Gulf Resources, Inc.
Q3 2015 Earnings Call Transcript

Published: 12 Nov 2015

[Operator:]

Good day. My name is [indiscernible] and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Gulf Resources 2015 Third Quarter Earnings Conference. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session [Operator Instructions]. Thank you. I would now like to turn the call over to our host Ms. Helen Xu. Madam you may begin your conference.

[Helen Xu:]

Thank you, operator. Good morning and good evening ladies and gentlemen for those of you from China, U.S. and now we’d like to welcome to all of you to Gulf Resources’ third quarter 2015 earnings conference call. My name is Helen, the IR Director. And today our Company CEO Mr. Xiaobin Liu; COO, Mr. Naihui Miao; and CFO Mr. Min Li will also join this call today. I like to remind you to 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 number of risk factors including, but not limited to, the general economic business conditions in China; future product developments and production capabilities; shipments to end customers; market acceptance of new and existing products; additional competition from existing and new competitors from the bromine and other fields, including plant [ph] cost 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 statement, and the risk factors detailed with the Company’s reports filed with the SEC. Accordingly, our Company believes that the expectations reflected in these forward-looking statements are reasonable and there can be no assurance of such will be prove to be correct. In addition, any reference to the Company’s future performance reflects the management estimates as of today, the 10th of November, 2015, Gulf Resources assumes no obligation to update these projections in the future and as market conditions may change. For those of you who are unable to listen to the entire call at this time, a replay will be available for 14 days at the Company’s Web site. The call is also accessible through the webcast and the link is accessible through our Web site. Please look at our press release issued earlier for details. First of all on today’s call, we appreciate all of you in our call. In the past we have had some questions about timing of our call, our normal time 8 AM U.S. is 9 PM for investors in China and Hong Kong and 5 AM for our investors in California. So we thought it would try this time to give those investors a better time without making our investors [indiscernible] because of that they are too late. Before I cover the quarter, we will have some brief introduction remarks from the Company’s CFO Mr. Min Liu, normally this was done by Company’s CEO Mr. Xiaobin Liu, but because his phone calls have problem he will do the QA part later, but his remarks will be done by Company’s CFO Mr. Min Liu.

[Min Li:]

Thank you very much for attending conference of 2015 and this conference call. This has been -- as you all know this has been a very tough time for economy in China. Every day you see second large [indiscernible] in commodity again no [indiscernible] at the beginning of the year that the Chinese economy would [indiscernible] you probably would have assumed that Gulf Resources would do badly for this year because we are in many economic sensitive industries. Yet we did not do badly, we did extremely well, our net income increased 112% and earnings per share increased 77%. Price from Bromine plunged sharply in the face of the economic slowdown in China. Should the economies improve in the future, prices of it should continue to rise and we would generate substantially higher income in this segment. Our acquisition of SCRC [indiscernible] had proven be a successful one, which sees profits exceeding our expectation. We have diversified our business in the manner that reduces risk from economic slowdown and gives us more balance and potentially faster growing strength of revenue and profit. We are also making excellent progress in the local government in Sichuan Province and our screaming [ph] application. Our balance sheet remains extremely strong which gives us the opportunity to continue to transfer our company that continues [indiscernible] for our natural gas project coupled with the success of SCRC and expected improvement in the Chinese economy could provide highly significant benefit to corporate results and our shareholders in the years ahead. So we are very excited about this opportunity. We will cover some our issues later in the call including the Q&A session managed by Mr. Liu and now I will turn the call back to Helen to review the quarter.

[Helen Xu:]

Thank you Mr. Liu. So now I will summary for this quarter’s financial and operating. We are very pleased with the result of this quarter. In the three months ended September 30, 2015, the company’s net revenue increased 37%, gross profit increased 69%, net income increased 112% and earnings per share increased 77%. For the year-to-date net revenue increased 43%, gross profit increased 67%, net income increased 79% and earnings per share increased 54%. For the third quarter, our net revenue increased 37% to 42.6 million for the three months period ended September 30, 2015 and increased up approximately around $11.5 million of 37%. This increase was primarily attributable to the consolidation into the business of SCRC which collectively contributed almost $11.8 million to our current net revenue. Revenue from the Bromine product segment increased slightly 6.5% to 14.9 million from 13.9 million, whereas cost of Bromine declined by 16%, the selling price increased almost 11% from $3,162 -- from $2,855 to $3,162. Revenue from the Crude Salt segment increased 14.2% to $3 million from $2.7 million, while our volume declined slightly. The average price per ton of crude salt increased 19% to $33.26 from $27.88. Given the softness in the Chinese economy and the fact that lower sales normally lead to lower prices, we’re very encouraged by the price increase we are experiencing. We expect the selling prices to remain at current levels through the end of 2015 should the PRC government’s macroeconomic tightening policy remain in place. Revenue from the chemical segment increased 97.4% to almost 24.6 million from 12.5 million. While most of the increases were attributable to our acquisition of Rongyuan Chemical, SCRC. Our other chemicals businesses in aggregate did show an increase. For the three months ended Sept 30, 2015 and 2014 respectively, research and development expenses were $69,403 and $30,985, an increase of 124%; Write-offs on property, plant and equipment were 819,000 and 673,700 an increase of 22%; General and administrative expenses were 831,900 and $1.9 million, a decrease of 56%, while other operating income were 115,000, and 116,900 a decrease of 2%. Income from operations increased 108% to 13.9 million from 7.2 million for the same period of 2014. As a percentage of sales, income from operations was 32.6% compared to 21.5% in the previous year. The increase in net income was due to the acquisition of SCRC, which contributed almost 4 million higher pricing in the bromine and crude salt segments, and a small improvement in our other chemical business. Net income increased 112% to $10.7 million from $5 million. This significant increase was primarily attributable to the consolidation in 2015 of SCRC, which contributed almost 3 million to our net income for the three-month period ended September 30, 2015, as well as to improved pricing and margins in bromine and crude salt as well as a slight improvement in our original chemicals business. Our effective tax rate for the three-month period ended September 30, 2015 and 2014 was 24% and 26%, respectively. Basic and fully diluted earnings per share increased 77% to $0.23 from $0.13 reflecting much higher earnings and a somewhat higher share count as a result of our acquisition of SCRC. We ended the quarter with cash of almost 120.9 million, the equivalent to $2.61 per share. Net cash was 91.98 million and equivalent to $1.99 per share. Working capital was 176.6 million equivalent to $3.82 per share. Shareholders’ equity was 338 million, the equivalent to $7.31 per share. For the nine months, revenue increased 43% to 126.9 million from 88 million. This increase was primarily attributable to the consolidation in 2015 of SCRC, which collectively contributed almost 40 million to our net revenue for the nine-month period ended September 30, 2015. Gross profit was 42 million or 33% of net revenues compared to 25 million or 29% of net revenues for the same period in 2014. The increase in gross profit was due to higher sales in chemicals, reflecting the acquisition of SCRC, as well as to higher margins in bromine and crude salt segment. Research and development costs increased 92% to 181,000 from 94,000. Exploration costs were 325,800 still have $25,800 from deal. Write-offs on property, plant and equipment increased 22%. General and administrative expenses increased 7% while other operating income declined 3%. Income from operations increased 79%, reflecting the acquisition of SCRC and improved margins in the bromine and crude salt segments. Net income increased 79% to $26.8 million from $14.99 million. Primary earnings per share increased 53.8% to $0.60 from $0.39. The diluted earnings per share increased 52.6% to $0.58 from $0.38. During the first nine months of fiscal 2015, cash flow was almost $34.9 million or equivalent to $0.75 per share. Now I will like to turn the call back to the Company's CFO, Min Li for some additional comments.

[Min Li:]

Now I would like first focus on the development to Sichuan project. We have been working closely with the local government in the province I, including Mr. Liu, we have debt repayment from our [indiscernible] because the natural gas is in very rural and mountainous. The local government want to see our plan for building the need infrastructure, so that we can respectively develop the natural gas business. We’re pleased that this process is both complicated and difficult, because it will be a as a barriers to entry from other potential competitors. In addition corruptions charges against many of the leaders of the Chinese natural oil companies had forced the local officials to conduct greater than normal due diligence. Once again we are pleased with this additional due diligence as it is greatly entrenches our long-term potential in this region. We continue to be very opportunistic that we may receive the permission to do our first sale soon and that we will be able to -- then we will again to obtain more permission to drill many more other wells. But we continue to believe that opportunities to come will be a transformative opportunity for Gulf Resources. Next, I want to talk about your request from many investors that we pay dividend. We have guided impact on dividend head by other U.S. listed Chinese company. In most cases the dividend had a positive, but a limited on a price of stocks. The problem is that U.S. investors don’t trust Chinese companies. We each do work different, we wish we could do something more than just talking to get a fair value of business. We have delivered good earnings, we have work to communicate with invested and have recently going on [indiscernible] to the U.S., that looks like it’s still difficult to overcome prejudice against smaller Chinese companies in your market. We believe the best way to overcome is prejudice is to try to become very large and very profitable company. We’re committed to increasing shareholder value. But our goal is now to have ourselves to go from $1.85 to $3 better or maybe or even $4. Our goal is to have our stock selling price to $38 to $40 per share. These are just assumptions but let’s assume the economy in China improves and bromine and crude salt prices continue to rise. In the past we have earned almost 60 million in these two segments when both businesses and the fuel resources that we have them now. Our chemical business is currently earning about $25 million revenue and the revenue should continue to increase if we are able to drill 20 wells this could add another 48 million in the revenue. In total this could give us historical [ph] revenue of over 140 million or more than $3 per share of revenue. Of course there is no guarantee that this will all [indiscernible], however it seems, it did work out and if our company was earning revenue of 140 million or $3 per share of revenue we will be large and profitable enough to list an exchange in the world and would be valued on a comparable basis with other natural resources company. Our management is focused on building a very large and profitable company for the long term. When we bought SCRC its investors agreed to a value of shares lock up agreement as they’re our boss, it seemed a very long term long [indiscernible] selling and pledging. We are all committed to the dream of having $20, $30 or even $40 stock. To do that we want to hold our cash so that we have enough cash flow to finance the potential trading opportunities in [indiscernible]. If we do not obtain sufficient or approval to dig many wells we will have a large amount of excess cash and we’ll find a way to returning that cash to shareholders through dividends of stock buyback. But at the present time we plan to wait to see the potential in the trench before deciding on returning capital to shareholders. We believe there is a very real potential of have a $30 or $40 stock shares in the next five years. We owe to our self and to company investors as well to give our firm a chance and now I will turn this call back to Helen.

[Helen Xu:]

Thank you, Mr. Liu. So now we will open the call for questions. I will translate the question for Mr. Li and Mr. Miao. In order to allow everyone to participate in this conference, so please limit yourself to two questions. Operator?

[Operator:]

[Operator Instructions] And our first question comes from line of Adam Waldow.

[Unidentified Analyst:]

Hi, Adam Waldow, with Small [ph] Partner LLC Chicago, Illinois, USA, thank you for taking my question. Congratulations on another strong quarterly operating performance. I wanted to see if you could give us a bit more of an update on the expected timing of the natural gas permit approval at least for the initial permit in Sichuan Province. On your last quarterly conference call you indicated that you were hopefully -- actually very hopeful that those approvals could well be received before the end of calendar 2015, can you give us an update on your current expectations as the timing of those initial permit approvals?

[Xiaobin Liu:]

Okay, thanks, Adam. So now our estimate for this approval has still the same. We still estimated by this year we'll get the approval to expect the natural gas in Sichuan projects. And that's why we're doing the SCRC communication and discussion with local government including me as I traveled a long route from [indiscernible] to Sichuan and Mr. Li you're travelling a lot to Sichuan and sometimes stay there for long time. So we still expect we will get it by this year and after we get it we will start to extract then move to higher level like after we get it we will from the local government approval then we will start it, then we will join the local government together to apply a higher levels, provisional levels, performance level approval for this natural gas.

[Unidentified Analyst:]

So based on that timeline of the local approvals by calendar year end, when do you think you could start to drill the first well in Sichuan?

[Xiaobin Liu:]

We expect it very soon once we get to the agreement approval from the local government then we will start to do the Company visitation in Sichuan and start doing investment in Sichuan local and we try to -- we think by the beginning of the first year of 2016, first half year of 2016, we will start like the active exposure.

[Unidentified Analyst:]

Okay, thank you. And then finally in your first quarter press release and conference call of this year you've discussed that the board and management were exploring steps to remove the chronic undervaluation of the Company share price on the U.S. exchange via a dual listing or relisting in either Hong Kong or Mainland Exchange, could give us an update on what conclusion had then reached on these options during the last six months?

[Xiaobin Liu:]

So considering that the Hong Kong Stock exchange market is not performing well. So until now our company’s stock and management did not reach final conclusion yet.

[Unidentified Analyst:]

So for the last fund you’ve been thinking about it but you haven’t reached to any conclusion? I don’t mean to be difficult, but the fact is 80% of cash and 30% of book value, it’s been that way for a long time. The company is doing a great job operationally, what catalyst is not a dividend, is not a relisting, what catalyst do you expect to deliver to close that chronic valuation you have if you're just to remain listed in the U.S.?

[Xiaobin Liu:]

So I think -- so Mr. Liu’s comment is that he thinks, we know what we can do the best in to improve the company’s operation and even those stock prices is not performing well, but we believe increasing the company’s performance there and operation our share price will get a better valuation.

[Operator:]

[Operator Instructions] And our next question comes from the line of Peter Seirra [ph].

[Unidentified Analyst:]

First I just have a comment which is, I think that there was in the text -- not in the text, in the translation a miss statement, I think when you were talking about size of the company, you said you -- they said it was translated as 140 million in revenues, but as I was listening to the Chinese I thought that was 140 million in earnings, am I wrong?

[Helen Xu:]

Wait a moment, let me check, maybe my mistake, sorry about it.

[Unidentified Analyst:]

$3 a share, you do want 140 million revenues?

[Helen Xu:]

Sorry, it should be earnings, not revenue.

[Unidentified Analyst:]

Okay, that’s what I thought I said, but you're already doing more than 140 million in revenues I just wanted to -- that’s what I heard, but I just want to make sure my Chinese was --.

[Helen Xu:]

It's my mistake, it should be earning.

[Unidentified Analyst:]

So I want to understand this plan, the -- is your view that as a small company that -- even though you're doing well and have a lot of cash that you will not be recognized, that you're too small to be public in Hong Kong or that you can’t get recognized in United States and that your strategy is to try to -- if the natural gas comes through you get to be a big company, so that you could list in Hong Kong or China is that what I am understanding?

[Helen Xu:]

Sorry, could you just repeat again your question.

[Unidentified Analyst:]

Is the strategy at your current size -- I am assuming that your current size at current level of profitability that you still little small for the Hong Kong exchanges and what I’m asking is, is the corporate strategy to try to develop the natural gas so you can be large enough to go public either at to be public in Hong Kong or China instead of the United States?

[Xiaobin Liu:]

Yes we are trying and the only thing in this sector as well.

[Unidentified Analyst:]

So the first strategy is, get the -- hope that you could get the natural gas and can go out to 140 million in earnings or some number, grow to very large number and then be public somewhere else. And if you don’t get that then the strategy is to return some capital to shareholders. Am I understanding that correctly?

[Helen Xu:]

When you say public on other places you means dual listing or just not U.S. markets and --.

[Unidentified Analyst:]

Or dual listing or re-listing or something.

[Xiaobin Liu:]

Yes, but listed on other stock exchange market, one consider -- its one factor we should consider, always been consider. But if we do this there are many questions out of the box like, if we can give the company long term that value for the company’s stock and some part of company operations. So in the other stock exchange market

[Unidentified Analyst:]

I wanted to ask about the overall what you’re seeing in the economy because I see prices have gone up even if the while the economy has been bad, so you see any signs that the economy is going to get better or do think it will stay where it is? Or get worse?

[Xiaobin Liu:]

We think that like, we all see that the Chinese economy has slowed down, there are many hurdles. So the Chinese government also realize these problems for long-term and they are always trying to put the economies into the policy and try their best to increase the China economy inclusive at the Chinese central government. We have been trying this continually and we can see that as some commodity prices tend to increase and we believe including our results, including our bromide, as natural gas and crude salt as well, we believe the prices will be -- maybe going to increase and this Chinese economy will become better.

[Operator:]

[Operator Instructions] And our next question comes from the line of Austin Hui [ph].

[Unidentified Analyst:]

I will say this in English. Stock price is depended on the amount of supply, how to create a better demand is not only a wish, we need to do something, what we should do, we need to have something to make people think this is good investment, good investment only need $0.05 a quarter or $0.20 a year. That will create a 10% of investment return for investor and that only use last only 8% internal cash reserve and only 20% of company's profit that will create a great demand of the Company's stock. So even today of the Company price should already be $30 or $40 which currently gas and expectation and operation. So I hope that company will not think something, but do something for our investor to create the liquidity and make more people invest in this company to create this demand, and this consideration is stock is not as something you wish, it is on demand and the supply. I hope the Company and the management team and the Board should understand this basic philosophy of stock market. Okay that my comment. I really want the company could get best dividends, as later as you gather the saving account that will create a good investment. Thank you.

[Xiaobin Liu:]

So this is the response from Mr. Liu, he said that we have already explained our company current [indiscernible] and we want to keep this company as a big earnings company, not for current, but for long-term as well. So that’s why we want to catch this potential opportunity in Sichuan, after that will be reward our cash back to our shareholders and the investors. To reward them maybe through dividend or share buyback. But company wants to combine the short-term current and long-term big earnings, overtimes, but not just short-term business.

[Operator:]

And at this point we are at the top of the hour. This brings our call to a close. Thank you for joining us today.