Laboratory-grown diamonds have an opportunity for growth
The trend of market supply and demand imbalance has brought opportunities for the development of lab-grown diamonds, and the performance of upstream manufacturers has increased significantly.
At the beginning of 2022, the industrial agglomeration represented by Henan launched the “982 Plan”, which involved a total of 6 lab-grown diamond projects, with a total investment of nearly 10 billion yuan and a planned production capacity of more than 1.8 million carats.
Specific to the level of listed companies, core manufacturers such as Zhongbing Red Arrow, Yellow River Whirlwind, and Power Diamond took the lead in breaking through the capacity bottleneck and formulating future plans. Among them, the 120,000-carat HPHT production line of Zhongbing Red Arrow has been completed and accepted in early 2022, and the second phase of the lab-grown diamond project is also under steady construction; By the end of 2021, the Baojing project raised by Power Diamond IPO has been completed, and another 4 billion yuan of cultivated diamond fixed increase project has been approved for refinancing registration; The Yellow River Whirlwind also issued a refinancing plan, intending to raise 1.050 billion yuan through a private offering, of which 800 million yuan will be used for cultivated diamond industry projects.
According to Guosheng Securities Research Report, Wald, Sinomach Seiko, Funike and many other manufacturers have also announced their entry into lab-grown diamond production, of which Wald plans to invest 330 million yuan to focus on the construction of a 200,000-carat lab-grown diamond production line. At the same time, overseas manufacturers are also planning to expand production, and CVD manufacturers led by Diamond Foundry plan to build a Spanish plant and continue to optimize the production capacity of the Washington plant.
Although domestic and foreign manufacturers are actively expanding the production capacity of lab-grown diamonds, they still cannot meet the growth of demand in the short term, and the end consumer market of diamonds is huge, as a highly scarce non-renewable resource, natural diamond mining is bound to face depletion.
At present, the world’s top 40 diamond mines account for 90% of the total mining, of which 87% are less than 40 years old and will be exhausted in the next 25 years. Under the neutral scenario, Frost & Sullivan expects the global diamond market to face a supply-demand gap of 159 million carats by 2030.
It can be seen that the lab-grown diamond industry will enter a long economic cycle.
Imbalance between supply and demand
Compared with lab-grown diamonds, although the total global natural diamond production is large, the rough production has declined year by year since 2018, reaching 107 million carats in 2020, a decrease of 32 million carats compared with 2019, a year-on-year decrease of 23%; At the same time, the global production value of natural diamond rough is also declining, reaching US$9.2 billion in 2020, a decrease of US$3.8 billion from 2019, a year-on-year decrease of 29.23%.
According to the “2021-2022 Global Diamond Industry Report” jointly released by Bain & Company and the World Diamond Center in Antwerp, in 2021, affected by the economic recovery, the total retail sales of global diamond jewelry were about 84 billion US dollars, a year-on-year increase of 29.23%, and the total global sales of rough diamonds were 137 million carats, a year-on-year increase of 26.85%; The total global production of rough diamonds was 116 million carats, an increase of 5% year-on-year, and by the end of 2021, the total upstream diamond inventory was 29 million carats, close to the historical low, and the overall supply of lab-grown diamonds is clearly outstripped.
In addition, according to the official DeBeers website, large natural diamond mines such as Argyle (2020), Diavik (2025), Komsomolskaya (2021) were closed due to the end of their useful life; According to Bain & Company, the optimistic estimate of natural diamond production over the next 10 years is a compound growth rate of 1% to 2%, and a conservative estimate is a decline of 1% to 2%.
Under the neutral assumption that strong consumer demand for diamonds combined with reduced production of natural diamonds has stimulated the potential of lab-grown diamonds, Frost & Sullivan expects the global diamond market to face a supply-demand gap of 159 million carats by 2030.
Specific to the sales level, the increase in demand for lab-grown diamond fees mainly comes from relatively low prices and increased penetration.
According to Guosheng Securities Research Report, the price band of lab-grown diamonds is widely distributed, and the 4C grading can cover the high-end, high-end and low-end price ranges, and the retail price is only 1/3 of natural diamonds, which can compete with wedding jewelry upward and replace fashion jewelry downward.
At present, the mainstream brands of lab-grown diamonds include Xiaobaiguang, Kellys, DimondFoundry, LightBox, Brisal & Rerelucir Polleen Klin, and the sales companies of natural diamonds include Zhou Shengsheng, De Beers, Cartier, Tiffany and so on.
Taking the above four natural diamond six-jaw classic ring styles of E color VS clarity diamond ring as an example, the average price of 50-point lab-grown diamonds is 7,964 yuan, the price of natural diamonds of the same quality is 41,700 yuan, the average price of 3-carat lab-grown diamonds is 142,000 yuan, and the average price of natural diamonds of the same quality is 1,357,300 yuan.
According to Bain & Company, in 2021, the retail price of lab-grown diamonds in the price of natural diamonds decreased from 35% in 2020 to 30%, and the wholesale price of lab-grown diamonds decreased from 20% in 2020 to 14%, and there is room for further decline in the future.
In addition, the lab-grown diamond industry chain can be divided into three major links, namely upstream lab-grown diamond rough manufacturing, midstream processing and polishing, and downstream terminal retail. 95% of the rough produced by lab-grown diamond manufacturers goes to India for processing, and monitoring India’s import and export data can understand the prosperity of the lab-grown diamond industry.
According to GJEPC data, in 2021, the import penetration rate of lab-grown diamond rough diamonds in India was only 5.96%, and the export penetration rate of loose diamonds was only 4.81%, which increased to 9.10% and 5.90% respectively in March 2022.
From this point of view, the increasingly obvious price advantage of lab-grown diamonds and the steadily growing penetration rate will further promote the demand for lab-grown diamonds.
Specific to the industrial chain level, the profit distribution of the lab-grown diamond industry chain as a whole presents a “smile curve”, with the gross profit margin of upstream lab-grown diamond rough manufacturing 60% to 80%, midstream polishing and processing 10% to 15%, and downstream retail 60% to 70%, and the profit distribution of the industrial chain showing two ends of high and low middle.
According to Bain & Company’s data, the global production pattern of lab-grown diamonds is highly concentrated, with the output of high temperature and high pressure method mainly coming from China (more than 90%), and the chemical vapor deposition method mainly in India, the United States and Singapore.
In 2020, China’s lab-grown diamond production was about 3 million carats, accounting for 41.67% of the world’s total production, of which the top 4 manufacturers in the industry accounted for at least 75% of the production capacity. Henan Province as China’s largest superhard materials industrial base, its region of Zhongnan diamond, Yellow River cyclone, power diamond, Yu diamond four enterprises together accounted for at least 75% of China’s lab-grown diamond production capacity, due to the long-term loss of Yu diamond and has been delisted, so the analysis of the above three listed companies can understand the current situation of the domestic lab-grown diamond industry.
Specifically, Zhongbing’s superhard materials business is undertaken by Zhongnan Diamond, a wholly-owned subsidiary, and two wholly-owned grandchildren, Zhongnan Jette and Shentian Carbon, Zhongnan Diamond mainly produces industrial synthetic diamond and lab-grown diamonds, Zhongnan Jet, which is mainly cubic boron nitride, is the largest cubic boron nitride producer in China, and Shentian Carbon is the production of raw materials specifically for synthetic diamond, and the three companies can form a certain synergy.
In 2021, Zhongbing Red Arrow achieved sales of nearly 5 billion carats of synthetic diamond, and its subsidiary Zhongnan Diamond’s annual operating income was 2.407 billion yuan, with a net profit of 657 million yuan, accounting for 135.30% of the listed company’s net profit in the current period.
Specific to the technical level, Zhongnan Diamond CVD technology has reached the international mainstream synthesis level, HPHT synthesis technology has matured, can stably produce large-size high-temperature and high-pressure gem-quality cultured diamond single crystals within 30 carats, and can supply high-quality high-temperature and high-pressure gem-quality cultured diamond products of more than 3 carats in batches. Zhongnan Diamond has also actively deployed lab-grown diamond retail channels, and its lab-grown diamond experience store in Zhengzhou Jianye Triumph Plaza officially opened on October 1, 2021.
Power Diamond’s main business is lab-grown diamonds, diamond single crystals, diamond powder, and has mass-produced 2-10 carats of large-grain high-grade lab-grown diamonds, and large-grain lab-grown diamonds in the laboratory technology research stage have exceeded 30 carats.
In 2021, Power Diamond achieved an operating income of 498 million yuan, a year-on-year increase of 103.50%; the net profit attributable to shareholders of the parent company was 240 million yuan, a year-on-year increase of 228.17%; The gross profit margins of the three major products were as high as 57.93%, 50.02% and 81.38% respectively; The revenue of the three major products was 197 million yuan, 137 million yuan and 156 million yuan, respectively, a year-on-year increase of 428.11%, 38.14% and 54.54%. It is clear that the lab-grown diamond business is the main driver of Power Diamonds’ revenue and net profit growth. As a private enterprise, the power diamond expansion power is slightly higher than Zhongbing Red Arrow, its listing less than 1 year before throwing out a refinancing plan and getting approval, of which 2.060 billion yuan for the construction of Shangqiu Science and Technology Center and lab-grown diamond intelligent factory, 1.599 billion yuan for the second phase of diamond and lab-grown diamond intelligent factory construction, after the fundraising project reached production, the company’s lab-grown diamond production capacity increased by 2.772 million carats / year to 3.4132 million carats / year. It is 5.32 times the existing production capacity (2022), and the diamond single crystal production capacity will increase by 1.507 billion carats/year to 2.493 billion carats/year, which is 2.53 times the existing production capacity.
As another privately listed company in the lab-grown diamond industry, the Yellow River Whirlwind has also made certain breakthroughs in technology. According to the Zheshang Securities Research Report, the Yellow River Whirlwind uses HPHT to achieve batch preparation of 4-6 carats, and masters the synthesis technology of “10 carats cultivated diamond single crystal”, the product color reaches D color, the clarity reaches VVS level, and the yield rate reaches 50%. In April 2022, the company released a non-public offering plan, intending to raise 1.050 billion yuan, of which 800 million yuan will be used for the construction of industrialization projects for lab-grown diamonds. In addition, the company’s cooperation with local governments is conducive to expanding investment funds and improving the speed of its own capacity expansion, specifically, the company and the Jiyuan government jointly established Henan Jifeng Diamond Material Technology Co., Ltd., state-owned funds to purchase synthetic diamond presses, Yellow River Whirlwind provides raw materials, semi-finished products produced by the joint venture company are sold to Yellow River Whirlwind, Yellow River Whirlwind uses purification technology to turn semi-finished products into finished products for sale. Yellow River Whirlwind also established Henan Xuzhuan Technology Co., Ltd. as a joint venture with the Xuchang government, with the first phase of the project of 150 presses and an investment of 300 million yuan.
From the data point of view, the domestic lab-grown diamond production field has basically formed a three-oligopoly competition pattern, in the context of strong downstream demand, with the landing of capacity planning, its performance will also be further released.
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