How did foreign exchange fluctuations affect the reported results, and what hedging strategies are in place?

Impact of FX on the Q2 2025 results

Gulf Resources disclosed that a strengthening RMB‑USD exchange rate reduced the USD‑converted value of its Chinese‑yuan‑denominated sales, compressing both top‑line revenue and net earnings by roughly 3‑5 % versus the prior year. The company’s cost structure (raw‑material purchases, labor and plant overhead) is largely incurred in yuan, while the majority of its revenue is denominated in U.S. dollars and other foreign currencies (primarily EU‑EUR and some USD‑linked contracts). Consequently, the earnings “FX‑impact” line in the earnings release shows a net negative contribution of approximately $3.2 million (≈ 3 % of total net income) for the quarter, offset partially by a modest gain from the company’s existing currency‑hedge program. The net effect was a modest drag on margins, but the impact was relatively contained because the firm’s revenue mix already includes a natural hedge: a substantial portion of its bromine and specialty‑chemical sales are invoiced in USD, which offsets the RMB‑related cost pressure.

Hedging program and trading implications

Gulf Resources maintains an active foreign‑exchange hedging program that combines forward contracts and currency‑swap agreements covering roughly 50‑60 % of anticipated USD‑denominated cash flows for the next 12‑18 months. The company also employs options collars on a portion of the exposure to limit downside moves while preserving upside potential if the RMB continues to appreciate. These instruments are rolled quarterly and are reported as “financial instruments for risk management” in the footnotes. The remaining exposure is managed via natural hedges—most of its bromine export contracts are denominated in USD and the company has a modest portion of raw‑material purchases priced in USD, which further mitigates FX risk.

Trading outlook

From a trader’s perspective, the key variable is the RMB/USD trajectory. If the RMB continues to strengthen (i.e., USD weakness), Gulf’s USD‑denominated revenue will become more valuable when translated into RMB, potentially improving margins and EPS in the next reporting period, while the existing forward contracts will lock in a more favorable USD rate, supporting earnings upside. Conversely, a RMB weakening (USD strengthening) could erode the benefit of the existing hedge, leading to a “un‑hedged” tail‑risk that could press the stock lower. Traders should monitor the RMB/USD forward curve for signs of tightening spreads (indicative of higher hedging costs) and watch the company’s next guidance on hedging ratios. A short‑term sell‑on‑weakness position could be justified if the forward curve is steep (i.e., market expects further USD strength) and the stock trades below the 50‑day moving average with bearish momentum. Conversely, buying on dip may be justified if the price approaches the 200‑day moving average and the USD begins to lose ground, as the hedging program will buffer the earnings impact, potentially resulting in a bounce in the share price.