Hollysys Automation Technologies Ltd (HOLI) 2010 Q2 法說會逐字稿

Thank you for standing by, and welcome to the Hollysys Automation Technologies' fiscal 2010 second-quarter ended December 31, 2009 earnings conference call. (Operator Instructions). Please be advised that this conference is being recorded today. I would now like to hand the conference over to Ms. Serena Wu, the Investor Relations Manager of Hollysys Automation Technologies.

Thank you, and good morning everyone. Thank you for joining us today. Our speaker today will be Dr. Changli Wang, the CEO of Hollysys Automation Technologies; Mr. Peter Li, the CFO of Hollysys; and myself, the IR Manager of Hollysys.

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 future operating results.

Such forward-looking statements, based upon the current beliefs and expectations of Hollis' mismanagement, are subject to risk and uncertainty which could cause actual results to differ from those 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, like inflation or regulatory environment requirements or changes adversely affecting the business in which Hollysys is engaged, revision or changes in government incentive programs, potential trade barriers affecting international expansion, fluctuations in customer demand, management of revenue growth and transition to new markets, intensity of competition from, or introduction of new and superior products by other providers of automation technologies.

Timing, approval and market acceptance of new product introductions. General economic conditions, geopolitical events, and regulatory changes, as well as other relevant risks detailed in Hollysys' filings with the Securities and Exchange Commission. The information set forth herein should be read in light of such risks. Hollysys does not assume any obligations to update information discussed in this conference call or in its filings.

On today's call the CEO of Hollysys, Dr. Changli Wang, will provide a general overview for the second quarter of fiscal year 2010. Then the CFO of Hollysys, Mr. Peter Li, will discuss our quarterly results from a financial perspective. Both Changli and Peter will be available for the Q&A session afterwards.

Please note that all amounts noted in this conference call will be in US dollars unless otherwise noted. Now I would like to turn the call over to the CEO. Please go ahead Dr. Wang.

Thank you and greetings to everyone. We are pleased to report a strong fiscal 2010 second quarter, with solid financial and operational results and a significant strategic progress. The management is satisfied with our financial performance from both operating and a financial perspective. Given the adverse impact of economic downturns and uncertainties we have experienced over the past 12 months, we accomplished the net income targets set out at the beginning of the fiscal year. Railroad steadfastly increasing investment in R&D activities to maintain Hollysys as a leading player in its end markets.

Of course, we are very excited that during the December quarter we have successfully completed the testing, delivery and installation of our high-speed railway signaling system for Zhengzhou-Xi'an high-speed railway line. Carrying our steady state-of-the-art automation and control systems installed for one of the world's fastest running high-speed rail line is a concrete testament of our advanced R&D, production, and project implementation capabilities in the high-speed railway sector.

As China continues to stay on track in achieving its 13,000 km high-speed railway build-out target by 2012, the Zhengzhou-Xi'an high-speed railway line is one of the first railway lines launched in China with a designed traveling speed at over -- at 300kph.

We are also very proud that during the December quarter, we commenced delivering our proprietary designed and manufactured large-scale industrial DCS to China's largest 1GW level thermal power station, Guohua Taishan Power Plant.

This signifies China's first-ever deployment of domestic made large-scale DCS instead of imported systems for the ultra-supercritical thermal power stations in China. this strategic reference project further validated Hollysys' dominant position in China's industrial automation and control field.

Also in the December quarter we initiated the minority interest of buyout program, acquiring 24.11% of the minority interest in Beijing Hollysys from the Rilin Group. The minority buyout initiative has important strategic significance to Hollysys. The acquisition will bring Beijing Hollysys to a wholly owned subsidiary of Hollysys, and contribute the full earnings and the revenue growth potential to the listing entity, particularly in the areas of high-speed rail, subway and nuclear automation.

On top of a minority buyout, we also managed to form a strategic partnership with Rilin Group to supply our industry-leading automation and control solutions and products to some of the exciting business lines of Rilin Group, such as wind power, shipbuilding industries. Such a strategic partnership will provide Hollysys a high entry platform to further scale its corporate proprietary automation and control technologies to some of the most attractive end markets in China today.

With that, I would like to turn the call over to our CFO, Peter Li, who will discuss in great details of our financial results.

Thank you Dr. Wang, and hello everyone. In a nutshell Hollysys' financial and operational results for the second quarter of fiscal 2000 ended on December 31, 2009, the Company reported a strong quarter with solid operational results.

For the second quarter we reported unprecedented backlog level at $219.7 million. Our revenues at $46.2 million, as compared to $38.2 million quarter-over-quarter and $52.5 million year-over-year. Non-GAAP net income of $8.1 million as compared to $6.6 million quarter-over-quarter and $11.1 million year-over-year. We generated $13.7 million net cash from operations for the quarter, and now our cash level reached $138.9 million as of December 31, 2009.

Now let's take a closer look into the quarterly numbers. Of the quarterly total revenues, revenue from integrated contracts amounted to $44 million with segment breakdown as follows -- $29.6 million or 67.2% from industrial automation, $10.7 million or 24.2% from rail and subway, of which $8.4 million from high-speed rail and $2.3 million from subway. $3.7 million or 8.6% from nuclear.

If we take a detailed analysis of revenue breakdown, one would find subway businesses decreased from $13.9 million from prior-year period to $2.3 million in this quarter. And high-speed rail grew only slightly from $7.6 million to $8.4 million on a quarterly base year-over-year.

What is encouraging is our industrial automations revenue achieved a significant increase from $25 million in prior-year period to $29.6 million in this quarter, with approximately 18% growth year-over-year.

This quarterly revenue lumpiness is mainly due to two factors. Firstly, some of our subway product implementation was delayed in delivery timeframe because of external factors. And also Ministry of Rails of China has been putting off contract renting for the high-speed railway signaling component in the 300 to 350 kilometer power segment, pending commercial operational situations for the first two pilot lines.

We believe these two factors will be eliminated given the current operational progress, some of which was already mentioned by Dr. Wang earlier. As I said before in previous earnings calls or investor meetings, I would like to reiterate that quarterly revenue lumpiness is part of the inherent nature of our business, given the involvements of various levels of governments in high-speed rail and subway sectors.

I would encourage investors not to feel overly pessimistic or optimistic upon quarterly revenue lumpiness in either directions, but to view the overall business fundamentals in a rational way by incorporating both revenue growth and backlog trendlines over a 3 to 5 quarter timeframe.

As a percentage of total revenues, overall gross margin was 31.2% for the quarter, as compared to 34.6% for the prior-year period, mainly due to gross margin for products sold decreased from 74.2% to 35.7% year-over-year. The gross margin for integrated contracts was 31% for the quarter compared to 32.7% year-over-year.

As I also said before in previous earnings calls, all gross margin could be fluctuating quarter-over-quarter due to different products with different margin profile recognized in the reporting period, which could swing our margin slightly within the range of 30% to 35%. Over the longer term with our higher-margin businesses taking up higher percentage of revenues, it will result in our gross margin expansion going forward.

For the quarter selling expenses were $3.6 million compared to $2.7 million year-over-year. The increase in selling expenses was mainly due to the Company's increased marketing activities.

G&A expenses, excluding non-cash share compensation expenses, were $4.1 million for the quarter or 8.8% of the total revenue compared to $1.9 million or 3.7% for the same period of the prior year. The increase was mainly due to an increase of $0.8 million in allowance for doubtful accounts, an increase of $0.5 million in stock bonuses, and an increase of $0.4 million in professional fees.

R&D expenses were $3.4 million for the quarter, a 74.8% increase, as compared to $1.9 million for the same period of the prior year. The increase was mainly due to increased R&D activities.

Vat refunds and government subsidies were $5.6 million for the quarter, a 121.6% increase compared to $2.5 million for the prior-year period, mainly due to VAT refunds increase. Recall, VAT refunds and the various government subsidies are R&D tax credits in assets. VAT refunds are calculated on a portion of internally developed software sales, on which 14% of the 17% value-added taxes will be refunded to Hollysys. We regard VAT refunds as ongoing R&D tax credits from the government, instead of one-time only tax credits. VAT refunds and government subsidies were recognized upon receiving the cash payment from various levels of governments.

The income tax expenses were $0.86 million for the quarter, a 67% decrease compared to $2.6 million for the prior-year period, mainly due to clawing back tax expenses recorded in the previous quarters upon receiving a tax preferral certificate for [Hongdo] Hollysys.

For three months ended December 31, '09, non-GAAP net income, excluding non-cash share compensation, was $8.1 million or $0.16 per diluted share based on approximately 50.6 million shares outstanding, as compared to $11.1 million or $0.25 per share based on approximately 44 million shares outstanding reported in the prior-year period.

On a GAAP basis net income was $7.9 million or $0.16 EPS. Compared to net loss of $5.9 million or $0.13 loss per share for the same period of the prior year.

Hollysys generated operating cash flow of $13.7 million for the quarter, including investing and financing activities. The total net cash inflow was $8.3 million.

Hollysys backlog as of December 31, '09 was $219.7 million compared to $187.5 million at December 30, ['09]. The detailed breakdown for the backlog by segment is as follows -- $107.6 million from subway business or 49% of the total backlog, $53 million from industrial automation or 24.1% of the total backlog, $53.9 million from high-speed rail or 24.5% of the total, $5.2 million from nuclear or 2.4% of the total backlog.

Recall, I have emphasized the quarter-over-quarter lumpiness of our backlog balance due to the timing of contract signing in the previous earnings calls. We should remain mindful of this nature of our business.

It is also worth noting though that our backlog reported this quarter reached a record high in Hollis' history. The next higher backlog record balance was at $200.7 million reported for the September quarter in 2008. Our backlog balance over the past 12 to 18 months has shown a clear uptrending run-up which indicates our strong business momentum going forward.

Moving to the balance sheet Hollysys has maintained a strong financial position. Hollysys' cash and cash equivalents were about $138.9 million compared to $130.6 million at December 31 -- 30, '09. Inventory turnover is 58 days for the quarter ended December 31, '09 compared to 75 days quarter over quarter. DSO at 137 days as compared to 157 days quarter-over-quarter.

In conclusion, from the management perspective we are pleased with our performance results for the second quarter of fiscal '10. Given our strong backlog level and sales pipeline, we are reiterating our revenue and non-GAAP net income guidance in the range of $185.9 million to $192.2 million and $30.3 million to $31.4 million, respectively.

Hollysys presents a unique opportunity for global investors to share with the great prospects of China's investment in its infrastructure areas and government support on domestic proprietary technology and product provider in this run of infrastructure buildout.

As a public company we strive to balance the short-term financial numbers with long-term growth prospects as any other companies. Investing in our long-term growth entails certain short-term compromises for Hollysys. For example, we would have reported a higher EPS at $0.19 instead of $0.16 for the quarter if our R&D spending remained at last year's level.

We will continue to work on meeting investors' expectations, while investing in R&D, to make Hollysys and even better positioned Company in the areas of high-speed rail, subway and industrial automation. Thank you.

Thank you, Peter. At this time we would like to open up for a Q&A session. Thank you.

(Operator Instructions). [Chang Chow], Nomura.

I have a couple of questions, if I may. The first question is about the revenue opportunities for the power plant DCS systems. I was wondering like for each -- for the nuclear power plant for each conventional island and for each nuclear island, what would be the ASP for you if you sell a DCS system for those reactors?

As we know, China is building about 20 nuclear reactors now, but already have approved to build another 30. So I just want to get a better handle on the ultimate revenue opportunity for you and your marketshare -- sort of your targeted marketshare in that area.

As relates to that, I was also curious to find out the revenue opportunities for you to supply DCS for the ultra-supercritical sort of 1GW thermal power plants, what that ASP may be for you as well. So that is my first question.

The second question is about the export opportunities. I noticed that the subway and the high-speed train our a major part of your backlog right now. And as we know, the leading train manufacturers in China, China South Locomotive and China North Locomotive, are increasingly exporting their subway cars and high-speed trains to many countries in the world. How that would present incremental revenue opportunities for your sort of the train systems let's say three years down the road? Thank you.

That's a very good question. As you know, as a lot of investors know, nuclear power presents a great opportunity for Hollysys. And given the recent Chinese government regulation of carbon emission control policy going into 2020, we think nuclear power buildout in China will be increased in the near future.

So according to the current plan, China is going to have 70 nuclear reactors in operation by the year 2020. Currently in China we have only nine reactors in operation. And as you said, there are currently 20 new reactors in construction today. And the unique positioning of Hollysys is that we have a 50-50% joint venture with the -- with China's largest nuclear station builder and operator, namely China Guangdong Nuclear Power Holding Corp.

You know, they're only three government-approved nuclear station builders and operators in China. They are China Guangdong Nuclear Power Holding Corp., China National Nuclear Corp. and China Power Investment Group. So among the three government-approved builders, China Guangdong Nuclear Power Holding Corp. is the largest marketshare holder and the most commercially managed and run company.

With this 50-50% JV we have, we are entitled to provide our proprietary nuclear conventional island DCS to all the nuclear stations contracted by China Guangdong Nuclear Power Holding Corp. So in terms of the per reactor EPS sales for our product sales to the JV we record roughly around [RMB]25 million per conventional island of each reactor. On top of that we also share 50% of the net income from our JV in our profit and loss statement.

But regarding going forward we think, especially our JV is currently internally developing its proprietary nuclear island DCS product, which is expected to be fully commercialized in the year of 2012 to 2013. Supposed 2013 with our JV providing proprietary nuclear island DCS product the related service work, or other product supplies required from Hollysys, will increase our revenues from $25 million to a much higher level going forward per reactor.

In terms of your -- second part of your first question in relation to the DCS for supercritical thermal power stations, in this area Hollysys really set a record in Chinese DCS market with delivering the first-ever China made DCS for 1Gw level of thermal power stations. Currently 1GW level thermal power stations is the largest scale in China and also in the world.

So with delivery, and also expected to go operational in September of this year, Hollysys will obtain a critical strategic reference site in this high-end market of thermal power stations, while further consolidate its leading positions within this area.

In terms of the overseas market opportunities in subway and high-speed rail, I think Hollysys is aggressively preparing for overseas market. As you probably know, Hollysys is the only -- is the first Chinese company who got its onboard control systems certified under the most stringent European safety standard, CO4, which we announced last year. And with this proprietary onboard control high-speed equipment, and with the Ministry of Rail China getting contracts in other parts of the world, we definitely are ready to sell this product by piggybacking on China Ministry of Rail's efforts overseas.

On the subway side, currently we have a market-leading productline called SCADA, which refers to surveillance control and data acquisition. And we are also internally developing a subway signaling system, which is currently the Chinese market are predominately controlled by foreign players, which we believe we can really leverage our technology know-how from high-speed rail signaling system area and our knowledge in subway and push out a subway applicable signaling productline in the next few years.

So all in all, I think nuclear, subway and high-speed rail has really presented Hollysys a great growth prospect going forward.

Peter, just for the export stuff, do you have a target, let's say, how much revenue you hope to get from outside of China in three years? And also could you please talk about the ASP for the ultra-supercritical? I think you did in managing the ASP for ultra-supercritical DCS. Thank you.

Yes. For supercritical it is roughly around $1 million to $1.2 million per site. For the -- with regard to the revenue estimate for overseas market, we currently don't provide that to the market yet, but we are aggressively pursuing opportunities in this area. I think we will provide markets and you guys with an update once we announce an international sales at (inaudible) time.

Sorry, one last question. Have you provided a longer-term operating model to the investors that says this is longer-term gross margin and net margin operating model? I was just wondering.

No, currently what we provide to the investor community is the annual top-line and bottom-line guidance. We haven't provided gross margin or operating margin. Going forward we definitely can complete providing that along the annual guidance.

Okay, thank you very much. I better pass the call. Thank you.

Mark Tobin, Roth Capital.

A question on the backlog. Obviously backlog is up very strongly here. Can you give us a sense by segment as far as revenue recognition what timeframe you think that revenue draws down?

Sure. As we communicated to the investor community before, we estimate roughly about 70% of the backlog would be recognized within next 12 months.

In terms of the breakdown, subway roughly takes about 6 to 18 months to recognize, high-speed rail roughly about 6 to 12 months, and industrial automation roughly about 3 to 9 months.

How about as we head into the nuclear -- as we start to get those contracts what is draw down expectation for nuclear?

Nuclear, because we signed the contract with JV, so normally there is a shorter timeframe. It is roughly around 3 to 9 month draw down.

I guess following up on the nuclear questions, the construction as we talked about has begun on 20 plants at this point. At what stage into the construction do the contracts for the control system get awarded?

I assume there is a lot of nuts and bolts construction work that happens at the upfront stage before the control system is awarded, network begins. Can you give us a sense of the timeline of nuclear plant construction and where you guys come in?

I am going to answer your question. Usually for nuclear power plants when the start of their construction of the site, the infrastructure construction, then they will begin to order the heavy equipments, like the generator, the reactor, etc.

And after they decide which reactor and which heavy equipment they are going to use, then they will decide the (inaudible) requirements and the controller requirements for the reactor and the heavy equipment. And then they will begin to beating -- in our case, not beating -- negotiating with us, when to -- how much we are going to sell and when we are going to deliver our systems. So usually it takes us two years later compared to the start of the project. This is a rough timeline. Okay?

Okay, thank you. That's very helpful. I guess, last question for Peter. Within the operating expenses I noticed it seemed like there were a few one-time items. Can you give us a sense of your expectations for the operating expenses going forward?

Sure. As I mentioned in my speech earlier, there was about $1.7 million in total -- in G&A expenses related to December quarter unique expenses. And we don't think it will be recurring going forward. So going forward we definitely will come down to a similar level in G&A and sales and marketing expenses, maybe a little bit more compared with the September quarter of last year.

But with respect to R&D expenses, it will continue to trend up. So definitely that is the operating expenditure profile going forward for the next few (multiple speakers).

Okay, that is helpful. Thank you. I will jump back in the queue.

Adam Hershey, SIAR Capital.

I was obviously happy to see the strong growth in the backlog over the $219 million. You had mentioned in the call that you saw strong business momentum going forward. You also talked about the fact that you expect to have gross margin expansion going forward. Can you just expand a little bit more on that about the gross margin expectations and the opportunity for gross margin expansion, particularly in the high-speed rail segment and the subway segment?

Sure. As I discussed in my earlier speech, part of the slower revenue growth reasons is that the high-speed rail revenue has not grown as fast as we expected. Because of, as you know, China's Ministry of Rail has been holding off granting the contracts for higher-speed bracket of 300 to 350 kilometer power because they want to see how Hollysys and our competitors are commissioning the products in Zhengzhou-Xi'an line and Wuhan-Guangzhou line.

With our commission higher-speed bracket line of Zhengzhou-Xi'an going into commercial operation February 6, and so far it has been operating very well, given the Chinese New Year higher transportation peak time. We are very satisfied with this operational status. And going forward we think with the higher-speed lines being constructed everywhere in the country sooner or later they need signaling products, either on the ground or onboard. So we are confident we are going to win some sizable nuclear -- I mean, higher-speed signaling contracts in this year, which will help expand our gross margin going forward.

Another area is that we are also working on the subway projects. In some of the traditional lines such as SCADA, we are providing more project size modulized solutions in terms of the platform. So going forward the gross margin in this area should also be expanded. So I hope this answers your question.

It does. Just one other quick question. You entered into that strategic cooperation agreement with the Rilin Group. Although it is early and it is a new relationship, could you talk about the opportunity that you see in some of the areas that you highlighted in the press release about wind power and shipbuilding -- and the shipbuilding fields?

Sure. Rilin Group is a private conglomerate headquartered in northeast of China. They are currently building a deep-sea seaport in (inaudible) City that is (inaudible) Province. With this big seaport, which is strategically located, we believe they will open up a lot of opportunities for our strategic cooperation with Rilin Group, as Rilin is also building the commercial vessels in its facilities.

So going forward such as vessel PLCs, Hollysys can supply these products to Rilin, you know, constructed commercial vessels. Also Rilin Group has a plan to get into the wind power industry by building wind farms. So with a strategic partnership in place, we think it will open doors for our future wind control products to get into the wind turbine manufacturer supplier list, which can really help us in obtaining more orders down the road.

Great. Thank you guys for a much.

[Michael Hand], Morgan Stanley.

Two questions from me. If you could, please give us an update on your wind turbine controller business that you are testing with a local partner.

And also regarding your business opportunity, given how fast the infrastructure need and the projects are taking place in China, I was wondering rather than going solo, have you considered or have you -- or are you currently entertaining an opportunity to work with a foreign manufacturer of many of these equipments using your local expertise and contacts and connections and whatnot to rapidly increase your business and opportunity?

I am going to answer those questions. About the wind power, last year I just got data from one of our directors, Professor [Chi], he just told me yesterday that in last year, 2009, China installed 15,000 megawatts wind power. That is equivalent to 10,000 windmills.

So of that large volume construction, all the controllers are imported from [either] Europe, America or Japan. So our state and economical co-development reformation commission is not satisfied with that. And it is encouraging the local companies to develop our own proprietary controllers.

So far (inaudible) started this product one half years ago. And so far we have finished the development of the central controller for the windmill. Now we are just testing -- currently is testing in the real sites in Mongolia with our partner. And also we now finished the prototype designing of the pitch control, which is a larger part of the controller.

In wind power (inaudible) above 1 megawatts volumes, usually they control both the -- the central controller control the whole cabinet, and also regulating the speed and the (inaudible) the turbine. But also we have the pitch control to control the blade, turning the blade so that to control the force, the power according to the wind strength.

So in that case this system is quite complicated. We have finished the designing of the products. Also, we have finished the testing in the laboratories. And we are planning with our partner to finish the laboratory testing, and then they are planning to install them in the real pitch (inaudible) to testing them on the real systems.

So hopefully this year -- in this year we are going to finish the central controller within half a year. And then we are confident in the fact we will get some orders from the manufacturer. Because we are contacting several major manufacturers now -- all of them we contacted. They are very -- how do you say -- they are waiting for our products. Because first of all, with their large volume the imported systems are quite expensive. Also, the maintenance is quite complicated, because they do not have the kernel technologies by themselves. So they have -- every time they have any problems they have to ask the suppliers from abroad even sometimes to support them.

But for us, in our case, we design our own systems. We know everything. So we can teach our partners to understand the systems, to help them. And also, at the same time, if we have any problems it is much easier for us to supply with the support.

So that is the station of our wind power. But the other new energy, like the solar energy, we have been starting that for a while already. But it seems that because of the cost problem, you know, solar energy is much more expensive compared to the wind power, and also the volume comparatively is much smaller. So we are waiting for the -- I have heard that some new technologies are coming up for the solar systems. So we are learning, studying the trade and studying the current technologies.

And later if we find a good opportunity we will jump in. Because the controllers are not so difficult for us. But only -- what we need is an appropriate partner so that we can work together to understand and supply the systems. So is that okay?

Yes. During the last call you said you were testing the central controllers, and you need to wait until the winter months, which is usually the harsher environment. So my sense was that the opportunity was a little bit more imminent. And you mentioned that within six months you expect to get orders. So I assume that the tests so far is going well.

Yes, it is going well. Because now this winter is very cold. Usually we have to -- before, we didn't expect so -- how do you say -- complete testing. We have to experience both the cold winter and the hot summer. So now this winter is extremely cold in China, especially in the north part of China. So our system is running now very well. So that is why I'm quite confident about the results in the future.

Okay, thank you. And your thought about working together with a foreign producer of perhaps a little bit more sophisticated -- technologically sophisticated equipment to come in -- help them come into China to increase your business activity.

This is Peter. I think Hollysys is open to working with anybody, which potentially can increase our marketshare and financial numbers going forward. We are actually talking to some of the leading multinational companies in exploring joint venture opportunities or other opportunities going forward in tackling both domestic Chinese market and international market at large going forward.

Understood. I had taken enough of your time. Thank you very much. A great set of results. And we look forward to your continued success.

Michael Weisberg, Crestwood Capital.

I have two questions. First, you talked about the Ministry of Rail. When -- did you say an expected timeframe where you think you can see a pickup in new orders let for high-speed rails?

Yes. What is your second question?

The second question is the sales to the thermal power market, what division -- when you put the sales, what division is that in? And is there any backlog there for any future systems?

Sure. With respect to high-speed rail sales pipeline from MOR, currently we are not discussing in greater details with the investors yet. But rest assured that the previous bottleneck for MOR in China holding off granting 300 to 350 kilometer power lines have been eliminated with our successful commercial operation of Zhengzhou-Xi'an 300 to 350 kilometer power line commissioned by Hollysys.

So we are confident we are going to find some sizable contracts in the future within the next six months. At deal time we will announce it to the market.

With respect to your second question, the sales in supercritical 1GW thermal power stations that belongs to industrial automation. And we are having similar contracts within the current backlog dedicated to thermal power segment of our market.

Thanks a lot, Peter.

Due to the time constraint we will now take our last question. Thank you.

Paul Quah, CLSA.

Most of my questions have been answered, but the outstanding one is really is about, I guess, in terms of how you budget for your expenses going forward. If I hear you [correctly] about the need to reinvest in the Company in terms of promoting, in terms of marketing expenses. But I guess for investors where do we -- what number should we be looking at, whether it is a margin percentage of revenues in terms of R&D spend and marketing going forward?

I think we discussed it in a previous question. I think in this quarter's operating expense lines is a little bit out of wack because it includes some of the one-time only charges. So don't be misguided by this quarter's lines.

I think if you want to get an accurate gauge of our operating expense lines going forward, you really should take out those one-time charges and compare with September quarter, and you basically get a good of the future 1 to 2 quarters expense lines amount.

With respect to R&D, that is the only operating expense line, and expecting it will continue to increase, but still in the range of approximately 7% of our total revenue.

Okay, very good. Peter, what about the impact of higher raw material prices, for example? Have you seen it come through your margins?

Not really. Because our -- as you know, the components costs only take up to about 40% to 50% of our total cost of sales. The majority -- the vast majority of our components are electronic components. So today electronic components are not too much copper or commodities are being used. As you know, electronic components pricing continue to go down quarter-over-quarter. And our components are mostly sourced in local markets, so nothing specifically we have to import overseas. So we have been managing the cost of our components pretty well. We don't see much cost pressure in this area.

In your impending move into the new facility, have you provisioned for additional expenses there, or should we expect some further guidance later on?

Yes. Because the new facility moving is scheduled to occur in August of this year, so it will be in the next fiscal year. It will be provided with respect to the costs estimate in the future. But the majority of the moving costs, especially for the new building renovations, it will be capitalized anyways.

The final question, I suppose, is in terms of the cash flow. Fantastic result on cash this quarter. Is that something that we can expect to see continuing going forward? You obviously managed to have taken up working capital lot more, so I am just wondering what the trend is over there?

As you know, we consistently generated operating cash flow over the past 18 months. For the last fiscal year we generated about $40 million, so roughly about $10 million each quarter. For this quarter I am very pleased to see about $13 million to $14 million being generated. I think it is really a result of better management of our accounts receivable, and better management of accounts payable, and the vendor management.

So going forward we will continue to work along these lines. And I am not going to tell you that the operating cash flow will continue to increase. I think if we can remain at this kind of level roughly around $10 million each quarter, I will be very pleased.

Thank you everyone for joining us on the call today. If you have any follow-up questions that you didn't get a chance to ask, we will be very happy to answer them either by phone or by e-mail.

Lastly, we at Hollysys would like to wish everyone a very happy, healthy and prosperous Chinese New Year. Thank you very much. Bye for now.

Thank you, bye.

Thank you.

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