rail factor like the factory automation we emphasize on two things. The first one is mechanical ability. This is focused on like the machine product like we'll meet the project like Hai Di Lao after the [indiscernible] side they need to us provide a machine replaced labor, so we have to raise ability to provide the machine. This emphasized mechanical ability and also the Hollycon from the Chinese [indiscernible] area they also focus on the machine mechanical ability rate. But the second path is for the software for the technology based on solutions. This kind of solution focused on the layer of data close to equipment. For example like the proximity computing or like the data analyzing or data install rate of the cloud. Those kind of things focused on the traditional industry upgrading, intelligence upgrading. So this area we have to provide a lot of new technology or new method combine with our existing products into a platform to assume that solutions focused on different verticals, so that's the transformation we actually have a lot of things to do and we are working on it. Thanks, Thomas.

[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 looking forward to speaking with you again in near future. Thank you.

That does conclude our conference call. Thank you for participating and you may now disconnect.