Gulf Resources Inc (GURE) 2020 Q1 法說會逐字稿

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

I'll now turn the conference over to Helen Xu. Please go ahead, Helen.

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

I'd like to remind you to all of our listeners that in this call, certain management's statements during the call will contain forward-looking statements about Gulf Resources Incorporation (sic) [Gulf Resources, Inc.] and its subsidiaries business and products within the meaning of Rule 175 under Securities Act of 1933 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 conditions in PRC, the risks 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 oilfield and power production chemicals, change in technology, the ability to make future bromine assets, and various other factors beyond its control. All forward-looking statements are expressly qualified in this entirety by this cautionary statement and the risks factors detailed in the company's reports filed with 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 its expectation reflecting 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 estimate as of today, the 21st of May 2020.

So 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 your press release -- our press release issued earlier for this detail.

So we'd like to start the call with some introduction remarks by our CEO, Mr. Xiaobin Liu. (foreign language)

(foreign language)

[Interpreted] Thank you all for attending this call. So for the past 30 months have been long and very difficult for our company as we had to close all of our facilities for the several reasons. During this difficult time, we were hit by one of the most destructive typhoons in the history of China. When we were getting production back, we were adversely impacted by COVID-19 pandemic. Now however, at last we can see real signs of progress.

(foreign language)

[Interpreted] We have 4 of our bromine facilities in commercial production. We are optimistic about the remaining 3 bromine factories. The company had drilled more new wells and bought new equipment. Now we are about to start construction of our new chemical factory, which is being planned to focus more on higher margin pharmaceutical intermediate products. And Petro China had also discovered one of the biggest natural gas wells in Chinese history in the same time that our existing natural gas well and 2 additional registered sites are located.

(foreign language)

[Interpreted] Despite the fact that all of our facilities closed for most time of the past 30 months, and the cost of buying all-new equipment and drilling more new wells, we're still in a strong financial position with approximately $33.6 million (sic) [$93.6 million] in cash. We have enough capital to build our new chemical factory, reopen our remaining bromine and crude salt facilities and drill our well in Sichuan Province.

(foreign language)

[Interpreted] We look forward to returning to profitability in the near future. We appreciate the support of our shareholders. Once we start construction on our chemical factory and get a better sense of timing for the approval of our remaining bromine factories, we will provide investors with future further updates on our 3-year plan for growth and profit. We are very optimistic about our future.

So now let's look at the first quarter 2020 financial results and major events.

Because of the pollution issue, Chinese New Year and the circumstances relate to the COVID-19 pandemic outbreak, the company's bromine facilities were closed for most time of the first quarter 2020. On November 25, 2019, the government of Shouguang City issued a notice ordering all of the bromine factories in Shouguang City to temporarily stop production from December 16, 2019 to February 10, 2020 for environmental reasons. Due to the COVID-19 outbreak, the company received approval dated on February 27, 2020, allowing the company to resume its bromine production issued by Shouguang Comprehensive Coordination Group for Epidemic Prevention and Control. In January 2020, the company obtained an [environment] assessment approval issued by the government of Shouguang City, Shandong Province for the proposed new Yuxin chemical factory.

On January 27, 2020, the company completed a 1-for-5 reverse stock split of its issued and outstanding shares of common stock, which was effective for trading properties as of the commencement of trading on January 28, 2020. On February 12, 2020, the company announced it received a notice from Nasdaq on February 11 indicating that the company has regained compliance in the minimal bid price requirement on the Nasdaq Listing Rule for continued listing on The Nasdaq Global Select Market.

On March 5, 2020, the company received government approval allowing the company to resume production at bromine factories #1, #4, #7 and #9. In the mid-March 2020, the company began trial production at bromine factories #1 and #7.

Since the company's factories were closed for the most time of the first quarter 2020, the company generated relatively little revenue and sustained operating losses. For the first quarter 2020 ending March 31, 2020, the company reported net revenue of approximately $557,700, up from approximately $38,600 in the same quarter of the previous year. The loss from operations were approximately $4.8 million compared to approximate $6.40 million in the same quarter of the previous year. The net loss after tax was approximately $3.5 million compared to approximately $5.0 million in the same quarter of the previous year. The net loss per share was $0.37 compared to $0.52 in the same quarter of the previous year.

Despite the closure of the facilities for the 30 months in the past, the company's balance sheet for the first quarter 2020 remains strong. At March 31, 2020, the company had cash of approximately $33.6 million (sic) [$93.6 million]. Cash per share was $9.84. Current assets were approximate $46 million (sic) [$96 million], and current liability was approximate $2.5 million. Working capital per share was $9.85. Shareholder's equity was approximately $255.1 million and book value per share was $26.80.

Our income statement, balance sheet and statement of cash flows are included in our press release, in our 10-Q. So since the end of the quarter, the company has made substantial progress in reopening its business.

Now we will look at our -- each of our business segments.

Firstly, that is our bromine and crude salt segments. At the month on April 3, 2020, the company factory #1, #7 had commenced commercial production. Because these factories had been operational back in year 2019, so the opening and commercial production has been relatively easy. On May 6, it commenced commercial production for factory #4 and #9. Expect the ramp-up of these 2 factories would be slightly slower than the ramp-up of factories #1 and #7. Because they were not operational in the year 2019, we have installed new equipment in all of our factories and want to be certain that everything is operating perfectly. However, we can expect to achieve full production by the end of the third quarter 2020.

We are in discussions with the local government for the opening of factories #2, #8 and #10. These factories had issues related to the crude salt field and aqueducts. For example, we had to add some neighboring crude salt fields and we still need approval from the village government for the aqueducts. Mostly, we are optimistic that we will receive approval and we will be able to open these factories in year 2020. As soon as we get a better sense of the exact timing of the year opening of these factories, we will communicate with our shareholders.

Over the past year, we have invested approximately $39.5 million to drill more new wells. Many of the older wells had accumulated mud or need to be disposed so that had limited our production. Some of the wells had also been damaged by Typhoon Lekima. These new wells have been drilled around all of our factories, including factory #2, #8 and #10. We would not have drilled wells around these factories if we had not been, and we continue to be optimistic about receiving approvals from the government.

To the company's knowledge, some of the bromine factories in China are still closed and some of them may be closed permanently due to the strict measures being taken by the Chinese government in an effort to battle against environmental pollution. The company expects that demand and pricing for bromine will increase. The company is optimistic about the future of the bromine market. At the present time, there's somewhat mixed pictures. Some domestic amount for products for papermaking and other industries had been stopped. Exports of downstream products also have been slowed.

On the other hand, bromine is a disinfectant that is used for both humans and animals. This COVID-19 pandemic has put an increased focus on increased use of disinfectant. In the past, people might not have been diligent about the use of disinfectants, but now government regulations and increased health awareness appear to be creating what we believe will be a continuing increase in the demand. Bromine is also used in pharmaceuticals. We are seeing an increase in demand in these 2 markets, which we expect to be continued.

Despite the closure of many of our downstream customers, the current price of bromine remains at over RMB 30,000 per ton, significantly higher than it was when our factories were closed and almost twice the level from 5 years ago. We expect that both demand and pricing will increase as Chinese economy recovers. We also expect our crude salt business to be strong.

During this period of COVID-19, we would like our investors to know that we are operating with the highest possible levels of protection for our employees. All of the company's employees have to wear masks and have to be disinfected both before and after work. In addition, we are constantly disinfecting our factories and other facilities.

So secondly, let's look at the company's chemical products segment.

The company is planning to begin construction of its new Yuxin chemical factory in the immediate future. It has received full environmental approval as announced from the government and now it's just waiting on the construction permission due to this COVID-19. Construction is expected to take approximately 1 year and another additional 6 months should be required for equipment installation and testing. The company expects to begin trial production at the beginning of the year 2022.

Our chemical factory will not produce lower-margin products such as chemicals for papermaking. Instead, it's planned to focus more on higher-margin pharmaceutical intermediate products. Bromine is widely used in pharmaceuticals and pharmaceutical byproducts. Bromine ions has ability to decrease the sensitivity of the central nervous system, which makes them effective for use as [better] anti-epileptic and many other medicines and other medical conditions. These products, which are in high demand, offer the opportunity for much higher pricing and margins than do some of our traditional products. While this factory will be smaller than with some of our products -- while this factory will be smaller than the combined 2 previous factories, but the company expects the company -- this can lead to make higher net profit margin with its products. We continue to estimate the cost of this factory to be around $16 million. If there is any increase in the cost, we will communicate with our investors. As Mr. Liu also previously made in his prepared remarks, we have enough cash on hand to construct this factory and open our bromine factory too.

And now we turn to natural gas and bromine in Sichuan Province. On May 11, 2020, Petro China announced one of the largest discoveries of natural gas in China in Tianbao Town, Daying County, Sichuan Province. This discovery which is estimated to be in excess of 1 trillion cubic meters and it's approximately 5 miles from the company's current natural gas well site and -- as well as its 2 additional registered sites. We believe this will be of substantial benefit for the company.

As our investors may recall that on May 29, 2019, the company received a verbal notice from government of Tianbao Town, Daying County, Sichuan Province, whereby the company's required to obtain project approval for its natural gas and brine water projects and approvals for the safety production inspection, environmental protection assessment and land issue. Further, also need exploration license and mining license for bromine and natural gas-based activity. Based on the government requirements at the time, we were basically the only company seeking to operate in this extremely remote rural area. As a result, the province had not yet formalized all of its environmental regulations and mining exploration policies for this area. A discovery of over 1 trillion cubic meters of natural gas by Petro China is accelerating the provincial government's focus on Tianbao Town and Daying County. The discovery of one of the largest natural gas sites in Chinese history by a major state-owned China company should ensure that the process is accelerated.

Our company is very confident in its position as recent Chinese policy also state that private companies can explore for and produce natural gas. We have one well field and have 2 more sites already in detail with the government. The fact that Petro China has found this natural gas reserve in the same formation leads us to believe that within this area of our wells may be more reserves than we first believed. Petro China's discovery offers the company significant advantages. In addition, the company would clearly explore the possibility of working with Petro China if with chance. We are in active discussion with the local and provincial government and will keep shareholders informed about any update.

So now let's look at the corporate commentary. Because we have received a number of questions from shareholders about corporate issues that we'd like to answer before returning the call back to Mr. Liu even we already covered most of the questions in our previous discussion.

There is one question about the company's general administrative expense. It's asking the company's general and administrative expenses had gone up significantly in the last 2 years from and $5 million in year 2017 to $13.2 million in year 2019, a 56% increase. We note that both years 2019 and year 2018, we had exceptional repair expenses, rectifications and typhoon. We expect year 2020 and year 2021 to be back to the levels similar to 2017. So the answer, there was onetime costs such as rectification costs and repairment costs after typhoon may be reduced. But due to the inflation, as there are some costs which had been increased, such as employee's compensation and salary, which increased for the recent years, which is hard to decrease, but the company will look into this matter and finding other ways, try to saving costs and maintain the general and administrative expenses to be at a similar level to year 2017.

Strategic plan. The company is currently working on a 3-year strategic plan. As soon as we get clarity about opening of our bromine and crude salt factory, the construction timing of our chemical factory and the timing of opening our natural gas and brine operation in Sichuan, we will complete the plan and share it with our investors.

Communication with shareholders. As you can see, the company had been very proactive in issuing press releases this year. We will continue to work very hard to keep our shareholders informed. In addition, we will update the company website continuously. As soon as we get better clarity on the timing of opening the remaining business, we will also provide our sales and earnings guidance to investors.

So now we'd like to turn this call back to Mr. Liu for the Q&A section. Operator, can we open for the Q&A section?

(Operator Instructions) Helen, it appears we have no questions at this time. Excuse me, Helen, I'm sorry. We did get a question from [John Yule], a private investor.

Yes. We're now halfway through the second quarter. Hello? We're now halfway through the second quarter of the year. Do you have a forecast for revenue and profit in this quarter?

Sorry. I cannot hear you clear. Do you mind repeat your question?

We are now halfway through the second quarter of the year. Do you have a forecast for revenue and profit in this quarter?

For the second quarter already. Okay. (foreign language)

(foreign language)

[John], clearly, this comes from Mr. Liu.

[Interpreted] Even though there are only 4 factories in commercial production currently, for the fairness to all our public investors, we said that we may provide like a prediction, revenue prediction or guidance for public, issue the press release or on the company's website for this.

There are no additional questions at this time. Helen, would you like to make some additional remark?

Okay. (foreign language)

Thank you, Helen. We have no additional question.

(foreign language)

(foreign language)

(foreign language)

Okay. (foreign language) Operator, do we have any more question? Otherwise, can we close the call for today?

Yes. There are no additional questions, Helen. You may close the call.

Okay. Thank you. Thank you for attending this call. Thank you, all. Take care.

Thank you. This concludes today's conference.

Thank you.

You may disconnect your lines at this time, everyone. Thank you for your participation.

Thank you.

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