Executive Summary / Key Takeaways

• Strong Q2 2025 Rebound: Gulf Resources demonstrated a significant operational turnaround in Q2 2025, with bromine and crude salt revenues surging by over 300% and 27% year-over-year, respectively, leading to a return to gross profitability.
• Prudent Capital Allocation: Management is strategically delaying full operationalization of its chemical factory and certain bromine facilities, prioritizing market optimization and higher-margin product identification over immediate deployment, aiming to maximize long-term profitability.
• Enhanced Operational Resilience: A substantial $50.5 million flood prevention initiative is underway, designed to protect core assets from environmental risks and unlock future production capacity, significantly reducing potential future damage costs.
• Focused Export Strategy: A dedicated task force is exploring chemical export opportunities to generate overseas U.S. dollar revenue, a critical step to circumvent China's currency restrictions and enable future shareholder value initiatives.
• Undervalued Resource Play: Despite a challenging operating environment and Nasdaq compliance concerns, GURE's strong cash position, ownership of limited, essential resources, and management's deep alignment with shareholder interests suggest a compelling long-term investment thesis.

Setting the Scene: GURE's Foundation in China's Industrial Core

Gulf Resources, Inc. (GURE) operates as a multifaceted player within China's basic materials and specialty chemicals sectors, with core businesses spanning bromine, crude salt, chemical products, and natural gas. The company's strategic foundation is deeply rooted in its localized expertise and access to critical, often limited, natural resources within China. This positioning allows GURE to serve essential industrial and agricultural needs, from flame retardants and fumigants, water purification, and medical applications, to alkali production and oilfield chemicals.

The broader industry landscape has been shaped by significant forces, including a pronounced slowdown in the Chinese economy, shifts in demand post-COVID-19, and increasingly stringent environmental regulations. These dynamics have created a challenging yet potentially advantageous environment for GURE, particularly given global supply constraints in key commodities like bromine, where a substantial portion of global production is concentrated in geopolitically sensitive regions such as Israel, Jordan, and Ukraine. This global backdrop underscores the strategic importance of GURE's domestic production capabilities.

GURE operates as a niche player within this complex environment, contrasting with global giants like Albemarle Corporation (ALB), ICL Group (ICL), and FMC Corporation (FMC). While these larger competitors benefit from diversified global footprints and extensive R&D budgets, GURE's strength lies in its localized operational execution and deep understanding of China-specific regulatory frameworks. This allows GURE to potentially achieve cost efficiencies and foster stronger customer relationships within its domestic market, offering a qualitative edge in pricing flexibility for certain Chinese applications. The company's overarching strategy is one of prudent capital preservation and long-term value creation, often involving strategic delays in asset deployment to optimize for market conditions and higher-margin opportunities.

The Enduring Power of Brine: Bromine and Crude Salt

GURE's bromine and crude salt segments form the bedrock of its current operations, leveraging the extraction and processing of brine resources. Bromine is a versatile element crucial for flame retardants, fumigants, water purification, and medical applications, while crude salt is a fundamental input for alkali and chlorine-alkali production, as well as the food and beverage industries. Crude salt is also a significant byproduct of bromine extraction, creating an integrated operational synergy.

The company demonstrated a notable operational rebound in the most recent period. For the three-month period ended June 30, 2025, the bromine segment reported net revenue of $7.68 million, marking a substantial 312.9% increase year-over-year, and achieved a gross profit margin of 9%. This performance was driven by a 64% increase in the average selling price of bromine and a 152% increase in tonnes sold, reaching 1,972 tonnes with a 26% utilization ratio. Similarly, the crude salt segment saw its net revenue grow by 27.4% to $667,411, with a robust gross profit margin of 49%, primarily due to a 22% increase in average selling price. The six-month period ended June 30, 2025, mirrored this positive trend, with bromine net revenue at $9.16 million (+204.3% YoY) and crude salt net revenue at $789,989 (+23.3% YoY), both showing improved gross profit margins.

Operationally, GURE has five bromine factories (No. 1, 4, 7, 8, and 9) in commercial production, with Factory No. 8 having recommenced operations in Q4 2022. The company is actively seeking governmental approval for its remaining two factories, No. 2 and No. 10, which may require modifications to existing infrastructure. The establishment of Shouguang Hengde Salt Industry Co. Ltd (SHSI) in April 2022 to separate crude salt operations aligns with new government policies, further streamlining segment focus. In June 2024, SHSI expanded its crude salt field by acquiring 5.14 million square meters, a move finalized in February 2025 that underscores commitment to this segment.

GURE's competitive standing in bromine benefits from its strong local presence and regulatory licenses in China, which can provide a cost advantage and operational agility compared to global players. The ongoing geopolitical conflicts in major bromine-producing regions globally also create supply constraints that could favor GURE's domestic production. Management remains optimistic about a price rebound, believing bromine prices have bottomed out, and anticipates renewed demand from emerging applications such as zinc-bromine batteries and new medical products.

The Chemical Catalyst: Yuxin Chemical Factory's Strategic Pivot

The Yuxin Chemical Factory represents a significant future growth vector for GURE, though its journey has been marked by strategic delays. Since November 2017, the company has been mandated to relocate its chemical production plants to the Bohai Marine Fine Chemical Industrial Park due to stricter environmental and safety regulations. While civil works for the new facility were largely completed by June 2021, the segment has generated no revenue since 2017.

The ongoing delay in equipment delivery and trial production is a deliberate strategic pivot. Management has postponed the delivery of remaining equipment, particularly that related to environmental issues like waste gas, solid waste, and wastewater treatment. This pause allows the company to "undertake a thorough review of the potential market" and identify the "most applicable equipment" for producing higher-margin chemical products, such as pharmaceutical intermediaries. This approach, while extending the timeline, is designed to maximize future profitability, drawing lessons from the segment's past performance which saw income from operations of $33 million in 2015 and $25.5 million in 2016.

The technological differentiation here lies not in a novel chemical compound, but in the customization and integration of advanced environmental treatment equipment. This investment is critical to meet China's increasingly stringent government environmental requirements, ensuring sustainable and compliant operations. By tailoring this infrastructure, GURE aims to enable the production of high-value chemical products that might otherwise be unfeasible or cost-prohibitive under less advanced environmental controls. This strategic focus on compliant, high-margin production positions GURE favorably in a Chinese chemical industry where many competitors have been forced to close due to regulatory non-compliance.

Unlocking New Frontiers: Natural Gas in Sichuan

GURE's natural gas segment, centered in Sichuan Province, holds substantial long-term potential, though it remains in a developmental phase. Trial production commenced in January 2019 but was subsequently halted due to requirements for various governmental approvals, including project approval, safety production inspection, environmental protection assessment, and resolution of land issues. The company also needs to secure exploration and mining licenses. This segment did not generate revenue in Q2 2025, reflecting the ongoing regulatory hurdles.

To accelerate progress, GURE is actively exploring a joint venture with the government of Daying County for the extraction of halogen water and related products. This partnership is viewed as a strategic mechanism to "hasten the process" and "overcome some of the government-related issues" by leveraging governmental support for approvals and infrastructure. The company remains optimistic, especially given new policies allowing privately owned enterprises to participate in natural gas production, which could open "substantial opportunities" for drilling more wells for both bromine and natural gas. While new competitors have emerged in the region, a government partnership could provide a significant competitive advantage.

Fortifying the Foundation: Operational Resilience and Capital Strategy

GURE's commitment to operational resilience is evident in its proactive flood prevention initiative. Following substantial damages from typhoons in 2018 and 2019 (costing over $40 million and $6 million respectively), the company launched a $50.5 million flood prevention plan in Q3 2023. By Q3 2023, $15.15 million had been disbursed, with an additional $35 million projected for Q4 2023. This investment aims to renovate river channels within its mining area, protecting wells, aqueducts, and crude salt pans. Management anticipates this will reduce potential damage from future similar typhoons from $40 million to a mere $3-5 million, while also enhancing the probability of reopening factories No. 2 and No. 10 and enabling additional well drilling.

The company maintains a robust liquidity position, with cash and cash equivalents of $7.74 million as of June 30, 2025. This strong balance sheet is a testament to its conservative cash management strategy, prioritizing safety over aggressive, higher-interest investments. GURE's cash position was approximately $103.8 million ($9.95 per share) in Q3 2023, with net-net cash of $8.21 per share, and $108.2 million ($10.37 per share) in FY 2022.

A key strategic initiative to address shareholder value concerns and China's strict currency restrictions is the formation of a task force, led by COO Mr. Naihui Miao, to explore chemical export opportunities. The goal is to generate overseas U.S. dollar revenue, providing the "financial flexibility" necessary to undertake shareholder-friendly actions like share repurchases or dividends. This strategy is reinforced by management's deep alignment with shareholder interests, exemplified by the CEO and senior management foregoing significant cash salaries and the CEO personally repaying past compensation.

Risks and Challenges

Despite its strategic initiatives, GURE faces several pertinent risks. The company was transferred to The Nasdaq Capital Market tier in May 2025 and has until November 3, 2025, to regain compliance with the $1.00 bid price requirement, with a reverse stock split being a considered option. The ongoing slowdown in the Chinese economy continues to exert pressure on demand and pricing across its segments. Regulatory delays remain a significant hurdle for the full operationalization of its chemical factory and the natural gas project in Sichuan. Bromine prices, while showing signs of recovery, have historically been volatile, impacting profitability. Furthermore, China's stringent currency restrictions continue to limit the company's ability to return capital to shareholders. Customer concentration is also a factor, with the top five customers accounting for 65.2% of sales in the first half of 2025, potentially increasing revenue vulnerability.

Conclusion

Gulf Resources stands at a pivotal juncture, poised for a strategic reawakening. The company's recent Q2 2025 performance, marked by a significant revenue surge and a return to gross profitability in its core bromine and crude salt segments, underscores the inherent value of its limited natural resources. GURE's strategic delays in fully deploying its chemical factory and certain bromine facilities are not signs of stagnation but rather a prudent, long-term approach to optimize for higher-margin opportunities and market stability.

The substantial investment in flood prevention highlights a deep commitment to operational resilience, safeguarding assets and unlocking future production capacity. Coupled with a focused export strategy for chemical products, GURE is actively building the financial flexibility required to address shareholder value concerns. While challenges such as Nasdaq compliance, regulatory hurdles, and market volatility persist, the company's strong cash position, management's alignment with shareholder interests, and its competitive advantages in a globally constrained bromine market present a compelling, albeit patient, investment thesis. GURE's future hinges on the successful execution of its strategic pivots, particularly in its chemical export initiatives and the Sichuan natural gas joint venture, which promise to transform its financial landscape and unlock its underlying asset value.