Gulf Resources, Inc.
Q2 2016 Earnings Call Transcript

Published: 12 Aug 2016

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Gulf Resources 2016 Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. And after the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I will now turn the conference over to Ms. Helen Xu. Please go ahead.

[Helen Xu:]

Thank you, operator. Good morning, ladies and gentlemen and good evening to those of you who are joining us from China and I like to welcome all of you to Gulf Resources second quarter 2016 earnings conference call and first of all, we are sorry for starting late, because our phone had some problems when starting from China. So sorry about it. My name is Helen, the IR Director. Our CEO and CFO of the company, Mr. Xiaobin Liu and Mr. Min Li will also join this call today. I will be offering translation for management’s comments for the company’s operating results. I would like to remind you to all our listeners that in this call, management’s remarks will contain forward-looking statements, which are subject to risks and uncertainties. The management may make additional forward-looking statements. Therefore, the company claims the protection of Safe Harbor for the forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today depending upon a number of risk factors, including, but not limited to, the general economic business condition in China, future product development and production capabilities, shipments to end customers, market acceptance of new and existing products, additional competition from the existing and new competitors from the bromine and other oilfields, agriculture and flame production chemicals and change in technology, the ability to make future bromine asset purchases and various other factors beyond the company’s control. All forward-looking statements are expressly qualified in their entirety by this precautionary statements, and the risk factors detailed with the company’s reports filed with the SEC. Accordingly, our management believes that the expectations reflected in these forward-looking statements are reasonable and there can be no assurance of such will prove to be correct. In addition, any reference to company’s future performance reflects the management estimates as of today, the 11th of August, 2016. Gulf Resources assumes no obligation to update these projections in the future as market conditions may change. For those of you unable to listen to this entire call at this time, a replay will be available for one month at the company's website. The call is also accessible through the webcast and the link is accessible through our website. Please look at our press release issued earlier for details. It’s now my pleasure to turn this call to Mr. Liu, the company’s CEO, who’s going to provide some initial remarks and then I will translate for him. Xiaobin?

[Xiaobin Liu:]

[Foreign Language] Okay. First of all, thank you for participating in Gulf Resources second quarter 2016 earnings conference call. We are very pleased with our results for 2016 second quarter. Considering the timing issue, now, I will turn the call over to Helen to review the financials, the Sichuan project progress summary and last, we will explain about the rationale behind our strategy.

[Helen Xu:]

So, now I’ll do the financial discussion on behalf of Mr. Liu and the company management. We are very pleased to have reported another strong quarter. Despite the economic slowdown in China, we have reported higher net income and earnings per share for both the second quarter and the six months. For the second quarter, net revenue declined 4% to $47.6 million. The cost of revenue decreased by 10% to $29.2 million. Gross profit increased 8% to $18.4 million. Selling, marketing, research and development, and general and administrative expenses, declined 55% to $1.2 million. Income from operations increased 19% to $17.3 million from $14.6 million. Net income increased 22% to $13.2 million. Basic and diluted earnings per share increased 26% and 22% respectively to $0.29 and $0.28 from $0.23 for the same period of last year. For the six months ended June 30, net revenues declined 3%, gross profit increased 10%, selling, marketing, research and development, and general and administrative expenses declined 31.4 million, sorry, 31.4% to $3.2 million. We had no exploration costs in the six months compared to $325,000 in the previous year. Income from operations increased 20% to $26 million. Net income increased 22% to $19.7 million. Basic and diluted earnings per share increased 19% and 17% respectively to $0.43 and $0.42 from $0.36 for the same period of last year. For the trailing 12 months, our primary earnings per share is $0.82, giving our company a PE ratio of less than 2 times. The strength in the second quarter and the first half was led by our bromine segment, which benefited from significantly higher bromine prices. Our chemicals and crude salt segment had some declines, primarily caused by slow growth and financial tightening of economy in China. In the press release issued yesterday, we have described at length the segment financial results and factors impacting all of the segments. Investors may refer to the press release and the 10-Q for all the detailed information. At last, we ended the quarter with cash of approximately $146.3 million, which equals to around $3.16 per share based on the 46,285,202 share count as shown on the balance sheet in the 10-Q. Net, net cash, which is cash minus all liabilities, it was around approximately $131.3 million or $2.84 per share. Working capital was approximately $202.8 million or $4.38 per share. Shareholders’ equity totaled approximately $349.9 million or $7.56 per share. We have provided considerable detail of the segment of our business including pricing and sales of specific products in both our 10-Q, which we filed yesterday and in the earnings press release as well, which we issued yesterday. Rather than spending a major percentage of this call reading this information for you, we will just refer to this document. Instead, we would like to spend the next segment of this call focusing on the common stock, intermediates and long-term strategy for building our business and recognizing shareholder value. Our balance sheet is extremely strong. We do not believe there is another pilot company, which is staring at low PE ratio and that share count to both its cash and its net net cash. Despite the slowdown in Chinese economy and a financial tightening that has impacted many of our customers, we remain optimistic about our business and continuing to believe our earnings and earnings per share. In 2016, we will meet our guidance issued early of this year. During this quarter, we’ve made substantial progress on our natural gas project in Sichuan Province. We have signed the agreement for the equipment needed for drilling and converting the natural gas, constructed the roads and related infrastructure needed to begin operations in the remote and mountainous region of Daying county in Sichuan province and continued to work with the government of Daying Province. We believe we will begin production on the first well in October or November of this year. Based on the developments we are seeing with Sinopec and other companies, we are even more enthused about the opportunities in Sichuan than before. Now, I’d like to turn the call over to our CEO, Mr. Xiaobin Liu, for a few comments. Xiaobin?

[Xiaobin Liu:]

[Foreign Language] We know our investors are disturbed by the weak performance of our shares, but no one is more disturbed than the members of the management. We have worked for many years trying to accelerate that are lower than what people receive in the United States. We have invested our careers in Gulf Resources and we need the price of stock to go up substantially to justify our many years of service with Gulf Resources. [Foreign Language] We have one expression in Chinese, [Foreign Language]. It means two people sleeping in the same bed, dreaming the same dream. We want the investors to dream the same dream we are dreaming. We are determined to work with our shareholders to create meaningful value. We would like to take a few minutes in this call, so you may better understand the rationale behind our strategy. Helen will now describe our thinking about creating shareholder value.

[Helen Xu:]

So now, I’ll follow Mr. Liu’s instruction and the comment from company management to describe about the company management’s thinking about creating shareholders value. The company has hired consultants and we also studied the market for small capitalization China companies listed in the United States. Virtually, all of these companies are selling at very low market costs. We have even [indiscernible] substantial percentage of their earnings, these companies are also selling at very -- at low multiple. In many years, we think the market for small capitalization Chinese stock in the United States is broken. Institutional investors will not look at the company is $25 million master tax and $45 million float and that effect will not cover our company. Fewer investment banks will not invite us to appear at their comprehensive. We have considered as an alternative at the present time, our market capitalization is full of Hong Kong and as well as China. Our core business has started, despite a slowdown in the Chinese economy. Further, the government may continue to match environmental regulation with some of our smaller and less financed competitors to close some of their facility. If this occurs, which should benefit, we believe our core business can grow substantially in the next several years, as the Chinese economy improves and competition lessens. This brings us to the consideration of our natural gas project. If you read the Wall Street Journal, you may recently have seen several articles about the alternative for natural gas in Sichuan province. According to the Wall Street Journal China, which has seamlessly solution problems is working to encourage the development and consumption of clean burning natural gas. China has substantial reserves of natural gas that’s actually in the Sichuan province, but the complicated geology has made tracking this gas difficult. There are two major Chinese state energy companies led by Sinopec and are spending billions of dollars to develop these resources. However, the Chinese government has also indicated its intention to open the development to private companies. Gulf Resources is in a unique position, we have the support with Daying County’s local government. This creates great opportunity for Gulf, resulting with our agreement with Government of Daying County. We may be able to develop what we believe will be substantial natural gas results. As an example, the company [indiscernible] just for natural gas segment. Many investors continually ask us why we’re not paying dividend or buying back stock. The answer is quite simple. We want to show the government of Daying County that we are well capitalized enough to be their partners. We know that once we started to produce natural gas, other companies including the major state-owned oil companies will come through into Daying County, trying to get a permission or licenses. We do not want to give the Daying government any excuse to find a second partner. Small private companies really find themselves in a position to develop potential large natural gas fields. We do not want to do anything that could risk this great opportunity. It’s a natural gas business and if successful as we currently hope, we believe this business alone could be worth many times of the current share price. In such instance, our company would become large enough to be of interest to institutional investors and analysts. It would also be of interest of investment banks in China as well as to the major Chinese energy companies. This will give the company opportunity to release our different exchange. Natural gas business, [indiscernible] in China are sold to one of the state owners, energy companies of 2018 would be huge wins for our shareholders. If the natural gas business is now successful as we currently hope, we will still have strong free cash for our traditional business. In this instance, we would consider to pay dividend, all buying back stock to give our long term investors or buy back some assets or to acquisition. The question is what is the timing and goals. We do manage that, a dividend of stock payback could push the current price to $2.50 or $3, however, as we have stated before, we believe we can create much higher levels of value. We know many of you believe we can do both, but we do not want to take the chance and still we have a better deal of the opportunities in Daying County. We are not going to ask investors to wait patiently. Within the next several years, we should have a much better idea of the potential in Sichuan. Our dream is to see if we can have stock that would set at $30 a share or even more. If our dream does not come to work, we will take other actions to make sure that shares of Gulf Resources become significantly less undervalued.

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

So at last this is a conclusion from Mr. Liu. I would translate for him. He says that, we want you to understand the company management have the same interest as you do. Last year, Mr. Liu as company CEO earned salary of $48,000. Our CFO and COO earned $32,000 respectively. We all have the substantial amount of option. Our financial futures are related to the price of our stock. No one is more interested than seeing the price of per share than we are. We know that you have been patient, we know our shareholders have been disappointed with the price of stock, but we give you a word that we are even more focused on the price of the stock than you do. So, operator, can we open up for the Q&A session?

[Operator:]

[Operator Instructions] Your first question comes from the line of [indiscernible]

[Unidentified Analyst:]

[indiscernible] in Chicago, Illinois, USA. Thank you for taking my questions. I want to congratulate you on the continued strong operating performance of the company, given the continuing macroeconomic challenges in China overall in a number of your end markets, it continue to, I think you’re doing an excellent job operating the company on behalf of shareholders. I do continue to think however that you’re not doing the best job you could in translating a strong operating performance into valuation for the shares and we’ve talked about this a few times on past conference call. I appreciate what you’ve shared in terms of your strategic thinking and how the development of the natural gas project could greatly increase the earnings power of the company. But you’ve also said that you think the US listing market for Chinese shares is growing and based on that, I failed to understand how you think a continued US listing will translate into the kind of share price expectations you have as the natural gas project develops over the next couple of years? So I have a couple of questions. First, about a year or a year-and-a-half ago, you explored options to relist in ChiNext. And you’ve said on this call that Hong Kong is out, because the requirements are too high and I understand that, but ChiNext market is a viable option as I understand it. So I’d like to hear management’s comments on plans to relist the company on ChiNext or another smaller exchange in the domestic PRC market in Shenzhen or elsewhere. Secondly, I’d like to ask about efforts management could take over the next couple of years to share their dream of a company that can earn $3 to $5 per share and have $30 more share price with investors, whether in the US, China or elsewhere. It seems to me that while investment banks may not be inviting you to investment conferences because of your small market CapEx and float you could absolutely get out aggressively and tell your story in company managed roadshows to see institutional investors in Hong Kong and Singapore, in the mainland CRC and in the US. I’ll stop there and look forward to your comments? Thank you.

[Helen Xu:]

Okay. Thank you. [Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

[Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

Hi Adam, here is the translation for the response from Mr. Liu for the first question; Mr. Liu said that because it’s no matter we wanted to list on China or Hong Kong and [indiscernible] we have to do the delisting from US market first. And to know it will be a long process. And about considering a second listing like natural gas, several listing as of [indiscernible] looks like it is not clear yet now, I'm sure the natural gas is strong enough maybe you can separate but until now this opportunity is not clear yet. Then the second question’s response it that the company is doing road shows and attending some conferences but looks like there are few opportunities now current available for the company and we are always looking for any opportunities to attend conference or the road show, maybe it did not have a good result as we expect but we will do more, put our more effort in the future to do this. Hello?

[Operator:]

Are you ready for the next question?

[Helen Xu:]

Yes.

[Operator:]

Your next question comes from the line of [indiscernible].

[Unidentified Analyst:]

I have a two part question for you, the first part is where do you think your shares are currently trading, where would they be currently valued, fairly valued at today. And my second part is, have you considered taking the company private at say $8 to $10 a share since the market hasn’t fairly valued your stock for month if not years, and so many other small Chinese companies have gone ahead and just taken their shares private. Thank you.

[Helen Xu:]

Okay, thank you. [Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

Hi Lewis, here is the response from Mr. Liu for the first question; he personally thinks that the company's current price should be $10 above. And the second response - second question’s answer is that because private - if you go to private, there are many issues involved and shareholders and the boss should be involved in this process, he personally thinks that now is not a good time and yes.

[Operator:]

You have a follow-up question from the line of Adam Waldo.

[Adam Waldo:]

I just want to follow up on my earlier question about a dual listing. It seems to me that there is a possibility that dual listing here, [indiscernible] one of the other smaller company exchanges in China that you could affect the crystallized value in the share as well you pursue a delisting from the US. And the related question I have is you make reference in your press release to there being some point in the future which valuing province would have enough confidence in your financial strength to allow you to fully exploit the resources that you have for natural gas in the province. Can you give us a better more specific timeframe for a point in time in the future at which you would reach that point with valuing province such that you might then subsequently be able to start to turn company's substantial excess capital to shareholders? Thank you.

[Helen Xu:]

[Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

So for the first question about regarding dual listing, company has observed and reviewed some other Chinese capital listed companies during this case, and we did not see any clear results or cases which have been successful, very successful in dual listing, so the company should think about this risk when we you to do a dual listing first. Second, regarding the timing question, the company already issued in the press release and we did mention in the press release as well we have signed the agreement to buy the equipments and we have build the grow and the infrastructure needed for the production, the production will start on November - October or November in this year on the first well.

[Adam Waldo:]

I’m aware of all that, thank you. I think perhaps my question got lost in the translation. What I'm trying to figure out at what future point in time approximately will you have reached the point of development of the natural gas project working with valuing province, that they have been satisfied about your financial strength, you’ll following off the line that you won't need to carry such a huge amount of excess cash on your balance sheet and can start to return that cash to shareholders through buy back and dividends?

[Helen Xu:]

Sorry, maybe I missed the.

[Adam Waldo:]

So I apologize if I asked the question poorly.

[Helen Xu:]

[Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

Hi Adam, here is the clear question answer, Mr. Liu said within next year while the - if we are going to our platform more wells permission exploration permission we can see the results if the cash needed there or not.

[Adam Waldo:]

I think understand that possibly you're saying in about another year or so meaning by mid to late 2017 you would reach that point regarding province on the project and you could start to release excess capital for shareholder share buybacks and dividends did I understand properly there?

[Helen Xu:]

Something like that, it is like – wait I just have to confirm this. [Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

It is like this because we also discussed this for you in the press release, this November or October we started production and after some time period of time we can see the results from this well improve if it is good we will continue to apply more well exploration from them and if that come down and support us, this cash would be used for those wells divestment. And we will see how much test left, if everything goes fine, we will have more wells commissioned and treating more, where we need more investment, if it not goes as we expected as good then we will have much more cash left and we will consider about paying dividend and buyback or other acquisitions as well.

[Adam Waldo:]

Again I understand all that I'm just trying to figure out is there an approximate date in the future when the development of project…

[Helen Xu:]

Like next year, we think…

[Adam Waldo:]

About one year from now. So let's say mid-to-late 2017, you should reach that point?

[Helen Xu:]

Yes, within in 2017.

[Adam Waldo:]

That's very helpful clarification can I just quickly call upon the other gentleman's question about going private. It seems to me that you all see a great value opportunity here, you have a great opportunity before you that’s going to take a number of years, there is a huge disconnect between how the US listing market for your stock is valuing all of this and the way your management valuing this. And so, you know you have a couple of ways that you can capture that value other than relisting which we talk about, one is going private and second is selling the whole company to a strategic buyer. Could you just give a little more commentary around why you have chosen to this point it would seem not to pursue either one of those options aggressively to realize value for management and your fellow shareholders?

[Helen Xu:]

[Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

So first of all if you go private there are many issues involved, it is not only decision from the company management, it is the whole shareholders and the boss also involved, especially those big shareholders, majority shareholders if they agree to go private, so we cannot make the decision. Certainly the US market did not recognize the value of the Chinese company including our company as well. We believe maybe it’s a temporary situation right now, that's why company wants to address as we can to try to get the company's value slowly recover and if we really cannot see a good opportunity or good future that our company can get - would recognize in US market go like private or list on other stock exchange is also our may be company's alternative but until now this decision has not been made yet.

[Adam Waldo:]

Thank you very much Mr. Liu and Helen for the very helpful answers in terms of understanding your thinking current. And I hope you will continue to make good progress and start to really get some realization of the value of the company and the trading price of the stock. Thank you.

[Operator:]

Your next question comes from the line of [indiscernible].

[Unidentified Analyst:]

The question you mentioned that the possibility of new regulation in China, the new environmental regulations could cause some of your competitors in the bromine derivative to close. Can you give more clarification on that, what timeline you would think that occur and what percentage let's say of production in the country could be affected? Thank you.

[Helen Xu:]

[Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

So, as you all know that Chinese economy is not strong as before and the Chinese pollution is also very bad in China, now so government is trying to put more stricter environment policy or regulation to protect the environment. So, for those companies which could not do good environment protection such as those more companies or they have very bad cash flow, they do not have enough cash to upgrade the environment protection equipment or upgrade their equipment for the environmental protection so they may close when they have bad cash flow. This make it the company's opportunities if they cause, of they are suffering from cash flow than this may give the company's opportunities to increase our market share and we will have more power to increase our product line and maybe also creating opportunities for company's acquisition of those smaller competitors and this is based on the company's expectation it is not a prediction.

[Operator:]

At this time there are no further questions in queue.

[Helen Xu:]

Hi operator if there are no questions, I think we can close the call today, thank you very much. Have a good day.

[Operator:]

This concludes today’s conference call, you may now disconnect.