Gulf Resources, Inc. (NASDAQ: GURE) shares may have had a miserable 2011, falling from highs near $10 at the beginning of the year to recent lows below $2.00. Just because a stock takes a hit, however, doesn't mean it's going to stay at those depressed levels. What is GURE really worth based on a rational assessment?
Simply put, Gulf Resources, Inc. is a Chinese chemical company.... bromine, salt, and oil/gas-related chemicals are just a few. Consumers won't see its products on the shelf of a grocery store, and GURE customers are energy companies, wastewater treatment plants, paper mills, and other industrial organizations.
And business has been good to say the least. Revenue has frown from $54 million in 2007 to $158 million last year. Profits grew from $12.2 million to $51.3 million in the same timeframe. Considering the GURE market cap is a mere $78.6 million (translating into a P/E of 1.55), it's certainly hard o argue that the share-value isn't solid.
The question is one of plausibility - is it really possible that Gulf Resources, Inc. is growing its business this rapidly, and this profitably? After all, in the shadow of so many exposed shams within the world of Chinese small cap stocks, 'too good to be true' is understandably a red flag. The answer is, the underlying conditions for such growth are actually better than you may imagine.
For starters, bromine prices reached record levels in 2010 (up 40% on a yoy basis then) - this isn't anything Gulf Resources could fabricate. As China's biggest bromine producer, the bromine price increase translated into higher revenue, even if volume-sales didn't budge.
Major infrastructure construction projects in China - including new water treatment plants - are also boosting GURE revenue, as the corporation supplies these plants with the needed chemicals. Gulf Resources, Inc. also offers additives and agents used to explore for, and distribute, oil - an industry (and commodity) that has been in recovery mode for the past two years, coinciding with the company's incredible recent growth. In fact, SINOPEC and China National Petroleum Corporation are two of its biggest customers.
Point being, the amazing success of Gulf Resources really isn't all that hard to believe... once you take a step back and think about what's going on in China, and globally.
A perfect stock? No, one couldn't say that. One of the common complaints about GURE is that management does a pretty poor job communicating with the investment community... which is a fair assessment. It doesn't change the overall success of the operation, but it doesn't help boost the confidence needed to support the stock's price. And ultimately, some investors note that the poor communications from Gulf Resources, Inc. underscores what at times has seemed like a bumbling management team. Perhaps that's a fair assessment too, though bear in mind cultural differences and the fact that the company's mere distance from the U.S. may create communication-logistics problems.
Moreover, bromine prices finally started to ease off last quarter, and profits did indeed fall. It wasn't disastrous, but it does reflect a fallibility that - in an odd way - confirms this isn't one of those 'too good to be true' situations after all.
Again though, none of these problems change the fact that the operation is a good one. And to be clear, there is a real operation; investors have visited the company's plant sites looking for evidence that its apparent bromine production jives with its SEC filings. And it does. More than that, Goldman Sachs own 1.18 million shares ($2.6 million) of GURE... or about 3% of the whole company. It's unlikely Goldman would touch anything it didn't have high confidence in.
Bottom line? As magical as it may seem on the surface, Gulf Resources, Inc. is legitimate and extremely undervalued. That will only matter to current owners, however, if the rest of the market starts to believe. That challenge may only be resolved with lots of time, so patience is needed here.