Hollysys Automation Technologies Ltd.

For the third quarter ended March 31, 2021, total revenue increased to $109.9 million from $80.8 million a year earlier, up 36.1%. Integrated contracts revenue rose 26.7% to $85.8 million, product sales revenue rose 82.4% to $6.5 million, and service revenue rose 85.1% to $17.6 million. Non-GAAP gross margin was 37.5% versus 30.8% in the prior-year quarter; gross margin by category was 25.9% for integrated contracts, 81.2% for product sales, and 77.4% for services. Segment revenue in Q3 was Industrial Automation at $67.5 million, Rail Transportation Automation at $30.7 million, and Mechanical and Electrical Solution at $11.8 million. For the first nine months, Industrial Automation revenue was $242.3 million, Rail Transportation Automation revenue was $140.6 million, and M&E Solution revenue was $51.8 million. Management did not provide explicit next-quarter or full-year revenue/EPS guidance on the call, but said IA performance is expected to keep its strong trend and that the company expects the equity investee loss line to increase for the full fiscal year versus last year.

CEO Colin Sung said Industrial Automation’s strong performance reflects both a recovering market, especially in domestic China, and Hollysys’ strategic shift toward faster-growing end markets. He highlighted greater focus on chemical and petrochemical, pharmaceuticals, food and beverage, and upgrades tied to digitalization and intelligent manufacturing. His tone was confident and constructive, saying IA can keep its current trend “even in the coming years.”

CFO Steven Wang emphasized the quarter’s financial strength, pointing to $109.9 million in revenue, 37.5% non-GAAP gross margin, and category margins of 25.9%, 81.2%, and 77.4% for integrated contracts, product sales, and services, respectively. He also noted selling expenses of $7.2 million, non-GAAP G&A of $12.2 million, and R&D of $13.2 million, with R&D up mainly due to higher development activity. On capital and the equity-method line, he said the share of net income loss from equity investees was a fluctuation in the quarter and that the company expects that line to increase for the full fiscal year compared with last year.

Analysts pressed management on the outlook for Industrial Automation, the performance of joint ventures and equity investees, dividend policy given the roughly $700 million cash and time deposits mentioned by the analyst, and the risk from chip and raw-material shortages. Management said it will not give specific revenue guidance for the joint ventures because it is not yet the majority shareholder and the businesses are being reorganized, but said the JV/associate loss line should improve for the full fiscal year. On dividends, Sung said raising the payout ratio is part of the plan and will be discussed further with analysts and shareholders. On supply chain risk, management said it had prepared for chip shortages two years ago, has backlog coverage for short-term chips, is seeking alternate suppliers for long-term chips, and is close to launching a new generation DCS and other products based on its own IP.