Sarine Technologies
ELEPHANT IN THE ROOM
Midstream activities regained traction from 4Q20 into 2021 with increase in Rough supply and equipment sales. FY2021 revenue increased 52% and net profit at $16.5M increased 596%. The highest in five years. Pent up demand and travel restriction due to Covid-19 shifted consumption towards luxury items. There is a notable shift in revenue mix from India to Africa and Asia.
2022 began with uncertainty clouded by spread of Covid-19 Omicron variant and Russia-Ukraine conflict that began on 24-Feb-2022. Alrosa were sanctioned by U.S. for their link to oligarchs.
Baby Elephant: Lab Grown Diamond (Growth Phase)
About 50% U.S. retailers offers LGD in 2021.
Sarine partnered Constell to develop this market in May21 and is already generating revenue.
The company products & services are applicable to this new market segment.
E-Grading is particularly attractive because of LGD lower price structure - "diamond produced by technology, graded by technology."
Chart: Rough supply correlation with equipment sales has weaken after 2014.
Aging Elephant: Equipment Sales (Replacement Cycle)
Equipment sales increased by $13M from $20M to $33M. Larger quantity of higher price Galaxy were sold in FY2021. 65 units Meteor & Meteorite were sold in both FY2020 & FY2021 with more Meteor transacted in FY2021.
Galaxy/Solaris replacement cycle could be in the horizon. 55 units sold FY10-11 are 11-12 years old. 135 units sold FY-12-14 are 8-10 years old. Only 11 & 15 units were sold in FY20 & FY21 respectively. Motivation to upgrade older equipments should grow. Alternative would be maintenance work (recurring revenue) to keep machine in shape. Recent launched Advisor 8.0 enabling higher yield, cost saving features and enhanced to map smaller stones is a motivating factor to hasten upgrade.
Semiconductor export control on Russia will impacts OctoNus and benefit Sarine and Sahajanand Laser Tech.
Circus Elephant: Recurring Revenue (Cyclical)
Consist of scanning, maintenance, Quazer & polished stone services.
Market size: 65M stones scanned annually. This segment sales generally correlates with Rough supply. Demand is currently strong.
Stones scanned increased from 10M in FY17 to 33M in FY21.
Revenue increased by $5M to $23M. Sales mix guesstimate is 60% scanning and 40% for the rest of the activities.
Advisor 8.0 launched in Feb21 is expanding scanning to smaller stones and integration into Swiss Synova all-in-one cut-shape-facet system will deepen market penetration.
India rough import in Feb22 was $3.2B vs $1.5B average between Dec19~Feb20 and Sep20~Feb22.
Sarine AutoScan beta-testing at mines should have meaningful contribution from 2H2022 or 2023 onwards.
Rough valuation for financing was launched in Mar22 with Mazalit. This is expected to significantly scale up.
Chart: Sarine Profile, Sarine Diamond Journey and digital tender shifting from initiation to high growth phase.
Elephant in the Room: Retail-related (Growth Phase)
Consist of Sarine Profile, Sarine Diamond Journey, digital tender, rough-polished wholesale service and A.I. or e-Grading.
Revenue increased 138% from $2.1M to $5M or 8% total sales. 2H21 revenue was $2.9M or 11% total sales on strong digital tender.
Sarine Profile, Diamond Journey launched few years ago requiring long gestation and digital tender is entering growth phase.
A.I. Grading (service centre) introduced in 2018 is gaining traction with adoption by New Arts Japan, Maison Boucheron, a leading U.S. wholesaler and European players.
E-Grading was launched in Feb-2022. Strategy is to position grading equipments at suppliers, wholesalers and retailers to significantly reduce customer operating cost. It also allow for smaller stones and lower quality diamonds to be graded, including LGD. E-Grading is now in the process of commercial launch with manufacturers in India.
This is significant given that grading is a $500M market. Sarine first mover advantage and positioning is likely to result in retail-related segment becoming the company largest revenue & earning driver.
Note 1: In mid-2020 GIA announced collaboration with IBM. A 6-8 weeks grading turnaround in 2021 imply that GIA has yet to launch e-grading. Existing structure, cost and positioning will post significant challenges to the company.
Note 2: On 11Mar22. GIA stop lab submission from Russian companies and issuance of GIA Diamond Origin Report due to Ukraine-Russia war. Unintended consequences is a hastening of e-Grading adoption and use of Sarine Diamond Journey report in addition to other grading agencies services.
Flying Elephants (Next Growth Phase)
From 2022 Sarine is effectively engaging in all sectors of the natural & synthetic diamond industry value chain in a meaningful way.
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AutoScan at mines
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Digital tender for Rough
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Rough valuation for financing - launched Mar22
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Galaxy family & Quazer for midstream plan, cut, shape, polish
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e-Grading at suppliers, wholesalers, retailers
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Sarine Profile, Diamond Journey, Sarine Light at retailers
Russia sanction will hasten adoption of Sarine AutoScan, e-Grading and SDJ Report to facilitate traceability.
With Galaxy/Solaris equipments due for replacement using cost saving Advisor 8.0; the segment is ripe for an upgrade super-cycle.
Launch of e-Grading services with early adopters at supplier, wholesaler and retailer value-chain signal the beginning of growth in this $500M market from zero revenue base.
2020-2021 was a recovery year for the diamond industry and Sarine midstream products & services have benefited from this upturn.
2022 onward will be exciting for the company as new products and services are adopted by the entire diamond value-chain leading to the next growth phase.
Notes on ALROSA
Alrosa rough sale in 2020 was $1.7B and polished sale $0.15B. Only 3% polished diamonds were sold in United States. (Annual Report 2020)
Alrosa was sanctioned for Russia invasion of Ukraine. In March, U.S. banned import of diamonds from Russia. However if rough cut & polish took place in e.g. India, U.S. Custom will consider the stone to be of India origin.
News outlets indicate that Alrosa rough is flowing in the pipeline. Alrosa plan to increase production by 5% to 34M. Output constitute 28% of global supply. Transactions is likely to continue in the porous system with difficulty.
Midstream activities for 1Q22 is likely to be stable given strong sight sales in Jan & Feb. Impact may be felt in 2Q22 as the industry sort out financial transactions options.
For the year, production could improve as more mines are returning to full production post Covid reopening. Unsold rough to be shifted to inventory for future sale when conflict eventually draw to a close.
Demand as of writing is still strong given tight rough supply. Despite U.S. import ban; thinking is that as long as demand is greater than supply; there would be some form of 'musical chair' to rebalance polished diamonds for United States, Europe and rest of the world.
ROUGH DIAMOND
The company was incorporated in 1988 as Borimer Ltd in Israel.
It develop, manufacture, market and sell precision products for processing of diamonds and gemstones. This includes:
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Determining the optimal yield of rough stones
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Laser cutting, measuring & analysing of polished diamonds
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Inscription of polished diamond
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Providing technology for sales of jewellery in store & online
Geographical Segment
India constitute about 70% of business. Revenue from Africa, Europe, N. America and Israel ranges between 3%-8%.
Tailwind
In 2008, Sarine acquired Galatea, an automatic inclusion (clarity) mapping system for rough stones. In 2009, the first Galaxy 1000 and 2000 was introduced to the diamond midstream industry. The system enables polishers to improve yield in the diamond planning stage prior to cutting & polishing. Use of equipment were charged a carat-based fee.
Diamond cut & polishers operate on thin margin and the introduction of Galaxy was a game changer, resulting in high growth from 2009-2014.
In 2018, Sarine Inscription system was used for Berkshire Signature Diamond by Warren Buffet.
Headwind
From 2015, the firm business started to decline due to:
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High inventory and rough prices
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Competitors illegal copying of Sarine's software Advisor 5.0
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Banks credit tightening of liquidity, exacerbated by Nirav Modi of Firestar Diamond $1.8B fraud.
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US FTC recognition of Lab Grown Diamond (LGD) led to confusion in the industry
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Covid-19 pandemic in 2020.
These events caused the company share price to fall from $3.20 to low $0.20s by Jul-2020.
Recovery
De Beers sight sale 3 & 4 halted due to Covid-19 have resumed. Sight 7 was up 16% at $334M and Sight 8 was up 57% at $467M YoY. Both De Beers and Alrosa reduced rough prices by 5%-10%.
High quality diamonds above 1.0 carats are in short supply.
Rough suppliers like Alrosa have also taken initiatives to offer midstream buyers alternate sources of finance via ex-bank entities.
Polish activities was at about 80% in Aug20.
As for illicit competitors, actions taken include:
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Legal action
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Enforcing IP in the United States and other countries
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Initially replaced Advisor 5.0 by 6.0. Most customers have since migrated to Advisor 7.0 and Advisor 8.0 with new features and robust IP protection will be released soon.
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Develop and sale of small stones equipment Meteor (0.2-0.89 carat) and Meteorite (< 0.4 carat). Robust sales indicate that the firm is gaining ground against illicit competitors. Note: copycats mostly operate in the small stone segment.
About 97% of LGD using HTHP or CVD processes were for industrial usage. In 2018, US FTC reclassify LGD as gemstone. Currently most LGD sold are smaller stones.
De Beers embraced this change by introducing LightBox brand.
LGD generally do not have much resale value, hence is likely to fill the costume jewellery segment of the market.
Since 2018, the company have started entering the retail segment with Sarine Profile & Journey. It essentially provide a report to consumer of a diamond journey from rough to polished form. Tiffany & Co. and numerous retailers have adopted Sarine Profile to engage out-of-state customers over its digital platform.
Sarine Technologies announcement dated 24 June 2020
E-Grading (4C) using artificial intelligence is expected to be introduced from 2H20.
Presently diamonds' 4C are graded physically by gemological labs. Local labs require about a week for grading; and two weeks when international shipping is involved. E-Grading allow onsite grading without physical transport & inspection within an hour.
This is a significant development given Sarine dominant market share (70%) in the midstream segment. Gross margin of this new business is forecasted to be about 60%-70%.
Opinion
The sharp increase in 1Q20 equipment sales signal a recovery after five years of downturn. Strong sale of Meteor & Meteorite indicate that the firm is winning the battle against illicit competitors. While Covid-19 did dampen recovery, various data points in the value chain points to an improving environment moving forward.
Importantly, sale of 6 units Solaris (1.0 - 2.5 carats) and 1 unit Galaxy Ultra (up to 20 carats) in 1H20 is consistent with news of strong demand for high quality stones larger than a carat.
This is significant because Sarine key revenue generation comes from activities in larger stones; which are charged per-carat use. See table above.
It also make sense why Meteor & Meteorite systems are sometimes sold as one-off.
Significantly, Sarine is expanding from midstream to Retail segment of the jewellery industry whose market size is much larger than midstream. E-Grading using AI could potentially be a game changer in the gemological retail industry.
In the PC world we have Windows; in the Mac world we have MacOS and in the diamond world we have Sarine Advisor.