A Close Look at Gulf Resources
posted by The Traveller on Sunday, July 24, 2011

Gulf Resources (GURE) is currently trading at $3.80, down 64.46% for the year. The Trading China Tracker Score is 19 (Strong Buy), the Trading China Safety Score is 36% (High Risk).

Let's have a detailed look at Gulf Resources, a producer of bromine, crude salt, and specialty chemicals in China. The company has two operating subsidiaries, one for the chemicals, and another for salt and bromine. The stock has lost two thirds of its value since the beginning of the year, despite record results for FY2010 and positive pricing developments for its core products. Is it worth putting some money at risk here? Let's start with a detailed timeline of the past 18 months to see what exactly has been going on with this stock.

Gulf Resources Timeline

2010, February 10: Gulf Resources dismisses Morison Cogen and engages BDO Limited as its new auditor.

2010, April 14: The company raises guidance for fiscal year 2010 to revenue between $146 million and $150 million and net income between $44 million and $46 million. It says that "in addition to strong demand, a shortage of bromine supply is supporting prices."

2010, May 11: Gulf Resources reiterates revenue and net income guidance for 2010 with the release of First Quarter earnings.

2010, June 8: GURE announces the acquisition of bromine and crude salt manufacturing assets for $13.9 million, paid in cash (95%) and stock.

2010, August 6: The company files a mixed securities shelf for $120 million with the SEC.

2010, August 16: Gulf Resources reiterates revenue and net income guidance for 2010 with the release of Second Quarter earnings.

2010, September 10: Deloitte Touche Tohmatsu is engaged to perform an independent assessment over the Company's internal controls.

2010, September 14: The company defends the shelf registration in a press release, but clarifies that while it plans to use its common stock as currency for acquisitions, it will only happen at levels that are accretive to existing shareholders."

2010, September 15: Due to its depressed stock price, management announces that it has decided not to raise capital during 2010. The shelf registration remains effective.

2010, September 15: The company raises guidance for fiscal year 2010 to revenue between $151 million and $155 million and net income between $48 million and $50 million, as a result of a further increase in bromine prices.

2010, September 27: A $10 million Share Repurchase Program is announced. "We are confident that this is an optimal opportunity to leverage our strong balance sheet and invest in Gulf Resources."

2010, November 6: Independent director Biagio Vignolo resigns without stating a reason. He is replaced with Mr. Nan Li who works as financial controller at Global Pharm Holdings Group (GPHG.OB).

2010, November 16: Gulf Resources reiterates revenue and net income guidance for 2010 with the release of Third Quarter earnings.

2010, December: The company is anonymously accused of falsifying its financial statements filed with the SEC. Allegedly, there are discrepancies between data filed with Chinese authorities (SAT) and the Securities and Exchange Commission.

2010, December 8: Xiaobin Liu, CEO of Gulf Resources, responds to those allegations, says they were completely without merit and that all financial statements are accurate.

2010, December 14: The company follows up with a detailed response, confirms that its 2009 Annual Report is consistent with its 2009 SAT filings, and provides proof in form of an official letter from the local SAT bureau, which is confirming that there are serious discrepancies between GURE's subsidiaries' actual tax filings and the figures provided in the anonymous report. CEO Liu reassures investors that "our financial statements are accurate and we do not expect any adjustments to them. Our business has maintained its momentum and we do not expect any changes in business conditions in the foreseeable future."

2011, January 4: Gulf Resources announces the acquisition of a crude salt field from a state-owned company for $10.6 million in cash.

2011, March 2: Independent director Richard Khaleel resigns from GURE's Board, as the company he recently joined has requested that he resigns as a director of any public company. Khaleel's replacement is Mr. Yang Zou, a senior accountant with a Beijing-based CPA firm.

2011, March 4: Deloitte has issued a final report regarding the internal control assessment performed. Management believes that the Company's internal control is improved after implementing the recommendations made by Deloitte.

2011, March 16: GURE files its Annual Report for 2010. Reported revenue of $158.3 million and net income of $51.3 million both exceed the high end of the company's official financial guidance, which had been raised twice in 2010. Gulf Resources provides a favourable outlook for 2011, without giving specific guidance at this time. Internal control over financial reporting, as audited by BDO Limited in the 10-K filing, is still ineffective due to a "material weakness regarding management's failure to maintain effective controls over the identification of related parties and the disclosure of related party transactions in the company's consolidated financial statements."

2011, March 28: The company provides financial guidance for 2011. It expects revenue to range from $195 million to $198 million and net income to range from $64 million and $66 million. CEO Liu says he expects "the price of bromine to stabilize at a high level and possibly reach a new historical high price during 2011."

2011, April 26: Short-selling outfit Glaucus Research Group releases an extensive 29-page report on Gulf Resources. The group "initiates coverage" with a $0.00 price target, based on its belief that investors "are likely holding worthless paper in a shell company." Glaucus claims that "the two Chinese subsidiaries that own and operate the business are privately owned by a company controlled by the chairman."

2011, April 27: John Hempton of Bronte Capital, who is also short the stock, comes out in support of the Glaucus report. He argues that an inventory turnover of 169.5 times per year is not believable in the bromine industry.

2011, April 28: The company issues a detailed response to the Glaucus Report. Explains that it produces most of its bromine and chemical products on demand, therefore does not accumulate inventory. Provides 2009 SAIC filings for both its subsidiaries and concludes that reported SAIC financials are in line with SEC filings. Provides documents that should prove ownership of subsidiaries. Explains low shipping costs with customers directly picking up their products from facilities. Reiterates that Deloitte's internal control assessment did not find major issues in the Company's corporate governance and internal control system.

2011, May 2: Gulf Resources issues a second press release in response to the allegation in the Glaucus Report.

2011, May 11: Gulf Resources issues a third press release in response to the allegation in the Glaucus Report.

2011, May 16: The company reiterates revenue and net income guidance for 2011 with the release of First Quarter earnings. Says it expects bromine prices to remain at current levels for the remainder of the year.

2011, May 19: Another short-seller, Kerrisdale Capital publishes a hit piece, supporting the April 26 Glaucus report and adding its own claims, particularly that GURE's reported profit margins "are too good to be true." Kerrisdale concludes that Gulf Resources' "business claims are not within the realm of reason."

2011, June 7: GURE announces that it intends to register a subsidiary in Daying county, Sichuan province, in order to research possible resources for bromine and crude salt in Sichuan province.

2011, June 22: BDO Limited is reappointed as the company's auditor for the 2011 fiscal year.

2011, June 23: Gulf Resources announces that the share repurchase program, announced in September 2010, has been initiated, and the company has acquired 100,500 shares of its common stock through open market transactions.

2011, June 29: Independent director Yafei Ji resigns for "personal reasons." He is replaced by Mr. Tengfei Zhang, a CPA and Chairman of the Board of Supervisors of Shenzhen Kaili Industrial Co., a manufacturer of computer cables.

2011, June 30: Gulf Resources' ticker symbol changes from 'GFRE' to 'GURE'.

2011, July 13: Chairman Ming Yang, the company's largest shareholder (38.7%), declares that he will not pledge or sell any of his shares in the next three years. The company reiterates that it maintains 100% ownership in its subsidiaries, that its corporate structure remains linear and unchanged since February 2007, and that Gulf Resources maintains full control over its operating subsidiaries. Documentation for subsidiary ownership is attached to the 8-K Filing.

2011, July 20: The company withdraws its shelf registration that was originally filed on August 6, 2010. "We decided to withdraw our registration statement because we think our share price remains undervalued and do not intend to sell any securities under the registration statement."

Evaluation

Extremely Cheap Valuation - GURE has posted Earnings per Share of $1.48 for the fiscal year ended December 31, 2010. Official 2011 guidance calls for 24.8% to 28.7% net income growth, not taking into account any impact from potential acquisitions. During 2010, the company raised its guidance twice and managed to exceed the high end of its guidance range when it posted final numbers in March. At Friday's close ($3.80) the stock is trading at a forward P/E of 2.05, based on 2011e EPS of $1.85. That is about as cheap as it gets for a Nasdaq-listed growth stock.

No Shareholder Dilution - the company did not sell any stock in the past 18 months. The shelf registration that became effective in August of 2010 has been withdrawn earlier this month. GURE paid for all its recent acquisitions almost entirely in cash. Total dilution for existing shareholders over the past year was just 2.38%, which is among the lowest with U.S.-listed Chinese stocks. If GURE were a fraud then it is certainly not very clever with monetizing its stock.

Management Continuity - Unlike most other Chinese names, Gulf Resources has not been hit with a slew of management resignations. The Chairman of the Board, CFO and CEO are all with the company for a long time. There have been three director resignations in the past 18 months, but I believe it is credible that none of them were in disagreement. I also believe that it is part of good corporate governance if a company changes its independent directors every once in a while.

Strong Responses to Short Seller Attacks - Gulf Resources has been a short seller target for more than a year, the depressed stock price clearly reflects that now. Yet, the company has always been very quick, detailed and elaborate in its response to such attacks, unlike most other names in the China space. GURE does reliably provide documents to support its position and publicly files those with the SEC so all interested parties can review them easily.

Corporate History - This is the strongest negative aspect, and it is one that will never go away. Gulf Resources' public company life began with a China Finance (CHFI.PK) shell, in connection with reverse merger specialists like China US Bridge Capital, a subsidiary of CHFI. China Finance went dark in 2009, stopped filing anything with the SEC, and is now a 2-cent zombie stock. All of the other CHFI RTO's are either complete frauds or extremely questionable at least, including CNOA, JADA, BFAR and CHCG. It is a bit of a stretch to argue that Gulf Resources is the one exception in an otherwise smelly pit of dirt.

However, and here it comes, proclaiming guilt by association has never been a good or wise strategy. Gulf does surely wish - fraud or not - they would have never been associated with China Finance, but we should judge them by their actions after all. Maybe they have cut all the ties with CHFI, as they say they have, a long time ago already? The company's communication with investors in the past 18 months certainly doesn't bear any resemblance with other former CHFI clients.

Prime Short Seller Target - GURE has been attacked several times by multiple individuals and entities. Short interest in the stock sits at about 20% of the float and has been at a very high level for most of 2011. While the company has managed to stabilize the stock price since May, none of the recent announcements led to a meaningful recovery and investors are still sitting on a loss of 64% for the year.

Half-hearted Stock Buyback - There is no better investment for a company like Gulf Resources than investing in its own stock at just 2x forward earnings. But it took the company almost nine months to initiate its buyback program that was announced in September of last year. And the number of shares (~ 100k) that has been repurchased so far is very small for a company that supposedly has more than $80 million cash on the bank.

Ineffective Internal Controls - BDO attested that the company's internal controls are ineffective due to a "material weakness regarding management's failure to maintain effective controls over the identification of related parties and the disclosure of related party transactions." Gulf management hired Deloitte Touche Tohmatsu for an internal control assessment, and announced that DTT did not find major issues in the Company's corporate governance and internal control system. We don't know what issues Deloitte found, but we know that related party issues are one of the short sellers' most prominent claims.

Conclusion

Bottom line is, I don't have any conclusion - you have the choice between a "Yes, but..." and a "No, but..." approach. It is my belief that GURE's stock price will more likely appreciate from here than deteriorate, as the main reason for its low level is the general investing public's reluctance to put money in any name with a strong "but...", especially Chinese reverse mergers. We are now probably beyond the peak of "weeding out China frauds" and there are signs that investor appetite for the remaining Chinese names is slowly but steadily increasing from here.

There are compelling arguments for taking a position in GURE at the current level, however the arguments for staying away completely are also quite convincing. This is the prototype of a "high risk" stock which could easily double or even triple from here if/when market sentiment improves. But those risks are real and they are obvious to most market participants, so cautious investors should act accordingly.

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194 Comments:

At July 29, 2011 1:50 am , Anonymous Anonymous said...

You have a great site here, and I very much appreciate it very much.

For the GURE analysis above, I notice two points I'd like to comment on:

1.) "And the number of shares (~ 100k) that has been repurchased so far is very small" ... no, they rather quickly began the repurchase of shares once the long-delayed plan was put into effect in June, 2011. It was wise and beneficial for GURE to wait as they did before implementing the buyback, since they get to buy back more shares for the same amount of money! What is better: buyback 800,000 shares at $12 per share or buyback 2.5M shares at average of $4 per share? (The stock jumped from about $6.50 to $12.00 during a 10 week period after the buyback plan was announced last year!) Short-term traders/flippers might not like the delay, but for longterm investors, GURE's delaying until able to buy back at the lower prices of this summer is much preferred.

And it is misleading to imply that the 100,500 shares is all the shares which GURE bought back to date, since after announcing that initial purchase, GURE stated "The Company plans to update investors on the status of the repurchase program on a quarterly basis, in conjunction with the release of its financial results and filing of its quarterly and annual reports ..." ... so an update will occur quarterly, and it seems very certain that purdent purchases are being made currently on the open market at current low prices. Smart buyback implemented! Please take the implementation of the buyback off the list of negatives. How it was timed and implemented is a great positive!

2.) You say that the strongest negative is GRUE's listing history. But that shouldn't be viewed as a *current* negative, when GURE has demonstrated through high quality audits that it has the sales and earnings and money in the bank as they state ... making it way beyond any reasonable question that GRUE is a real solid business with sales, earnings and cash assets as stated. GRUE's genesis, via an RTO assisted by China Finance Company is past history, and GRUE now clearly has proven itself as a viable entity, with a solid business, and even with very well-known strong support and backing of the local government.

I hope you buy the stock very soon, because GURE is destined to eventuually sell at a P/E reflecting its strong growth, earnings and assets ... which will bring it to over $20 per share in 1 to 3 years. (GRUE would be at $20/sh right now if trading at a P/E of just 10 times current year's expected earnings of over $2.00 per share!) And thereafter, the huge Daying project and expansion will catapult GURE to even much higher levels. The current price of about $4.00 is an extreme bargain.

 
At July 30, 2011 6:14 am , Blogger Chickenpookie said...

GURE is trading at $3.50 now, I smell another pump and dump in progress. Sad but true, no reflection on your blog.

 
At August 03, 2011 9:12 am , Anonymous Trading Resources said...

I am glad, you shared this. This is truly helpful. Thanks !

 
At August 07, 2011 9:13 pm , Anonymous Anonymous said...

Thank you for your assessment. This is one of the most unbiased view of GURE I have read online. The short sellers are definitely in control for the past couple months. However, they are expected to exit very soon according to Pxxxxx.

 
At August 15, 2011 9:12 pm , Anonymous Anonymous said...

Great job,but keep in mind gulf repaid a 21.3m non interest bearing loan to china finance subsidiary
Shenzhen Hua Guaranty on february 6 2009 for .50 cents on the dollar in gulf stock. As I recall the
stock was about .45to .50 and they issued 21,287,493 shares in full payment of the debt. It is
curious that china finance would have extended this loan in the early years of gulf's existance
if they were involved in fraudulent activity. However this may account for some bad blood and
the possible genesis of the large short position in New York ,the former headquarters of china
finance. There is no love lost between gulf management and that rogue outfit.

 
At August 16, 2011 7:07 pm , Anonymous Anonymous said...

Q2 results show that the buyback was a deliberate smokescreen and a deception. No buyback occurred other than the measily 100,500 shares they reported at what was supposed to have been the onset of a major $10M buyback. That constitiutes deliberate fraud of shareholders. I sold all my holdings today.

 
At September 19, 2011 12:38 pm , Anonymous Anonymous said...

A recent article in Seeking Alpha from a shareholder who visited and took photos of GURE facilities exposed the lies of the "hit pieces" of "glaucus" and "kerrisdale".

The local government of Yangkou Town, Shouguang City has agreed to compensate the company RMB 8,599,835 (approximately USD 1.3 million) for its Factory No. 4 relocation expenses and maintenance cost also. It's one for the factories that the aforementioned shorters claimed are not exist!

The company said that under the current circumstances they will not raise cash by a public offering due to the very low pps and they will need a loan for their new projects. For the same reason they didn't continue their buy back program and the didn't declare a dividend, as many short term investors wanted. So, they sacrifice any action that could pump the pps for the short term, to invest in the company (not the stock) and the future its growth.

 
At October 29, 2011 3:47 am , Anonymous Simon said...

Not seen any reviews of WUHN on your site and it's a Chinese micro stock, just like to point it out.

 
At November 06, 2011 3:42 pm , Anonymous Anonymous said...

GURE sure sounds like a fraud to me.

Put your money into CNTF instead. Best Chinese stock out there, with plenty of advertisements, demos, etc, to prove that they are real. Plus a partnership with Qualcomm.

 
At November 16, 2011 4:22 pm , Anonymous Anonymous said...

"GURE sounds like a fraud"

"SOUNDS" is not enough.
-GURE provided several verifications from local government and agencies for its production capacity and its facilities.
-GURE Chairman and his family filed with the SEC to hold all their shares, nearly 39%, for THREE years.
-Grant Sherman is checking GURE and they verified its production as well.

In the last CC GURE management admitted that they are approached by investment bankers and a few private equity firms talking about the privatization processes and the procedures. They stated that they will take these suggestions into consideration and discuss with the BOD.

-To bash without any evidence just to promote another chinese stock like CNTF is lame.
-To stay short in a P/E 2 stock which is in talks to go private is insane.

 
At December 22, 2011 9:41 am , Anonymous Anonymous said...

The buyback was a total, deliberate lie by the CEO, with no explanation or apology. He's not going to come out and tell you that he mockingly lied to you, because he has contempt for you, whom he sees as suckers for believing in truth and honesty. The CEO has no concept of truth and honesty as being something of value ... he has the mind of the predatory psychopath. Why else would be create such a lie to feed you?

And "production" was never verified, where "production" is defined as the bromine produced by the company plants from raw product produced by the company's own bromine wells. All that was verified was that the physical plant assets exist and that they have such-and-such *CAPACITY*. Alleging that "production has been verified" is another just lie and smokescreen to deceive investors.

 
At January 11, 2012 8:41 am , Anonymous Anonymous said...

Dear "mizesaw" (that's is your alias in Yahoo! boards), you came after 7 months to refer to the buy back program, which ended on July 2011. You did the same in the Yahoo board, after you didn't find anything more recent to criticize GURE.

The company explained why they repurchased only 100,000 shares: they could not raise money from the market due to the low pps and they needed cash for the Daying project and new acquisitions. And definitely, they didn't lie about that because they made another acquisition for nearly $10M, the second in 2011. They spent about $20M for acquisitions in 2011, so they have cash and they use it.

What it's expected in the next three moths is the news about the Daying project and how much money it will need.

 
At January 23, 2012 7:28 pm , Anonymous Anonymous said...

"Anonymous At January 11, 2012 8:41 AM",

They didn't spent 20 million but 34 million in 2011 for acquisitions.

They will also need a lot of money to invest in Daying county, where they found recently 1.53g bromine per liter (confirmed by a third-party independent testing expert), seven times more from its brine water resources at the Company's bromine factories in Shandong Province.

It's not difficult to understand that one only factory in Daying can double GURE bromine production.

 
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