Posted by: donmihaihai | February 3, 2008

Woman best friends’s best friend.

Let say I walk into a bright jeweler shop to buy a contemporary diamond ring for my love one. With ever attentive sale personnel, I make my choice, make payment, and walk out with the diamond ring in a small pretty wrap box and a certificate. My mind is already on how I going to give to lady I love.

Hold on for a second, since I know nothing much about how to grade diamond, how do I know that this small little diamond in my hand is of quality, not synthetic diamond, cheap fake and maybe blood diamond. Ya I know, the diamond look extraordinary beautiful but I start to worry. Walk back to the shop and approach the same sale personnel with questions. Everything that one need to know are in there, she point to the certificate.

I had made purchase of diamond ring before but not often, each time I did not even look at whatever certificates being provided because I just trust that those chain retailers are of reputation. Grading diamond is not a common skill and it is not hard to imagine that most sale personnel do not have the skill as well. Retailer does not want to be associated with fake diamond as well because once it get blow up, no one will visit the retail chain again. Why not going back? Because we, normal people do not have the skill, we rely on trust, profession and well that certificate.

Why all these stories on diamond? Because of Sarin, which the equipments they sell involve mainly on most part of process where the output are in the certificate. Certificate is most important part of the industry where information asymmetry gap are close(or narrow). Because of the importantness, it is not hard to imagine that a big cut of the profit(proportional to the sale) in the value chain goes into Sarin hand.

But why Sarin? Why not any other equipment manufacturer in the industry? Sarin competitive advantage is clearly written on its IPO prospectus. Seldom had I read a prospectus that can clearly state the company competitive advantage. On page 64, it states “There are essentially fewer than 50 major gemological laboratories worldwide. The leading laboratories that have the most influence on the diamond industry today, all of whom are our clients, utilizing products.” What follow by are a list of 8 laboratories. And at beginning of the prospectus it state “ Opinion leaders in the industry mainly use our products, our products are used almost exclusively by the major gemological laboratories worldwide – an endorsement of our products as perceived by the other industry players.” This is big deal because Sarin products are for every player in the value chain excluding consumer. They are looking for some standard, authority where it can be easy feed into consumer. And when these peoples, opinion leaders are using exclusively or mainly Sarin products, it is a mark of authority for Sarin products. One get credibility by using the same products from just a few leading equipment brand names, any other name just don’t make the cut especially when the end buyers are looking for status, the rich that don’t mind paying for quality that come along with the brand(local or global diamond/jeweler brand), cheap diamond(low quality because of cut, clarity, colour or synthetic diamond) is not what most diamond buyer want.

When an equipment commanding that status usually charge high price for the products, and usually for this kind of stuffs, the economic is higher status charge higher price or because of increasing price lead to higher status. This mean Sarin is actually at a sweet spot. So how Sarin is well known in the industry? I don’t know but just by google “Sarin and diamond industry” I can get lot of results/information and not those provided by Sarin on their latest acquisition, new products and words like leading technologies leader. Sarin seem to be bigger or/and of great important in the industry than I thought. Beside that Sarin announcement on 28 Jun 2007 that “Hari Krishna becomes the second of Sarin Century Club” is another point to think about. What so special that an Indian manufacturer and exporter started in 1992 thrills to be using their products and becoming a member.

With the status and financial rewards(after a big portion is being paid to management, employees and R&D) why Sarin is not constantly being attack by competitors, especially big time MNC equipment manufacturer/brand name? I don’t know whether they tried or not, but this industry is so small and at the leading age of the diamond industry in which Sairn itself barely generated over USD30 million in revenues. If they come in how much more sales can be extracted? Being a big fish in a growing small pool is much better than being a small fish in the ocean.

Recent news that South Africa, the biggest raw diamond exporter is restricting the amount of rough diamonds to country like India. Sarin get most of its profit from India so is it a concern? Well, let look at it another way. Israel has a long deep history with the diamond industry but it is not even being mentioned because of the insignificant contribution to Sarin. So if it is shifting to South Africa, something don’t change as diamond buyer does not care whether rough diamonds are being cut and polish in India, Israel or South Africa, they are still demanding the same thing. So if South Africa decided to develop their own downstream, and if they cannot produce finish diamond at the standard required by those buyer, they cannot demand the same kind of price and is going to be dump somewhere that are looking for cheap stuffs. For that, as like manufacturer in India, they are still going to purchase products from Sarin and other leading equipment maker.

Why not coming up with their own equipment? Well, take a look at contract manufacturing or just plain manufacturing that many are being shift from Southeast Asia or more developed countries to China. After attracting so many investments for export, due to cheaper labour, where they buy their equipment? The same MNC or just shift those equipment from factories that are closing in other countries. China tries to build up their own equipment products, usually selling at a cheaper price but after years it still haven’t reach the stage with recognition. For a small and specialise industry where Sairn belong, the lead time should be longer with Sarin keen with widen their advantage.

I won’t be surprise that Sarin sales to other countries are surging. In fact it is happening right now.

How is Sarin trying to widen their competitive advantage? Thru R&D. Look at the amount of R&D they spent in the last few years, never slow down even when the industry experience slowdown. R&D does not guarantee success but for Sarin, without or cutting back R&D mean lesser/no product. Each new products may not generate the same kind of wonderful sales but like bolt on acquisition or new service/products from google which may be money loser but increasing the chances of user clicking on the online ads. Like them, Sarin concentrate on the 4 Cs of the grading and some sub parts with each new products or improved products. It is not hard to see Sarin improving on their competitive advantage.

Sarin recently spent quite a sum of money buying a big interest in IDEX Online. It seem like IDEX Online is a leader in the area but the number suggesting that financially it is very weak. But well, not much information is available so more clarification is required. But it is an interesting acquisition as long as IDEX Online can generate good profit because both can make each other stronger in the industry.

Is Sarin cheap? Well, at $0.33, it is trading at around 2 X book value but there is actually nothing in Sarin B/S except cash. Neither looking at BV is a good way to value Sarin. At $0.33, Sarin is selling at a valuation of around SD$83 million in the market. After taking away SD$30million in cash(after acquisition), Sarin is valued at SD$50 million. For the last 3 years, Sarin generated around SD$30 million in free cashflow. So it means at $0.33, Sarin is trading at 5 X no growth free cashflow.

Now this is something very interesting as the market is offering such a strong player in the industry with wonderful numbers at such a cheap price. Of course there is an important factor to consider as Jewish and Israel.

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