Key investment points:
Introduction: This report analyzes the emerging track of diamond cultivation, explains the impact of technical path and industry policies on the development of diamond cultivation industry, as well as the resumption of natural diamond industry, deduces the future change trend of natural diamonds and the opportunities for diamond cultivation, and answers the questions of why the diamond cultivation industry rises and what the future prospects are generally concerned by the market. After dismantling the diamond industry chain, we believe that at the current stage, the concentration of the upstream industry is high, and the emergence of industry leaders has laid the foundation of the industry. The downstream is still scattered and in the exploration stage, but it is very important for the establishment of the overall tone of the industry in the future and the key to the long-term survival of the industry. With the upgrading of upstream technology and the maturity of downstream consumer education, the cultivated diamond market is expected to mature after two to three years of rapid growth.
Why does the diamond track suddenly rise & is the supporting logic behind the industry sustainable? (1) Synthetic diamond has been renewed for a long time. Industrial products have opened a new jewelry track. The current technology has not reached the ceiling, and there is room for further growth and Optimization in the future. Synthetic diamond was mainly used in the field of industrial manufacturing in the past. With the iterative upgrading of production technology, large single crystal synthetic diamond can be mass produced, activating more application scenarios. Cultivating diamond production is divided into high temperature and high pressure method and CVD method: the application scenario of high temperature and high pressure method is narrow, which can be used in industrial products and jewelry. There is room for continuous cost reduction and efficiency increase in the future, and the main advantage lies in low cost; The cultivated diamonds produced by CVD method have a wide range of applications. Compared with the products produced by high temperature and high pressure method, they can be applied to thermal, optical and electronic fields, and there is a large space for technological improvement. (2) The price of natural diamonds will continue to rise in the future, expand the price gap with low-cost jewelry, and cultivate diamonds to obtain growth opportunities. By reviewing the price fluctuation history of the natural diamond industry, we find that the decline and ebb of natural diamond prices in history are due to the misestimation of market demand by industry leaders led by De Beers, resulting in too many diamonds flowing into the market. Combined with the current downward trend of global reserves of natural diamonds, the industry leaders may continue to tighten the volume of natural diamonds in the future. This is partly confirmed by the multiple price increases of natural diamonds in 2021. Cultivated diamonds are low-cost substitutes for natural diamonds. The reduction of production and price increase of natural diamonds provide an opportunity for the rapid growth of cultivated diamond market. (3) Cultivating diamonds can meet the needs of mass marriage and fashion jewelry, and has an incremental and stock market. Cultivating diamonds can not only cut part of the stock demand from the existing natural diamond market, but also obtain incremental space from the fashion jewelry market originally dominated by gold and gemstones. It is predicted that the total space of cultivating diamond market will reach US $18.29 billion in 2025.
The upstream of the industrial chain has the attribute of industrial products. In the early stage of the industry, the Underwriters regulate the price and output, and the downstream follows the consumption logic, focusing on establishing the brand image and creating a premium to ensure sustainability. The cultivation diamond industry chain is divided into four links: equipment production, upstream cultivation diamond production, midstream processing and polishing and downstream terminal retail. At present, the investment value of the industry chain is mainly concentrated in the upstream diamond production and downstream terminal retail. (1) Equipment production link: is it easy to increase production by cultivating diamond production equipment? The equipment manufacturer is mainly responsible for the production of the core parts of the machine and the assembly of the whole machine. The core parts have technical barriers and need technical accumulation, so it is difficult for new players to enter. The hinge beam is the core component of the high temperature and high pressure method equipment. The quality of the hinge beam is related to the service life and production cost of the equipment. At present, the production process of high-temperature and high-pressure equipment in China is divided into forging and casting. According to channel research, the annual output of all forging and casting presses in China is about 1500, which is limited, which limits the production expansion speed of upstream diamond producers to a certain extent. The technical barrier of CVD equipment production is relatively low. There are many manufacturers at home and abroad, among which India has the largest number of equipment. However, the core barrier of CVD microwave equipment lies in the airtightness of the equipment. Although general equipment can produce cultivated diamonds by CVD method, air tightness defects will lead to poor quality of finished products. At present, high-quality diamonds are produced by CVD method, which are mainly purchased from Japanese manufacturers, and the annual output is scarce. (2) Cultivating diamond production: will production capacity be released too quickly, resulting in oversupply? Limited by the capacity of equipment manufacturers, it is difficult for diamond producers to produce large quantities in the short term. At the same time, in addition to jewelry, there is also a shortage of industrial diamond supply, and the phenomenon of short supply is expected to continue. Taking China’s high-temperature and high-pressure production as an example, the total number of six sided top presses in service is about 10000, of which about 3000 are used to produce and cultivate diamonds, and the rest are mainly used to produce industrial diamonds. The presses are concentrated in the manufacturers of the head. Small enterprises have a small number of presses and old models. Leading producers, led by Henan Huanghe Whirlwind Co.Ltd(600172) and Zhongnan diamonds, have contributed most of China’s diamond production and contracted most of the newly produced equipment, making it more difficult for new enterprises to expand production. On the premise that the output of a single equipment cannot be greatly increased in a short time, it is difficult to release the upstream production capacity of diamond cultivation in the short term. The six sided top press can produce industrial diamonds and gem grade diamonds. It is less difficult to switch the production mode between them. At present, not only the supply of gem grade cultivated diamonds is in short supply, but also a large number of gem grade diamonds are converted to industrial diamonds, which also leads to a shortage of industrial diamonds. (3) Midstream processing: diamond processing is an Indian national industry. Will the midstream pattern be maintained? Diamond processing is mainly concentrated in Surat, India, with high labor-intensive attributes. India has built diamond processing into a national industry and formed a certain bargaining power over upstream producers. At present, China has also begun to set up processing and polishing factories, which is expected to form a midstream pattern of processing high-quality diamonds in China and low-quality diamonds in India in the future. (4) Downstream retailers: is consumer demand real? At present, the demand for diamond cultivation is concentrated in the United States, the market accounts for 80% of the total global scale, and the market education is relatively mature, with a penetration rate of about 8%. Many overseas traditional jewelry retail brands began to get involved in the diamond cultivation business. After the jewelry retailer signet sold through the pilot sales of the online brand James Allen, it then sold and cultivated diamonds under the offline brand, reflecting the real and growing demand of the U.S. market. Swarovski and Pandora, two fashion jewelry brands, have also carried out diamond cultivation business. Strong brand strength can play a positive role in the promotion of diamond cultivation. The U.S. market has developed rapidly in the three years since 2018. The Chinese market is generally three years later than the United States. In 2025, China’s cultivated diamond market is expected to reach the current level of the United States. At present, China’s downstream market is still in the embryonic stage of the industry, and the number of retail brands is small. However, the emerging brands led by xiaobaiguang showed a high growth rate in 2021. They have recently completed the pre-A round of financing, and their future performance can be expected. A number of jewelry brands also said they would set foot in the field of diamond cultivation in 2022. (5) Large underwriters: is the price system for cultivating diamonds stable? The Underwriters controlled the speed of entering the market by underwriting most of the upstream finished products, assumed the position of De Beers in the natural diamond industry to a certain extent, and served as the task of stabilizing the industry price system and establishing the brand tone in the early stage of the industry. With the increase of upstream production, it is difficult for a single underwriter to absorb all upstream production capacity for a long time. However, after the formation of downstream brand potential energy, retail products will be maintained by brand premium, and the impact of price decline will be absorbed by the upstream and midstream.
Downstream retail brands lead the cultivation of diamond fashion, and the U.S. market can see the future consumption trend.
Cultivating the diamond industry is demand-oriented. At present, although the overall supply is in short supply, the long-term logic still depends on whether the downstream demand can rise. Products permeate from wedding and self pleasing fashion consumption scenes. The demand for diamond decoration for wedding will remain basically stable for a long time in the future. Cultivating diamonds can transform part of the original customers of natural diamonds. Because the price of cultivated diamonds is lower than that of natural diamonds, and the cost is lower. At the same time, special-shaped diamonds are easier to produce and have strong plasticity. They are suitable for making fashion jewelry products. At the same time, compared with natural gemstones, the tonality of synthetic jewelry brands is more grounded and the scope of cross-border joint names is broader (for example, Pearl brand Mikimoto once joined hands with Hello Kitty), which is conducive to broadening consumer groups. Similarly, cultivating diamond brands has more imagination space and attracting millennials and Z generations who love fashion culture. At present, retail brands such as vrai, lightbox and signet are selling and cultivating diamonds, focusing on meeting the needs of marriage and taking into account the daily wearing of jewelry products, while Swarovski and Pandora mainly start with fashion products. These global well-known jewelry brands can effectively promote the cultivation of diamonds, let more consumers know about the cultivation of diamonds, and improve their awareness and penetration.
Investment suggestion: focus on upstream production enterprises at the current time point, and follow up the trend of downstream retail brands. At present, the whole industry is still in the growth stage, the volume of downstream demand is small, and the proportion of consumer education is still very low, but the demand trend is relatively certain. At present, the main competition is the capacity expansion speed of upstream manufacturers. Upstream manufacturers with first mover advantage, large overall capacity scale and perfect technical R & D team have high investment value. The demand for upstream capacity expansion brings growth space for equipment manufacturers. At present, it focuses on: North Industries Group Red Arrow Co.Ltd(000519) , Henan Liliang Diamond Co.Ltd(301071) , and it is suggested to focus on: Henan Huanghe Whirlwind Co.Ltd(600172) , yudiamond, Sinomach Precision Industry Co.Ltd(002046) . With the gradual improvement of market education and the gradual entry layout of various retail brands, the upstream capacity will certainly exceed the demand at a certain point in time from the medium and long-term perspective, but the reputation is stable. Retail brands can maintain a certain brand premium and will not be affected by oversupply. At present, it is recommended to continue to track overseas jewelry brands signet, China’s Mclon Jewellery Co.Ltd(300945) , Guangdong Chj Industry Co.Ltd(002345) .
Risk warning: the upstream production expansion speed is lower than the expected risk; Market competition intensifies risks; Risk of too slow growth of downstream demand; Cultivate a sharp downward risk of diamond quotation.
