Pearls of Wisdom: Can Atlas Pearls maintain its impressive turnaround and secure a prosperous future?
I stumbled upon Atlas Pearls during my search for another troubled company that have staged a turnaround. Today, Atlas Pearls trades at an adjusted P/E of 4.67 and a P/FCF of 3.8. The company experienced a 50% jump in revenue in FY 2024, fueled by robust demand for its South Sea pearls. As a result, the management declared a substantial dividend – rewarding shareholders and signaling an upbeat outlook.
In this post, you will find:
Brief introduction to the pearling industry
How and why pearls are in demand
How is Atlas Pearls performing and its strategy to improve ASP
Disclosure: I hold shares in this stock.
Disclaimer: DYODD. Not investment advice.
About the Company
Atlas Pearls (ATP) is a pearl farming company that is listed on the ASX. Ticker ATP.AX. ATP started the first pearling farm in Kupang – East Nusa Tenggara in 1994 which was shut down involuntarily during the East Timor movement for independence. Since then, ATP found new locations and now operate 8 farms across the Indonesian archipelago. Rather than farming oysters from the wild, ATP hatch and grow oysters themselves to produce the famous South Sea Pearls.
8 Farms Across the Indonesian Archipelago
A Brief Introduction to Pearl Farming
Pearl farming is essentially an agricultural activity. Oysters are used for saltwater pearl production while mussels are used for freshwater pearl production. A bead (made from mussel shell) is inserted into oysters or mussels to act as the nucleus around which pearl will form. This process is known as nucleation or implantation. The oysters/ mussels are then placed back into the water in baskets/ nets suspended in the ocean/ river. Water quality is of paramount importance to ensure that oysters/ mussels get sufficient nutrients and grow healthily free from diseases.
Pearls typically take 1-3 years to form and mature. Akoya pearls take at least 1 year to mature, while South Sea pearls and Tahitian pearls may take 2-4 years to mature. After which oysters/ mussels can be re-nucleated to produce another pearl.
Pearls as Jewelry
Pearls are unique among all other jewelry because they are grown out of living organism. Therefore, pearls were extremely rare and only the nobles could have access to pearls. Pearl cultivation was first pioneered by the Japanese in 1890s and since then pearls have become more widely available. Pearls are also associated with the symbol of peace as pearl farming/ cultivation is only possible during peaceful times.
Currently the most popular pearls for jewelry making are – ranked in order of exclusivity:
South Sea – originate from Australia, Philippines Indonesia. Large round pearls, used for high end jewelry
Akoya – mainly produced in Japan. Classic round shape, usually smaller than South Sea pearls.
Tahitian – also known as black pearls. Originate from Tahiti.
Freshwater – lakes and rivers of Zhejiang, China
Keshi/ Baroque – irregular, non-spherical pearls
Pearls are typically made into bracelets, necklaces, earrings, rings etc.
Pearl Supply
The world’s most premium pearls are produced by Paspaley. Paspaley’s South Sea pearls are usually large in size, round in shape and have the best luster/ color when compared against other pearl types. Paspaley uses wild oysters rather than hatchery-bred ones, hence the rarity. Paspaley’s South Sea pearls are regarded as the pinnacle and are often categorized as luxury jewellery.
Price in AUD
Meanwhile, excluding Paspaley, the other 4 key players who also cultivates South Sea pearls include the following:
Rio Pearls – 10 farms (Indonesia, Myanmar, Philippine, Tahiti, Aus). Produces 100-200k pearls per year (guestimate)
Jewelmer – mainly in Philippines. Production figure undisclosed.
Autore – 10 farms in Aus, Indonesia. Produces about 350k pearls yearly.
Atlas Pearls – 8 farms in Indonesia. Produces about 500-600k pearls yearly.
Atlas Pearls is the only publicly listed company among all 4. Based on the disclosed production figure, Atlas harvests grew from 370k pearls in 2017 to 560k pearls in 2021. The production plateaued between 2021 and 2024 at 500~600k pearls. Despite growing volume, it is still very negligible when compared to production volume of Akoya pearls.
Akoya pearls ranges from entry level/ affordable luxury (200-500USD) to high-end luxury (>10,000USD). Mikimoto, Tasaki, Otsuki are the 3 key Japanese players in Akoya pearl cultivation. The Japanese cultivation had experienced a sustained declined due to diseases, disruption due to Covid 19, reduction of pearl farmers etc. Rumor has it that production has dropped from 70t to 20t (or about 15~25 million pearls) over the course of 20 years.
Meanwhile, China is the largest producer of freshwater pearls. Freshwater pearl cultivation in China had seen production dropped from 1800t to 450t due to changes in environmental regulations. Freshwater pearls are typically the least expensive among all pearl types.
In a nutshell, it does seem like pearl cultivation has experienced a significant decline in recent years. Besides the reasons stated above, the industry might also be recovering from an oversupply situation.
Trends
Fashion trends typically ebb and flow, and jewellery is not exception. Such trends typically operate on a “20-year cycle” – trend re-emerges 20 years later, if they do rise again. The 20-year cycle has been pretty eminent partly because every 20 years there is a ‘graduation’ of young adults who look to define their identities. Often times, trend from 10 years ago feel too outdated, while trend from 20 years ago are treated as vintage. However, I’m not surprised if the fashion cycle has been cut short. Afterall, we all live in the social media age that constantly craves dopamine and excitement.
A quick look at trending brands of recent years – such as Pandora, Swarovski, H&M, Lululemon etc all show very prominent stages of rise, peak, and decline/ stagnant.
These brands become household names simply because they fulfilled consumer needs (lifestyle related needs) and cultural trends (psychological and emotional demands) of the time. Both evolves dynamically in the society and are heavily influenced by KOLs/ influencers, subcultures within the society, pop culture, and lastly the persistent shaping by brands and marketers. Diamond is not a brand but definitely worthwhile to include in this discussion. Diamond had its peak in 1950 when De Beers launched the “A Diamond is Forever” campaign. However, diamond is facing headwinds at the moment due to changing consumer behaviour, especially diamond has always been associated with environmental damage and unethical production.
The Pearl Renaissance
Pearls have a long history of being used as jewellery, perhaps up to thousands of years. Atlas Pearls reported that there was a global oversupply issue between 2012 and 2016. It is not until 2023 when there was a massive uptick in demand that saw pearl prices spiked by 200-300%, where Atlas Pearls reported record average price of AUD 103/ piece (South Sea pearls) in 1H 2024. And the reason is none other than the insatiable demand from Chinese buyers. Generally, the long cultivation period (2-4 years) for pearls means that any sudden spike in demand would definitely push prices up tremendously.
Is Chinese demand structural, or just a fad?
In mid of 2023, a famous actress Ni Ni made a social media post of herself wearing Tahitian pearls. It is believed that Ni Ni herself is very passionate about pearls and the series of post she made was basically photos of herself, taken by herself, wearing multiple style of pearls with different outfit, at various occasions.
Ni Ni Wearing Pearls
The subsequent pearl auction (held by Robert Wan – a pearl trader based in HK) in September then saw massive influx of eager buyers who snapped up the pearls in the first hour. The prices of Tahitian pearls also skyrocketed during the auction. And of course, the buyers were mainly Chinese. The chain reaction started when the demand spread beyond Tahitian pearls to other types after that.
Now I’m not entirely sure if we should attribute the entire renaissance to Ni Ni’s social media post. But let’s carry on. Since then, pearl seems to have found a new market:
New sales channel in livestreaming by KOLs/ influencers reintroduced pearls to the public.
Pearls no longer belong to old people -- young generation starts to appreciate pearls. Even men are wearing pearls (is pearl becoming gender neutral?).
Pearls are now part of the “quiet luxury” subculture. Furthermore, pearls are now seen as symbol of soft/ gentle, cultural heritage, elegance, refined taste, sustainability (vs mining).
While all trends come and go, I do believe that pearl renaissance is probably in its early innings as it could go on for another 2-4 years. However, understanding how dynamic consumer preference is, it could also fall out of favour next month.
How is Atlas Pearls Doing?
Atlas Pearls stock has performed poorly since listing – reaching all time low in 2020-2022, before the surge in 2023/24 due to spike in pearl demand.
Below is a summary of the company’s 10-year financial performances.
Several observations:
Revenues had averaged about 16m AUD from 2015 to 2022 and the company had accumulated losses up to 8m AUD during this 8-year period.
The company conducts yearly revaluation of biological assets – based on prevailing pearl prices, estimate of pearl quality, oyster mortality rate etc. In 2024 due to huge demand spike the company recorded 17m AUD of revaluation gain. This somewhat distorted the bottom line. Excluding oyster revaluation, the company made 14.5m AUD in 2024 vs 8.5m AUD in 2023. (Note that the pearl craze in China started in the middle of 2023).
The company was relying on debt financing from 2015 to 2021 but promptly paid them off when it started to generate profits in 2022.
Operating cash flow experienced an uptick since 2021. The company accumulated 38m AUD of operating cash flow from 2021 to 2024.
In 2024, the company also declared its first dividend of 8m AUD (1.85 cents/ share) in 10 years.
The improvement in financials can be simply attributed to the following 2 factors:
Increase in pearl production from 375k in 2017 to 600k in 2024.
Rise in pearl prices – unfortunately the company did not disclose pearl prices from earlier periods, hence unable to draw good comparison.
Multiple Distribution Channel
Due to COVID-19 disruptions, the company began to take the initiative to develop multi-channel distribution for its pearls. In the Chairman’s own words: “question the efficacy of the traditional auction system and to examine more efficient wholesale paths to reach our final customers” (Annual Report 2020). Prior to 2020, the company relied mainly on physical auctions, such as those held in Kobe, to distribute its pearls.
The company developed an online auction platform (for both retail and wholesale) in November 2020. This platform allowed the company to reach new customers beyond the reach of physical auctions. In 2023/24, the company continued to participate in physical auctions (which now also accommodate remote online buyers), launched a retail-focused website for refined jewelry, re-engaged with other Australian and international wholesalers, and reopened retail shops at its farms in North Bali (now the flagship location), Alyui, and Pungu.
The company, in its H1 FY25 announcement, reported that it had “diverted pearls for higher prices and margins away from the auction system.” -- something that they weren’t able to do pre – 2020. 13% of pearls sold in H1 FY25 were sold through channels other than auctions, compared to 7% in H1 FY24. Channels outside of auctions now contribute up to 30% of revenue in H1 FY25, compared to 15% in H1 FY24. In H1 FY25, the average selling price via non-auction channels was $149 per pearl, compared to $53 per pearl from auctions.
How Much is Atlas Pearl Worth?
The company seems to have re-invented itself amid growing pearl demand.
The company’s fortunes hinge entirely on steady production and sustained high pearl prices. Both factors currently appear stable; however, I acknowledge that they could easily turn downward without warning. The company now operates eight farms and aims to open another one in the near future—hopefully, this diversification will help weather unpredictable disruptions from Mother Nature and hedge against fluctuations in pearl quality (the company acknowledged that pearl quality as of 2024 has been below historic norms).
The company began publishing Kobe auction results in late 2023. Following the price spike in the second half of 2023, pearl prices experienced a sharp drop in the first half of 2024. However, prices appear to have stabilized since October 2024.
*Average Index Point is a proprietary grading system developed by Atlas Pearl to gauge the pearl’s quality – in terms of size, shape, luster, color etc.
Management, upon paying down debt and accumulating cash reserves, promptly announced large dividends of up to 8 million AUD (or 1.85 cents per share) in 2024. This represents a yield of approximately over 10% based on today’s share price. Management appears transparent and honest about the company’s performance, openly discussing industry headwinds, poor pearl quality, and the accidental death of an employee in the annual report.
At today’s price of $0.16 per share, the company trades at a market capitalization of approximately 70 million AUD. What do investors get at this price? Based on FY2024 results:
P/E = 70m / 15m = 4.67 (excluding oyster revaluation)
P/FCF = 70m / 18.5m = 3.8
My estimation for FY2025 total revenue is 39 million AUD:
Announced 1H2025 total revenue is 19 million AUD
Two Kobe auctions in April and June 2025 contributed 14 million AUD
Estimated revenue from other channels amounts to up to 6 million AUD
The company has achieved a 31–35% net income margin in 2023 and 2024—NPAT for FY2025 should fall within 12–13.6 million AUD. Estimated FCF is about 16–18 million AUD.
Forward P/E = 70m / 12.5m = 5.6
Forward P/FCF = 70m / 17m = 4.1
Lastly, this is not a buy and forget stock. It is more of a bet on a turnaround scenario where market demand for the company’s product has picked up tremendously.
My guess is as good as anybody’s. I have no clue whether pearls would still be in high demand this year or next, I am also not sure whether mother nature would remain kind to pearl farmers for many years to come. I guess this is part of the investing game where sometimes we just have to take a punt. And then, pray.