Hollysys Automation Technologies Ltd.
Q1 2018 Earnings Call Transcript

Published: 14 Nov 2017

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Hollysys Automation Technologies Earnings Conference Call for the Fiscal Year 2018 First Quarter Ended September 30, 2017. [Operator Instructions] Please be advised that this conference is being recorded today, November 14, 2017, 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.

[Arden 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 fiscal year 2018; and I will on behalf of CFO, Ms. Qu discuss our performance from a financial perspective. The Q&A session will be 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 that are not historical facts, including statements relating to the expected growth of Hollysys' future product introductions, the mix of products in future periods of 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

[Baiqing Shao:]

Thank you, Arden, and greetings to everyone. I would like to discuss some key events during this quarter. The momentum of recovery in Industrial Automation continued in this quarter as we recorded 27.6% and 18.9% year-on-year growth in revenue and new contract respectively, with revenue achieving year-on-year growth for three consecutive quarters. Our performance in power industry remained stable and dominant as we signed contracts on Datang Dongying 2X1000MW power units and Guohua Yongzhou 2X1000MW power units, et cetera. In chemical, we signed several major contracts, including a DCS contract with Inner Mongolia FuFeng Group on Biology ingredients workshop project and a contract with Zhonganlianhe Coal-chemical Company on 1.9 million ton methyl alcohol and olefin conversion project. In food beverage area, we signed a contract with Xinjiang Kashi Aodu Sugar Industry on 20 million tons per year Beet Sugar DCS project. In nuclear, we continued to provide products for Tianwan #5 and #6 units. In factory automation, we kept focusing on several key industries and renowned players and our demonstration-for-further-application approach has been going smoothly. As we perform these projects, we improve our capability of providing turnkey solutions, accumulate track records and raise brand awareness. In white-goods area, our cooperation with Haier went further as we won new contracts on their Tianjin-based and Qingdao-based washing machine factories. Additionally, breakthrough was achieved in new energy area, as we won contracts from Do-Fluoride Chemicals Corporation, Limited to help improve the interconnection, data collection and management of production equipment in their lithium battery workshop. We believe that these projects will lead to more business opportunities from the current and an increasingly wider customer base. In high speed rail, we signed contract to provide TCC to Longchuan-Shanwei Railway. Our short term performance can be affected by factors such as limited completion of newly planned railway infrastructure in the early years of the 13th five-year-plan and the change in customer procurement timeline. However, we believe that outlook for rail business in the long run remains positive, given an explicit national plan, growing after-sale service demand and launching of our new products. For subway, we adhered to the expansion strategy to win new SCADA contracts in more cities and work closely with subway authorities to promote our SCADA system and subway signaling technologies in future. In mechanical and electrical installation services, with macroeconomic and political circumstances in South East Asia and the Middle East being closely followed, Concord and Bond remained active in exploration and kept executing projects covering various industries. Management and risk control have also been addressed to improve operation efficiency. 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.

[Arden Xia:]

Thank you, Mr. Shao. I want to share some highlights for the fiscal year 2018 and the first quarter ended September 30, 2017. Comparing to the first quarter of the prior fiscal year, the total revenues for the three months ended September 30, 2017 increased from $103.5 million to $115.5 million, representing an increase of 11.6%. Broken down by the revenue types, services revenue increased by 378.7% to $10.4 million, products sales revenue increased by 13.8% to $9.5 million, and integrated contracts revenue increased by 2.8% to $95.6million. The Company's total revenues by segments

[Operator:]

[Operator Instructions] We'll take our first question from Kevin Luo with Morgan Stanley.

[Kevin Luo:]

[Foreign Language]

[Arden Xia:]

The first question now today, this quarter the Industrial Automation compare increase, but from the revenue or accelerates for the new contract, but the railway transportation compared not too much, so this quarter the need from the railway transportation part, the new contract of what kind of a fact and also we hear about 175 end users trained while being procurement for the 300 how about, where we can sign the contract, this is the first question. The second one is out to international business. What about the net income report for the whole group and also about this fiscal year the potential performance to increase what kind of percentage and also talk about the strategy for this area for the coming years?

[Baiqing Shao:]

[Foreign Language]

[Arden Xia:]

The railway transportation new contract for this quarter compare not too much but it mainly comes from the after sale contract like the surveys, and use that now ahead of 75 train for the procurement cut line and we will participate bidding actually when it kind of chase but we have not finished the whole sign contract yet. So we cannot be totally tracking that but we will - we believe it will start to finish bidding ending out of this calendar year and we will disclose it later. And also the couple of factors we also recently of our contract we will disclose later. The second question for the M&A factor international business, beyond all our product sale the M&A factory specially come for last fiscal – it's added some cost for some specific project - so lead the goodwill impairment and also the net income were flat in our performance are good. And right now we are focusing on this area to control improvement of the management field and also the product and because their products are wrapped each to Asia and Middle East because those areas either is economic or political factor they have the potential challenges. So we are focusing on the control of the rate rather than to gain the revenue and contract so this is why the performance is not compared increase but this part we are striving to improve others factor of performance and a filed end of the control. We think it will gradually keep positive to increase sales. Thank you.

[Kevin Luo:]

[Foreign Language]

[Baiqing Shao:]

[Foreign Language]

[Arden Xia:]

The question is, how did that future landscape about the fixed rate 300 kilometer per hour segment and there are three layers how that help in market share and also the price. And the answer is that out from the history whole record which we see whole around 30% of the market share. So this is will continue but not based on each is contract, it's based on yearly total average trains procurement. And also the price is very stable within the cost marketing, [indiscernible] added pressure to three of us, right now. Thank you.

[Operator:]

We'll go next to Gary Cheung with Haitong International.

[Gary Cheung:]

[Foreign Language]

[Arden Xia:]

The question is on the gross margin, compare increase and improve a lot, can we talk about the gross margin future trend.

[Baiqing Shao:]

[Foreign Language]

[Arden Xia:]

The gross margin is 36% compare increase. The specific background I will let Mr. Arden Xia to introduce and from business factor actually the percentage of that structure are different than before and right now we see after sale revenue is compare increase a lot. This quarter is around 17% of the sale revenues of total revenues from the upper sale and this part of gross margin is higher average so that's why for this quarter the gross margin is better than the last quarter the third period of last year. But right now we want to advertize the - which we had few challenge because right now for example the Industrial Automation gross margin is slowing down because we strategically are focusing on penetration of significant contract. So we will valid the gross margin, try our best between the range of 35 to 40 as what we said before. Thank you.

[Operator:]

[Operator Instructions]

[Arden Xia:]

Thank you, everyone. It seems like no further questions. I think this quarter performance didn't like what we had before and for the coming quarters we believe it will turn better. Okay, next one Alex.

[Operator:]

We'll go next to Alex Chang with Citigroup.

[Alex Chang:]

[Foreign Language]

[Arden Xia:]

The first question is now to the exchange loss, and also the cost in that piece - what about the items. And the second question is the expenditure increasing and the compared revenue a little bit higher ratio and the revenue increase. So what about the whole fiscal year expenditure trend.

[Baiqing Shao:]

[Foreign Language]

[Arden Xia:]

The first question now today - the exchange loss and this part not affect too much because we are related to import and export of our house products right now take very small percentage and from the whole financial port of transportation it always meet the consideration but right now you talk about the exchange loss this quarter will not too much in future. And the second one about the cost investee, actually this is all compared to equity investee. The equity investee and the cost investee all relate to the partially of holding of the company and that 50% is between 30% to 60% it will put in the equity investee and is between 20% to 30% of the shares it will book into the cost investee. So this is the item differences. And the second question about the expenditure is growing and right, the trend is growing right now we create more SG&A like the selling activities but from absolutely value to so see within years around US$85 million and this year from actual value it’s just a little bit maybe 10% increase around, but I feel not so much. Thank you.

[Baiqing Shao:]

Thank you everyone for joining us on the call today.

[Operator:]

We have no further questions. Thank you.

[Baiqing Shao:]

We'll go to next one, the last one more question.

[Operator:]

We’ll go next to Peter Halesworth with Heng Ren.

[Peter Halesworth:]

I have a quick question for Mr. Shao. Could you please explain the CapEx budget for this new year and also I understand that there should have been a Board vote regarding the dividend, the regular dividend. Could you inform us the result of that vote and also what the pay-out ratio is? Thank you.

[Arden Xia:]

[Foreign Language]

[Baiqing Shao:]

[Foreign Language]

[Arden Xia:]

I will do the translation. The CapEx each year not too much we are close to a couple of companies, so we could see no more than US$10 million each year. And second question about dividend, the dividend we have a regular dividend policy, the payout ratio is 10% and last year we changed the policy to a regular dividend policy.

[Peter Halesworth:]

So just to follow up the payout ratio is going to remain unchanged at 10% because that seems to be a very low payout ratio relative to the CapEx needs and also to the cash flow you’re generating on an annual basis. So, I am just curious why we are keeping the payout ratio so low when the company is brimming with cash?

[Arden Xia:]

[Foreign Language]

[Baiqing Shao:]

[Foreign Language]

[Arden Xia:]

From recent years because in China is trending faster for Industrial Automation, so you could see our business focusing on the IA, especially Industrial Automation and also international basic expansion and that’s why we're more glad to put the resources into this area to keep pace with the market in recent years. But from the long term we definitely will consider to raise the payout ratio. Thank you, Peter.

[Operator:]

And we’ll go next to Kevin Luo with Morgan Stanley.

[Kevin Luo:]

[Foreign Language]

[Arden Xia:]

The first question is about the track circuit new contract. And we heard from the market that is where our regular speed contract how about the contract that carry to these little bit of information. The second question is about the subway signaling control system because right now the market that you could see it will lead - it has been leaded by the local government and also some construction company. So even to the PBT model, what about your method currently maybe PBT participate or corporate with the local government and that would be better to penetrate the signaling control system.

[Baiqing Shao:]

[Foreign Language]

[Arden Xia:]

The first question is about track circuit, we separate by two parts, one is regular speed to light and second one is high-speed rail license above 200. Right now we’re just get regular speed to license and won a contract that’s called [indiscernible] line but the contract size is not very sizeable, it's just less than 10 million China event because currently the regular speed procurement are compare high speed rail procurement of the track circuit have just few contract and I feel we already got the tax inline and for running at least one year. So we will probably get license in the fiscal year 2019 calendar year. And by the way the [indiscernible] line where we won the contract it will be finished the whole contract recognized revenue within this fiscal year. And the second question about PBT project and subway signaling, we are participating in bidding and hopefully we can get the subway signaling within one year, and the PBT project because we really need to do it very cautiously it depends on the PBT model, the project itself because sometimes it’s not just limited with capacity, it’s limited with capability and also put a lot of money, we can just do whatever we have for and it depends on the profit of the products and also depends on the rate control. We do not deny to do PBT project and we are also in discussions with local government right now.

[Baiqing Shao:]

Okay. Thank you, everyone for joining us the call today. If you haven’t got a chance to raise a question, we're pleased to answer them through follow-up contact. We look forward to speaking with you again in near future. Thank you.

[Operator:]

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