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Sarine Technologies
09-01-2019, 10:08 PM.
Post: #211
RE: Sarine Technologies
I am vested, but in big loss. 
Don't think current dividend is sustainable. But feel maybe abit undervalued now.

https://writingofinvestingnoob.com/2019/...rine-tech/

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14-01-2019, 08:29 PM.
Post: #212
RE: Sarine Technologies
As a company, Sarine has produced a record of profitability, maintained high dividend pay outs, holds a substantial amount of cash, and consistently finances its operations and expansion without the use of loans. It does this through focus on constant development of better (and more) products for its (potential) customers, with the aim of ensuring customer satisfaction. Indeed, these are some of the qualities that investors often cite as reasons to invest in Sarine.

Prospectors who compared the current share price of Sarine against the past 1, 2 or 3 years may reason that now is a good time to buy, since it has fallen so much. Likely, reasons such as those mentioned above will be cited to support the view. 

But those reasons may only remain valid if Sarine continues to thrive in the diamond industry. And it seems that the diamond industry is on the precipice of big changes.


Patsy of the Diamond Supply Chain

It is understood that Sarine serves the diamond manufacturers. But between the miners, manufacturers, and retailers, which is the most lucrative business in the diamond supply chain? Let’s take a look at the various metrics of three companies; Lucara Diamond (miner), Asian Star (processor), and Tiffany & Co (retailer).



a)      ROA & NPM

 
Return on Asset (%)        FY10      FY11      FY12      FY13      FY14      FY15       FY16       FY17     
Lucara Diamond              -10.7       -7.7       -3.2         26.3       14.4        22.6         23.4         17.8      
Asian Star                         3.1        2.6         2.1           2.4         2.7          2.6           2.2            2.4        
Tiffany & Co                     10.5       8.9         3.8           9.3         9.0          3.8           8.7            6.7
 
Net Profit Margin (%)     FY10      FY11        FY12      FY13       FY14       FY15       FY16        FY17     
Lucara Diamond                0            0          -17.9        36.1       17.2          34.7         23.9          29.5
Asian Star                         2.1         1.7         1.7          1.7         1.7            1.9           1.7             1.6
Tiffany & Co                     11.9       12.0       10.9         4.4         11.3          11.2         11.1            8.8


Lucara Diamond is a Canadian miner who owns the Karowe mine in Botswana, Africa. Its negative returns from FY10 to FY12 were due to start-up costs. Production only began in FY12, and went into full swing from FY13. Asian Star is a cutter and polisher in Surat, India, and was a public company since 1995. Tiffany & Co needs no introduction.

The two tables above should illustrate quite clearly the pecking order of the diamond supply chain; diamond processors have no/little ability to lower rough diamond cost, and raise polished diamond prices. Since Sarine is selling its products and services to only diamond processors, Sarine’s fortunes are very sensitive to the financial strength of these processors; bad times for diamond processors means Sarine can expect the same. And since its diamond processors earn tiny margins and low returns, it will be difficult for Sarine to further increase the selling price of its products and services.



b)      FCF/Profit and Dividend payout ratio

 
                                      Total FCF, FY10-FY17      Total Profit, FY10-FY17                FCF/Profit          
Lucara Diamond                US$163m                           US$282m                                  58%
Asian Star                          Rs350m                             Rs2,863m                                  12%
Tiffany & Co                       US$1,842m                        US$3,167m                               58%
 
                                      Total Div, FY10-FY17       Total Profit, FY10-FY17                Payout Ratio     
Lucara Diamond                US$217m                           US$282m                                    77%
Asian Star                          Rs171m                             Rs2,863m                                    6%
Tiffany & Co                      US$1,444m                        US$3,167m                                  45%


Looking at their level of free cash flow, profit, and dividends, Asian Star is again at the bottom with very low FCF/Profit and dividend payout ratio. Its low payout ratio is due to the need to conserve cash to expand working capital, and its low FCF/Profit is due to growing receivables (as a result of more business) and capacity expansion. So liquidity is tight for diamond processors. So far, Sarine has not had any major issue with receivables collection, though it is taking longer than before.


Sarine Tech                                  FY10      FY11      FY12      FY13      FY14      FY15       FY16       FY17

Revenue (million USD)                 45.6       57.8       63.7        76.3        87.7       48.5         72.5        58.6
Receivables (million USD)             3.1         6.6         7.3         15.8        13.4       11.3         16.9        17.2
Turnover (in months)                      0.8         1.4         1.4          2.5         1.8         2.8           2.8          3.5


c)      Liabilities to Assets
 
LTA (%)                              FY10      FY11      FY12      FY13      FY14      FY15      FY16        FY17     
Lucara Diamond                  5.5         29.4       33.1       17.9        27.9        25.4       33.7          29.8
Asian Star                            75.8       75.0       68.4       71.8        68.6        70.1       65.4          65.1
Tiffany & Co                         41.7       43.5       43.8       42.7        45.2        43.2       40.1          40.8


The story is still the same when looking at their capital structure. Because of the tiny margins, and hence low returns, diamond processors have to use plenty of credit to juice up its returns. Otherwise, the Indian investor would be better off buying Indian government securities yielding 7% to 8%. So Sarine’s customers – especially the smaller ones – have a higher credit risk. 

But in spite of all its poor financial metrics – low ROA, low NPM, low FCF, high leverage – these diamond processors are unlikely to fold so long as global demand for natural retail diamonds remain intact.

Nevertheless, the poor economics of diamond processing in India – where about 90% of the world’s diamonds are cut and polished – means diamond processors has to constantly look for ways to reduce cost. These become pronounced when revenue takes a hit, as it has over the recent years. The better-known casualty is Sarine, whose software was pirated by some of its customers, and whose receivables are taking longer to collect. The lesser-known casualty are the diamond cutters and polishers.

…27 year-old diamond polisher Ritesh Lad had ended his life by drinking poison in Punagam area. Lad’s salary had drastically decreased as the unit owner had slashed the wages due to low output. The very next day, a small diamond unit owner Vijay Dungarani too consumed poison on the way home from Vastadevdi Road. Sources in Surat Diamond Association said that he was extremely worried about making payments to his staff as the work had decreased due to slack demand.

https://www.reuters.com/article/us-india...SKBN1K000M

https://timesofindia.indiatimes.com/city...122042.cms


If the poor economics of diamond processing is the only concern of Sarine – where a few bad years of global demand for diamond hurts Sarine’s bottom line – then Sarine investors need not worry; a few bad years is acceptable, so long as global demand for diamond continue to be on a stable increasing trend. If this is the case, then Sarine’s shares are probably selling at a bargain price right now.

So the important question is: What will the future demand for diamonds be? Is it rising, plateauing, or falling?



Foundations of the Diamond Industry

The diamond production industry emphasizes on increasing yield, and quality assessment. These emphases are not unique to the diamond industry, but are particularly important to Sarine.

Increasing the yield that a processor can get from rough diamonds is important because rough diamonds are expensive, and when polished, command even higher retail prices. To ensure a processor is able to maximise the realisable value of the rough diamonds they bought, there is a need to optimise each rough diamond’s cut, carat, and clarity. Sarine fulfils this need with its scanning, planning, inclusion mapping, and laser sawing tools.

The accurate and objective assessment of a diamond’s quality (4Cs) is important because of, again, the high prices that retail customers are paying. Apart from brand, customers need (lab certification) to be convinced of the high prices that they are paying. And it is only because of high prices that quality assessment of each diamond is economically sensible. Diamonds are probably one of the few consumer products whose quality are individually assessed. And Sarine, again, fulfils this need with its hardware and software. With the increase in production of synthetic diamonds, Sarine has also developed the ability to differentiate natural and synthetic diamonds.

Without high prices, it may not make economic sense to utilise Sarine’s best-in-class products to increase yield, and it may not be necessary to utilise Sarine’s best-in-class products to assess a diamond’s quality. After all, diamond cutting and grading was traditionally performed without any laser, or computer aids. Lightbox – De Beer's synthetic diamond retailer – does not provide grading certificates of its synthetic diamonds; perhaps making a point of how unworthy they are?

As most would know by now, the high retail prices of diamonds were a result of the public’s perception that diamonds are rare, valuable, and together with its physical properties, an ideal proposal gift. These perceptions were a result of controlled rough diamond supply, and clever consumer marketing. And they are important because they are the foundations of the entire diamond supply chain.

However, these foundations are under attack by the emergence of large-scale manufacturing of high-quality 'synthetic' diamonds.


Attacking those Foundations

The only difference between a grown synthetic diamond and a mined diamond is simply that; its source. To the consumers who are not particular about the source of their diamond, they now have much cheaper options. And as the technology for producing synthetic diamond improves, the costs to produce them, and their retail price, will likely fall. 

There will be customers seeking to purchase cheaper-but-just-as-beautiful diamonds. Since a synthetic diamond is indistinguishable from one that is mined, the consumer need not worry about the embarrassment caused from being called out for wearing a ‘fake.’  But how much of such customers are there? Morgan Stanley estimates that synthetics could take 15% of the melee (<0.2ct) market by 2020.

If this was all there is to it, then the natural diamond supply chain parties can breathe easy; losing 15% is not a lot, and they could recover as the market size continues to grow. But the bigger worry is that the market size may not continue to grow, or worse, shrink.

Growing diamonds in a lab attacks the foundations of mined-diamonds. When synthetic manufacturers increase their production and lower their costs, diamonds will no longer be rare. Instead of taking millions of years to form, they will now only take days to weeks. And because they can be mass-produced, and at lower costs, they will also no longer be valuable. When diamonds are no longer considered rare or valuable, will they still be the gift of choice for proposals? If demand for diamonds are substantially reduced, all parties in the natural diamond supply chain will be hurt badly.

The tables below shows the revenue of Chow Tai Fook and Tiffany & Co. For CTF, even though the number of point-of-sales grew over the past 7 years, the revenues from jewellery did not follow the same trend. For Tiffany, revenues did not grow meaningfully as well. 


Chow Tai Fook                 FY12      FY13      FY14      FY15      FY16      FY17      FY18
Jewellery Revenue           15.3       13.1        16.3       17.3       15.4      12.8       13.7              (in billion HKD)
Jewellery POS                   1.4         1.6         1.8        1.9         2.0        2.2        2.4              (in thousand)
Total Revenue                  56.5        57.4       77.4      64.2       56.5      50.8       57.8              (in billion HKD)
 
Tiffany & Co                     FY11      FY12      FY13      FY14      FY15      FY16      FY17             
Revenue                           3.6         3.8        4.0         4.2         4.1         4.0         4.1              (in billion USD)


Presently, the production of synthetic diamonds is estimated at 2 million carats a year. This is tiny compared to about 150 million carats of natural rough diamonds produced each year. So it is unlikely that the revenue figures of CTF and Tiffany were strongly influenced by the emergence of synthetics. As production of synthetics increase, its effect on natural diamond will become clearer.


A Future for Sarine?

Some may raise the point that synthetic diamonds still require the cutting and polishing. This is true. But whether Sarine will benefit from an increase in synthetics depends on two points. The first is whether the entrance of synthetics may cause the collapse in demand for diamonds, as mentioned above. The second is whether Sarine is actively courting synthetic manufacturers, or the processors that work for these manufacturers.

On the second point, Sarine’s competitor, OGI Systems, appears to be more active in its pursuit of business from diamond growers; OGI’s website offers products that are specific to diamond growers. Though these products may be the same or similar to those used on natural roughs, it shows OGI’s willingness to work with growers. Sarine, on the other hand, does not seem to be making such initiatives. Instead, it seems more aligned to the natural diamond parties, having sold its products to the major gem labs, and developed products to differentiate between a grown and mined diamond.

The future narrative of the diamond industry is not clear. And this make it difficult to value Sarine. But given the circumstances, and erring on the side of caution, Sarine appears fairly valued to me.


References

https://www.bain.com/insights/global-dia...port-2018/

https://beta.scmp.com/lifestyle/fashion-...nal-market

https://www.forbes.com/sites/pamdanziger...c32073f529

https://www.nytimes.com/2018/02/09/your-money/synthetic-diamond-jewelry.html

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16-01-2019, 03:42 PM.
Post: #213
RE: Sarine Technologies
thanks a lot for putting it altogether like this. thinking v hard whether to get in in now amidst all the uncertainty. the last time it traded at this level was 2011-2012 where its revenue is about what it is now. but its earnings then was roughly double what it is today, so i think it's btwn fairly to over valued.

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16-01-2019, 07:43 PM.
Post: #214
RE: Sarine Technologies
If you really like it, and you're sure of it, then go big with it.

If you really like it, but you're not so sure about it, then make a smaller wager. Or just look elsewhere. There are many other securities to consider too.

The situation isn't going to change in the short-term; it will take a few years to see the effect of synthetic diamonds (if any) on the industry.

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