3 Risks Confronting Sarine Technologies Ltd That Investors Should Know

Sarine Technologies Ltd (SGX: U77) is an Israel-based company that develops and manufactures precision technology products that are used in the processing of rough diamonds and gemstones into the polished versions you see in jewellery stores.

The company recently caught my attention due to its long-term market-beating performance. Over the five years ended 19 November 2017, Sarine Technologies’ share price had climbed by 181%; in the same period, the Straits Times Index (SGX: ^STI) was essentially flat.

As such, I decided to take a deeper look at the company. Now, as an investor, there are many aspects to learn about a business. But in this article, I will focus on just one – the risks that can affect Sarine Technologies’ business.

A weak economy

Diamonds are luxury goods. As such, its demand usually tracks consumer sentiment, which in turn, is driven by general economic conditions. In other words, a strong economy will be good for diamond sales and this could benefit Sarine Technologies’ business.

The flipside is that any significant economic downturn could have a strong impact on consumers’ demand for diamonds. If so, this will deter diamond manufacturers from investing in new machines and services from Sarine Technologies.

China’s economy grew by 6.9% in 2015. Although that’s significantly faster than many of the world’s largest economies, it was still the slowest rate of growth seen in 25 years for the giant Asian nation. This resulted in restrained demand for polished diamonds from China in 2015, which in turn partly caused Sarine Technologies’ revenue in the year to fall by 45%.

Changes in diamond prices

Sarine Technologies derives most of its revenue from diamond manufacturers who process rough diamonds into polished gems. As such, there must be enough spread between the prices of rough and polished diamonds in order for the diamond manufacturers to carry out their business.

But this spread can become thin to an extent that diamond manufacturers struggle to make a profit. This happened in 2014 and 2015, when there was a combination of high rough diamond prices and stagnant polished prices. This caused a big drop in rough diamond processing activity.

As diamond manufacturers who cannot profit from the thin spread end up tightening their belts, demand for Sarine Technologies’ products became one of the main casualties.

A failure to protect proprietary technology

Sarine Technologies’ proprietary products and services appeal to customers because they help the diamond manufacturers lower costs and derive greater value from rough diamond stones. And, the company does so through technological leadership. This is why Sarine Technologies has to constantly focus on research and development.

The risk here is that Sarine Technologies’ intellectual property may be copied by competitors, especially if the company fails to protect its intellectual property rights. Moreover, even if the company has done everything within its efforts to protect its rights, there is no guarantee that its competitors can’t imitate and reproduce the same products or technologies at a lower cost.

But to Sarine Technologies’ credit, its inclusion-mapping systems, the Galaxy family of products, was introduced in 2009. Till date, there’s no competition for the systems in the market. (Inclusions are natural defects found in rough diamonds when the stones are formed in the earth; polished diamonds without inclusions are worth more than those with inclusions.)

A Foolish conclusion

What I’ve shared above are three risks that investors should pay attention to with Sarine Technologies.

Having a grasp of the risks associated with a company’s business can help investors better understand said company and also make better judgements during times of significant uncertainties.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.