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Edited Transcript of GURE earnings conference call or presentation 14-May-19 12:30pm GMT

Q1 2019 Gulf Resources Inc Earnings Call

WEIFANG May 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Gulf Resources Inc earnings conference call or presentation Tuesday, May 14, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Helen Xu

Gulf Resources, Inc. - IR Director

* Xiaobin Liu

Gulf Resources, Inc. - CEO, President & Director

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Presentation

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Operator [1]

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Good morning. My name is Kyle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Gulf Resources 2019 First Quarter Earnings Conference Call. (Operator Instructions)

Please, Helen Xu, Director of Investor Relations, you may begin your conference.

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Helen Xu, Gulf Resources, Inc. - IR Director [2]

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Thank you, operator, and sorry for those of who are listening to this call. We are 5 minutes late due to a line problem. So good morning to ladies and gentlemen, and good evening to all of those of who joining us from China. And we'd like to welcome all of you to Gulf Resources First Quarter 2019 Earnings Conference Call. My name is Helen, the IR Director. Our CEO of the company, Mr. Xiaobin Liu, will also join this call today. I will be offering translation for his comments for the company's operating results during the Q&A section as well.

I would like to remind you to all of our listeners that in this call certain management's statements during this call will contain forward-looking information about Gulf Resources Inc. and its subsidiaries business and products within the meaning of the Rule 175 under the Securities Act of 1933 and Rule 3b-6 under the Securities Exchange Act of 1934 and are subject to the Safe Harbor created by those rules. Actual results may differ from those discussed today taking into account a number of risk factors, including, but not limited to, the general economic and the business condition in China, future product development and the production capabilities, shipment to end customers, market acceptance of the new and existing products, additional competition from existing and the new competition from the bromine and the other oilfields and the power production chemicals, changing technology, the ability to make future bromine assets and the various other factors beyond its control.

All forward-looking statements are expressly qualified in their entirety by this cautionary statement and the risk factors detailed in the company's reports filed with the SEC. Gulf Resources assumes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Accordingly, our company believes the expectations reflected in those forward-looking statements are reasonable, and there can be no assurance of such will prove to be correct. In addition, any reference to the company's future performance represents the management's estimates as of today, the 14th of May, 2019. For those of you unable to listen to the -- this entire call at this time, a replay will be available for 14 days at the company's website. The call is also accessible through the webcast. A link is accessible through our website. So please locate our press release issued earlier for the details. (foreign language)

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Xiaobin Liu, Gulf Resources, Inc. - CEO, President & Director [3]

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(foreign language)

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Helen Xu, Gulf Resources, Inc. - IR Director [4]

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Okay. I will do the translation for Xiaobin Liu's remarks.

[Interpreted] He said that, hello, everyone. Thanks for attending Gulf Resources 2019 First Quarter Earnings Conference Call. So the company had past 18 months extremely difficult for it. The CEO of Gulf thinks the results [in this year's state] that now we are beginning to get our major facilities back in operation, and are very excited about the potentials of our business.

Firstly, I will give you the financial results summary. And to make the call more efficient, we have received [positive] questions from many of our investors, which we'll answer during the second section of this call. At last, Mr. Liu, the CEO will provide his comments during the question-and-answer section. So firstly, let's look at the financial results.

On April 2, 2019, Gulf Resources received governmental approval to open bromine factory Number 7, which is a combination of factories Number 5 and Number 7, and subsection factory of Number 1, which now called Section Number 4. Each factory had begun operations in April 2019. And during the first quarter of 2019, Gulf Resources commenced trial production at its natural gas in [central] province. And, thirdly, despite a lack of operation for most of the past 18 months and a substantial investment in the coming new facilities, Gulf Resources ended the quarter with cash of approximately $179.7 million, which is equivalent to approximately $3.83 per share.

The net-net cash, which is cash minus all liabilities, is approximately $163.8 million or approximately $3.49 per share. Working capital of approximately $176.1 million or equivalent to $3.75 per share. Shareholders' equity of approximately around $295.1 million or equivalent to $6.29 per share. So now let's look at the second section about the specific [up questions] and answer from our shareholders.

Now let's look at the bromine and crude salt business segment.

Question one. Can the company give us an update on the standards of the factory you have already opened?

Answer. Yes, as we noted in our April 2019 press release, the company had commenced production in its 2 factories.

The first one, which we call factory Number 7, it's a combination of old factory Number 5 and Number 7.

And the second is a subdivision of Factory Number 1, which we call Number 4, Factory Number 4 now.

These factories are at the production currently. At the present time, these factories are doing as testing their production.

All of our factories have new environmentally-friendly equipment.

So we are testing all of the aspects of this equipment to make sure that they are operating correctly. These are complex production systems. And we have to make sure each stage is functioning appropriately.

Since we have not operated much of this equipment in the past, we are not yet able to estimate when we will be able to ramp up commercial production.

This process normally takes around 3 to 6 months. But when we know more, we will let our shareholders know.

As a result, the current level of daily production in these factories is not significant. However, we are optimistic that this new modern and environmentally-friendly equipment will soon be operating at high levels of efficiency.

At the present time, we cannot estimate a level of production at end of quarter -- second 2 -- second quarter.

However, as we ramp up production, we will communicate the results with our shareholders and investors.

However, we'd like to note that the price of bromine remains extremely high, which is RMB 35,000 per tonne. At these levels, our factory should be profitable once full production commences.

Question 2. Do you expect annual capacity of these factories to be the same as they were before?

Answer. We are not yet in a position to estimate the annual capacity of these factories.

We have [more and more] the equipment that, however, it's not possible -- it is possible that government could place some restriction on capacity. We have no knowledge of the potential of such restrictions yet. But we wish to be conservative in all matters relating to the government.

Question 3. What is the status of other factories?

Answer. We also received approvals for the inside rectification of Factory 1 and Factory 9. And are now focused in outside rectification.

We currently expect to receive approvals for these factories by end of second quarter 2019 or early of third quarter of 2019.

Upon receipt of all [record] approval, we will follow the same course as is -- we're using with our existing factories. The remaining 3 factories, 2, 8 and 10 are going through rectification stages.

Most of these rectification are relate to the planning approval and the land use rights approval.

As previously noted, we entered into a contract with a third party to allow the company to use the land near to its Factory Number 10 for waste water discharge and have invested $1 million to build an aqueduct to discharge the wastewater.

Question 4. Are you still considering potential acquisition?

Answer. We are carefully looking at acquisition. There are 2 different types of acquisition.

There are factories that have finished rectification and have received approval.

There are also factories that have finished rectification but not yet received approval.

The later factories can be acquired at a more attractive prices. We believe we have a advantage because we have good relation with the local government and (inaudible) rectification and approval process. We believe we can use this experience to acquire bromine assets at attractive valuation. However, at the present time, we have not finalized any acquisitions yet.

Question 5. What is the status of the negotiation associated with land for the closed factories, number 3, Number 4 and Number 11?

We have returned the land from those factories to the villages on which the land is located.

Now let's look at the second, chemicals segment.

Question 6. What is the latest status of the new chemical production facilities?

Answer. We're still waiting for final government approval. (inaudible) has already announced the closing of more than 600 chemical factories.

However, we are still very confident our factory will receive final approval.

Question 7. What's your latest estimate of when production will begin?

Answer. Once we receive full environmental approval, we will begin production. We continue to expect production will begin before the end of year 2020.

Question 8. How much have you spent so far on the project?

Answer. The (inaudible) relocation cost [comprise --] includes prepaid land fees and the professional fees related to the design of the new chemical factory in the amount of approximately 10.2 -- $10.9 million.

Now let's look at the last business segment, Natural Gas.

Question 9. Trial production started 4 months ago. Could you update us on where you stand in this trial production?

Answer. Our trial production is on track. We are producing small amount of natural gas to ensure that all of the equipment is functioning correctly.

We are currently very pleased with our trial production.

Question 10. What level of production have you achieved today? And what level do you expect to achieve by the end of second quarter?

Answer. We expect the trial production will continue at this level for additional 3 to 4 months.

Then we will do a complete assessment of our well. After which, we expect to move to commercial production stage.

Question 11. When do you expect to begin commercial production? What's the expected volume? What's the expected price?

As we enter commercial production, we will carefully increase production. And the immediate term grow is approximately 20,000 cubic meters per day.

Question 12. What plans and schedule do you currently have for creating a second well?

How many wells do you plan to drill in the coming 9 to 12 months?

Are you considering speeding up the development after commercial production is achieved?

And any potential partnership?

Answer. We are now applying for certificates to drill more wells.

We have learned a lot of over the past several years. We are confident in our equipment and our personnel. We are now ready to expand our Natural Gas business. We're not considering any potential partnerships at this point in time yet.

So at last, let's look at the other related questions.

Question 13. Any update on the Chairman's planned purchase of shares?

Are you concerned about the impact of not fulfilling this commitment has on the shareholders' trust?

Answer. The Chairman and the management are focused on this issue. The Chairman applied for permission to take money out of China, so he could buy back the shares to which we committed.

Unfortunately, the government did not give its approval. The government is being very rigorous in controlling outflow of capital. So we will continue to work on this issue.

Question 14. What are your plans for developing the bromine potential in Daying County?

Answer. We continue to believe that Daying County can and will provide a significant opportunity for bromine production.

However, at the present time, we are working to get our other factories open. So once everything is functioning well, we will focus on this opportunity.

Question 15. How easily do you believe will it be to regain your previous bromine customers?

What payment terms do you plan to have for such customers?

Answer. Getting back our previous customer will be extremely easy.

There is a stock shortage of bromine in China. Customers are anxious for any product they can get. We will have no problem getting customers back.

Our payment terms will be the same as they were before.

So operator, Can we open up the call for today? Please asking for questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a question coming from the line of [Nick Ross], an investor.

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Unidentified Participant, [2]

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First of all, I'd like to say good job with all the adversity and all the tough times with the regulations and the hurricanes and the storms, so really appreciate that.

I wanted to ask whether you ever considered doing buybacks. Not that the Chairman would buy shares, but that the company itself would buy shares?

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Helen Xu, Gulf Resources, Inc. - IR Director [3]

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Okay. [Nicholas], I will ask about it from Mr. Liu. (foreign language)

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Xiaobin Liu, Gulf Resources, Inc. - CEO, President & Director [4]

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(foreign language)

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Helen Xu, Gulf Resources, Inc. - IR Director [5]

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[Nicholas], here is the response from Mr. Liu, the CEO -- company's CEO.

[Interpreted] He says that the company does not have the shares buyback plan yet, because you know the company in China, where it's located and it's need -- really need a lot of cost to get back its equipment back in production. And the [other step to] production, it had to do still a lot of work to satisfy the government requirements in order to make the company to have a continuing long-term operation result.

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Unidentified Participant, [6]

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Just to make sure I understood that. You -- there hasn't been any focus on this, but this is a possibility? The main focus has been on rebuilding the factories and restoring the company back to operating condition?

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Helen Xu, Gulf Resources, Inc. - IR Director [7]

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Yes. Let me focus it to here. And there is no current plan yet on the buyback from company side.

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Unidentified Participant, [8]

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Okay. And would you guys consider something like this? Because potentially, this could give a lot more value to shareholders than one more factory or one less factory. I mean, the shares are extremely...

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Helen Xu, Gulf Resources, Inc. - IR Director [9]

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Okay. I got your point, I think. (foreign language)

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Xiaobin Liu, Gulf Resources, Inc. - CEO, President & Director [10]

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(foreign language)

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Helen Xu, Gulf Resources, Inc. - IR Director [11]

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[Interpreted] Okay. [Nicholas], so we understand that the company's shares would be really undervalued, and we think when the company's operations back, and when it have a consistent long-term running production, then we will consider about this, shares buyback.

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Unidentified Participant, [12]

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I see. I mean I will mention this that while operations are extremely important, by the time operations are back, then the opportunity in the stock price will probably, hopefully, not be there.

In other words, when operations are back, when profits are back, when sales are back, when all that's back, then price of the shares hopefully will rise eventually.

I don't really care if it's next quarter or next year, but eventually it will get there. But right now, there is an opportunity in buying the shares on the cheap. And you have definitely have enough cash.

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Helen Xu, Gulf Resources, Inc. - IR Director [13]

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Okay. As we just now, firstly explained that there are still a lot of places during the rectification or during the government's requirements which need funds, we have to do.

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Unidentified Participant, [14]

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Say again, sorry.

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Helen Xu, Gulf Resources, Inc. - IR Director [15]

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I say, as we explained at the beginning of this question, we say that there are still lots of places still needs lot of funds to get back the company in operation. Because the rectification and maybe government has some new requirements we had to do, and the natural gas as well.

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Unidentified Participant, [16]

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So as far as I saw, the...

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Helen Xu, Gulf Resources, Inc. - IR Director [17]

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Also to get the company back...

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Unidentified Participant, [18]

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Sorry. Go ahead.

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Helen Xu, Gulf Resources, Inc. - IR Director [19]

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Okay. In order to get back the companies to sustainable operational capabilities, there are still needs funds, so that's why we can't -- we should be conservative and should be careful in spending these funds.

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Unidentified Participant, [20]

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Absolutely. Absolutely. And the care and step-by-step is definitely a strong selling point. Can you just, more or less, tell me how much you -- I mean, I saw estimates of $60 million to $70 million to get back -- to get operations back. Is that not the case?

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Helen Xu, Gulf Resources, Inc. - IR Director [21]

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Okay. Do you mean $60 million or $70 million from now or total?

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Unidentified Participant, [22]

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I thought it was total, but I may be a bit hazy on the details.

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Helen Xu, Gulf Resources, Inc. - IR Director [23]

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Okay.

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Unidentified Participant, [24]

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Could you tell me, if I remember correctly, there's around $169 million left in cash?

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Helen Xu, Gulf Resources, Inc. - IR Director [25]

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Okay. (foreign language)

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Xiaobin Liu, Gulf Resources, Inc. - CEO, President & Director [26]

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(foreign language)

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Helen Xu, Gulf Resources, Inc. - IR Director [27]

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[Interpreted] Okay. [Nicholas], I just now checked that the cash which is $179 million...

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Unidentified Participant, [28]

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$179 million. Okay. Sorry, go ahead.

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Helen Xu, Gulf Resources, Inc. - IR Director [29]

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And Mr. Liu just now did explain that there are 2 major halves which need cash fuel.

Firstly, we want to get all of our bromine factories, chemical factories and crude salt plants back in operation, all of this.

And then secondly, now we are -- as we say, we are applying for the natural gas certificate to drill for more wells and to have to cooperate with the government. So once we get that, we will have a new budget for like how much we have to spend on natural gas as well.

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Unidentified Participant, [30]

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Okay. So could you break it down for what you estimate the cost being for the crude salt, the bromine, all the factories reopening, recertifying from this point until getting it all back to operations? That's question number one.

And question number two is, the natural gas part of it, how much you would have to spend on that part?

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Helen Xu, Gulf Resources, Inc. - IR Director [31]

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(foreign language)

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Xiaobin Liu, Gulf Resources, Inc. - CEO, President & Director [32]

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(foreign language)

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Helen Xu, Gulf Resources, Inc. - IR Director [33]

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[Interpreted] Okay. [Nicholas], I think all these budgets we have disclosed previously in our PR or press release, because we had to go back to check it. And if you need it, I can e-mail you. You can send me your e-mail address. I will forward all this information to you. Okay?

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Unidentified Participant, [34]

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Okay. So you'll send me that information, and then we'll follow up from there.

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Helen Xu, Gulf Resources, Inc. - IR Director [35]

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Yes, yes, yes. You e-mail me. I get your email address, I will send you, okay?

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Unidentified Participant, [36]

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Okay. What's the e-mail address, just so I have it on record?

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Helen Xu, Gulf Resources, Inc. - IR Director [37]

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Or you can just check my -- the press release. It's beishengrong@vip. 163.com.

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Unidentified Participant, [38]

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Okay. I'll get the exact email from the protocol of the conversation. I think that concludes my questions for today.

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Helen Xu, Gulf Resources, Inc. - IR Director [39]

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Yes, yes. Okay. Thank you. Have a good day.

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Xiaobin Liu, Gulf Resources, Inc. - CEO, President & Director [40]

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Thank you.

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Helen Xu, Gulf Resources, Inc. - IR Director [41]

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You're welcome.

Operator. Any other questions?

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Operator [42]

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(Operator Instructions) There are no questions at this time. Please continue.

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Helen Xu, Gulf Resources, Inc. - IR Director [43]

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(foreign language)

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Xiaobin Liu, Gulf Resources, Inc. - CEO, President & Director [44]

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(foreign language)

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Helen Xu, Gulf Resources, Inc. - IR Director [45]

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Operator, if there are no questions then you can close the call today.

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Operator [46]

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All right. This concludes to this conference call. You may now disconnect.

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Helen Xu, Gulf Resources, Inc. - IR Director [47]

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Okay. Thank you.

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Operator [48]

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You're welcome. Have a great day.

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Helen Xu, Gulf Resources, Inc. - IR Director [49]

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Okay. Thank you. Have a good day. Bye-bye.