Sony Corporation (TYO: 6758)

Curtis Cifuentes outlines our investment thesis for Sony Corporation, our stock pick for the Future Generation Virtual Investment Forum 2020. As a Future Generation Australia global fund manager, we do not charge management or performance fees, allowing Future Generation to invest 1% of assets to its supported charities each year.

Many may, wrongly in our view, see Sony as a company beaten at its own game by nimbler and more aggressive Korean and American competitors in consumer electronics. We, rather, see a company that has managed to put pride and hubris behind it and instead focus on its strengths, creating a more profitable, resilient business that we believe is underappreciated by investors.

Firstly, and most importantly, Sony has focused resources in areas where they have competitive advantages, some of which include:

Games – Sony is the undisputed leader in console gaming today and is launching the PlayStation 5 in late 2020. Many have predicted the demise of console gaming over the years (firstly due to PCs and then smartphones), and while we are not ignorant of the risks of cloud-based gaming, we believe the strong exclusive game line-up and signs of pent-up demand will lead to another successful launch for Sony. We think Sony has learnt some lessons from the smartphone industry too, introducing subscription services as well as incremental hardware updates, both of which reduce earnings volatility.

Music – Sony is one of the three large global music publishing labels, an industry that is now emerging from a painful decade that saw inflation-adjusted revenues halve with the shift away from physical media. Music publishers earn highly defensive recurring revenues by controlling and charging for access to catalogues of music. Today more and more people enjoy music through streaming services, which has seen industry revenues return to growth.

Image Sensors – Sony’s semiconductor division is today the world’s largest supplier of smartphone image sensors, with image quality improvements being one of the major selling points to smartphone buyers. Sony’s image sensors are industry leading, making them critical suppliers to smartphone manufacturers, including Apple, and the market is not exposed to the commodity dynamics we see in other components like memory. There is also future optionality in autonomous driving and other automotive applications.

Lastly, Sony has exited or restructured loss-making and uncompetitive business such as consumer electronics, eliminating a source of, occasionally large, losses.

We feel Sony is a resilient collection of strong businesses, in many of which Sony is the global leader, and is benefitting from new-found management focus that is yet to be fully appreciated by investors. Sony is trading on 16x operating income, which compares favourably to peers, but we believe upside will be driven by profit growth in the divisions mentioned above.


 

This material has been prepared by Avenir Capital Pty Limited (ABN 40 150 790 355, AFSL 405469) (Avenir) the investment manager of Avenir Global Fund (Fund). Fidante Partners Limited ABN 94 002 835 592 AFSL 234668 (Fidante), is the responsible entity of the Fund. Other than information which is identified as sourced from Fidante in relation to the Fund(s), Fidante is not responsible for the information in this material, including any statements of opinion. It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. You should consider, with a financial adviser, whether the information is suitable for your circumstances. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The PDS for the Fund, issued by Fidante, should be considered before deciding whether to acquire or hold units in the Fund. The PDS can be obtained by calling 13 51 53 or visiting www.fidante.com. Neither Fidante nor any of its respective related bodies corporate guarantees the performance of the Fund, any particular rate of return or return of capital. Past performance is not a reliable indicator of future performance. Any projections are based on assumptions which we believe are reasonable, but are subject to change and should not be relied upon. Avenir and Fidante have entered into arrangements in connection with the distribution and administration of financial products to which this material relates. In connection with those arrangements, Avenir and Fidante may receive remuneration or other benefits in respect of financial services provided by the parties.

 

Written by Curtis Cifuentes

Investment Director

Curtis Cifuentes is an Investment Director at Avenir Capital and is responsible for the portfolio management of the Avenir Global Fund. Prior to joining Avenir, Curtis worked at Platinum Asset Management, where he spent 15 years as an investment analyst covering Japan and technology sectors.