Sarin Technologies

Maybank Kim Eng Research on 28 May 2013

DEBEERS has once again increased rough diamond prices by about 4 per cent in its May sight. According to Rappaport, rough prices have increased by about 10 per cent this year, while polished prices for one-carat diamonds rose by a mere 0.3 per cent (although prices for 0.30-carat stones rose by 9 per cent). Trading of rough in the secondary market is weak as sightholders would lose money after accounting for broker fees and other costs if they sell. Without the needed rise in polished prices, manufacturers would face a squeeze on their margins.

Consequently, Indian manufacturers are expected to maintain cautious manufacturing levels. Furthermore, it is usually a quiet period in the second quarter during this May summer-vacation period. We believe that this may lead to more subdued demand for traditional capital equipment sales in Q2 2013. Fortunately for Sarin, we believe that this could be compensated by stronger Galaxy sales that were being held back last quarter.

The market is looking at the Las Vegas jewellery show next week for indications of demand and prices in the polished diamond market. US retailers have experienced steady sales in Q1 2013 and the hope is for improved sentiments to compensate for slower demand in the Far East. A positive movement in polished diamond prices would provide a relief to the market.

Although the current situation may constrain liquidity for manufacturers in the short term, we believe that the repeated margin pressures faced by the manufacturers would stimulate an increased motivation to seek higher efficiencies through long-term investments in technologies.

We highlight that the investment case for Sarin is in the structural changes it would bring forth with its game-changing technologies. Other than the increasing penetration of the Galaxy in the rough diamond industry, its entry into the polished diamond markets should see more rapid developments over the next few years. Maintain "buy" and TP of S$1.66.

BUY