Gulf Resources Inc (GURE) 2021 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Gulf Resources 2021 Third Quarter Earnings Conference. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Helen Xu, IR Director at Gulf Resources.

Helen, the floor is yours.

Thank you, Paul. Good morning, ladies and gentlemen, and good evening to all those of you joining us from China. And we'd like to welcome all of you to Gulf Resources Third Quarter 2021 Earnings Conference Call. I'm Helen Xu, the IR Director. Our CEO of the company Mr. Xiaobin Liu is also joining this call today.

I'd like to remind you to all our listeners that in this call certain management's statements during the call will contain forward-looking information about Gulf Resources Corporation and its subsidiaries business and products within the meaning of Rule 175 and the Securities Act of 1933 and the Rule 3b-6 under the Securities Exchange Act of 1934 and are subject to the safe harbor created by those rules.

Actual results may differ from those discussed today, taking into account a number of risk factors including, but not limited to, the general economic and business conditions in PRC; the risk associated with the COVID-19 pandemic outbreak; future product development and production capabilities; shipments to end customers; market acceptance of new and existing products; additional competition from existing and new competition from the bromine and other chemical industry and the changing technology; the ability to make future bromine assets that -- and the various other factors beyond the company's control.

All forward-looking statements are expressly qualified in their entirety by this cautionary statement and the risk factors detailed with the company's reports filed with the SEC. Gulf Resources assumes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call.

Accordingly, our company believes expectations reflecting in those forward-looking statements are reasonable, and there can be no assurance of such will prove to be correct. In addition, any reference to the company's future performance represents the company management's estimates as of today, the 16th of November 2021.

For those of you unable to listen to this entire call at this time, a replay will be available at the company's website. The call is also accessible through the webcast and the link is accessible through our website. So please locate our press release issued earlier for the details.

So before we discuss the quarter, I'd like to discuss the recent developments on our 3 business segments and the events that have occurred after the end of quarter. Firstly, let's look at the Chemicals segment. The world and Chinese economies have been impacted by the supply chain issues in many industries, including the energy industry. Shipping shortages have disrupted delivery of many products throughout the world. China has also been impacted by shortage of energy. For example, in some regions of China, the government has restricted electrical usage, including Shouguang City and some businesses under construction had restricted from electrical usage in Shouguang City.

So the supply chain issues as well as electrical restrictions have delayed the production and delivery of some equipment to the company's new chemical factory. In addition, the company's new Yuxin chemical factory has also been restricted from the electrical usage. This means the installation, timing of testing and the beginning trial production at the chemical factory will be delayed.

At this time, the company is not in a position to determine the extent of the delay, but it will keep shareholders advised. This new chemical factory will focus on pharmaceutical intermediary products and its by-product. We may produce other products, but pharmaceutical intermediary products are in high demand and provide us with higher margin. So we expect this factory will be profitable with commercial production.

Secondly, let's look at the bromine segment. As I'm sure you know that bromine prices have risen substantially throughout the world and even more substantially in China. In the world market, shipping issues have disrupted delivery. As a result, China has been unable to import its normal share of bromine. With a shortage in supply and the demand, the prices of bromine have soared to the highest levels ever recorded. From the second quarter of 2020 to the end of the third quarter of 2021, bromine prices increased 68.1%, reaching record levels.

Since the end of the third quarter, bromine prices have increased approximately 40%. Since the raw material price increases and lower than the bromine price increase, we believe this type of pricing should be good for our fourth quarter 2021 profitability. The company has no idea on how long the current shortage will last. However, we will also keep our shareholders informed if any change we have seen.

If you look at the results from the third quarter, you will be able to understand the impact of bromine pricing on profitability. In the third quarter of 2021, we sold 2,511 tons of bromine. In the same quarter of previous year, we sold 2,301 tons of bromine. The average selling price was $5,939 versus $9,000 -- sorry, versus $3,990 an increase of 48.8%. At the present time, market prices are $10,787 per ton, an increase of 82% over the average selling price in the third quarter. Because there is the lag time between order received and shipping, it favored the higher prices to impact the sales and margins in the fourth quarter of 2021.

In the third quarter, gross profit per ton was $3,210 versus $1,569, an increase of 111%. If prices remain elevated, our bromine business can be very profitable. Given current prices, we expect higher gross margins in fourth quarter 2021. At this time, we expect production in the fourth quarter to be relatively the same as the third quarter. The only potential issue is whether the government announces a winter shutdown because Chinese New Year in 2022 is 10 days earlier than the year 2021, a small amount of production could be shifted from the fourth quarter to first quarter of 2022.

At the same time, present time, we have not heard anything about a winter shutdown. We expect production from our 4 operating factories to be slightly higher in fourth quarter 2021 than in fourth quarter 2020.

So for our company, bromine factories #2, #8 and #10, the most recent development. As we have noted, the government is completing its planning process for all mining areas due to the requirement for core production of bromine and crude salt and including that for prevention of flood. From our point of view, the major issue related to the treatment and disposal with the water, while the plan is not yet complete, but we know we will not be able to send the wastewater to sea or deposit it to the farmland. This could entail constructing treatment facilities and aqueducts. While we cannot control timing of government approval, we remain optimistic about being able to reopen the 3 bromine facilities.

Firstly, let's look at our natural gas segment. In addition, the company also believes that the current energy issues impacting China could ultimately assist us in receiving approval for natural gas project in Sichuan Province. China badly needs new resources of natural gas. There are a large natural gas discovery in Tian Bao Town, Daying County, Sichuan Province. The government has already ruled that private companies can drill for natural gas. We believe we will receive approval to retain -- to drilling natural gas in Sichuan.

Guidance, given the current price of bromine, the company expects sales and earnings in the fourth quarter to be substantially better than those of the previous year. While we are not giving specific guidance at this time, we think year 2022 will be a very good year for the company because it expects higher prices for bromine for the foreseeable future. We believe our chemical factory and our 3 other bromine facilities will be operational and we hope to receive approval to drill for natural gas.

Now let's turn to the financial results. The third quarter income. Revenues in the third quarter increased $69.4 million to approximately $17.8 million versus approximately $10.5 million in the same period of 2020. Gross margins increased to 53.8% from 35.6%. Income from operations was $7.1 million compared to a loss of $2.7 million in the third quarter of 2020. Net profit was $5.4 million compared to a loss of $2.9 million in the previous quarter. Earnings per share were $0.52 compared to a loss of $0.30 in the same quarter of the previous year.

Nine months results. Revenues in the 9 months increased 108.3 percentage to $34.2 million. Gross margins improved to 43.5% from 22.6%. Income from operations was $1.4 million versus a loss of $10.5 million. Earnings per share were $0.02 versus a loss of $0.91.

So balance sheet. At the end of the third quarter, cash equaled to $98.9 million. Working capital was $104.7 million. Shareholders' equity was $282.2 million. Based on the shares outstanding, the cash per share was $9.44, net-net cash per share was $7.31 per share. Working capital per share was $10. Book value per share was $26.9.

Cash flow. During the 9-month period ended September 30, 2021, cash flow provided by operating activities of approximately $11.1 million was mainly due to the noncash adjustments related to the depreciation and amortization of property, plant and equipment, and restricted stock expenses offset by a net loss of $12.32 million and an increase in accounts receivable of approximately $6.89 million. But during the year, same period of year 2020, cash flow provided by operating activities was approximately $3.26 million.

So the third quarter segment reporting, bromine. Bromine sales increased 62.4 million to 14.9 -- 62.4% to $14.9 million. Production increased only 9%. So most of the increase was due to improved pricing. Gross profit was 55.7% versus 39.3% in the same period of the previous year. Income from operations increased to 252% to $6.9 million.

Crude salt. Revenues in crude salt increased 118% to $2.8 million. Gross profit increased 921% to $1.2 million. Income from operations was approximately $561,400 versus a loss of $484,300 in the previous year.

Chemicals and natural gas. Chemical reported operating loss of approximately $535,000, and natural gas reported an operating loss of $49,300. So now let's turn the call over to Mr. Liu for some remarks.

(foreign language)

[Interpreted] Okay. I will do the translation. Thank you, Helen. I'm Xiaobin Liu, the CEO of the company. First of all, I'd like to welcome all of you to the Gulf Resources Earnings Call for Third Quarter of 2021. The huge increase in pricing on bromine augurs well for our short-term profits. You can see how well we did in the third quarter. Prices, however, are not providing to the record highs. As Helen noted, the current prices are almost 82% higher than the average selling price in the third quarter of year 2021.

Since the raw material prices increases are lower than the bromine price increase, if the prices remain at elevated levels, we should have a profitable business. While prices of bromine could decline, but we do not believe the supply chain issues will disappear. Some bromine facilities shutting down, which will reduce market supply. Transportation issues will continue to impact imports. We believe we are entering a period of outstanding profitability for our bromine business segment.

(foreign language)

[Interpreted] So we believe we will receive permission. Yes, thank you (foreign language). We believe we will receive permission to open our rest 3 bromine plants. We continue to be optimistic about our chemical factory. We are located in a government-approved chemical park. We have followed all government regulations, and we have purchased most of the new equipment. In addition, our end products are focused on the pharmaceutical intermediates and by-products, which are important for health reasons with higher gross margin, profit margin.

Finally, we remain optimistic about the opportunities in Sichuan for our natural gas and bromine projects. We are waiting for Sichuan Province to complete it. We continue to work closely with the government for Daying County and Tian Bao Town. Based on our communication, we know that the China originally needs natural gas now. The national government has approved that privately-owned enterprises are allowed to participate in the natural gas production.

We have installed our equipment for our first natural gas well and did a period of trial production. As soon as the land and resource planning for Sichuan Province been completed, the company plans to proceed with its application for the natural gas and the bromine project approvals. In addition, we have found very high concentration of bromine in our well. Given the current bromine prices and the shortage of supply, we are also very optimistic about this opportunity.

We'd like to thank you, all our shareholders for their patience, and I would like to state that with our new compensation policy, the interest of the company management and the shareholders are completely aligned. So before we open the call for questions, I'd like to remind all our shareholders that the company has a new website. As you have requested, we have worked hard to update the design and the information. We still have something to add like our 5 years plan and the PBT and some new updated pictures.

We will continue to be active in issuing PR and will post pictures and videos of both new facilities. I believe our previous discussions have covered most of the questions we received from our shareholders. I would like to respond to several questions we received after the last week's call.

So the first question from an investor who asked about what are restrictions to executive officers have regarding those shares?

The response, there are very strict rules for company officers to follow regarding the SEC requirements based on our knowledge to sell under the Rule 144. There are 5 conditions that must be matched. Firstly, the shares they're holding must be held for at least 6 months. Secondly, there must be a trading window where company management does not have material nonpublic information. At this point in time, it is likely the trading window will be extremely small. Third, trading volume. As the average, the maximum and (inaudible) can sell in the 3-month period is limited to the greater of 1% of the outstanding shares on the average reported weekly trading volume during the 4 weeks.

Fourth, in addition, the executives must be able to open account with [bromco] dealer. This could be complicated as now it's difficult for Chinese companies. Fifth, if the executive officers want to sell 5,000 shares or more, there must be filed a notice to sell with the SEC.

The second question from our investors. Investors also asked about why we have not been able to increase utilization. The answer, we are pleased with the performance of our 4 operating facilities -- factories. Some of the new rules for the treatment of waste water limit, but increase in utilization.

Third question, dividends and buybacks. Answer, we received a question on dividends and buybacks. We'd like to once again explain that -- this issue. China has placed controls on the export of Chinese currency, all of our business in China. We'd like to be able to buy back shares or pay dividends, but until we can't figure a way of getting money out of the country, we will be unable to do so.

Question, the acquisition? Answer, we are not considering any acquisition at this time.

The last question. An investor asks if executive officers wanted to sell your shares, could the company buy them back? The answer, the company may need cash on hand to support its further operation and investment. By the way, there might be another idea that the company may reimburse the manager in RMB. That manager would then transfer the U.S. dollars to the company, which could use it to buy back stock. But -- this is a good idea, but the Chinese government may not like it, and might think the company was trying to get around the roots. And this idea is based on if the company operation are back in normal and it may have good cash flows in.

So operator, can we open up the Q&A section?

(Operator Instructions) And we did have a question come from Max (inaudible).

Helen, thanks a lot for your communication that has a lot improved in the last month and the compliments for the very good result -- the good results reported. I have only 1 more question. That is, what do you want to do to improve the liquidity like the day volume of the shares traded on the NASDAQ? Because one of the main concern is the Gulf Resources are just 10,000, 20,000, 30,000 shares traded every day, that is very low. So according to me, you should focus on improving this parameter.

(foreign language)

(foreign language)

[Interpreted]

(foreign language) Max, so here is a response from Mr. Liu that the company currently is in discussion with the IR companies. So it is trying to find a better IR firm, which can help the company to introduce itself to the public and in order to increase the liquidity in the future.

Okay. And I have also a second question that is very similar to the first one. But partially, you have already responded. It's also very important that some financial analysis starts to coverage Gulf Resources and give a price target because it will increase the visibility of the firm. So for me, it's very important that management does this one last objective to get some financial analyst coverage and to get time price target.

(foreign language)

(foreign language)

[Interpreted] Okay, thank you. We will consider about it.

(Operator Instructions)

And there were no other questions in queue at this time, I would now like to hand the call back to Helen Xu for any closing remarks.

Paul, do you mind asking one more time if there is any questions. Otherwise, can we close the call for today?

(Operator Instructions) And no other questions came in Helen.

Okay. Thank you.

(foreign language)

(foreign language)

[Interpreted] Okay. So thank you. If there is no more questions, thank you all for attending today's conference call. Any questions, you may e-mail me further. Thank you very much. Have a good day. Bye-bye. Bye, Paul. Thank you. It's a pleasure.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect at this time, and have a wonderful day. Thank you for your participation.

Bye-bye. Have a good day.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]