Stock Pick Series #4 – Sony

Company Description

Sony Corporation is a Japanese multinational conglomerate that produces, develops, and sells electronic equipment and devices. Apart from consumer electronics, the company is also involved in the content business segment, including gaming, music, and movie industries. Sony Corp currently enjoys the status of a top global company of gaming consoles, CMOS image sensors, professional broadcasting and digital cameras, music publishing, wireless earphones, movies, recorded music, and more. Furthermore, Sony Corp provides financial services, including banking, life, and non-life insurance, etc. Sony Corp was founded in 1946 and is based in Tokyo, Japan.

Investment Thesis (Business)

From a business perspective, Sony Corp represents a key stock pick within the consumer discretionary segment of our ESG Fund, essentially for three reasons: successful product differentiation, emphasis on R&D, and good financials.

Over the years, Sony Corp has kept a consistent track record of success in multiple business segments, which has made the company competitive in terms of product differentiation. Differentiation not only provides multiple income streams to the company but also reduces the risk related to potential product unsuccess due to competition. Sony Corp has six core business segments, each representing a sizeable revenue share:

Sony’s Sales Composition by Segment % (FY 2019). Source: Sony’s Corporate Report 2020

Among them, G&Ns, Music, and I&SS are perhaps the most successful and most competitive. As stated in Sony’s Corporate Report for 2020, in the area of G&Ns, Sony’s PS4 was awarded the title of “best-selling home console brand ever”; in relation to Music, the company is ranked number one in terms of content IP sales in music publishing, and number two in terms of global market share; within I&SS, Sony holds 53% of the global market share in CMOS image sensors. These key divisions will continue to serve as a strong economic moat to the company for the years to come. However, the Portfolio Team of CBS SFC also recognizes that Sony Corp faces intense competition, particularly from Samsung, LG Electronics, Microsoft, and Panasonic. Therefore, past performance does not necessarily guarantee future success, especially in such a competitive environment.

This brings us to the next point, namely Sony Corp’s emphasis on R&D. As part of its business strategy, Sony Corp focuses on innovating its business portfolio to deliver more customer value. The conglomerate enjoys a strong synergy among its global R&D centers that harness their regional strengths to develop new intellectual property, benefitting different business segments within Sony Corp. For example, Sony developed endoscopes and surgical microscopes by adopting technology developed for image sensors. This strategy enabled the group to develop a competitive advantage in audio-visuals, imaging, and sensors, as well as AI and robotics. The Portfolio Team foresees an interesting potential in the growing electric car industry, where Sony can leverage its capabilities in CMOS image sensors, as hinted at in the recent announcement of its newest concept car, VISION-S.

Sony’s Concept Car: VISION-S. Source: Sony’s Corporate Report 2020

Last but not least, Sony Corp also seems to be an attractive and well-positioned business in terms of financials. The company presents a solid net cash position exceeding long-term debt, as well as consistent growth in net profits and return on equity over the last few years, except for 2020 due to current supply chain disruptions posed by the pandemic. Nevertheless, we believe that Sony Corp will continue to grow and prosper in the long-term thanks to its unique advantages and supported by secular industry trends in its respective business segments.

Investment Thesis (ESG Management)

Sony Corp is not only a global leader in consumer electronics and content business but also in ESG Management. MSCI awarded a AAA rating (i.e., top ESG score) to the company in November 2019. Compared to its peers, Sony Corp is a leader in corporate governance and chemical safety. As stated in the latest Sustainability Report, Sony Corp sees itself responsible for contributing to create a sustainable society. To do that, the company is engaged in different kinds of initiatives.

Regarding the Environment, the company is determined to neutralize its environmental footprint of the entire life cycle of its products and business activities by 2050, as part of the “Road Zero” initiative. As for FY 2019, the company has made several achievements, in particular, it reduced: its annual energy consumption of products by 52% since FY 2013; C02 emissions from logistics are down 64% from FY 2013 levels; waste production by 20%, compared to FY 2015.

As for Social, the company, for example, established the “Sony Global Relief Fund for COVID-19” in 2020, which amounted to 100 million USD and was deployed to provide assistance for the people affected by the pandemic in the medical, educational, and community areas. Similarly, the company has actively supported Save the Children’s activities since 2016.

Finally, in the field of Governance, Sony Corp has complied with national and international standards and established its own regulations to improve its integrity and transparency in relation to the separation of the Board’s functions with those of management, appropriate Board size for promoting active discussion, and pertinent activity of the statutory committees.

Investment Thesis (SDG)

When it comes to the UN’s Sustainable Development Goals (SDG), Sony Corp is targeting multiple SGDs through a diverse set of initiatives. For example, Sony Corp signed an agreement with the United Nations Office for Project Services to promote the development of infrastructural technology to face climate change. Similarly, the company is testing applications for Synecoculture™, a sustainable practice in agriculture that balances crop yield and biodiversity and advancing Open Energy Systems™, a new electric power system using renewable energy.

Conclusion

Overall, Sony Corp presents a successful and highly diversified business portfolio with a high focus on innovation, healthy financials, exceptional ESG performance, and active engagement in pursuing UN’s SDGs. Based on these characteristics, the Portfolio Team of CBS SFC sees Sony Corp as an interesting consumer discretionary stock pick and thus has decided to include it in our ESG Fund.