Hollysys Automation Technologies Ltd.
Q1 2014 Earnings Call Transcript

Published: 19 Nov 2013

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Hollysys Automation Technologies Fiscal Year 2014 First Quarter Ended on September 30, 2013, Earnings Conference Call. [Operator Instructions] Please be advised that this conference is being recorded today, November 18, 2013. I would now like to hand the conference over to Ms. Jennifer Zhang, the Investor Relations Director of Hollysys Automation Technologies. Thank you. Please go ahead, Ms. Chang.

[Jennifer Zhang:]

Hello, everyone, and thank you for joining us. Today, our speakers will be Dr. Changli Wang, CEO and Chairman of Hollysys Automation Technologies; Ms. Herriet Qu, CFO of Hollysys; and myself, the IR Director of Hollysys. On today's call, Changli will provide a general overview of our business, including some highlights for the quarter, and Herriet will discuss our performance from financial perspective and a financial outlook for fiscal year 2014. Both Changli and Herriet will answer questions after their remarks. Before we get started, I would like to remind everyone that this conference call may contain forward-looking statements within the meaning of the 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, the mix of products in future periods and the future operating results. Such forward-looking statements based on 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 the statements

[Changli Wang:]

I'm pleased to report a robust financial and operational results for the first quarter of this fiscal year. Here, I would like to discuss some key wins during this quarter. Industrial automation continued its solid growth even though the revenue performance was relatively weak in this quarter, but the new orders taken -- was continuously recovering and achieving and achieved 20% growth. The weak industrial automation revenue growth in this quarter was mainly because of the decline of new orders growth in the second quarter of last fiscal year. During this quarter, we constantly executed our strategy to enhance our position in the high-end industrial automation market and the increase of our market share in mid- to low-end markets. Through generation DCS released to the market, we are doing to expand our market position in chemical, petrochemical, metallurgy industries as well as we have achieved in the thermal power industry. Today, in fact, we have more other proprietary automation and control systems and technology suite to the market. And our total solutions capabilities for class automation and control, our industrial automation sector will continue to deliver fruitful result and will bring significant revenue contribution. In the nuclear sector, our joint venture with China Techenergy Co., Ltd. established with the China Guangdong Nuclear Power Corporation was granted a new contract to supply automation control and the reactor protection systems for #5 and #6 units of the Hongyanhe Nuclear Power Station in September. As the only qualified local automation and control technology provider to the nuclear power industry in China, Hollysys has leveraged the strategic alliances with the largest nuclear power builder and operator in China to further penetrate nuclear power automation under controlled markets with our nuclear power plants automation and control solutions. In rail transportation, we will benefit from the accelerated high-speed rail construction after China Rail Construction Corporation established. In August, we signed a contract to supply our ground-based, high-speed rail signaling system to the Lanzhou-Xinjiang high-speed rail line for the Xinjiang section. The contract was valued at approximately RMB 118 million or USD 19.2 million. In October, we signed another significant ATP contract of RMB 316 million, or USD 51.47 million for 200-kilometer per hour high-speed rail trains and 300 kilometers per hour high-speed rail trains. With our advanced technology, outstanding reliability and a well-reputed track record, Hollysys will continuously capture its fair share in China's fast high-speed rail built-out and the world as well. In the overseas sector, we are sending qualified and experienced engineers from China to overseas and recruiting local engineers to expand our overseas team. We believe that with our proprietary technology, industry expertise and the strong competitive advantages, together with our expanded local channels through Bond and Concord, we will continue to make exciting achievements in the international markets in both industrial and the rail transportation fields. With that, I would like to turn the call over to Jennifer Zhang, who will read the financial results analysis on behalf of our CFO, Ms. Herriet Qu. Okay, Ms. Zhang.

[Jennifer Zhang:]

Thank you, Dr. Wang. In nutshell of Hollysys financial and operational results for fiscal year 2014 first quarter ended on September 30, 2013, the company reported solid financial results. For this quarter, total revenues increased by 28.6% to $113.2 million from $88.1 million for the same period in the prior year. Of the total revenues, revenue from integrated contracts increased by 28.3% to $106.3 million as compared to $82.9 million for the same period of prior year. Revenue from product sales increased by 33.2% to $6.9 million as compared to $5.2 million for the same quarter last year. The company's total revenue by segment was as following

[Operator:]

[Operator Instructions] Your first question comes from the line of Alex Chang from Citigroup.

[Alex Chang:]

And I have 2 questions. First, I noticed that the gross margin improved compared with last year, and this is even after the income ratio of Bond as I understand that Bond has a relatively lower margin. So how have you managed to achieve this, and is it sustainable, and what is the guidance for the FY '14? And my second question is about DSO and account receivables. So I noticed that the quarter, the DSO and account receivables both increased flat. So could you please explain the major reasons and what is your expectation on the trends?

[Changli Wang:]

Okay, Alex, that's very good. And I think I'll try to answer the first question and the second question will be answered by Herriet. That's okay. We have told the investors a lot of times, Hollysys' gross margin is a mix of different businesses. So even though this quarter we increased, because in this quarter, even this composition has changed a little bit, in this quarter, the high-speed rail is growing because last year you see, especially in the last 2 quarters, the railway business has been declining for a few quarters consecutively. But this time, the high-speed rail has been growing in this quarter. So the high-speed rail signal systems have a higher margin compared to the other businesses, relatively. And so that's why in the future with the high-speed rail construction accelerated, I think we can maintain quite a good margin in the future -- in the near future especially. And that's it. And also, our industrial automation margin has remained the same, almost the same, has not changed a lot. And for the second question I think Herriet will answer your question. Okay, Alex. Thank you.

[Jennifer Zhang:]

Okay. [Chinese]

[Herriet Qu:]

[Chinese]

[Alex Chang:]

[Chinese] So I would like to double confirm the current backlog of the high-speed rail orders. So just confirm, is it included the -- around USD 51 million ATP contracts signed in October?

[Changli Wang:]

Okay, thank you.

[Herriet Qu:]

[Chinese]

[Changli Wang:]

Jennifer, please translate.

[Jennifer Zhang:]

Okay. I will translate the first question regarding the DSO accounts receivables. Firstly, DSOs is longer compared with the last quarter and the quarter in the same period of last year. There are several reasons. Firstly, because account receivables have increased by some extent, and also because the worsening environment -- economic environment in China. And also another reason is because we have more of the notes into the accounts receivables. The notes we received achieved a more than 50% growth compared with last quarter and so the absolute value is more than $10 million. So it represents about 1/3 of the accounts receivable increase. And also another reason is because of the lessening of the payable days for the -- some business sectors. And also for the rail, because even though we have the short time of the delivery of the products, but the payment of the -- from the rail segment is longer. But according to our expectations and our analysis and also because of our addressing efforts in the management of the projects and also to put the metrics of DSO into the performance review of the individual personnel. So we don't think the DSO will be worsening into the future. So it will be gradually recovered to its normal level around 160 days. So for the second question, Alex asked about the ATP order. Is the ATP revenue has been recognized into this quarter? Ms. Qu answered that we do have a portion of the ATP revenue recognized during this quarter.

[Operator:]

Your next question comes from the line of David Jin from Goldman Sachs.

[David Jin:]

I have 2 questions here. The first question is regarding your new order outlook because I noticed that Dr. Wang mentioned in the first quarter, we have 20% growth for the industrial automation new orders year-on-year. So I'm wondering, can we have a rough breakdown of which sectors we saw the best growth and which relatively lacked other sectors, and also any updates going to second quarter or fourth quarter of our calendar year, especially after the Third Plenary just closed, and have we seen any changes like, towards more new industry or environmental-related industry business? So that's the first question. And the second question is regarding your bad debt allowance which we saw an increased of USD 1.3 million in the first quarter, which is pretty much consistent with what we saw in other industrial sectors. So can we have a comment on that and any, like, forecast for the rest quarter of the fiscal year?

[Changli Wang:]

David, I'll answer your first question and Herriet will answer your second question. Yes, I would like to answer the business questions, okay? This quarter -- 2 quarters ago, I ordered a letter even to apologize for we didn't achieve a very good result for the industrial automation part because the market environment has changed in the last few quarters, and we didn't have put enough effort to drive the business to grow. And other than that, we did quite a lot of things to analyze of what we will do and what the environment -- what the market will be. And after a few months, it seems our work has become showing effect. First of all, the new orders has grown this quarter and where we're going in the future, we kind of expect that. You asked a very good question and what sectors the business grow most? So far, it seems we have done very well in a few areas. Like, for example, like power industry, we grow -- although power industry, the market is not growing very well, but we grow -- we still grow our business. And especially these 2 years since our capabilities in providing better solutions for the power plants, especially the large ones, we have shown the customers with a very good record so that now we have currently opportunities to bidding for almost all the projects not like before. Before, we can only bidding for the smaller projects. The bigger ones, either they have not allowed or not invited us to participate the competition even. So nowadays in this 300 megawatts level, we achieved a very high market share. In the last few quarters, they think our market share has reached on the top of the market. And for the 600 above, like 9 gigawatts power plants, we also have done few projects very well, and so that in the future, in the power industry, we can maintain a very high margin. And in this industry, also, we have found that a lot of coal mining corporations or even some big customers, they began to build out their own power plants in the future. So that provide a market for this. And also in China, the power market, the power industry has developed dramatically in the last 20 years. So we have a very big volume. And most of these were installed 10 years ago, they need to be replaced by the new products, by the new systems. So we think in the future, replacement is also a market. That's power. We can maintain a very good better share and also we have a volume. The second part we grow quite well is the chemical and petrochemical carrier and also the iron and steel. Petrochemical area, it's just because our market share is still very small so we can still grow in that part of the business with our better solution and our better products. And for the iron and steel industry, I want to stress a little bit, because everyone thinks iron and steel industry is a kind of declining industry because it's too much overcapacity. I mean, the situation is very serious now. But still, since just because the demand is less than the supply, so the competition between the iron and steel corporations become more and more fierce. And also, nowadays, in China, the new government put more and more regulations in the future on the energy conservation and also to prevent the pollution problems. So in that case, we have designed something for the iron and steel plants. For example, just to have them to save energy and also to prevent pollution, it's a very sophisticated software package combined with our hardware. So in that case, nowadays, we can -- we also find a lot of opportunities in this very mature market for our products. So that's just one example. We are developing more on these kind of areas like energy conservation and air -- I mean, environmental protection systems. It is for the industrial automation for this part. The second part is on general, Hollysys market share in the process control is still relatively small. I mean, although in some segments, it's quite well, but in some segments, we're still very small. So that provides us with a very good opportunity to grow if we put some efforts in that area. So nowadays, we segmented the market into different sections and we put some expertise in these different sections. So we managed to grow in the few selected areas. And in the future, we can maintain flat -- satisfactory growth in this area. So we are quite confident of that. And also, we just announced of a new system last year. And after these few months, it seems our system has proven very well in the market. First of all, the performance and the quality has improved a lot and also is more convenient. And on the other hand, the cost has not increased. So in that case, the competitive advantages has become more and more apparent of that. And also we have designed some other products we just launched a couple of months ago and some of them are a couple of quarters ago. Like our system, the Safety Instrumentation System, that's for the process -- emergency shutdown process and protection process. And this system is selling very well in the field. Although this segment is not big enough but is growing very fast. And we are confident that in the future that will become significant part of the industrial business. And also we have designed some other software packages. For example, like just in the mature market in the power industry, we designed optimization software and simulation software for power plants, and that sell very well for a very good margin because that's mainly composed of software package only and some of the engineering works. So on general, we -- although -- I mean, industrial process control is quite mature market, but we still have a lot of areas and a lot of spaces to grow. That's on the general. You just mentioned that after the Third Plenary conference have announced any changes. I think now it's still too early to say that. We are going to spend quite a lot of effort to consult some expertise even, I mean, to see what you're going to do, what's the new conference have any influence on us. But to -- so far, we can see that the situation will be better definitely, I mean, compared with before. So I think we will be waiting for too long already, so we are quite confident that after this -- I mean, the federal government has such a strong, I mean, decisive power to drive the marketing economy, that will better ensure to provide us of all the products and services become more efficient and more effective and that's require, I mean, a good industrial automation systems. So we are -- that's why we are confident that the industrial automation business will maintain quite a solid growth in the future. Thank you very much.

[Herriet Qu:]

Okay.

[Jennifer Zhang:]

So the bad debt allowance is many because of the middle and small-sized customers. Historically, we do have some small customers with some payment risks. But we don't think this will continue in this -- like the same situation because we have the evaluation of the credit of the customers before we sign the contracts and also because of our continued after-sales service and the spare parts and other systems we're providing, we will continue to strengthening our cash collection. Maybe in the future, we will experience the longer of the payable days, but we will not recognize too much of the bad debt allowance. Does that answer your question, David?

[Operator:]

There are no further questions at this time, ma'am.

[Jennifer Zhang:]

Okay. Thank you, everyone, for joining us on the call today. If you have gotten a chance to raise your questions, we'll be pleased to answer them through follow-up contacts. We look forward to speaking with you again in the near future. Thank you.

[Operator:]

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