How Sarin Technologies can turn diamond manufacturer squeeze to its advantage

By servicing demand for higher efficiencies.

According to Maybank Kim Eng, diamond manufacturers are now in a short-term liquidity bind, and coupled with persistent margin pressures, will convince some to upgrade to higher effincies by investment in technologies, including those by Sarin Technologies.

Here's a more complete company and sector analysis from Maybank:

Rough and polished prices disconnection. DeBeers has once again increased rough diamond prices, by about 4% in its May sight. According to Rappaport, rough prices have increased by about 10% this year, while polished prices for 1-carat diamonds rose by a mere 0.3% (although prices for 0.30-carat stones rose by 9%). 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.

2Q13 capital spending may be soft. Consequently, Indian manufacturers are expected to maintain cautious manufacturing levels. Furthermore, it is usually a quiet period in the second quarter due to the May summer vacation period. We believe that this may lead to more subdued demand for traditional capital equipment sales in 2Q13. Fortunately for Sarin, we believe that this could be compensated by stronger GalaxyTM sales that were being held back last quarter.

Las Vegas show to set tone for polished market. 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 1Q13 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.

Crisis is opportunity for Sarin. 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.

Maintain Buy. 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 GalaxyTM 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 SGD1.66.