Hollysys Automation Technologies Ltd.

Hello, everyone, and thank you for joining us. Today, our attendees will be CEO, Mr.

Colin Sung; CFO, Mr. Steven Wang; Mr.

Yi Ma, Chairman of the Hollysys Group, one of the company's subsidiary; Co-COO, Mr. Yue Xu and Mr.

Lei Fang, who are in charge of IA and the Railway business, respectively. On today's call, Mr.

Sung will provide a general overview of our business, including some highlights for the third quarter and the first 9 months of fiscal year 2021. Mr.

Steven Wang will discuss our performance from financial perspective, and all management team will answer questions afterwards.

Thank you, Arden, and greeting to everyone. Industrial Automation, IA, business finished the third quarter with revenue and new contract at $67.5 million and $106.7 million, representing 97.1% and 68.7% year-on-year growth.

For the first 9 months of the 2021 fiscal year, IA revenue and new contract achieved 44.1% and 34% year-on-year growth, respectively. In the power sector, we employed sustainable development tactics in order to address the needs of former customers.

By offering these various upgrade products and wider range of services, we were able to increase market share.

Yes. Thank you, Mr.

Sung. I would like to share some financial highlights for the third quarter ended March 31, 2021.

Comparing to the third quarter of the prior fiscal year, the total revenues for the 3 months ended March 31, 2021, increased from $80.8 million to $109.9 million, an increase of 36.1%. Broken down by the revenue types, integrated contracts revenue increased by 26.7% to $85.8 million, product sales revenue increased by 82.4% to $6.5 million and service revenue increased by 85.1% to $17.6 million.

The company's total revenue can also be presented in segments as follows. For the third quarter, Industrial Automation revenue achieved $67.5 million; Rail Transportation Automation revenue, $30.7 million; Mechanical and Electrical Solution revenue, $11.8 million.

For the 9 months ended March 31, 2021, Industrial Automation revenue achieved $242.3 million; Rail Transportation Automation revenue, $140.6 million; M&E Solution revenue, $51.8 million. The overall non-GAAP gross margin was 37.5% for the 3 months ended March 31, 2021, as compared to 30.8% for the same period of the prior year.

The non-GAAP gross margin for integrated contracts, product sales and services rendered were 25.9%, 81.2% and 77.4% for the 3 months ended March 31, 2021, as compared to 22.3%, 71.3% and 75.3% for the same period of prior year, respectively. The gross margin fluctuated mainly due to the different revenue mix with different margins during the period.

Selling expenses were $7.2 million for the 3 months ended March 31, 2021, representing an increase of $1 million or 16.1% compared to $6.2 million for the same quarter of the prior year. Presented as a percentage of our total revenues, selling expenses were 6.5% and 7.6% for the 3 months ended March 31, 2021 and 2020, respectively.

The non-GAAP G&A expenses were $12.2 million for the quarter ended March 31, 2021, an increase of $3.3 million or 36.5% compared to $8.9 million for the same quarter of the prior year. Presented as a percentage of total revenues, the non-GAAP G&A expenses were 11.1% and 11.1% for the quarters ended March 31, 2021 and 2020, respectively.

The R&D expenses were $13.2 million for the 3 months ended March 31, 2021, representing an increase of $2.9 million or 28.7% compared to $10.2 million for the same quarter of prior year, mainly due to the increased research and development activities. Presented as a percentage of total revenue, R&D expenses were 12% and 12.7% for the quarter ended March 31, 2021 and 2020, respectively.

At this time, we'd like to open up for the QA session. Operator, please.

Okay. Thank you, Kevin.

The question is from Kevin, a Morgan Stanley analyst, and also company with the -- along with the company for -- focus on company for a long time, several years. And the first question is about the third quarter and the first 9 months about the Industrial Automation.

No matter from the new contract or revenue or compare increase very fast, and for right now, we could see the revenue already doubled compared year-on-year growth. And what about the next quarter and the next fiscal year 2022, the guidance for the IA?

And the second question is about the -- we know about Hollysys have a lot of investment joint venture company, and like we provide the equipment system to the Haidilao. And also in the medical area, we also have a Chinese producer medicine company.

And what about this company current revenue and the net income performance because I can saw from the financials that the equity investee compare decrease and this time is record a loss. So how about performance behind?

And the third question is about the dividend. Right now, we could see the cash and cash equivalents, plus the time deposits already are close to USD 700 million, and also Hollysys always have strong operating cash flow.

So are you thinking about to raise the dividend payout ratio?

The Industrial Automation right now performance compare increased and very strong, and we think it can keep this trend even in the coming years. And it's mainly because of two reasons.

One is, currently, the market is recovering and especially domestic market is relatively strong. And we -- our performance could over the growth of the market growth itself.

And the second one is about the business adjustment. We focus on the chemical, petrochemical area.

And also compare to traditional power sector, even right now, power is also very good. But we reinforce our chemical, petrochemical penetration and also the medical food beverage area and especially focused on the upgrading for the of the digitalization and also intellectual smart manufacturing.

Okay. And the second question regarding the performance of our subsidiary.

The couple of two major our subsidiary, one is regarding the nuclear operation and the other one is regarding the smart or intelligent services for Haidilao. At the current stage, those two companies just went through a reorganization, and we do see a certain cost increase for the quarter.

And in relation to the third question regarding the dividend increase for the company, I think this is also the plan. Company will have a discussion with analysts as well as individual shareholders in the coming days and weeks.

And it is part of the company's overall M&A strategy as well as the user policy or user capital to have more in-depth discussion with the shareholders in the coming days.

Can I have a follow-up question regarding the joint venture? You mentioned that this year, this fiscal year, some of the JVs that are happening, some of the organization.

But may I know the revenue, the lovely revenue number? And how about the revenue outlook and the profitability in the next fiscal year?

I think at this stage, we still is not a majority shareholder, and we do not give any guidance or any particular figures regarding those revenue. I think company in the process to reorganize along with the management team of subsidiary.

In the near future, once company made the decision, I think we will give you more insight to those figures, Kevin.

Okay. Thank you, Kevin.

You're probably looking at the line of share of net income loss of equity investees. You see a fluctuation.

Again, that's really a fluctuation. We're actually expecting for the total fiscal year for that line to actually increase compared to last year.

So that's probably a fluctuation for this quarter.

Okay. Thank you.

The first question about the Industrial Automation. And I also saw from the press release that you're already launching Fangcun smart service APP and this is based on the cloud service and also the users can purchase spare parts, submit service requirements like -- stuff like that.

And my question is about this kind of platform is just to focus on Hollysys' own after sales spare parts or it can also service the other like competitors, ABB, Schneider, for example? And also beyond that, a lot of Japanese company also focus on this area like to do the MRO, the industrial automation spare parts, those industry are already success.

So what about your consideration from this stack? And the second question is about the Rail Transportation, and we saw you won a CBTC system in Kunming and congratulations.

And can you give more colors about background, how long your -- from your participated the bidding and to win the contract? And also, is there any other new opportunity for the coming year to have the CBTC contracts?

And the third question about the production business itself. No matter, IA or Rail Transportation, we are all provide a control system.

However, right now, spread across the whole world that the chips is lack of supply and also the raw material cost is growing. And have you ever meet any issue in this area?

Especially, do you have enough chips to support the production for the business?

About the first question, I want to emphasize that to be -- that relate to the Industrial Automation are different with the customer side. And naturally, we want to do it.

The purpose is to provide high-quality services and also very quick response time to our customer. So that's why the current Fangcun smart service APP is just to focus on Hollysys' after sale.

And it's a combination of our supply and also -- upside or downside supply chain and also focus on the customer together to provide better services. The CBTC, we won the contract in Kunming Changshui Airport line and right now is in operating.

And we've made -- we've been made recognition by the experts within the industry and also recognition by the customer. So right now, this is a good demonstration that we could have capability to provide CBTC system to the other cities.

So that's why right now, we also focus several potential targets, and right now it's under the discussion. And then this is including the local government and even the subway operating company.

Maybe we could use the way to set up joint venture with them to better explain our platform within the subway sector. And also, Mr.

Kong Lingxin asked a supplement about the joint venture. You mean to cooperate with the local government or the local private sector companies.

And the answer is more close to the government because the government have the policy to do the innovation and the upgrading for the whole industry. So they want to import the good entrepreneur and the company to join this area.

So that's why this is also a few chance. Thank you.

The third question also answered by Mr. Fang, the IA COO.

Actually, you mentioned that the chips already started from last year to now, and we could see a lot of company be influenced by that. However, this is not influenced by our production because 2 years ago, we already got to start to prepare this kind of situation.

So we have several ways. One is for the short-term chips.

We have enough preparing in the -- in our backlog. And the second one is about the long-term chips.

We are focused on the replacement -- I mean, the -- to find the other available supplier to instead of the situation. The third way is for develop the next new generation DCS and also the other automation system, and right now, we already close to the end.

I mean for the second half of this calendar year, we will provide our new generation DCS, including a lot of the other new products that based on to solve the supply chain and that they are our own IP and we could easy to solve the supply chain issue.

Okay. Thank you.

Two questions. One is about the chips and the raw material cost is growing, and what about the influence for the gross margin.

And I also saw about your inventory and also cash flow, especially in freight compare increased a lot. So is this because of the -- of your pre-procurement of the raw material and chips?

And the second question about IA. The IA revenue, could you give me a breaking down by industry niche market revenue or percentage?

And for example, like the chemical, petrochemical and the pharmaceutical, food beverage right now compare increase relatively good, you mentioned. So what about the percentage contribution within IA right now?

Thank you.

The first question about the cost. And we also know about, for example, like the copper, like the chips are increased the cost right now.

But for us, we -- this has not too much influence about our gross margin and still within the healthy range. And you said right, the inventory increased because we also have the preparing for those raw materials.

And the second one about IA proportion with the industry, because I cannot give you a number right now, but I can say from another stack. For example, like the petrochemical plus chemical, right now, the revenue contribution are already over the -- sorry, over the power sector.

And the pharmaceutical, food beverage area right now is already reached to 2 contribution by the IA revenue and grow relatively very fast. So it's already be the third large contribution niche market.

Thank you, everyone, 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 the near future. Thank you.

Thank you.