Sarine Technologies - Maybank Kim Eng 2021-05-28: The Sparkling Gem; Ride The Earnings Upcycle; Initiate BUY


Sarine Technologies - The Sparkling Gem; Ride The Earnings Upcycle; Initiate BUY

  • Sarine Technologies (SGX:U77) mainly engages in the development and manufacturing of advanced systems for diamond technologies.
  • We are initiating coverage on Sarine Technologies with a BUY and DCF-based target price (WACC: 8.6%, LTG: 2%) of S$0.70. Our intrinsic value implies 17.9x FY21E P/E and 14.4x FY22E P/E, compared to > 20x during the previous upcycle.
  • We expect Sarine Technologies to post cyclical earnings uplift in tandem with the recovery of the global diamond industry. The successful dual listing on Tel-Aviv Stock Exchange by 2Q21 and better-than-expected adoption rate for its e-Grading could further catalyse the stock.

About Sarine Technologies

  • Established in 1988, Sarine Technologies (SGX:U77) is a recognised leader in the development and manufacturing of advanced modelling, analysis, evaluation, planning, processing, finishing, grading and trading systems for diamonds.
  • Sarine Technologies' products include the Galaxy® family of inclusion and tension mapping systems, rough diamond planning & optimisation technologies, laser cutting & shaping tools, laser-marking, inscription & fingerprinting equipment, automated (AI-derived) clarity, colour, cut and light performance grading systems and traceability, visualisation and retailing services.

Sarine Technologies - Investment thesis

Moving downstream with e-Grading™ revolution

  • Demand for grading reports has grown significantly over the past 20 years. Today, diamonds as small 0.2 carats are sold only with a report from a reputed lab to provide buyers and/or consumers, with reassurance. That said, reports for the same type of diamonds can have differences that translate into 20-40% lower prices.
  • In 2020, Sarine Technologies introduced the concept of e-Grading™ by enhancing its technology-based AI-derived 4Cs grading with additional functionality for process control and intra-process verification. This will provide manufacturers and other industry players with a time-saving cost-cutting in-house solution for the 4Cs grading of polished diamonds, without necessitating the inefficient and costly process of going offsite to a gemmological laboratory (hence the “e-Grading™” term, just like e- Learning is from the comfort of your home).
  • The systems utilised for the grading process are all cloud linked and the grading results are automatically uploaded to the cloud. Thus, the 4Cs grading results are derived without any human intervention and are immediately available for online B2B access and subsequent B2C consumer report generation. Intra-process automated verification of the polished diamond at each station will ensure reliable and accurate data flow, optionally verifiable by its TruMatch™ fingerprinting.
  • All its technologies generate cloud-based data for immediate anytime anywhere accessibility on mobile devices, a key factor for appealing to the new 21st century consumer. It intends to leverage on this trend to accelerate the group’s market penetration and broaden its market share. It has significantly increased its sales staff in the key APAC market and it’s investing in end-market retailer and consumer recognition of its brand.
  • Its new grading paradigm enables truly objective and consistent grading at a fraction of the time currently required (hours or a day max vs weeks) and with none of the indirect costs of shipping, insurance, customs handling, etc. associated with having the grading done at an external third-party lab.
  • Notably, it also offers operational flexibility, as the polishers can prioritise their stones' sequence of grading to best meet their delivery schedules. Late in 2020, the group began initial beta-testing of this new concept in India. According to management, the 1H21 will be dedicated to the ongoing refinement of the solution and implementation of the necessary operational cloud infrastructure.
  • Commercial launch with broader introduction to midstream polishers is scheduled for later in 2021, along with its specific efforts vis-à-vis the NGTC lab in China and leading wholesalers and retailers such as Tiffany & Co. and Japan's QVC. Sarine Technologies aims to capture up to double-digit share of US$500+m annual market of diamond grading in the long term, where Gemological Institute of America (GIA) is currently the dominant player in this segment.

Technologies spanning the entire value chain

  • Through its application of patented solutions (proprietary mechanics, electronics, optics, lasers and sophisticated software), Sarine Technologies has become a recognised leader in the development of systems used throughout the entire diamond value chain, from mine to retail, from rough diamonds evaluation, planning and polishing to polished diamonds grading and trade.
  • The group has launched aggressive marketing offerings to target specific sub-segments of the midstream diamond industry. Its new marketing promotions are aimed at enabling smaller businesses to acquire its systems on cost-effective terms – for instance, a package specifically offered to polishers of very small stones a tenth of a carat rough and under.
  • Management expects these promotions will drive significant sales of its Meteorite™ and Meteor™ systems. It is also proactively launching a new initiative aimed at re-establishing substantial demand for its Solaris™ model for mid-sized rough stones (from 1 to 2 carats in weight).
  • Meanwhile, we expect Sarine Technologies to continue its market domination of inclusion scanning and mapping, rough planning and related manufacturing products and services. In 2021, the group will also launch its Advisor ® 8.0 with enhanced features, thus widening technological gap with piracy.

Increasing acceptance of lab-grown diamonds

  • Synthetic diamonds, or more accurately termed, lab-grown diamonds (LGD) continued to expand in 2020 though they still comprise a relatively small part of global polished diamond volumes, estimated at ~3-4%. However, they have recently gained huge popularity and are reportedly in demand from millennials attracted by LGD makers' claims of being eco-friendly.
  • Studies indicate that the demand for LGD is expected to remain on its expansion path in 2021 with nearly half of US retailers already offering LGD products in their stores. This usually forms part of their inventories given LGD is increasingly seen as a lower-priced complementing product to natural diamonds.
  • This growing market acceptance of LGD provides a new opportunity for Sarine Technologies. Having verified the applicability and adaptability of its various technologies to LGD manufacturing, grading and trade, the group has extended its marketing efforts to penetrate this growing market. Its traceability and e-Grading™ solutions can also be applied to LGD to ensure a verifiably sustainable supply of diamonds in a rapidly changing consumer environment.
  • The Galaxy® inclusion mapping and Advisor® planning technologies can contribute to the optimal utilisation of the manufactured LGD raw material. Sarine Technologies is complementing the Galaxy® software with pattern recognition capabilities, in order to automatically discern between natural and LGD rough material and automatically adjust the billing for the scanning service.
  • Its Quazer® 3 has proven to be the most cost-effective offering for dicing the LGD wafer into the cubes from which the gems are polished. In fact, its AI-based e-Grading™ is especially applicable to LGD grading, as it allows grading of the less expensive finished LGD gem at a much more affordable cost than that charged for grading services by common gemmological laboratories.
  • Sarine Technologies recently entered into a strategic collaboration agreement with the Constell Group to forge a closer cooperation that will quickly and efficiently provide technological solutions for the current and evolving needs of the rapidly expanding LGD segment. This will allow customers to benefit from more competitive pricing as the business model remunerates Sarine Technologies based on each stone processed, regardless of the specific technologies applied in the processing.


  • Scanning: Create a 3D virtual model of the stone in order to accurately provide the dimensions, structure, and facet arrangement of the diamond. With the online model of the stone, the designers can then accurately create proportional sections of the jewellery so that it is as aesthetically pleasing as possible once assembled.
  • Inclusion mapping: Inclusions are small imperfections within a diamond that are created due to the extreme pressure and heat that diamonds experience when they form. To maximize the value of polished diamonds, any inclusions present in the rough diamond must be detected and mapped to assess the quality of the diamond. Once this is accomplished, the optimal method of cutting can be planned to maximize the value of the cut diamond or diamonds obtained from the rough stone.
  • Grading report: Determines the dollar value and is based on the “4 C’s” i.e., Colour, Clarity and Cut (proportion, polish and symmetry), which are the quality elements. Carat weight determines the value of a stone, while Clarity is frequently assumed to be the most important. However, colour and cut, in particular, have the greatest effect on the appearance of a diamond.
  • e-Grading™: Diamond grading at the source - on the manufacturing floor, in the wholesaler’s showroom, at the jewellery store, on any mobile device. This helps to reduce costs, accelerated time to market, enhanced retail experiences, and better results for everyone - manufacturers, wholesalers, retailers, and customers alike.
  • Galaxy® family: Scan a rough diamond internally and externally. With the three-dimensional information, manufacturers would be able to design and plan what polished diamonds can result from a rough diamond. It comes with the various models, the Meteorite™, Meteor™, Solaris™, Galaxy® and Galaxy® XL systems, covering a broad range of sizes of rough diamonds from below 10 points (0.1 carat) to over 200 carats in weight.
  • Sarine Profile™: Offer succinct image and video information of a diamond's quality and beauty, to enable online transactions with a completely new level of confidence and cost effectiveness, and enhancing the in-store buying experience by empowering the consumer to make a truly informed decision. This allows jewellery chains to offer any stone from their entire (virtual) inventory, regardless of its availability in a specific outlet.
  • Sarine Diamond Journey™ Traceability: Just like a new-born, every rough diamond emerging from the mine has its own birth registration ID. At the mine each rough stone is digitally scanned, creating a unique 3D model. Other important identifying data, such as country of origin, is registered and the data is uploaded to its secure cloud-based system.
  • Lab-grown diamonds (LGD): Sometimes referred to as synthetic diamonds and they actually consist of carbon atoms structures that displays the same chemical and optical characteristics of a natural diamond crystal. However, LGD prices are generally much lower than natural diamonds, and not having any resale value due to mass production in recent years.

Sarine Technologies - Financial analysis

  • Sarine Technologies suffered a net loss of US$1.4m in FY19 due to the substantial decline in the sales of rough diamonds by miners in 2019 that reduced polishing activities by over 25% for the year. The reduction of rough stones entering the pipeline led to lower recurring revenue from Galaxy scanning activities. As a result, this change in product mix severely impacted its GPM, which narrowed significantly to 57.6% (FY18: 65.9%; FY20: 66.1%).
  • Nevertheless, a robust recovery in diamond polishing activities in the midstream has materialised in 4Q20, mainly due to diminished inventories of polished diamonds because of the lockdowns in India from late Mar-Jul, on the backdrop of improved retail activity worldwide in general, and an increased demand for polished diamonds.
  • As such, the group intends to be even more aggressive in offering attractive terms for acquiring its systems for smaller stones, tailoring its offerings to all types and sizes of manufacturers – e.g., a business model specifically for polishers of stones only 10 points and less.
  • We understand that Sarine Technologies will focus especially on its systems for smaller stones such as the Solaris™, as well as lower-end Meteor™ and Meteorite™ models, where the market remains fairly underpenetrated.
  • Overall, management is expecting to see significant deliveries of Galaxy® family systems in 2021, including those sold on a one-off basis, with some backlog of orders delayed in 1Q21 due to lingering pandemic-related logistical issues.
  • Though the continued uncertainties from the COVID-19 crisis remains, Galaxy inclusion scanning during the initial months of 2021 has reached record levels, with peaks nearing 95,000 stones a day. This would imply a run rate that would annualise to over 25m stones, as compared to just over 17m stones in FY19and just under 19m stones in FY20.
  • In other words, this should translate into higher recurring income (including Galaxy®-related scanning, Quazer® services, polished diamond related services and annual maintenance contracts), which typically accounts for almost 50% of Group revenue.
  • The business model for e-Grading will be industry-standard per-carat charge (optionally packaged with light performance grading and Sarine Diamond Journey™ traceability). In the longer term, Sarine Technologies aims to capture up to double-digit share of the US$500m annual market for diamond grading.
  • We believe a successful rollout of e-Grading in 2022 could further expand the Group’s recurring income and profitability given its GPM is similar to the higher-priced Galaxy® margins of ~80%. For now, we conservatively assume top-line contribution of US$5m or just 1% of annual market size in FY22E from this new segment.
  • On the expense side however, this may be partly offset by a reduction of Israeli government COVID-19 grants, while its R&D and marketing expenses should also normalise to pre-Covid level as the pandemic situation in the country improves.
  • Note that gross margin was unusually high at 76.9% in 1Q21 due to sale of inventory previously written-off. While this may not be repeatable in subsequent quarters, we believe that Sarine Technologies’ positive operating leverage will progressively kick in along with a gradual shift to a better product mix.

Sarine Technologies - Valuation

Sarine Technologies seeks dual listing in Tel-Aviv Stock Exchange

  • Meanwhile, Sarine Technologies intends to seek a dual listing on Israel's Tel Aviv Stock Exchange (TASE), which is likely to be completed during the 2Q21. It will conduct an NDR (Non-Deal Roadshow) in Israel commencing late-May ’21, which would potentially expose the Group to a broader investing public.
  • The move comes at an opportune time, and we should see greater interest in the stock (hence better trading liquidity) as the domestic institutional investors, are generally more receptive to and familiar with Sarine Technologies's business model. While there is no direct comparable, we observe that the forward P/E valuation for technology companies listed on TASE is about 20x on average (versus 15x in SGX).

See the 22-page report attached below for complete analysis on Sarine Technologies.

Eric Ong Maybank Kim Eng Research | 2021-05-28
SGX Stock Analyst Report BUY INITIATE BUY 0.70 SAME 0.70