Gulf Resources Inc (GURE) 2020 Q4 法說會逐字稿

Greetings. Welcome to Gulf Resources 2020 Annual and Fourth Quarter Earnings Conference. (Operator Instructions) Please note that this conference is being recorded.

At this time, I'll turn the conference over to Helen Xu. Helen, you may now begin.

Thank you, operator. Good morning, ladies and gentlemen, and good evening to all those of you for joining us from China, and we'd like to welcome all of you to Gulf Resources Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. My name is Helen, the IR Director. Our CEO of the company, Mr. Xiaobin Liu, will also join this call today.

I'd like to remind you to all of our listeners that in this call, certain management statements during the call will contain forward-looking statements. Forward-looking information about Gulf Resources Incorporation and its subsidiaries, business and products within the meaning of Rule 175 on the Securities Act of 1973 and 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 the business condition within the PRC, the risks associated with COVID-19 pandemic outbreak, future product development and production capabilities, shipment to end customers, market acceptance of new and existing products, additional competition from existing and new competition from the bromine and the other oilfield and chemicals, changing technology, the ability to make future branding bromine assets and the various other factors beyond its control.

All forward-looking statements are expressly qualified in their entirety by the 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 that expectations reflected 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 management's estimates as of today, the 9th of April 2021.

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

So before we review the fourth quarter and the full year, which I believe have covered all of the questions from the company investors and shareholders, I'd like to turn the call over to Mr. Liu, for some introductory comments. Mr. Liu, (foreign language).

Yes. Hi. (foreign language)

[Interpreted] Thank you, Helen. The past 3 years have been extremely difficult for our company. We had to comply with all the new government regulations, which required us to rectify all of our bromine factories and contract a new chemical plant. Then shortly after the first of our bromine and crude salt facilities open, we were hit by the most destructive typhoon in Chinese history. This has not only forced us to rebuild our bromine and crude salt facilities and drill new wells and aqueducts, it also forced the government to implement full control as another environmental element. Then we had to face the COVID pandemic.

(foreign language)

[Interpreted] Now after 3 years, we have finally reported a profitable quarter and generated positive cash flow from operations. We did this just for bromine and crude salt factories in seasonally slow period because of cold temperatures and in a quarter in which the government forced an early closure for environmental reasons.

(foreign language)

[Interpreted] As we look to the future, we are becoming increasingly optimistic. The Chinese economy is recovering. Bromine prices continue to increase and our opportunity costs as many of our smaller competitors will never be able to reopen. We also expect to resume the approvals for the rest bromine and crude salt factories in the second half of 2021. However, there is no assurance that we will be able to get the approvals necessary to operate those factories from government.

The construction of our new chemical factory is on schedule. We expect this actually will make higher net profit margin as the company plans to focus more on the higher margin pharmaceutical intermediate products. The company is optimistic about its project in Sichuan province. And plans to proceed with its application for the natural gas and brine projects, approval with related government requirements after the government planning has been finalized.

(foreign language)

[Interpreted] Okay. In the past 2 years, we have spent over $60 million on property, plant and equipment, yet our balance sheet still in excellent shape. We have over $94 million in cash and no debt.

Although the closure for Chinese New Year will impact our first quarter, we believe we will be able to generate profits and cash flow in future quarters.

Now let me turn the call back to Helen to review the fourth quarter and the fiscal year 2020 results.

Thank you, Mr. Liu. So now let's look at the fourth quarter 2020 results first. In the fourth quarter, Gulf Resources had revenues of approximately $11.8 million. Cost of revenues were $6.7 million. Total expense were approximately $7.97 million. We earned a profit of $808,000 before taxes.

Our loss for the 12 months was 4% less than our loss for the 9 months meaning that we earned 4% in the fourth quarter 2020. These results also include approximately $1.3 million of direct labor and factory overheads incurred during the planned shutdown. Meaning, they were attributable to operations that was not yet open.

If this total is added back to our income, our operating businesses earned approximately $2.2 million during the fourth quarter. Further, our operating factories had to close on December 25, 2020, for environmental reasons. Meaning, we lost 1 week of operations.

Our bromine business earned $3.5 million in the quarter. This was offset by a loss of approximately $527,000 in crude salt. As we have noted, crude salt business is normally weak in the winter because it is difficult to mine crude salt when temperatures are low.

Our chemical and natural gas business, which were not in operation, which generated losses of $106,000 and $54,000, respectively. In the fourth quarter, we generated cash from operations of approximately $6 million compared to a negative of approximately $3.0 million in Q4 2019, an improvement of approximately $9 million over the results from the previous year.

As the Chinese economy continues to recover and production has resumed after the Chinese New Year, the price of bromine has continued to increase based on the monthly prices from CEIC, Tata Group and spot prices from sensors. The price of bromine on April 7, 2021, was RMB 36,667 per ton. This is an increase of 25% from Q2 2020, 30.9 percentage from Q3 2020 and 10.5% from Q4 2020. Since our costs are relatively fixed, this type of price increases, if they are [shifting], could significantly increase the company's profitability.

Now let's look at the fiscal year 2020 results. In year 2020, the company generated revenue increased 166 percentage to approximately $28 million. Net profit increased 70 percentage to approximately $8.8 million. Our loss from operations declined 58 percentage to approximately $10.2 million.

The loss included approximately $8.2 million of direct labor and factory overheads incurred during the plant shutdown. These losses were attributable to businesses that were not operating. GA, general expenses -- general and administrative expenses declined 23 percentage to approximately $10.2 million. Our loss from operations declined 58 percentage to approximately $10 million. Our net loss declined 67 percentage to approximately $8.4 million. We lost $0.87 per share compared to $2.73 per share in 2019.

Cash flow. Our cash flow showed significant improvement. We generated net cash from operations of approximately $9.3 million compared to a loss of $15.3 million in 2019. And during year 2020, the company spent approximately $21.7 million on property, plant and equipment. In year 2019, the company spent approximately $60.6 million on PPE. This includes major investments in our new Yuxin chemical factory, new bromine and crude salt factory and dozens of newly drilled wells and aqueducts.

Balance sheet. The company's balance sheet remains strong. At December 31, 2020, the cash equaled to approximately $94 million. Cash per share equaled to $9.43. Net-net cash, which included the cash minus our liabilities, equaled to approximately $77 million. The net-net cash per share equaled to $7.72 per share. Current assets equaled to approximately $107.3 million. Current liabilities equaled to approximately $7.1 million. Working capital equaled to approximately $100.2 million. Working capital per share equaled to $10.02. Shareholders equity equaled to approximately $277 million. Shareholder's equity per share equaled to $27.71.

Now let's look at the updates on operations by segments. This is an important discussion part, which will cover most of the questions from company's investors and shareholders.

Firstly, let's look at bromine and crude salt. The company is very optimistic about the opportunities in bromine and the crude salt segment, as partially is strong increase in prices since the third quarter and through the beginning of April, as we discussed previously. We expect the price to remain elevated because demand is increasing, especially with COVID-19 since bromine can be widely used in the contamination, and there are few competitors in the market.

If bromine prices remain at this level, we should have a good year for 2021. Because our factories were closed for the first 6 weeks of first quarter and because we had to take a few days to get our factories fully operational, our first quarter may be our lowest quarter in the year. However, we have seen excellent demand. And we believe we will see strong quarters for the remainder of the year. The company is working with the local authorities in Shandong Province, Shouguang City to finalize the issues related to our 3 remaining bromine and crude salt factories.

At this time, the major issues appeared to relate to securing a land for the company's crude salt accounts and constructing aqueducts to move with water to areas away from population centers and follow the government's further control policy because the government is still considering which modification they would like company to make. From the company judgment, most of the modifications will not be that complex.

However, we cannot be certain when the approvals will come and the timing of the new factories is up to government-accepted standards. We think excellent progress is being made. But at this time, company has to receive the approval for this bromine and crude salt factories in the second half of 2021. However, there is no assurance that it will obtain the approvals from government.

In terms of 2021, we expect our utilization to be higher than 25 percentage in year 2020. We are not making projections at this time, but we will make them when we release our first quarter results, which will be in approximately 1 month later.

As we have indicated, we expect bromine prices to remain high. As an example, on April 2, bromine prices were RMB 35,772. 2 days later, they were RMB 36,222. Yesterday, they've reached RMB 36,667.

As we have noted, the Chinese economy is recovery, bromine is a powerful disinfectant that is a key element in COVID-19 protection and effectively had been significantly reduced because many competitors have not been able to conduct their rectification.

Now secondly, let's look at the chemical segment. The company is also making excellent progress in the construction of Yuxin chemical factory. We expect to have construction completed by the second quarter of year 2021. And when the company will restore the machinery and test their equipment during the remainder of the year and expect to begin the trial production by the starting of year 2022.

Our current cost estimates at still $60 million exclude the land lease for this new chemical factory. We expect this factory will produce higher net profit margin as we plan to focus more on the higher gross margin pharmaceutical intermediate products. As a reference, our 2 factories had operating earnings of averaging $29.2 million in year 2015 to year 2016.

The last 2 years prior to the shutdown, we are not yet in a position to make projections for year 2020. The key issue is how quickly the company will be able to ramp up production. And however, with less competition and more demand, we are optimistic about this new chemical factory. And the company will continue to post new photos of the progress of its chemical factory on its website.

At last, let's look at the Natural Gas segment. We are also committed to our natural gas and brine projects in Sichuan. Petro China has made one of the largest natural gas discoveries in Chinese history in the same time as our well. We are waiting for Sichuan Province to finalize all its planning of its rules relating to the natural gas and brine.

However, we are encouraged by our discussions and belief, a recent ruling among private companies to participate or get (inaudible) for this project. We are in a slightly different position than other companies because our approvals are for both natural gas and brine. While Sichuan has huge deposit of Natural gas, it also has the most concentrated brine reserves we have seen. Our plan is to drill for both products in the same location. Once we'll receive approval for our (inaudible), we may be submitting applications for next 2 additional wells. Further, once we receive approval, we may consider partnering with other company or enterprise, such as Petro China.

At last, we have message to our shareholders. The company had been -- we have worked very diligently to respond to the request of our shareholders. We have updated our website. Please take a look at the changes and updates we have provided. We will continue to make improvement and ensure all information is current.

We also posted a new letter from the Chairman. In addition, we will commit ourselves to planning investors event at this point, traveling is still difficult. We will also consider expanding our shareholder base by reaching out to institutional investors once our market capitalization increases.

Finally, as all our factories, including the new chemical factory opens, we should be in a position to generate free cash flow. Once we are in this position, then we consider how we can recognize this free cash flow to benefit our shareholders. We understand that right now, the focus is on the opening plants and building a new chemical factory. But what steps are you prepared to take to help make the share price more reflective on the value of the company?

Company will also provide our shareholders with a 5-year plan in the near future once all business come back on track. We appreciate your support and hope to have continued positive news. At last, the company management would like to thank to our shareholders for their patience during this extremely hard period. In September 2020, we could not have understood how many difficult and different problems you would have to address.

Now however, we have excellent visibility towards the future. And what we see is very exciting. We believe we are in a position to produce record earnings for our company once all of the company's facilities are back in operation.

Okay. Operator, can we open up for the Q/A section?

(Operator Instructions) Our first question is coming from the line [Matt Waring] of (inaudible) Research.

You say the factory will have higher margins, the chemical factor will have higher margins. But will the factory have higher revenues as well?

(foreign language)

(foreign language)

We feel responsible and we feel that, yes, we will focus on higher (inaudible) products. We will have higher net profit margins.

Okay. So you'll have higher net profit margins?

Yes.

And then -- okay. And then the other question is, I know the company -- you just said the company is focusing on rebuilding factories before buying back shares and anything, but is the company allowed to buy back shares? I know a while ago, you guys weren't allowed to buy back shares. Are you allowed to now?

I think we didn't say very clearly what we will do, but we said that once the company will consider how it can utilize the free cash flow to benefit the shareholders in the future.

Okay. Yes. But are you just -- are you allowed to buy back shares?

Okay. Okay. Thank you. I will ask, again. (foreign language)

(foreign language)

[Interpreted] Okay. So as we said that as all our factories included new chemical factories opened, we should be in a position. And because we need the free cash to -- from these chemical factories for natural gas and for our bromine factories to be back on operation.

And at this point, we did not submit our application yet to the government for this shares buyback. So we are not confirmed about your answer based on current government policy, yes.

Our next question comes from the line of [John Rolls], a private investor.

Yes. Congratulations on returning to profitability.

Thank you.

Is there any timetable for decision to build additional wells at the Sichuan Province?

(foreign language)

(foreign language)

[Interpreted] John, here is the response from Mr. Liu that because now the company is still waiting the government to finish its plans. Because the Sichuan Province government is doing its first round mining resources planning for the whole province, once the government finish its plan, then the company can continue with its application and submit its application for -- to government department for their approval.

After that, then we can have a most specific and clear timetable on the company's plan. So now we cannot provide really like specific timetable until government finishes their jobs first.

You seem to be in a similar position with regard to your unopened factories that you're waiting for the government or the province to make...

Yes.

Are there any -- they're...

No, it's not a decision -- it's not a decision. It's like we are doing the planning for the whole province regarding its mining resources and land resource.

Yes. Usually, there's some schedule for the government to make a decision. You don't have such a schedule?

Just wait a minute, I have to check with Mr. Liu. (foreign language)

(foreign language)

[Interpreted] Okay. So -- based on our understanding, the plan is in this year, 2021, the cities and accounts are submitting their plans to provincial governments in Sichuan Province and by this year, 2021. And when the Sichuan provincial governments may finish their plan by beginning of the year 2022, and at that time, the company may submit its application for further approval and further wells at that time.

Our next question is from the line [Charlie Cheever] of [Cheever Partners].

Yes, my question is, what is the development plan for the natural gas? Will you try to develop that on your own? Or will you bring in one of the SOEs as partners to develop it?

And then the second question is, would you consider spinning out the natural gas into a separate company?

(foreign language)

(foreign language)

[Interpreted] Okay. So this is a really long-term planning. The company may consider partnership with other enterprises or state-owned enterprise or separate with natural gas projects as a separate company in long-term strategy.

But the most important thing, we think, we have to do now is after government finished its plan, then company gets the approval and -- first, have new more wells approvals as well. After this, company will have more bargaining power when its in discussion with other like companies still in the -- considering partnership or separate this natural gas into a new company.

Next question is from the line of [Kim Ming Jin], a Private Investor.

I've been a shareholder for the past 10 years on and off. My question is that what measures the company is planning to take in order to meet the most stringent requirement for auditing by Security and Exchange Commissions?

Sorry, [Kim], I think I did not get you clearly. Do you mind, just repeat your question?

Yes. What is the company's long-term or short-term plan in order to meet the most stringent requirement, auditing requirement set by Security and Exchange Commissions? That's the most concern matter from the shareholder point of view.

Okay. Do you mind, I just repeat your question. So you mean what's the company's long-term and short-term plan to make it compliant with the SEC rules on the mix of the company?

Yes.

Okay.

But if we do have a -- sorry, go ahead.

Okay. Thank you. (foreign language)

(foreign language)

But that didn't directly answer my question. Your CEO, Mr. Liu, mentioned that is how he is trying to do to increase the shareholders' value. But does he understand the requirement of the Securities and Exchange Commission?

(foreign language)

(foreign language)

[Interpreted] Okay. So first, hello?

I'm listening. Yes.

Okay. Okay. So here is your response from Mr. Liu that firstly, of course, the company operating business had to be operating well. So every -- like he mentioned, every business segment back and increased the shares. Of course, this is what we want to do best for our investors.

Then, of course, we will follow the SEC rule strictly and do our filing time -- on time, and then we use always continue learning in order to continually satisfy the requirements by SEC and NASDAQ. Of course, this whole process helped by the company legal counsel and monitored by the company's auditor.

What message are you going to pass on to the investors? I know some friends, Chinese friends, they're all kind of concerned about whether the company is meeting the strengthening requirement of the Security and Exchange Commission. The concern that the requirement is not -- I mean, the matter is not taken up to the satisfaction of the SEC, and then the company will be delisted, all their investment will be lost. That's the most concern of the investors. Some of them already sold shares. I'm one of the few that have not sold my shares.

Okay. (foreign language)

(foreign language)

(foreign language)

(foreign language)

(foreign language)

(foreign language)

(foreign language)

(foreign language)

(foreign language)

(foreign language)

(foreign language)

(foreign language)

(foreign language)

(foreign language)

(foreign language)

(foreign language)

[Interpreted] Okay. So for the fairness to our all listeners, I just want to have a brief translation between Mr. Liu and [Mr. Kim]. Firstly, they were talking about when the company's bromine actually comes back in its operation, what the size it will be? And Mr. Liu said that when our rest bromine companies and the crude salt companies stacking operation, it will be 2 out of 3 as compared to the beginning of -- before the factories shutdown. And by the next year, the company can do this and achieve this target.

Chemical factory will be starting its production almost like full production as a trial production by the end of next -- full production by the end of next year.

And then Mr. Kim asked about why the bromine and the chemical product prices are increasing in China, what are the reason for this? Mr. Liu explained that there are several reasons. The first reason because China economy is recovering and there is -- with more bromine and basic chemical materials.

Second reason, there are less competitors because for the rectification there, some bromine factories, chemical factories were shut down before. And the total production currently in this industry had decreased. Third, the basic chemical product materials are increasing in China now.

Then Mr. Kim asked about if the bromine price company selling totally based on company size or not. Mr. Liu responds that it does not possibly totally depends on the company. The bromine price are still determined by the market demand.

Then last question for Mr. Kim . He asked about the market share of bromine owned by Gulf Resources in the bromine industry. Last year, there are 4 to 5 percentage of bromine. They are percentage is the market by Gulf Resources. By the -- when the bromine factory and crude salt factory are back on operation, the year after next year, its market share may achieve 6 to 7 percentage. This is a brief translation between Mr. Liu and Mr. Kim for your information.

There are no additional questions at this time, Ms. Xu.

Okay. Thank you. (foreign language)

(foreign language)

Thank you. That's all for today. Thank you for the call. You have good night, and enjoy the day.

Thank you. This will conclude today's conference.

Thank you.

You're welcome, and you may disconnect your lines at this time. Thank you for your participation.

Thank you.