Gulf Resources (GURE) is known to be a leading manufacturer of bromine, crude salt and specialty chemical products in China. As with many other Chinese firms, the company had a significant decrease in its stock price during 2011 owing to fear of fraud spreading among investors. However, looking closely into GURE’s legitimacy proofs, operating performance, financial condition and business outlook, I believe that GURE is one of the best investment opportunities I have ever seen.
Legitimacy Proofs
- The company provided verifications from three local government agencies that validate the Company's market leadership, number of facilities, and 2010 production volume.
- The Company has received an appraisal report assessing its production capacity from a third-party independent international appraisal firm, Grant Sherman Appraisal Limited (“Grant Sherman”).
- GURE’s Site visit by an individual investor has confirmed 2011 Guidance.
Given the above detailed proofs, it’s no longer logic to question the company’s legitimacy with baseless accusations.
Operating Performance
During the third quarter of 2011, GURE has retained strong operating cash flow despite the decrease both in sales volume and price of bromine. In fact, bromine prices have already picked up and stabilized around $3900 (25,000 yuan) per metric ton after bottoming in November. Furthermore, the company has proven profitable even at the lowest bromine prices of $1680 per metric ton recorded in early 2009. In other words, GURE is a “Cash Cow” company.
Financial Condition
As of September 30, 2011, Gulf Resources had cash of $85.8 million, current liabilities of $17.1 million, and current ratio of 6.7:1. The strong cash position coupled with the consistently positive operating performance give GURE the peace of mind in withstanding the moderate slowdown in China’s manufacturing activity.
Business Outlook
Here comes another favorable story. Between 40% and 50% of bromine consumption is for Flame Retardants [FRs]. In 2010, demand for FRs, particularly in the construction and electronics industries, increased as the economy recovered. U.S. consumption was forecasted to rise by 2.7% per year through 2013 as a result of bromine use in insulated wire and cable and in construction as well as more stringent fire codes and flammability requirements. Recycling efforts in Europe for Brominated Flame Retardant [BFR] plastics in electrical usage may also increase the demand for BFR products. In 2007, Asia and the Pacific region were forecasted to be the leading consumers of FRs,with consumption rising by 7% per year.
Moreover, several companies were pursuing new markets for bromine to mitigate mercury emissions at power plants. Bromine compounds bond with mercury in flue gases from coal-fired power plants creating mercuric bromides. Wide acceptance of the new technology would likely increase the demand for bromine.
Bromine water treatment is also expected to show growth during the next several years. Bromine has been found to be safer than its substitutes in sanitary preparations because bromine has a higher biocidal activity level for the same volume of product.
Now, how is GURE valued?
If you buy GURE stock at $1.70 (Dec 14, 2011 closing price), it’s just like buying $100 for only $69 in cash. Unbelievable, but that’s just what it is. As of September 30, 2011, the company had cash of $85.8 million, or about $2.47 per share. Thus, ignoring all GURE’s production factories, customer base and business relationships, the stock price is only 69% of its current cash in banks, not to mention the continued cash generation by the company.
In conclusion, GURE looks to provide an unbeatable opportunity for investors. The old accusation about production claims are currently nonsense. I feel very comfortable that GURE is a well-managed company with extreme undervaluation.
Disclosure: I am long GURE.
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