Hollysys Automation Technologies Ltd (HOLI) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Hollysys Automation Technologies Earnings Conference Call for Fiscal Year 2021 First Quarter ended September 30, 2020. (Operator Instructions) Please be advised that this conference is being recorded today, November 13, 2020, Beijing time. I would now like to hand the conference over to Mr. Arden Xia, the Investor Relations Director of Hollysys Automation Technologies. Thank you. Please go head, Mr. Xia.

Hello, everyone, and thank you for joining us. Today our attendees are CEO, Mr. Colin Sung; CFO, Mr. Steven Wang; our Co-COO, Mr. Yue Xu and Lei Fang, who are in charge of IA and Rail business, respectively; as well as Mr. Yi Ma, Chairman of Hollysys Group, one of the company's subsidiary; and myself, IR Director of Hollysys.

On today's call, Mr. Sung will provide a general overview of our business including some highlights for the first quarter of fiscal year 2021. Mr. Steven Wang will discuss our performance from a financial perspective. And all management team will answer question afterwards.

[Before getting] started, I would like to remind everyone that this conference call may contain forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical facts, including the statements relating to the expectation of growth of Hollysys future product introductions, the needs of products in future periods and future operating results. Such forward-looking statements based upon the current beliefs and expectations of Hollysys management are subject to risks and uncertainties, which could cause actual results to differ from the forward-looking statements. The following factors and matters 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 that are adversely affecting the business in which Hollysys is engaged; cessation or changes in government incentive program; potential trade barriers affecting international expansion; fluctuation in customer demand; management of rapid growth, transitions 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 demands or regulatory changes; while other relevant risks detailed in Hollysys' filings with the Securities 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. Please note that all amounts noted in this conference call will be in U.S. dollars, unless otherwise noted.

I'd now like to turn the call to Mr. Colin Sung. Please go ahead, Mr. Sung.

Thank you, Arden, and greetings to everyone. Industrial automation IR business finished the quarter with revenue and contract at $82.6 million (sic) [$81.9 million] and $107.8 million, representing 27.7% (sic) [26.8%] and 28.4% year-on-year growth, respectively. In power sector, we continue our effort in strengthening our market position in high-end coal fire market, 600 megawatts and plus power unit. Meanwhile, with respect to our current client bases in this sector, we are actively responding to various regular and value-added service demand, covering old system replacement, system upgrade, part component sale and annual maintenance.

In chemical and petrochemical sector, contract growth remained healthy. We continue our effort in key project, winning client cooperation, marketing events and the development and demonstration of solution capability to penetrate the market and build our reputation. Sector highlight of the past quarter include winning the bidding of DCS, emergency shutdown devices, ESD; asset management systems, AMS; fire and gas, F&G; integrated solutions for 2 offshore oil platforms. In the 8th oil platform solutions for the company has won since the beginning of the calendar year, marking a remarkable progress for our exploration in oil and gas industry.

Signing a coordination control system, CCS, contract with a client on its 400,000 tons per year tert-butyl alcohol and 200,000 tons per year methyl methacrylate, MMA, projects, marking a breakthrough as it is company's first contract in MMA.

Signing DCs, SIS, GDS, MES, OTS, AMS and information security integrated solution contract with a client on its 100,000 tons polycarbonate projects. The DCS control points for the project amount to approximately 20,000, making it the largest ever for the company in the similar craft.

In food and beverage and pharmaceutical sector, we continue to see healthy growth in contract. With our core control solution capability and the inclusion of engineering design capability, we are building our engineering design, procurement, construction, EPS capability so as to provide more comprehensive solution to our clients. Periodic progress was made in such model as we design our first workshop level EPS contract with a client for its 7-ACA refining project, which is expect to lay foundation for our further pursuit of larger scale of EPC project in the future.

In smart factory business, we continue to actively engage the potential clients through various marketing events to stay close for in-depth grasp of market demand and to develop and improve our solution for real value creation in economic benefit and operation safety. Highlights of the past quarter include signing a contract with a new client from the thermal power sector to provide a total solution with control level and management level data integration that covers comprehensive function and modules, including control optimization, smart diagnostics, equipment management, decision-making and operational management. We expect such project to become a key demonstration of solution for the thermal power sector. Signing a contract with a client on the coal fire sector for its new 2*660-megawatt power plant. Contract covers a similar total solution at control and management level and marks a significant breakthrough in our smart factory solution for high-end coal fire market.

Signing a contract with an existing client from the petrochemical sector to provide management-level solution based on our industrial Internet platform.

After-sale business of IA is keeping the healthy pace. We continue to engage our valuable client bases and respond with both regular and value-adding initiative covering old system upgrade and replacement, part component sales, annual maintenance, control optimization, data integration and energy management.

Under our big automation initiative, we continue to improve our capability for wide range of solutions, covering entire life cycle. By end of September, we have put into operation our in-house instrument production line, with which we will able to -- we will able be capable of manufacture certain types of instruments contained in our total control solution. Such is expected to be valuable addition to our project delivery, market opportunity and operation.

Rail business finished the quarter with revenue and contract at $28.7 million and $24.2 million, recording 35.6% year-on-year decrease and 15% year-on-year growth, respectively. In high-speed rail, HSR, sector, we continue our delivery of an on-ground solution along with the railroad construction progress. Periodic progress was achieved for the smart solution initiative for the sector. And we have completed our top-level design of the smart maintenance solution.

Meanwhile, bidding from the client was seeing its gradual recovery in the post-pandemic period, both for on-ground and on-board equipment. Highlights of the quarter include winning the bidding of 140 sets out of a total package of 274 sets of ATP for C2, 250-kilometer China standard high-speed train in August.

In subway sector, our cloud-based SCADA project for Shenzhen Subway Line 6 was fully delivered, which was the second cloud-based SCADA project for the company and represents our constant effort in innovation for continued value creation for our clients. In delivery, our enhancement in supply chain management and engineering standardization has contributed to improved quality and the efficiency of project execution.

In after-sale business, we continue to strengthening local service network, to expand service solution and to develop technology and service centered services for better differentiation. In HSR sector we continue to respond to regular services, including advanced maintenance, system and software upgrade, part component sales as well as total replacement. We continue to act as a service provider to Hong Kong-Shenzhen high-speed rail, with our service quality being highly recognized. In subway sector, we continue to explore potential from the current client bases and signed contracts covering system upgrade, maintenance and product sales.

Under our big transportation initiative, the company has established the smart highway solution, was actively involved in marketing events for new contract breakthrough in new business. Highlights for the quarter include: Signing a breakthrough contract of smart traffic meteorology solution for a section of the highway connecting Sichuan and Yunnan provinces. The data-driven solution targets highway administration as the intended clients and for collection and the processing of meteorological, geographic and traffic data; advise the highway administration on more effective decision-making in highway management, in particular, under extreme weather conditions.

Mechanical and Electrical Solutions, M&E, business finished the quarter with revenue and contract at $18.2 million (sic) [$18.8 million] and $12.3 million, recording a 29.9% (sic) [34.4%] increase and 63.4% year-on-year decrease. COVID-19 remain a challenge to M&E and overseas business. We will keep monitoring the impact of this sector and the risk control remain to the key focus.

With that, I would like to turn the call over to Steven Wang, company CFO, who will provide a financial results analysis. Steven?

Thank you. Thank you, Mr. Sung. I'd like to share some financial highlights for the quarter ended September 30, 2020. Comparing to the first quarter of the prior fiscal year. The total revenues for 3 months ended September 30, 2020 increased from $123.2 million to $129.5 million, representing an increase of 5.1%, integrated contract revenue increased by 1.2% to $105.7 million. Product sales revenue increased by 7.3% to $6.6 million, and service revenue increased by 36% to $17.2 million. The company's total revenue by segment are as follows.

For Q1 of fiscal year 2021, industrial automation revenue, $81.9 million; rail transportation automation revenue, $28.7 million; mechanical and electrical solution revenue, $18.8 million; total revenue $129.5 million. Overall non-GAAP gross margin was 33.7% for the Q1 of fiscal year 2021 as compared to 37.7% for the same period of last year. The non-GAAP gross margin for integrated contract, product sales and services rendered were 25.3%, 73.7% and 70% for the first quarter as compared to 32.6%, 79.9% and 59.5% for the same period of the prior year, respectively. The gross margin fluctuation was mainly due to the different revenue mix with different margins.

Selling expenses were $8.2 million for the first quarter, an increase of $0.9 million or 12.4% compared to $7.3 million for the first quarter of last year. As a percentage of total revenues, selling expenses were 6.3%, and 5.9% for the 3 months ended September 30, 2020 and 2019, respectively. Non-GAAP G&A expenses were $10.2 million for the first quarter, representing a decrease of $0.4 million or 3.9% compared to $10.6 million for the same quarter of last year. As a percentage of our total revenues, non-GAAP G&A expenses was 7.9% and 8.6% for the quarters ended September 30, 2020 and 2019, respectively.

R&D expenses were $10 million for the first quarter, an increase of $1 million or 11.6% compared to $8.9 million for the same quarter of last -- of prior year. As a percentage of the total revenue, R&D expenses were 7.7% and 7.3% for the quarter ended September 30, 2020, and 2019, respectively. The VAT refunds and government subsidies were $5.8 million for the first quarter as compared to $3.5 million for the same period in the last year, representing a $2.3 million or 64.1% increase, which was primarily due to the increase of VAT refunds.

The income tax expenses and effective tax rate were $4.8 million and 18.9% for the first quarter as compared to $6.2 million and 17.3% for the comparable prior year period. The effective tax rate fluctuation was mainly due to the different pretax income mix with different tax rates as the company's subsidiaries were subject to different tax rates in various jurisdictions. The non-GAAP net income attributable to Hollysys was $20.8 million or $0.34 per diluted share for the first quarter of 2021. This represents a 30.2 % decrease over $29.8 million or $0.49 per share in the comparable prior year period.

Contracts and backlog highlights. The backlog at September 30, 2020 was $596.1 million. The detailed breakdown of new contract and backlog as follows. New contracts: Industrial automation, $107.8 million; rail transportation, $24.2 million; mechanical & electric solutions, $12.3 million. Backlog as of September 30, 2020: Industrial automation backlog $252.3 million; rail transportation, $254.8 million; mechanical and electrical solutions, $89 million.

Cash flow highlights. For the first quarter of fiscal year 2021, the total net cash inflow was $34.9 million. The net cash provided by operating activities was $21.6 million. The investing cash flow was $2.6 million and mainly consisted of $114.6 million of matured time deposits, which were partially offset by $108.8 million of time deposits placed with banks. The net cash used in financing activities was $0.2 million.

Balance sheet highlights. The total amount of cash and cash equivalents were $321.6 million, $288.8 million and $340 million as September 30, 2020, June 30, 2020, and September 30, 2019, respectively. For the first quarter of fiscal year 2021, DSO was 185 days as compared to 204 days for the comparable prior year period and 167 days for the last quarter. The inventory turnover was 58 days as compared to 56 days for the first quarter of last year and 66 days for the last quarter. Arden?

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

(Operator Instructions) Your first question comes from (inaudible) from MS.

(foreign language)

The first question about this quarter, we can see the railway revenue compared decrease because maybe this year, the CRC [profit and delayed]. But meanwhile, we also see when ADP contracts right now for many, like a matter of 200 or 300. So what about the we can expect the next quarter, the revenue of rail transportation will be increased relatively. The second question is (foreign language) Okay. Okay. But the first question we answer right now. I'll translate the second-hand 2 questions.

[Foreign Language]

(foreign language)

(foreign language)

(foreign language)

(foreign language)

(foreign language)

(foreign language)

The revenue for the railway transportation compared decrease, this is really about the (inaudible) changes, not the structural. We also (inaudible). You can see that the average here (inaudible). And, by the way, it really depends on the procedure of the CRC schedule. So we recognize revenue followed by the (inaudible). And also, about the [ATP], the CTC S-2, I mean, 200, we won about the [7K] train equals a handle of both sets of ADP. And the 300, we won 25 trains and about 15 sets of ADP. And we can see that the CRC bidding is recovering, and we will graduate to when the -- on board and also railway track equipment bidding for the coming momentum.

And also, Kevin asked about the delivery space, deliver speed. So we discussed about the delivery speed. It really depends on the CRC schedule. It's hard to say, for example, at the end of this month or at the end of this year, we can deliver hard or 2/3 of the total when the speed is really hard to predict because it really depends on the CRC (inaudible) provide. Their schedule sometimes always and transparency. So this is the answer.

And second question about the industrial automation. And Kevin asked about the industrial automation compare increase very fast. So what about the whole fiscal year expectation performance of the industrial automation. And this answer will have to -- will speak by Fang Lei.

(foreign language)

The industrial automation compare increase because 2 main factors. One is the COVID-19 influence and right now, recovery all the things within China. So we actively to achieve the customers and to gain the bidding. And the second one is because the first half year kind of alleviate of the COVID-19, alleviate a lot of activity. And right now it's kind of relief. Central relief for this quarter and that quarter. So basically, to say the whole fiscal year, we still have (inaudible). And the third question is the balance of the cash. We see you have a lot of cash on hand. What about to consider to raise the dividend or the other investment potential M&A, is there any activity to lately discuss?

Okay. And for that one, I will take the first response to that. Given the current economic condition and then the ongoing pandemic situation, both for domestic and international, the company, based on the risk, potential risk for the future development, the company is still taking it cautious or conservative, particularly, as you all know, Hollysys is more a private-owned industry, not a SOE or government entity. So in that manner, the whole financial sector is still unsettled or uncertainty. So for that, we still maintain a relatively keeping a cash position for the time being.

But in the meantime, the company is still looking for opportunity, most in the domestic market for a potential target related to our both core competency in the rail and, I think, industrial automation. So we are continued to working with our COOs to identify the target, to expand, enhance and also step up our strategic product development. And in addition, obviously, you see we do increase our expenditure related to R&D expenses for the current quarter compared to the previous quarter. Given that we will continue to look in that to identify the existing technology and the current technology undertaking and to expand our technology basis to enhance our revenue contribution ultimately towards the bottom line contribution to the company.

And then third is basically, you mentioned about the dividend payment. Obviously, company already made the dividend declaration a few weeks ago, and we made the proper announcement. So that payment will be paid out towards the end of November. But at the current stage, we still look at the dividend policy. It's not a permanent dividend policy yet, but we will evaluate the policy as ongoing basis. And then overall, I think we mentioned -- I want to point out, is company mentioned the guidance in the previous year-end financial disclosure. And then that guidance and then -- will maintain at the current stage. We will not make any changes. So we're still maintaining a top line revenue growth of 6% to 8%. So with the cash and certain expansion or potential opportunity, the organic growth of the overall company in related early question regarding industrial automation, we will maintain the current pace of 6% to 8% top line revenue growth.

Your next question comes from [Joseph Koh] from JPMorgan.

(foreign language)

Okay, thank you. The first question concerns the gross margin. The gross margin we could see abruptly based on (inaudible). And also what we see the fiscal year 2020, the past year, the IA business operation, the gross margin compare different and this cover and also it like the gross margin I give. So what about to share about information, different segments, IA, rail, the gross margin, respectively, the trend. This is first question.

Second question about the exchange loss, and we could see exchange loss for this quarter and can explain some information about that.

The third question is about the new business. Do you see any new trend or business or revenue to achieve, get for the moment to introduce what you think about the new business, no matter related to IA, rail?

Yes. We'll take the first question. Regarding to the gross margin. Again, again, like we mentioned before, you see a fluctuation on the gross margin. But in over -- in the entire year, we normally maintain a stability of the gross margin. In terms of -- for the IA business and rail business, you saw there is a increase of overall gross margin due to the higher percentage of industrial automation business as a percentage of the total revenue. So that's the reason for that. There's a -- we see the stability for the gross margin for IA and railroad business. We see a slight pressure on the IA business -- on the IA business side because we had a strategic acquisition of the contracts and the new customers. But again, for longer term, the margin was stable. That would be the answer for that.

The second question now on the exchange loss.

Exchange loss, yes. Okay. Again, those -- you see a fluctuation of the exchange rates so you'll see again losses on paper on our financial statements. For now, we'll -- we have no for financial instruments or tools for hedging the exchange rate. So that's the consideration for now.

In addition to what Steve is saying, on the exchange rate, you see there's some frustration from the beginning of the quarter versus towards the end of the quarter. So we do take in exchange noncash loss for the quarter. But if the exchange will maintain the same level as the last time from 7 -- a little bit over 7, down to 6.8, so we see some recovery in the second quarter, assuming the exchange rate will maintain stable. As you know, the RMB was taking a little bit devaluation in early this year. It maintain or went through a little bit upward over the last few months. So overall, as Steven is saying, company -- given the company cash predominantly being RMB currency, the company in the current stage do not have any hedging or any stabilization related to that. But we believe RMB is more -- will be more or less maintain the level going forward.

(foreign language)

(foreign language)

For the railway transportation, we also issued to use that from first of all, from next quarter, and we used to use the [main bank] in China right now because [they're big on] transportation. And this concept also relate to the highways, for example. And we focused on what we do after is the international management before the railway station. So we also focused on this part. And we already ran the contract from highway management delayed the contract. And we believe this is also what will contribute to next year and coming years of the revenue. And meanwhile, we also focus on the matter, the mainland rail, a high-speed rail board that the municipal transportation. We also service other platform to upgrade it to international or smart direction of railway transportation solutions. And also, we can provide the solutions and the maintenance, smart maintenance. This part, we could see the trend and also will contribute with the revenue for the railway transportation.

(foreign language)

And the industrial automation, I want to introduce (inaudible). The first one is about the upgrading replacement cycle. And because the profits can show, we have large basement track records and also right on the market, demand is increasing from this part. We need the cycle to do the replacement and the upgrading. And we also won the contract from this part. The second one is international smarts and manufacturing. And no matter the power of chemical petrochemical, we already have this significant project. And these projects, when done, could provide the demonstration at effects, can influence the customer to use the new solution for the smart manufacturing to help them to improve efficiency, those kind of plans.

The third one, effect is from the [shutdown rate] of pharmaceutical area and along with our EPC capability increase, this part of contract is increasing very fast. So we believe this part also contributes to IA. And in conclusion, generally speaking, the industrial automation is very stable market. And also from our revenue contribute, I have to say, there will have no very large [inflation], but we will keep our pace to win the contract to let the customers to use our equipment.

Yes. If I may make additional information on the industrial automation margins. And sometime, we get a lower margin contract. But afterwards, we have a continual Asian services and contracts. The same customer will make up the margins. That's one of the reasons you see a fluctuation. So really, as we mentioned a couple of times, we really have to look at long term for the margins.

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

Thank you.

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