Ladies and gentlemen, thank you for standing by, and welcome to the Hollysys Automation Technologies Earnings Conference Call for Fiscal Year 2021 Second Quarter Ended December 31, 2020. At time all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. Please be advised that this conference is being recorded today, March 05, 2020, Beijing time. And 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 attendees are CEO, Mr. Colin Sung; CFO, Mr. Steven Wang; CSO, Mr. Yi Ma; COO, Mr. Yue Xu and Mr. Lei Fang, who are in charge of IA and Rail business, respectively and myself the IR Director of Hollysys Group, one of the company's subsidiary; and myself, IR Director of Hollysys.

Thank you, Arden, and greeting to everyone. The industrial automation, or IA business, finished the second quarter with revenue and new contracts at $92.9 million and $71.4 million, achieving 34.1% and 2.7% year-on-year growth. For the first half of the fiscal year, IA revenue and contract grew 30.5% and 16.8% year-on-year, respectively.

Thank you, Mr. Sung. I'd like to share some financial highlights for the quarter ended December 31, 2020. Comparing to the second quarter of the prior fiscal year, the total revenues for the second quarter ended December 31, 2020 increased from $170.1 million to $195.3 million, an increase of 14.8%. Integrated contracts revenue increased by 9.9% to $142.5 million, products sales revenue increased by 29.3% to $8.5 million, and service revenue increased by 31% to $44.4 million. A - Arden Xia: At this we would like to open up for Q&A session. Please note that for Chinese speaking participants, we can also do the Q&A in Madrid and will provide translation. Operator, please.

Ladies and gentlemen, we will now begin the question-and-answer session. And your first question comes from Kevin Luo . Your line is now open. Please ask your question.

Hi.

Hi, Kevin.

Okay, thank you. The first question comes from the Kevin, Morgan Stanley and three questions. One is for the privatization and offers. The company always will be focused by the other group for the offer and what about the company's attitude? And whether the company expected to see this kind of offer? The second one is about the revenue and the gross margin, the current half year still okay, but the operating expenses is growing relatively fast, especially the R&D expenses. What are the key behind for example like the employer numbers is growing for the other reasons? And what about the trend for the operating expense in the next moment? And the third question is for the industrial automation sector, the revenue growing relatively faster, but the new order we could see a little bit slower than the revenue. And what about the trend for the new contract in the coming moment?

Hi, Kevin. This is Colin here. So I will respond the first quarter and then our CFO will respond to the second question. And then the last question, I will leave to our COO to respond. So for the first question, recalling this privatization offer, first of all, we only received a two unsolicited offers from the . So we do not receive numerous offers. That's the first statement I want to make correction. And then regarding the first offer the board approved through the discussion and review with that. And then on the second one, and that basically our board director issued a press release stating the board of duty and then it's consultation with our independent financial and legal advisor and the color is still kept under review and then evaluate the revised proposal receipt. I mean, that review process still is ongoing, and then we will provide more update when a determination has to be made. At this point, we have no further update nor any announcement related to this offer. Okay. I think the second question, Steven you may answer recalling our expenses related to R&D increase.

Sure.

And Kevin also asked the question, is there any additional substantial people headcount increase related to those R&D. So go ahead, Steven.

Right. Okay. Look at a quarterly basis, for the second quarter our R&D expenses increased 35%. On this first half of the year, we increased about 25.7%. So you can see a quite amount of an increase of our R&D expenses. And there were various reasons. We'll see the number of people increased. We also see the labor costs rising. For the detailed investment in different sectors, I will leave that to Mr. Fang and Mr. Xu to give a more detailed color on the IA and the rail industry.

Sorry, by the way, this is Arden. And I also want to add some colors about the R&D respect. And actually, we are focused on developing a lot of new technology and products currently for the IA, for example, like the smart factory solution, new DCS platform, and also this new DCS based on the massive supply chain. And also in the rail sector like the infrastructure platform for the rail smart products and also C4 signaling system, those stuffs like that. So this is also the other reasons for the rising R&D expenses. Okay, go ahead Mr. Fang.

And Mr. Fang also emphasize that two things within the R&D. One is the next generation DCS product and also focused on the intelligence smart manufacturing plant. And also second one is focused on the – because domestic customer also focus on the localization supply chain. So that's why we also develop our product based on the supply chain changing.

Okay. And so the Rail Transportation Minister Mr. Sheng also mentioned about it in the rail sector we focused on several things. One is the intelligence business platform. For examples is the product like the – the engine controller and that this is kind of a new product that also launching within the city line and the national lines. And right now we are investing that’s more into these new product and technology. And the other side is so focused on the high speed rail signaling; this is the kind of combination interlocking system combined with the train control signaling the other technology together and also develop the C4 technology. And this year we are doing the experimental design and also the trial within the project. This is a kind of centralized the investment at the – at this stage, we keep the pace with the China Rail Corporation. I mean, our climb the speed and that the R&D expenses not like this term, and will continue very keep high investment from the rail – high-speed rail sector because right now it's the beginning. So we centralized to investment even more. And this is also depends on the China Railway Corporation and customers demand. Yes. The last question is for the IA take part….

Okay, the Industrial Automation the revenue compare increase, and this is normal, if we talk about the contract, right now it is relatively slower, but it’s because of COVID-19 influence. Because the COVID-19 the contract, that process is sometimes the reason is changing by distributed by different process. So right now it just the process is normal, but the final signed contract that may delay a little bit. So from the distributor to say the trend for the new contract that you still very steady and we could see the steady contribution in a coming moment. Thank you, Kevin.

Thank you very much.

Thank you. The next question is from the line of Lingxin Kong from CICC. Please ask your question.

Okay. The question from CICC, Mr. Lingxin, three questions, one is for the business outlook and what about the outlook for the second and half fiscal year performance? Especially IA and Rail and IA, is it a possible to keep the momentum like the revenue growth at this point? And also the second question is in January, we had a press release about the share buyback of the management team, what the procedure – right now the procedure could update to us. The third question is related to the factory automation and at this part Colin, CEO said we won the orders and made it a progress. Can you talk a little bit more about that this quick and shall affected automation progress and what kind of project, and also new – is there any new customers. Thank you.

Steve?

Yes. I’ll take the first question. Yes, well, I think we are going to see a healthy steady growth trend for industrial automation business for the coming two quarters. In other words, the second half of fiscal year 2021, we’re going to see still the same train for railway business, rail business, because this is a longer-term – have a longer–term cycle for the contract to be realized to be a revenue. So we’re going to see a slow stellar gross for railway business, the similar trend I’m passing with fall in the first half of the fiscal year.

Yes. The second question regarding the management share buyback, company implement a corporate governance review in May last year and continuing the first – sorry late 2019 and continued the first half of 2017. And then one of those policy are implemented is a recall the company inside the training policy. It obviously the announcement announced for the management to share buyback up for the $15 million over the six-month period giving the codes window at the time make the announcement. And then they will not able to purchase from the open market for the period of time until today. So once the window is open in the next 24 hours, and a management team will be making the purchase, which will be an additional six months from the date of opening. And then there is any progress or any update will company will update the shareholder as well as the Street. So at the current stage, they pushes program installed, but not in the share is being purchased from the open market yet.

For the factory automation right now that may contract is still coming from the existing customer based on the process control area, because this part to currently have very good demand and we have a lot of customer base that based on the process control and also I want to emphasize this kinds of customer, a very good customer, no matter from the margin by Hollysys or the technology maturity to say it’s much easier and visible to launching the factory control system, then the single factory automation customers. So that’s why right now are focusing is to tackle the factory automation a combination of PA and a process control and factory automation together, and also help them to optimize the management related the demand.

Okay. Thank you.

Okay. Thank you. 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.

Bye-bye.

Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may now disconnect.