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Edited Transcript of HOLI earnings conference call or presentation 14-Nov-19 1:00am GMT

Q1 2020 Hollysys Automation Technologies Ltd Earnings Call

Beijing Dec 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Hollysys Automation Technologies Ltd earnings conference call or presentation Thursday, November 14, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Arden Xia

Hollysys Automation Technologies Ltd. - IR Director

* Baiqing Shao

Hollysys Automation Technologies Ltd. - Co-Founder, Chairman & CEO

* Steven Wang

Hollysys Automation Technologies Ltd. - CFO

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Conference Call Participants

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* Alex Chang

Citigroup Inc, Research Division - VP

* Jacqueline Du

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Kevin Luo

Morgan Stanley, Research Division - Head of China Capital Goods & Construction Research Team and Executive Director

* Lingxin Kong

China International Capital Corporation Limited, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Hollysys Automation Technologies Earnings Conference Call for the First Quarter of Fiscal Year 2020 Ended September 30, 2019.

(Operator Instructions) Please be advised that this conference is being recorded today, November 14, 2019, 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.

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Arden Xia, Hollysys Automation Technologies Ltd. - IR Director [2]

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Hello, everyone, and thank you for joining us.

Today, the speakers will be Mr. Baiqing Shao, CEO of Hollysys Automation Technologies; Mr. Steven Wang, CFO of Hollysys Automation Technologies; and myself, IR Director of Hollysys. On today's call, Mr. Shao will provide a general overview of our business, including some highlights for the first quarter of fiscal year 2020. Mr. Steven Wang will discuss our performance from a financial perspective. And 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 the statements that are not historical facts, including statements relating to the expectations (sic) [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; fluctuation 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 control system technology; timing, approval and market acceptance of the new product introductions; general economic conditions; geopolitical events or regulatory changes; as well as other relevant risks detailed in Hollysys' filings with 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.

And now I would like to turn to -- the call to Mr. Baiqing Shao. Please go ahead, Mr. Shao.

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Baiqing Shao, Hollysys Automation Technologies Ltd. - Co-Founder, Chairman & CEO [3]

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Thank you, Arden. And greetings to everyone.

I would like to discuss some key events during this quarter.

IA business finished the quarter with revenue and contract at $64.6 million and $84.0 million, achieving 12.0% and 4.6% year-to-year growth, respectively.

Under the guidance of our 4 -- 3+1+ N strategy, we continued our effort in market penetration in different industries. In our power business, we signed a contract to provide control solution to urban heat supply network, which is the first project of this kind of Hollysys -- for Hollysys. In chemical business, we have officially completed the milestone Zhong'an Coal Chemical Project and will continue to provide maintenance and other services afterwards. The project is one of the largest MAV-DCS projects for Hollysys. And we provided a total solution covering the integration of up to 10 system, including control system, asset management systems, alarm system, gas detection system, et cetera. In the petrochemical industry, with our DCS and SIS being certified by CCS, China Classification Society, earlier this year, we are better qualified in providing control solution in offshore oil-related business. Our strategic relationship with CNOOC, China National Offshore Oil Corporation, proceeded further as we signed several contracts with them in providing control solution to their offshore oil platform this quarter.

Besides market penetration through the newly built projects, we have kept leveraging on our nationwide network to respond to the aftersales demand of different industries, especially as the control products are approaching the end of our -- of life cycle. We maintained close relationship with our existing customers through various types of aftersales service while also exploited the opportunities in obtaining new clients through replacement and upgrade projects, especially in the chemical and petrochemical industries. We also build up our capability in providing more comprehensive solution covering full life cycle of the project. With the recently completion of the acquisition of a small pharmaceutical and chemical design institute, we are able to get involved in potential projects at earlier stage of the future for better opportunity.

In our smart factory solution, following our previous breakthrough contract in the power industry, we have signed several contracts this quarter with both existing and new customers from the chemical industries. Such will be long-term cooperation so -- and to turn their product smart comprehensively step by step. We have also broadened with our industrial software solution matrix as we launched a new solution that help to optimization emission control and signed the first contract with a client from the power industry.

Railway business finished this quarterly with revenue and contract at $44.6 million and $21.0 million, recording 11.5% and 20 -- 70.6% year-to-year decreases, respectively. In the high-speed railway business, the bidding price of CRC has not met the expectation of the market. We continued to provide aftersales service on the -- on our high-speed railway signaling system -- signaling products covering software upgrade, spare parts sales, maintenance and replacement.

Meanwhile, we are also actively preparing ourselves for new products and service in the aftersales high-speed railway market. In inter-city high-speed railway business, we signed contract to provide ATP with automatic train operation function through the Pearl River Delta region.

In subway business, the subway line for the new Beijing Daxing airport commenced business operation in September, with Hollysys being the provider of SCADA solution that supports driverless operation.

Going forward, our rail business will continue to adhere to the diversity strategy for stable and healthy growth and to improve our local service network for more value-adding and differentiated services. With urbanization as ongoing process, we are keeping leveraging our strong R&D capacity and prepare for the application of various types of railway transportation system in the future.

M&E business finished this quarterly with the revenue and contract at $14.0 million and $33.6 million, recording 54.2% year-to-year decrease and 128.0% year-to-year increase, respectively.

Given the macro economy in Southeast Asia and the Middle East, risk control remains to be the key focus of our M&E business. In IA overseas business, progress is constantly made in terms of establishment of the new cooperation with new key EPC players as well as ongoing cooperation with existing partners. Going forward, we will continue our effort in developing partnership with key EPC players and strengthen localization in manufacture, marketing and service in oversea business.

With that, I'd like to turn the call over to Steven Wang, who will read the financial results analysis.

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Steven Wang, Hollysys Automation Technologies Ltd. - CFO [4]

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Thank you, Mr. Shao.

I'd like to share some highlights for the first quarter ended at September 30, 2019.

Comparing to the first quarter of the prior fiscal year, the total revenues for the 3 months ended September 30, 2019, decreased from $138.7 million to $123.2 million, representing a decrease of 11.2%. Integrated contract revenue decreased by 10.4% to $104.5 million. Product sales revenue decreased by 23.8% to $6.1 million, and service revenue decreased by 9.9% to $12.6 million.

The company total revenues can also be presented in segments as follows. For first quarter, industrial automation revenue achieved $64.6 million, rail transportation automation revenue $44.6 million, mechanical and electrical solution revenue $14 million.

Overall non-GAAP gross margin was 37.7% for the 3 months ended September 30, 2019, as compared to 37.2% for the same period of the prior year. The non-GAAP gross margin for integrated contracts, product sales and services were 32.6%, 79.9% and 59.5% for the first quarter compared to 30.8%, 75% and 67.9% for the same period of the prior year, respectively. The gross margin fluctuation was mainly due to the different revenue mix with different margins.

Selling expenses were $7.3 million for the first quarter, representing a decrease of $0.4 million or 5.6% compared to $7.7 million for the same quarter of the prior year. Selling expenses were 5.9% and 5.6% for the 3 months ended September 30, 2019 and 2018, respectively. Non-GAAP G&A expenses were $10.6 million for the first quarter, representing a increase of $2 million or 23.6% compared to $8.6 million for the same quarter of the prior year. Non-GAAP G&A expenses were 8.6% and 6.2% for the quarters ended September 30, 2019 and 2018, respectively.

R&D expenses were $8.9 million for the first quarter, representing an increase of $0.1 million or 2% compared to $8.8 million for the same quarter of the prior year. Presented as percentage of total revenues, R&D expenses were 7.3% and 6.3% for the quarter ended 30 -- September 30, 2019 and 2018, respectively.

The VAT refunds and government subsidies were $3.5 million and $3.5 million for the quarter ended September 30, 2019 and 2018, respectively.

The income tax expenses and effective tax rate were $6.2 million and 17.3% for the first quarter as compared to $5.5 million and 16.3% for the comparable prior year period. The effective tax rate fluctuation was mainly due to the different pretax income mix with different tax rates, as company's subsidiaries are subject to different tax rates in various jurisdictions.

The non-GAAP net income attributable to Hollysys was $29.8 million or $0.49 per diluted share. This represent a 6.1% increase over $28.1 million or $0.46 per share for the comparable prior year period. On a GAAP basis, net income attributable to Hollysys was $29.7 million or $0.49 per diluted share, representing an increase of 6.4% over $27.9 million or $0.46 per diluted share reported in comparable prior year period.

Contracts and backlog highlights. Hollysys achieved $138.6 million of new contracts for the first quarter ended September 30, 2019. The backlog at September 30, 2019, was $578.9 million. The detailed breakdown of new contracts and backlog by segment is as follows. The new contracts achieved the first quarter ended September 30, 2019: industrial automation new contract, $84 million; rail transportation, $21 million; mechanical and electrical solutions, $33.6 million. Backlog as of September 30, 2019: industrial automation backlog, $195 million; rail transportation, $288.9 million; mechanical and electrical solutions, $94.6 million.

Cash flow highlights. For the first quarter ended September 30, 2019, the total net cash inflows was $15.3 million. The operating cash flow was $39 million. The investing cash flow was $8.1 million and mainly consisted of $31.9 million of matured time deposit and 4.4 -- $4.5 million of proceeds received at disposal of an equity investment, which were partially offset by $27.8 million of time deposits placed with bank. The net cash used in financing activities was $20.3 million and mainly consisted of $20 million repayments of bonds payables.

Balance sheet highlights. The total amount of cash and cash equivalents was $340 million, $332.5 million and $276.9 million as of September 30, 2019, June 30, 2019, and September 30, 2018, respectively.

For the 3 months ended September 30, 2019, DSO was 204 days as compared to 170 days for the comparable prior year period and 160 days for the last quarter. The inventory turnover was 56 days, as compared to 51 days for the comparable prior year period and 40 (sic) [42] days for the last quarter.

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Arden Xia, Hollysys Automation Technologies Ltd. - IR Director [5]

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Operator, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Kevin Luo from Morgan Stanley.

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Kevin Luo, Morgan Stanley, Research Division - Head of China Capital Goods & Construction Research Team and Executive Director [2]

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(foreign language)

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Arden Xia, Hollysys Automation Technologies Ltd. - IR Director [3]

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[Interpreted] And the first question is for -- about this quarter compare the railway transportation compare decrease. So what about this quarter or delivering of the ATP contract? And also, at end of this year, in December, around it, could you give us some hint about the delivering time line within -- from your side of ATP on the rolling stock pipeline; and also the differences between the rolling stock delivering and your ATP signaling control system delivering, differences? I mean it's well after for 1 month after delivering of the rolling stock? Or what kind of time line? And the second question for you is this automation backlog. Current position is -- compare high within history. And could you give us the proportion breaking down by differences, the verticals, like in the thermal, the coal power, the chemical, petrochemical, et cetera? And also please give us the prediction for the future trend, within IA, of the backlog.

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Baiqing Shao, Hollysys Automation Technologies Ltd. - Co-Founder, Chairman & CEO [4]

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(foreign language)

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Kevin Luo, Morgan Stanley, Research Division - Head of China Capital Goods & Construction Research Team and Executive Director [5]

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(foreign language)

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Baiqing Shao, Hollysys Automation Technologies Ltd. - Co-Founder, Chairman & CEO [6]

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(foreign language)

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Kevin Luo, Morgan Stanley, Research Division - Head of China Capital Goods & Construction Research Team and Executive Director [7]

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(foreign language)

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Baiqing Shao, Hollysys Automation Technologies Ltd. - Co-Founder, Chairman & CEO [8]

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(foreign language)

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Arden Xia, Hollysys Automation Technologies Ltd. - IR Director [9]

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Kevin, (foreign language)

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Kevin Luo, Morgan Stanley, Research Division - Head of China Capital Goods & Construction Research Team and Executive Director [10]

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(foreign language)

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Baiqing Shao, Hollysys Automation Technologies Ltd. - Co-Founder, Chairman & CEO [11]

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(foreign language)

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Kevin Luo, Morgan Stanley, Research Division - Head of China Capital Goods & Construction Research Team and Executive Director [12]

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(foreign language)

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Baiqing Shao, Hollysys Automation Technologies Ltd. - Co-Founder, Chairman & CEO [13]

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(foreign language)

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Kevin Luo, Morgan Stanley, Research Division - Head of China Capital Goods & Construction Research Team and Executive Director [14]

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(foreign language)

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Arden Xia, Hollysys Automation Technologies Ltd. - IR Director [15]

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[Interpreted] Let me finish the translation. The first question, about ATP. And actually it's really depends on the CRC, China Rail Corporation's, speed to require us to deliver sometimes at the end of this year, with a catch-up this (inaudible), sometimes not. So this is -- really depends on the situation. And currently, this year, we -- the CRC open bidding for 146 sets of ATP, and we get 40 sets ATP, 30%. And also it will delivering -- it will be delivering for the coming months. The industrial automation, actually we do not provide the breaking down proportion for the backlog, but generally speaking, for the new contract, to separate by different industry like -- the power, we take around 40% to 45%. Chemical, petrochemical take around 40% to 45%. And in future trend, we're still thinking that industrial automation will keep growth. And also, we discussed just about the ATP, whether or not we'll finish the delivering for the 40 sets of this time, but it still depends. And then finally, CFO mentioned about, if considering the first quarter (inaudible) and the second quarter together, we think, the first half year of fiscal year 2020, the railway transportation should be compared increase. Because based on current backlog and the potential delivering, we're thinking the revenue could catch, have positive growth. Thank you, Kevin.

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Operator [16]

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Your next question comes from the line of Alex Chang from Citi.

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Alex Chang, Citigroup Inc, Research Division - VP [17]

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(foreign language)

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Arden Xia, Hollysys Automation Technologies Ltd. - IR Director [18]

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[Interpreted] The question is for -- about railway transportation segment. As also mentioned by Kevin, I'll also continue to ask about the prediction for the performance of railway transportation for fiscal year 2020 because currently the CRC bidding process [enter] the market acceptance -- expectation. So what about the prediction for this fiscal year performance of railway transportation?

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Baiqing Shao, Hollysys Automation Technologies Ltd. - Co-Founder, Chairman & CEO [19]

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(foreign language)

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Arden Xia, Hollysys Automation Technologies Ltd. - IR Director [20]

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[Interpreted] The end of this calendar year, end, and the beginning of next calendar year, it will -- would have the ATP bidding for the new sets of the high-speed rail signaling control system. And based on current backlog and prediction, we're thinking the whole fiscal year performance for the railway transportation could keep, I mean, compare just -- compare the same or just a little bit increase. We will [through] the aftersale services -- aftersale revenue to catch up the potential and expectation of the bidding process. So -- and the railway transportation is still performance good.

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Alex Chang, Citigroup Inc, Research Division - VP [21]

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(foreign language)

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Arden Xia, Hollysys Automation Technologies Ltd. - IR Director [22]

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[Interpreted] The -- I still want to ask about the new products, like the track circuit, like the subway CBTC system and for the future. For this -- the whole fiscal year, how much percentage within the backlog continue to come from these new products? And also when the subway CBTC system could start first contract.

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Baiqing Shao, Hollysys Automation Technologies Ltd. - Co-Founder, Chairman & CEO [23]

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(foreign language)

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Arden Xia, Hollysys Automation Technologies Ltd. - IR Director [24]

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[Interpreted] The track circuit is still within a test procedure, so it will not contribute too much within the backlog for the fiscal year 2020. And CBTC system, still on the rail side for the small project but not too large contracts. So it is either -- not to contribute to the railway transportation revenue within the 2020. But we will try our best to get the first large contract from this CBTC system.

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Alex Chang, Citigroup Inc, Research Division - VP [25]

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(foreign language)

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Arden Xia, Hollysys Automation Technologies Ltd. - IR Director [26]

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[Interpreted] The last, one more question relates to the P&L. The P&L shows 2 new items. Gain -- one is gains on disposal of investments in equity investee, around USD 5.8 million. And another one for the equity investee also, right -- booking around the $1.5 million. What about the things behind of these 2 items?

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Steven Wang, Hollysys Automation Technologies Ltd. - CFO [27]

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(foreign language)

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Arden Xia, Hollysys Automation Technologies Ltd. - IR Director [28]

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(foreign language)

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Alex Chang, Citigroup Inc, Research Division - VP [29]

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(foreign language)

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Baiqing Shao, Hollysys Automation Technologies Ltd. - Co-Founder, Chairman & CEO [30]

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(foreign language)

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Alex Chang, Citigroup Inc, Research Division - VP [31]

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(foreign language)

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Baiqing Shao, Hollysys Automation Technologies Ltd. - Co-Founder, Chairman & CEO [32]

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(foreign language)

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Alex Chang, Citigroup Inc, Research Division - VP [33]

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(foreign language)

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Arden Xia, Hollysys Automation Technologies Ltd. - IR Director [34]

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(foreign language)

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Alex Chang, Citigroup Inc, Research Division - VP [35]

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(foreign language)

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Arden Xia, Hollysys Automation Technologies Ltd. - IR Director [36]

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(foreign language)

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Alex Chang, Citigroup Inc, Research Division - VP [37]

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(foreign language)

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Arden Xia, Hollysys Automation Technologies Ltd. - IR Director [38]

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(foreign language)

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Alex Chang, Citigroup Inc, Research Division - VP [39]

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(foreign language)

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Arden Xia, Hollysys Automation Technologies Ltd. - IR Director [40]

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(foreign language)

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Baiqing Shao, Hollysys Automation Technologies Ltd. - Co-Founder, Chairman & CEO [41]

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(foreign language)

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Unidentified Company Representative, [42]

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(foreign language)

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Alex Chang, Citigroup Inc, Research Division - VP [43]

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(foreign language)

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Arden Xia, Hollysys Automation Technologies Ltd. - IR Director [44]

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(foreign language)

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Alex Chang, Citigroup Inc, Research Division - VP [45]

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(foreign language)

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Arden Xia, Hollysys Automation Technologies Ltd. - IR Director [46]

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[Interpreted] Okay. Let me finish translation. The first one, for the $5.7 million about gain on disposal of investment in equity investee, that's represents the IPE company. We sold our shares in one of our joint stock company called IPE. And the difference between the price sold and our share original book value is recognized as gain. And also Alex asked, further asked about what kind of background of this company. And this company is focused on the biotech-related testing. And also Alex asked about why you sold this company. Because you are -- announced that you also get a pharmaceutical design institution. Is it any conflicts between -- to each other? The answer is no because the IPE is really focused on the bio testing, but what we new acquired, the pharmaceutical design institution, is for our big comprehensive solution. Because this can take the full cycle of the pharmaceutical industry process control and it can support the business have the synergy for the future, but the IPE joint stock company is not. So this is the first one.

The second question relate to the $1.5 million. That will be cost to equity investee. And we get the dividend. It's a kind of investment gain. And also, Alex asks about whether or not it's sustainable. It's not sustainable. It just depends on different quarter performance by the companies itself. So it fluctuate all the time. Thank you.

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Operator [47]

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

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Jacqueline Du, Goldman Sachs Group Inc., Research Division - Equity Analyst [48]

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(foreign language)

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Arden Xia, Hollysys Automation Technologies Ltd. - IR Director [49]

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[Interpreted] The question is about industrial automation. And we've been -- we could see the company proves there are a lot of resources within the chemical and petrochemical industry. And I also -- we mentioned about Zhong'an coal project. And this time, you mentioned about the new project for the COOPC (sic) [CNOOC], and is it the same product? And also I want to know about what capability you are increasing within the chemical, petrochemical. And then for the fiscal year 2020, is there any other new large project that we'll join?

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Baiqing Shao, Hollysys Automation Technologies Ltd. - Co-Founder, Chairman & CEO [50]

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(foreign language)

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Arden Xia, Hollysys Automation Technologies Ltd. - IR Director [51]

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[Interpreted] And thank you for your question. Actually we really put a lot of resources within the chemical, petrochemical. We'll hire the experts and also even the very famous ones within the industry and to increase, set up our brand name and let the customer know us. And right now, the Zhong'an project is not the same as this time we said about the CNOOC project. The Zhong'an project is the largest one chemical project within China. And we finished the whole project right now and get the admission by the customers. And this can demonstrate the Hollysys capability. And the CNOOC project is also very important because we finished and certified by CCS. And if you are a builder certified by CCS, you can participate in the offshore oil platform project. So this the -- a pretty new one for Hollysys. And we will continue to sign the large project with the large state-owned enterprises within the chemical, petrochemical industry for this year. And we think, the next step, we could contribute more to this industry.

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Jacqueline Du, Goldman Sachs Group Inc., Research Division - Equity Analyst [52]

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(foreign language)

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Arden Xia, Hollysys Automation Technologies Ltd. - IR Director [53]

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[Interpreted] And I want to make supplement, to ask question about if -- from a competitive thinking, what about the current market share for the chemical, petrochemical? And what about the future, the market share you want to achieve?

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Baiqing Shao, Hollysys Automation Technologies Ltd. - Co-Founder, Chairman & CEO [54]

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(foreign language)

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Arden Xia, Hollysys Automation Technologies Ltd. - IR Director [55]

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[Interpreted] The chemical, petrochemical competitors. Actually, for former years, we were focused on power and not put more -- enough resources within chemical and petrochemical. So we're behind that. And right now, we are catching up, and we think that we will very quickly to penetrate the market. But from the market share to say, it's hard to give you the data because there we have no statistical bureau. And also it's very fragmented within [such] industry. So maybe in future, but right now, we have no data at hand. Thank you.

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Operator [56]

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Your final question today comes from the line of Kong Lingxin from CICC.

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Lingxin Kong, China International Capital Corporation Limited, Research Division - Analyst [57]

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(foreign language)

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Arden Xia, Hollysys Automation Technologies Ltd. - IR Director [58]

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[Interpreted] Okay. The first question, I want to ask a detail about your set, the ATP, when, and 40 sets. The 40 sets means how many trains actually?

And this answer the sets. Each train, rolling stock train, have 2 sets of ATP, so it should be 20 rolling stocks. (foreign language)

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Lingxin Kong, China International Capital Corporation Limited, Research Division - Analyst [59]

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(foreign language)

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Arden Xia, Hollysys Automation Technologies Ltd. - IR Director [60]

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(foreign language)

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Lingxin Kong, China International Capital Corporation Limited, Research Division - Analyst [61]

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(foreign language)

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Arden Xia, Hollysys Automation Technologies Ltd. - IR Director [62]

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[Interpreted] And let me finish the translation.

This question about, Mr. Kong said. Actually, the CRC open bidding for the trains, more than 100 trains. So it's populated by your side. You have 20. It's not 1/3 of market share. And I want to make a -- clarify that we see that -- the 1/3 market share, no problem, but maybe the -- whether or not the 20 rolling stock or 40 rolling stock, we have to double check. Because the data right now will not -- as the same. But we based on the press release by the CRC. So no matter what kind of numbers, we get 1/3. And this, the market share, has no doubt.

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Lingxin Kong, China International Capital Corporation Limited, Research Division - Analyst [63]

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(foreign language)

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Arden Xia, Hollysys Automation Technologies Ltd. - IR Director [64]

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[Interpreted] The second question, about the railway transportation new contract. The CFO, Mr. Wang, say the performance revenue for the railway transportation for the Q1 and Q2 would -- turns positive, but I want to ask it from the new contract stat. Could you give us some prediction for the new contract of railway transportation for the first half fiscal year compare, increase or decrease?

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Steven Wang, Hollysys Automation Technologies Ltd. - CFO [65]

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(foreign language)

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Arden Xia, Hollysys Automation Technologies Ltd. - IR Director [66]

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[Interpreted] And in revenue, we give -- the prediction is based on the execution of the projects and backlog. So this is through the achieved, but based on the new contract, it's hard to say. It's really depends on CRC bidding process.

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Lingxin Kong, China International Capital Corporation Limited, Research Division - Analyst [67]

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Okay. (foreign language)

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Arden Xia, Hollysys Automation Technologies Ltd. - IR Director [68]

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[Interpreted] And for the gross margin, the last question to the gross margin. I saw the first quarter gross margin increased 0.5%. And also I noticed that -- the structure, like 3 different kinds of contracts of -- the integrated contracts, the product sale and service rendered. And internally, the integrated contracts compare increased 32.6%. So could you talk more about the integrated contract, internal, what kind of changing?

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Baiqing Shao, Hollysys Automation Technologies Ltd. - Co-Founder, Chairman & CEO [69]

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(foreign language)

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Steven Wang, Hollysys Automation Technologies Ltd. - CFO [70]

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(foreign language)

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Arden Xia, Hollysys Automation Technologies Ltd. - IR Director [71]

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[Interpreted] The -- Mr. Shao said from the operation business effect the company always focus on control the gross margin and to improve the contract and show at first time, and the delivering, quality to manage the range. And you can see our range prediction for the gross margin always within the range what we said, like the whole business 35% to 40%. And then fluctuation specific like 1%, for example, it's hard to say internally which part contribute. And so -- but what we can focus is the whole management efficiency improvement. So this part is what we want to emphasize. And we will continue to control the expense, everything to improve the gross margin and to lock up the net income.

And CFO mentioned about the gross margin. We will lock up within a [health] range. And if you see the railway transportation itself, it's hard to use 1 quarter to show about the whole performance, represent the whole gross margin. Actually we recommend to see the railway transportation through the -- based on a whole year because the quarterly fluctuation would be very sharply. Thank you.

Okay. Thank you, everyone, for joining us on the call today. If you haven't got a chance to raise questions, we will be pleased to answer them after the call. We are looking forward speaking with you again in near future. Thank you.

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Baiqing Shao, Hollysys Automation Technologies Ltd. - Co-Founder, Chairman & CEO [72]

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(foreign language)

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Operator [73]

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

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]