Hollysys Automation Technologies Ltd (HOLI) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Hollysys Automation Technologies Limited fiscal 2010 fourth-quarter and year ended June 30, 2010 earnings conference call.

At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions). Please be advised that this conference is being recorded today, August 12, 2010.

I would now like to hand the conference over to Ms. Ling Zhang, the Investor Relations Manager of Hollysys Automation Technologies. Thank you. Please go ahead.

Good day to everyone, and thank you for joining us.

Our speakers today will be Dr. Changli Wang, CEO and Chairman of Hollysys Automation Technologies, Mr. Peter Li, 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 operation 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; fluctuations in customer demand; management of rapid growth and transitions in to new markets; intensity of competition from or introduction of new and superior products by other providers of automation and control system technology; timing, approval and market acceptance of new product introductions; general economic conditions, geopolitical event 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 obligation to update information discussed in this conference call or in its filings.

On today's call, the CEO and Chairman of Hollysys, Dr. Charlie Wong, will provide a general overview of our business, including some highlights of the quarter. Then the CFO of Hollysys, Mr. Peter Li, will discuss our quarterly and annual performance from the 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.

I'd like now to turn the call over to Dr. Changli Wang. Please go ahead.

Good morning or evening, everybody. We are very pleased to report a solid fiscal 2010 annual result, culminated by the fourth quarter of strong financial and operational results amid some of the difficulties we've overcome during the year.

Our financials demonstrated they can (inaudible) trend our revenues and earnings growth on a year-over-year basis. Our record-breaking backlog balance and strong sales pipeline indicated our strong operational results -- status going into the new fiscal year. Mostly important, Hollysys is becoming a stronger and a better company, not only from the market competitiveness perspective but also from the corporate management perspective.

I would like to discuss some of the key wins that took place during this quarter. In the Industrial Automation segment, we achieved accelerated growth in both revenue and backlog this quarter attributed to our solid execution -- execution -- increased efforts in research and development. The quarterly segment revenue increased by 27.8%, and backlog balance increased by $31.5 million year over year.

In high-speed rail segment, a contract wins of $12.4 million, Tai-Zhong-Yin line, in July 2010 is the result of hard work and the persistent effort in the previous quarters. We were contracted to provide our ground-based high-speed rail signaling system to the Phase I of (inaudible) railway line with 460 kilometers in length. It's designed to travel at a speed of 200 kilometers per hour. With the winning of this contract, it is not only a strong validation of Hollysys' state-of-the-art high-speed rail signaling system. Most importantly, it's marked our successful penetration into China's northwest (inaudible) high-speed rail market. (inaudible) China's high-speed rail construction accelerates towards 2012, Hollysys has successfully laid a solid foundation to capture its fair share in this unprecedented high-speed rail buildout.

In our Subway segment, we were awarded a contract to supply our SCADA system to Phase II of Beijing Subway Line 8 valued at approximately $11 million. This contract win further validates our well-established brand name recognition in China's fast-growing subway automation market.

As China's subway [ramps] up accelerates in over 22 cities nationwide, Hollysys will continue to leverage our (inaudible) [solid] track record and brand name recommendation to expand the market share in this booming market.

In the Nuclear segment, we commenced the supplying of our (inaudible) automation control products to Phase I -- to number one and number two reactors of Yangjiang nuclear power station pursuant to first batch purchase orders from our [JUA] with China Power Nuclear Group. The Yangjiang nuclear power station in (inaudible) province is designed to house 6.1 gigawatts pressed water reactors using (inaudible) GPC's progress (inaudible) 1000 technology.

With China accelerating its new clear buildout in the coming years and our strategic alliance with most of the leading nuclear station builders in China, our Nuclear segment will contribute more to our margin and profit going forward. Given the backlog balance and a strong pipeline across all other business segments, we believe our revenue and net income growth will accelerate to approximate 35% and 25% respectively in our fiscal 2011.

At the same time, the Company has decided to grow our industrial automation sales team at an exponential rate and increase the investment in the Company research and development initiative to further establish Hollysys as a dominant leader in automation and control field across industrial, rail and subway industries in China.

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

Hello to everyone.

In a nutshell, Hollysys' financial and operational results for the fourth quarter and the year ended June 30, 2010 -- the Company reported solid fiscal 2010 annual results. For the three months ended June 30, 2010, total revenues increased by 25.9% to $56.4 million from $44.8 million in the prior-year period. Of the total revenues, revenue from integrated contracts increased by 26.9% to $53 million compared to $41.8 million for the same period of the prior year.

The Company's integrated contract revenue by segment was as following -- $24 million or 45.3% from industrial, representing a 27.8% segment revenue growth year over year. High-speed rail and subway was $26.5 million, or 50%, representing a 16.3% increase year-over-year, of which $8.9 million or 16.9% from high-speed rail and $17.6 million or 33.1% from Subway; $2.5 million or 4.7% from nuclear and miscellaneous, compared to $0.2 million year-over-year.

So quarterly, gross margin was 33.9% as compared to 33.5% for the same period of last year, mainly due to the gross margin for product sales increased from 42.5% to 51.8% year-over-year. The gross margin for integrated contracts was 32.8% for the quarter, unchanged compared to the same period of the prior year.

Selling expenses for the fourth quarter were $3.1 million compared to $2.3 million year-over-year, increased by $0.8 million, or 33.8%, mainly due to the Company's increased marketing activities. As a percentage to total revenues, selling expenses were 5.5% for the quarter as compared to 5.2% year-over-year.

Excluding non-cash stock-based compensation expense, the quarterly G&A expense was $4.5 million, representing an increase of $1.7 million or 64% compared to $2.8 million for the same period of last year. The increases mainly consist of $1.3 million in bad debt allowance and $0.7 million in provisions for fixed assets.

R&D expenses for the fourth quarter were $3.9 million compared to $3.6 million for the same period of the prior year.

For the quarter, the share of net gains of equity (inaudible) amounted to $3.3 million, of which $3.2 million was contributed by Beijing Techenergy Limited. The 50-50 joint venture between Hollysys and China Guangdong nuclear power Corp., that mainly engages in providing automation control products and services to China's nuclear industry.

For the three months ended June 30, 2010, non-GAAP net income attributable to Hollysys, excluding non-cash stock compensation costs, was $10.7 million, or $0.20 per diluted share based on 55 million shares outstanding. This represents an increase of $4.4 million or 69.2% over the $6.3 million or $0.14 per share based on 46 million shares outstanding reported in the prior-year period.

Now, moving onto the 2010 fiscal year, for fiscal 2010, total revenues increased by 10.5% to $174.1 million from $167.5 million in the prior year. Of the total revenues, revenue from integrated contracts increased by 9.9% to $164.1 million from $149.3 million for the prior year.

The Company's integrated contract revenue by segment was as followings -- $94.2 million or 57.4% from industrial, representing a 15.6% increase year-over-year. High-speed rail and subway was $60 million, or 36.5%, representing a 0.4% increase year-over-year, of which $28.8 million or 17.5% from high-speed rail and $31.2 million or 19% from Subway; $9.9 million or 6% from nuclear and miscellaneous representing a 23.2% increase year-over-year.

The annual gross margin was 34.6% as compared to 34.7% of the prior year. The gross margin for integrated contracts was 32.8% for the year compared to 33.4% of the prior year, mainly due to the decrease of high margin, high-speed rail revenue in both absolute dollar value and as a percentage of total revenue.

The annual selling expenses were $12.2 million, increased by $2.2 million or 21.3% as compared to $10 million for the prior year. The increase is mainly due to increased marketing activities. As a percentage to total revenues, selling expenses were 7% for the year as compared to 6.4% of the prior year.

G&A expenses, excluding non-cash stock-based compensation expense, were $13.4 million as compared to $9.4 million of the prior year, representing an increase of $4 million or 42.1%. The increase is mainly consisted of $1.6 million increase in bad debt allowance, the increase of $1.2 million in staff salaries and bonuses, and $0.7 million in provision for fixed assets.

R&D expenses were $13.1 million for the year compared to $8.8 million for the prior year, with an increase of $4.2 million, or 48%, which was mainly due to the increasing R&D (inaudible). As a percentage of total revenue, R&D expenses were 7.5% for the year as compared to 5.6% for the prior year.

The share of net gains of equity [investees] amounted to $4 million for the year, of which $2.9 million was contributed by Beijing Techenergy Limited.

For the fiscal year 2010, the non-GAAP net income, excluding non-cash stock compensation costs, was $30.7 million, or $0.59 per diluted share, based on 52 million shares outstanding. This represents an increase of $5 million, or 19.4%, over the $25.7 million or $0.57 per share based on 45 million shares outstanding reported for the prior year.

Hollysys generated operating cash flow of $1.8 million and $30.1 million for the quarter and the whole fiscal year respectively. Including investing and the financing activities, the total net cash outflow for the quarter was $0.4 million. For the year, the total cash outflow was $9.4 million, including investing and the financing activities, mainly due to the usage of $9.7 million to acquire the 25.89% minority interest of Beijing Hollysys in the addition to the Company's cash inflow and outflow during the ordinary course of the business.

As of June 30, 2010, Hollysys' cash and cash equivalents were $119.5 million compared to $119.9 million on March 31, 2010 and $128.9 million on June 30, 2009. The annual DSO is roughly about 140 days, reduced from 147 days of the prior year. Inventory turnover is 73 days for the year as compared to 79 days of the prior year.

Based on our operating results for fiscal 2010, we project our fiscal 2011 revenues to be in the range of $233 million to $237 million. We expect our fiscal 2011 non-GAAP net income to be in the range of $38 million to $39 million, which while translating to net income per share of $0.69 to $0.71 per share based on expected 55 million shares outstanding.

Last but not least, I would like to use this opportunity to express our appreciation of your support during the past 12 months when we experienced some lumpiness in our high-speed rail business. Lumpiness can be either negative or positive for Hollysys' businesses. For those of you riding out of the negative lumpiness, it might be your turn to enjoy the positive lumpiness of our business for the new fiscal year. Thank you.

Thank you, Peter. At this time, we would like to open up for the Q&A session. Please note that for Chinese speaking participants, we can also do the Q&A in Mandarin and will provide the translation. (spoken in foreign language). Operator, please?

We will now begin the question-and-answer session. (Operator Instructions). Anderson Chow, Macquarie Capital.

Good morning. Thank you. Good morning or good evening. Very good results, congratulations Mr. Wang and Mr. Li. I have two questions.

Firstly, just in terms of the -- I just want to get a better sense of the market share that Hollysys currently possess in high-speed rail signaling products, as well as the subway signaling product. Could you give us a rough idea of how much was tendered in the -- what is in calendar year or the fiscal year, and also put that in perspective how much Hollysys won? So that's question one.

The second question, in your outlook segment for 2011, you mentioned that you decided to grow your industrial automation sales team substantially. I just wonder what sort of maintenance here are we talking about in terms of sales and distribution expenses in 2011 as a percentage of revenue, or as an absolute number, and whether that is a reflection of the slower, somewhat slower than expected high-speed rail signaling contract win we've seen over the last six to nine months? Thank you.

Good questions. The first question I'll provide answers to you. I think the second question I also will give you a preluding answer and Dr. Wang will give you the elaborated answer from his perspective.

In terms of market share of Hollysys in the booming high-speed rail market in China, our official version, which you all are well aware of, our PowerPoint presentations or the historical communications is that we are holding 70% of the market share of 200 to 250 kilometer power segment of the ATP market. This is based on historical install base since day one of high-speed rail buildout till very recently. That kind can really give you a strong indication of how strong we are in 200 to 250 kilometer power segment of ATP market.

Another measurement we normally like to use is to give you a picture of how many players in this field. For example, in 300 to 350 kilometer segment of high-speed rail of Chinese market, there are very limited players in this field. Currently, there are only two.

Hollysys Automation Technologies, and together with China Rail Signal and Communication Corp., which is a very large SOE with more than 10,000 employees, China Rail Signal and Communication Corp. used to be a direct affiliated company of China Ministry of Rail. They (inaudible) sort of spun off back to '90s of last -- about 15 years ago. Now they are under the administration of State Asset Commission.

So having said that, I think Hollysys is really in a very privileged position in the high-speed rail signaling market. I think quite a lot of analysts have been pinpointing a market share estimate from their perspective. But from corporate management perspective, we are hesitant to put a detailed number on the market share.

I think, if you noticed, we have been sort of announcing the two contract wins over the past 20 days. I think from this, these announcements, especially the Tai-Zhong-Yin railway line of $12.4 million and [Hani] and (inaudible) lines winning of contract really can give you the idea of the momentum has been picked up from contract wins, from contract bidding perspective with Ministry of Rail. We believe high-speed rail, the activities of bidding and winning going into the second half of this calendar year will get more picked up. So, we are expecting to win more contracts down the road.

By the way, it's also, this pattern we see from our bidding and contract sales pipeline, is also validated by the official version of Ministry of Rail's budget. Their annual budget in the rail is roughly about RMB830 billion. Up to June 30 of the first half of the year, Ministry of Rail spent 33% of that budget. So they do have an accelerated pace to catch on in terms of the spending in the second half. I hope that answers your question.

For the second question regarding the industrial salesforce investment and expansion going forward into fiscal 2011, we used a term exponential increase. So what we understand from exponential is it's definitely more than 100% in terms of the -- it could be 200%, it could be 150%, anywhere what we call exponential. We will gauge the market activities and also our strategies into the year, and will exactly maneuver the hiring plans, recruiting plans. It also will be dependent on how the market will be unfolded. I think Dr. Wang will provide more color from his perspective.

Okay. Very glad you asked this question, because I am prepared for answering this one. In fact, we have a lot of discussions with the managers, so different layers of the company. From the previous years experience, we become more and more cognizant of our capabilities in this industrial automation market.

First of all, we have confidence of the market trend because, after we studied the scenario in Chinese economy, they found that we have -- we are undergoing a lot of changes in these few years. First of all, the Chinese federal government pressed a lot of pressure on the economic development structure in order to reduce energy consumption and also to reduce the environmental pollution. In that case, we are going to start -- we haven't seen a lot of mission projects coming up.

The second change in the Chinese -- not economical, but also demographic perspective, is our labor cost will be increased dramatically in the next few years as we can understand. So in that case, originally a lot of Chinese industrial companies, their manufacturing companies especially, they intended to use labor instead of automatic control systems because laborers tend to cost less than these systems.

But now, with the increase of the labor cost and also we see government encouragement for the labor union (inaudible) etc. So a lot of companies we found that they want to install automated control systems rather than involving more labor workers because, first of all, the automated control systems now become less and less expensive compared with previous years with the development of a technology and progress of systems.

But also at the same time, our system application has been improved a lot so that we cannot only reduce the cost of their labor costs, but also at the same time we can help the factories to improve their efficiency to quite a higher extent. And also not only (inaudible) first time I just give you an example, like in the power plant control systems. Originally we mainly using the control systems to reduce the commission or instrumentation systems so that we can replace a few operators in that case. But now, in our control systems, we are not only using the base functionalities, but we also provide with the optimization process so that we can increase the process efficiency, and also at the same time reduce the power consumption of the whole process. So in that case, now we've found more and more industrial customers, they want to use this technology.

For the industrial automation, but also in another way we see the picture. Now Hollysys in this process control market, we are occupying some like 15% of the share. But we are very confident that if we enlarge our sales team, especially in some areas now we are not doing very well, and we can improve our market share quite significantly. Like for example to 20%, 25%, even 30%. We are quite confident of that because now our systems and our experiences are building up. Our systems are very competitive compared with these multinational competitors in a way. This is why we are going to build up our sales marketing team, and also at the same time to enlarge our energy team so that we keep up this to pace, pace-to-pace, to make our Industrial segment becoming a more dominant segment in this market, this one.

Also, about the optimal prediction of our 2011 data, As Peter just commented, I would like to add a few, just a few comments. First of all, as I said, we are very confident about the Industrial Automation segments because they build up the momentum, [so] what we can see from the previous few months. At the same time, for the real high-speed rail, in fact we just announced two or three contracts signed. But we are also expecting a few more, a series more in fact, contracts coming up. So in that case, although maybe the whole market, the international market, it's very difficult to tell what the trend. But here for Hollysys, in a way, we're giving all this data is not by random guess. It is based on our careful study of our segments, our each business opportunities.

So that's my comment. Thank you.

Thank you.

Mark Tobin, Roth Capital Partners.

Good evening. Following up on the question about (technical difficulty) increased investment (technical difficulty) Industrial Automation segment, can you give us a sense of as far as what you're targeting looking at -- are you looking at new market verticals, new technologies, new geographies? What is the focus when you -- as you increase your headcount and also invest in R&D?

First of all, this is a very good question. First of all, we have so far in all over China we have eight divisions occupying the Chinese market. Three or four of them are doing very well. And the other three or four of them due to the lack of personnel power, so it's not doing very well. So first of all, we would like to increase our (inaudible) salesforce to balance the whole market. So if all these segments, all the divisions doing similar and we can increase 30% or more of the market share ourselves, at least, so this (inaudible) we will enlarge our sales team so that we are increasing the market share in some of this part of the Chinese market -- the one.

The second is now we are through our (inaudible) of the last year and this year, we are going to put some new products in the market. For example, we are designing the -- we have just finished the designing of our protection system and the regulator system for the generators, power generators. Originally, this only a very small part of our business, and this part is originally occupied by some foreign multinational companies.

Now, we have things, the designing this product and the leads just to (inaudible) release it to the market. After they pass (inaudible) already finished. The result is very good, it's very promising. And also the price is very competitive.

So since our original market, we have a very big marketplace. Our (inaudible) the DCS to our (inaudible) control customers. Now, not only do we sell these DCS automation control systems, also we can supply with the reactor -- generator, regulator and protection systems. This one.

Also for the power plant, as I said, we have just finished the designed optimization process software, and also assimilation software for the power plants. So that's also going to enlarge -- from the [same] customer, we can enlarge the market value quite a lot. So for this -- this is the second factor.

The third factor is we have found some new segments in this automation market. For example, originally Hollysys has done quite (inaudible) in the -- like tuning, this kind of tuning equipment, like the oxygen separator, etc., and the pressure, gas pressure, this kind of equipment. Since our technology, which is used for the power generator, can also be used in these kind of areas. This market is quite big, although it's not huge, but it's quite big. So now with this expansion of the product spectrum of Hollysys now, with the increase of the sales team, we are quite confident that we are going to gain not only the market share from the original customer, from the original segment, but also we can break into some new parts of the business because we have gained some of the confidence already based on this area.

A quick follow-up, what is your current -- where did you end fiscal 2010 from a headcount standpoint in your salesforce? Has that hiring already begun in these first couple of months of fiscal '11?

Yes, the hiring has already begun. We are -- we started already adding numbers to our sales team. They were actually just here in the Beijing headquarters, new staff training last week. We don't expect them to be productive for the first few months on the roll, but they are valued and expected to produce in a couple of months in their respective roles. But we are not disclosing the detailed numbers to the market. As we put it in the 6-K, it is exponential increase for the salesforce.

Also, I would like to just I want to add another comment. Our new business segment also belongs to the industrial automation (inaudible) the discrete control system for factory automation. This year, we are doing very well. Compared with last year we made 80% growth, and next year we are expecting a higher growth rate. So that's why we need -- because the product is ready, so that's why we need to enlarge the salesforce to make it -- to realize the (technical difficulty).

I appreciate it. Thank you.

Ole Hui, Daiwa.

Good evening, Dr. Wang and Mr. Li. I have two questions. My first question is a follow-up question to your PLC business. Can you give us a sense of how big is your PLC business today?

My second question is on your nuclear business. Your joint venture has a license to develop a control system for the nuclear item. Can you tell us how that is progressing?

For the PLC part, this year, I mean this calendar year, because we are making this business, planning this business in the Chinese calendar year, so this calendar year, our PLC business will grow to about $12 million to $50 million. Compared with last year, this growth rate -- this volume is about 80% of growth rate, more than 80% of growth rate. Also, the sales of this PLC is not through -- one single project. But we are selling these products to the OEM manufacturers, and some of the distributor customers. So that now they are building up this momentum; they are buying the products every month.

So next year, they are going to enlarge the number of customers so that -- through -- after this few years, this product has been fully proved by the customers. And also we have designed some specific functions for some of the specific areas. So we are not competing with some of the multinational (inaudible) German companies and the Japanese companies by just (inaudible) price, etc. But we are trying to tailor the products so that it will suit some specific applications very well, so that we can sell the products with some quite good margin for this one.

For the nuclear, in fact we didn't say too much about this because all the most activities were taken by [JUA]. We just, so far we have 14 nuclear reactor systems under construction. This year, I'm sure we are going to have another few because (technical difficulty) negotiating for quite a long time, and we are in the process. There's no problem with that. And also, for the protection system for the reactor, we have just got the support from our government authorities. The developments is just going well of that by [our JUA]. We are expecting, because we are planning with (inaudible) nuclear, which is not normally our shareholder of this [JUA], but also with the main nuclear power plants builder of China. So we are discussing from which stage we can utilize our own systems in their new clear powerplants. So far, all I can tell is everything is just (inaudible) normal.

Just one more comment to Dr. Wang's answer to you. For the -- currently in-house being developed nuclear island automation control by our JV as well underway, in the later part of the R&D designing phase. The next step to go is to [involve] it in one of the pilot reactors in [Schengen] province. As soon as it indicates a good satisfactory testing result upon successful operation, the current plan is to install this self-developed nuclear island automation control in number five and number six reactors of [Yung Jung] nuclear stations. Does that answer your question?

Yes, thank you.

[Katya Veronkirk], Rodman & Renshaw.

Good evening Peter and Dr. Wang. Congratulations on your quarter. My first question is about your Subway segment. Could you tell me what was the gross margin for the segment for the last year? Also, I believe you have mentioned in the past that gross margin for this particular segment is going to improve once you launch proprietary subway signaling equipment. Can you give us an update how close you are to manufacturing this product, and what kind of gross margin you expect in the Subway segment thereafter?

Thanks for your question. I think the Subway gross margin we have been communicating to the Street is anywhere between 15% to 20%. We used to say between 10% to 15%, but over the past 12 months, due to the successful increasing usage of our proprietary software components, the gross margin has been steadily going up. Hopefully in the not-too-distant future, we will come out to tell you that the gross margin profile for Subway business will be in the 20% to 25% range, but currently we are saying is between 15% and 20%.

In terms of the new product line of subway signaling system, if you notice, we won the first ever our subway signaling project of the Beijing (inaudible) line for roughly about RMB324 million. For this project, we have been deploying other people's technology for this project. We mainly played a role like system integrator in order to gain the firs-hand business know-how and business logic of subway signaling business so that we can leverage our high-speed rail signaling technology and know-how to develop our own proprietary subway signaling products going forward. Our current goal is to have our proprietary subway signaling products to be deployed in one of the subway lines in China in the year of 2012 to 2013. Does that answer your question?

Yes. My second question is on your recent contracts. I just would like to understand better how compatible your systems are with your competitive systems. For example, if Hollysys systems are being installed on one stretch of the railway of subway line, can we expect your product to be used on the remainder of the line? In other words, are [switching and] integration costs high enough to dissuade your clients from using another company's products from new stretches of the railway or subway?

Thank you. Since you (inaudible) this area. In fact, just as Peter mentioned, first of all, we have designed a series of signaling systems for the high-speed rail. The hardware platform is almost the same compared with the platforms used for the subway systems, signal systems. But however, the application software, which is, to some extent, the difference to the high-speed rail, because if you compare the two areas, high-speed rail, it is very high-speed, but with not many stations. And also the interval between the different trains are quite large, but for the subway system, the requirement is different. The [system] will cost the same, but you know, their speed is much lower than the high-speed rail. But at the same time, the requirements for the small time interval between the trains, their (inaudible) are very high. Since our (inaudible) tends to about one half minutes between the two trains (inaudible). So in that case, the application software is different.

So what we are doing now is we are trying at the same time we are doing this real project, based on some mature technology, and at the same time we transplant this application software to our hardware platform, which we designed for the high-speed rail. At the same time, after we finish this transplantation, and we also need to certificate this platforms by some international certification of (inaudible) like the (inaudible) or the English one. So after we got the certification, we can sell our own products to the subway, so Peter just said.

Now all the development of the transplantation of this process is undergoing, because that's why we increased so much in R&D expenses, because the R&D work itself is not that expensive, but to get all this product certified by this organization costs a lot of money. So and all this are undergoing normally.

Actually what I meant is, for example, for the Tai-Zhong-Yin railway line, so I see that the Phase I is about 460 kilometers. Let's say, in the future, there will be Phase II. So can we assume, if your product is going to be used for Phase I, can we safely assume that the client will also have to use your product for Phase I when it is constructed because of high switching costs and integration costs if they use a system manufactured by a different company?

I think either -- basically I think, for high-speed rail, the landscape is totally different. I think you need also to watch who is the real decision-maker for the contract purchase. For example, for Tai-Zhong-Yin's line, if the decision-maker of the whole product is -- are revised with the same local bureau, I would say we get a very strong likelihood to obtain together the second phase of the project. But if a local high-speed railway line's income passes the different local bureaus, or [income] pass going through different provinces, than the decision-makers will all be different, and then we gain no advantages in terms of Phase I, Phase II products. Does that answer your question?

Yes, thank you. Another question on your new system which I believe this was (inaudible) due to come online in August. Can you just give us an update if you're going to be on time with this facility and also what kind of products you plan to manufacture at this facility, and also if you think this facility will help you to deliver on your backlog faster?

Absolutely. Actually we are moving tomorrow.

Congratulations.

Thank you. So the new facility, the majority of our staff already moved into the new facility. The new facility is expected to be up and running actually as we speak now, and the production capability will be doubled. Currently, we'll maintain our original production line, operational simultaneously while we get the second line operational after we move in.

So going forward, this doubled-production capacity definitely will help us deliver some of the rush orders, especially from high-speed rail, within a very short time period, as requested by the Ministry of Rail.

I see. Just very quickly, the last question. What is your projected capital expenditures for 2011?

For this past year, 2010, the annual CapEx was roughly about $20 million, $21 million. We don't expect the CapEx will be exceeding the past-year number for the new fiscal year.

Jason Brenner, Siar Capital.

I'm on a cell phone. (multiple speakers)

(multiple speakers) I hear your voice. It's nice to hear you.

It's nice hearing your voice as well. A lot of the questions that I haven't been asked and answered in a very professional manner. I just wanted to get a sense again of, from a nuclear point of view, I know you're always sensitive to what it is you can say. But it does look like the nuclear opportunity is coming on, both directly and indirectly, through your joint venture partner. The joint venture partner obviously contributed in a more significant way to your earnings than they have in the past. Can you -- and I think the backlog all of a sudden has begun to also become an overall factor in your backlog.

Can you give us a sense from a point of view of overall timing whether the nuclear opportunity, which of course is very large, to what extent can we see that nuclear opportunity beginning to expose itself over the next two years so that it becomes a much more significant factor in your business?

Now we are -- in fact, we just finished the board meeting of the [JUA] last week. All of our concern is about our capabilities, how many systems we can deliver a year, and we just bought another -- (inaudible) just bought another facility for the installment, ad the testing, for the testing of all the systems. We are expecting yearly, on a normal, from next year, a normal status, we are expecting we deliver three to for systems per year, so to the field. So that will increase the path in our business quite significantly.

Before, (inaudible) we have been waiting for this for a long time, preparing for this for a long time. Originally, we only deliver some parts, and this year, this fiscal year, we delivered one-half systems, in fact something like that. But normally from next year on, we are expecting we deliver four systems on average per year. Does that answer your question, Jack?

Yes, but I want to expand on it. There's always been a sense that the nuclear opportunity which is perhaps even more proprietary than some of the other opportunities that you have, all of which are increasingly becoming more proprietary, and therefore contributing greater margins. Will we see, again, based upon your position in the nuclear industry, will we see the gross margins of that business tend to be different and significantly better than the gross margins associated with your other businesses?

Yes, sure. From our own path, (inaudible) our only control hardware modules to our [JUA]. And although the volume is not that (inaudible) high, but the margin is very high. I don't want to say the exact number, but quite high, much higher compared with our other businesses, the later -- this part of the business where we grow in the share. At the same time, now for our [JUA], we are using the imported partnered reactor protection systems from Mitsubishi. Later, after we've finished our own proprietary protection systems, our [JUA] will improve the margins significantly, even I can say dramatically, because that costs a lot of money. That part of the margin is much higher than the commission or control systems.

Let me just go to another product that you have been working on for a while, which is the windmills. Again, I think this has been something that has been attempting to be demonstrated and proved. Where are you in relation to that overall effort in terms of making a contribution to the business?

Well, so far, all the testings are okay, and we found some partners. But still, as I said, this part of the business is growing not as fast as we expected. We couldn't dedicate more manpower in that area because we have more opportunities in other industrial automation areas. So now, at the same time, we keep watching with some of the key players in this area. At the same time, we are waiting for some real opportunities. Now, we have tested with some of the partners already, several, not only one. Before, we tested with one partner, but unfortunately hasn't got a new contract yet with our product. So later, we are expanding the opportunities. But it takes time, so now I don't want to give any optimal predictions about that part. I would rather give you some surprises later.

Thank you, everyone, for joining us on the call today. If you haven't gotten the chance to raise your questions, we will be pleased to answer them through follow-up contact. We look forward to speaking with you in the near future. Thank you.

Thanks everyone. Bye-bye.

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