CFA Institute Research Challenge hosted by CFA Society of Japan Tokyo Institute of Technology
[Tokyo Inst. of Technology] Student Research [Wholesale Industry] This report is published for educational purposes only by students competing in the CFA Institute Research Challenge. Sanrio Co. Ltd.
Date Ticker: TSE: 8136 (Japan) Recommendation: SELL September 30th, 2013 Price: ¥ 6,030 (as of 9/30/2013) Price Target: ¥ 4,998 Exchange: 98.87JPY/USD
Earnings/Share (EPS) Mar. Jun. Sept. Dec. Year P/E Ratio 2010A ¥13.00 ¥17.46 ¥42.83 ¥31.47 ¥104.76 23.5 2011A 32.09 30.79 65.29 34.39 162.56 19.9 2012A 32.96 30.38 41.55 37.22 142.09 29.5 [Tokyo Inst. 2013E 29.90 30.56 59.15 41.51 161.12 37.4 of Highlights Sanrio is a company of character business which runs mainly product sales, licensing business and theme Technology] park business. Sanrio is popular to own famous character, Hello Kitty and My Melody and so on (Exhibit5).
・Overestimated price compared to fundamentals even adopting bullish estimate : Target price based on DCF is 4,998 JPY, 17% downside from the current price. We adopt bullish EPS estimate of 161.12 JPY in FY03/13 compared to the Sanrio’s guidance of 150.87 JPY, and predict Sanrio’s operating profit will be 23.7 billion JPY in FY03/14, 30 billion JPY in FY03/16, and will reach to 40 billion JPY in FY03/21 as Sanrio increases revenue from character licensing. However, we believe that current price, which is more than double of 2,754 JPY as of January 2013, has already reflected above scenarios. Besides, the market has become overly optimistic, due to the expectation of Sanrio’s theme park business becoming profitable for the first time and x-date interim dividend was in the end of September, followed by the exciting news in September that Tokyo will host Olympic games in 2020. ・Gradual expansion of sales and profit by licensing business: Sanrio’s value driver is the character licensing ,especially in overseas segment . Revenues from licensing will continue to increase with growth of the number of licensee although sales per license will remain largely unchanged. For the next ten years, Sanrio will expand its licensing deals to 3,600 in FY2022 from 2,700 as of FY2012. Total sales of Sanrio will gradually increases 110 billion JPY FY2022 in 3.9% CAGR, OP margin will be 44 billion JPY FY2022 in 6.6% CAGR.
・High profitability and cash pile: Sanrio has been improving its profitability by expanding licensing business. The current ROE is 32.1%, which is about two times higher than its competitors. Sanrio will accumulate cash as the licensing business grows, which will lead to deterioration of capital efficiency, since licensing does not require much additional expenditures. Consequently, current ROE will not be sustained unless allocating ample cash for appropriate investment opportunities such as acquisitions, or distributing the excessive cash to shareholders.
Volume (Millions) Price (JPY) Market Profile 1.80 6,500 6,000 1.60 52 Week Price Range (JPY) 2,301-6270 Sanrio (8136) 5,500 Average Daily Volume 556,900 1.40 5,000 Beta 0.753 1.20 4,500 Dividend Yield (Estimated) 1.00% 4,000 1.00 Shares Outstanding 89,065,301 3,500 0.80 Market Capitalization (million JPY) 537,063 TOPIX 0.60 3,000 Institutional Holdings 29%
0.40 Insider Holdings 4% 2,500 0.20 Book Value per Share ¥533.33 0.00 2,000 Debt to Total Capital 49.9% Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct サンリオ 8136 Return on Equity 32.1% TOPIX (Indexed to 8136) Important disclosures appear at the back of this report
CFA Institute Research Challenge Date
Figure 1 Business Description consolidated sales, OP, OPM Sanrio is a character business company. Sanrio has designed more than 400 characters including the world famous “Hello Kitty” (Exhibit5). Sanrio has expanded character business by owning character copyright. The company was established by Mr. Shintaro Tsuji, the President and CEO of Sanrio, in 1960 with the concept of “Small Gift Big Smile” which means that small gift makes people happy. Sanrio established the subsidiary in US in 1974, and in Germany in 1980, and has expanded overseas business. In fact, overseas sales constitutes around 45% of consolidated total sales. Main businesses are character licensing (In Japan and overseas), product sales (In Japan and overseas), theme park (In Japan) and others (rental robots, making movies and so on). Profitability has become higher by having shifted business model, from product sales to licensing business mainly in Europe and in America. This has been led by Mr. Rehito Hatoyama, ex-Mitsubishi Corp. since 2008, and he has responsibility for strategy for overseas business. As a result in FY03/13, the consolidated operating profit reached 20.1 billion JPY (+6.8% YoY). It was historical record.(Figure 1) Licensing business (In Japan and Overseas): Character copyright licensing is the profit driver of Sanrio, Source: the security report and its royalties constituted 42% (31 billion JPY, Figure2) of consolidated total sales in FY03/13. Sanrio licenses its character copyright to 2699 companies which mainly are in apparels (Exhibit7). The operating Figure 2 profit margin is very high because Sanrio doesn’t bear costs for redesigning, producing and selling. Licensee Sales breakdown by business pays these costs. And Sanrio allows licensee to redesign their character almost freely. For this reason, Sanrio can license multiple companies in the same industrial category. Therefore Sanrio’s potential market size is unlimited in theory. In overseas, because the subsidiaries of Sanrio have master license, they can license the copyright of Sanrio characters to local companies. This makes character’s design suitable for the area rapidly. For this reason, sales is growing. The growth of royalties in overseas is remarkable. Especially in North-America, Asia and South-America, total sales grows over 30% YoY. Although debt crisis in Europe and not good economy in Japan, total sales remains high (Figure3) . Sanrio has contract with many companies, for example with ZARA (INDITEX Group) and H&M (They are the top2 in apparels) in Europe, with Walmart in America, with KT Company and KT Shanghai Company (they are one of Li&Fung Group which is big trading company in Hong Kong). Product sales (In Japan and Overseas): Product sales constitutes 64% of total sales in Japan (21.2 billion JPY), and in Japan, there are 209 Sanrio shops, including a department store, and 929 wholesale shops. In overseas, Sanrio discontinued to operate a directly managed store but spread shops through the local agency. From now licensing is main business of Sanrio. In Japan and Asia, after closes down unprofitable stores and cuts costs, shops will be selectively operated to increase awareness of their characters. Source: the security report Theme park (In Japan): Sanrio operates the Sanrio Puroland (Suburb near Tokyo) and the Harmonyland (Oita-prefecture). In FY03/13, total theme park sales was 5.3 billion JPY (-0.6% YoY) and operating loss Figure 3 Licensing sales in was 0.5 billion JPY (+13 million JPY YoY). Theme park business has been making losses, but operating each region (bn JPY) loss has become smaller by reducing costs while the number of visitors and per-visitor spending decreases. Sanrio business model is shown in Figure4.
Figure 4 Business model
Source : the security report Source: company documents
2 CFA Institute Research Challenge Date
Figure 5 Industry Overview & Competitive Positioning Retail market size of character products (bn JPY) Industry Overview ・Environment of market will be severe. Due to economic slump and decline of birthrate in Japan, the retail market size of character products is scaling down from 2000s (Figure5). In overseas market, there have already been many popular local and global characters (ex: Mickey Mouse, The Walt Disney Co.; NYSE: DIS). Additionally because existing contents from Japan and others are going to entry overseas character market in earnest, the competition among characters becomes more severe. Difference between Sanrio and competitors is taking media-mix strategy which promote their characters by TV animation, books, movies, Internet media and try to diversify and maxim of revenues. It is said that media-mix strategy is essential to create new popular characters. However, Sanrio don’t have strength of these strategies.
SWOT Analysis (Figure 6) Sanrio’s operating profit is mainly from licensing business. But, product sales and theme park business is Source: CharaBiz DATA 2011 closely connected to licensing. By owning these business, Sanrio can provide pleasure of customers by CharaBiz DATA 2013 playing with characters, research trend by directly contact with customers and to induce customers to buy Figure 6 SWOT analysis licensing products. So we think these businesses are combined, therefore we don’t do SWOT and 5 Force analysis of every business but “Sanrio” which includes all Sanrio businesses.
Strength ・“Hello Kitty”, stable income resource (Exhibit9): “Hello Kitty”is a character popular enough to take the top spot in the character ranking not only in Japan but also in overseas. Hello Kitty is very popular especially among Japanese women irrespective of age. There are only few characters which are popular among that age range. Therefore, “Hello Kitty” is stable income resource.
・Highly flexible redesign of Sanrio’s character : Most of character’s license contracts have strict condition about design and usages. Licensee cannot redesign the portrayal of original based on their promotion strategies, and licenser can contract only one licensee in one product category. Because most of licensers don’t own copyrights of their characters (generally characters from animation). And even they own it, licensers necessarily prioritize protection of characters as long business image down of them directly decreases revenues of licensing. However, because Sanrio has copyright of its characters and many characters of flexible design. Sanrio allows licensees to arrange based on their promotion images and contracts multi licenses in one product categories. By this unique contract, they have the merit to redesign “Hello Kitty” to be suitable for their product and differentiate other products, and Sanrio can gain more revenues from licensing and has merit to keep off staleness for “Hello Kitty” by spreading its various design. In fact, Sanrio can collaborate with multiple companies in the same product category such as H&M and ZARA. Therefore, Sanrio’s potential market size is bigger than competitors, This unique licensing contract have been a basis of expansion of oversea business. ・Localization of licensing: When Sanrio shifted to focus on licensing its characters rather than making products in 2008, the company accelerated localization of licensing business in oversea segment and, especially in China contracted a master license to a subsidiary. By this localization, Sanrio can make a licensing contract with more local companies. And this enables licensing business not only to expand entire licensing business rapidly (Figure7), but also to fit licensing business to local trend or cultures easily and reduce the risk to break a local taboo. ・Diversified “Regional portfolio”: Sanrio is in Japan, and subsidiaries are in Europe, North-America, Asia and South-America. Therefore, Sanrio runs licensing business and product sales around the world. Thanks to this “Regional portfolio”, there is a possibility that when the total sales and operating profit decreases in an area, the profit in other area increases more than offsetting. Actually in FY03/13, because economy was not good in Europe, the total sales and operating profit decreased there, but operating profit in other areas covered its weakness. As a result, the consolidated operating profit reached 20.1 billion JPY in FY03/13. ・Has enough cash for investment: Licensing doesn’t require large capital investment, and Sanrio closed down unprofitable retail stores. For these reasons, the operating profit margin has expanded. As a result, Sanrio has been able to run their business with net cash since FY03/13, therefore the company can afford to invest.
3 CFA Institute Research Challenge Date
Figure 7 Weakness number of licensees each region Currently “Hello Kitty” sales constitutes 60% of licensing sales in Japan, and 90% of licensing sales in overseas. High dependence on one character “Hello Kitty” is working well so far. However, this could be a weakness in the future, we think. ・Theme park is unprofitable: Sanrio theme park business has been making losses since it started. As stated earlier, the purpose of theme park is not only for profit, but it has dragged down Sanrio’s profitability. ・Low profitability of retail stores in Japan still remain: Sanrio closed down 40 unprofitable stores in Japan in FY03/12, but still the profitability of Japan’s product sales remains low in FY03/13.
Opportunity ・The 40th anniversary of “Hello Kitty”: It will be 40 years from birth of Hello Kitty in 2014 and this will possibly increase product sales. Because when the 35th anniversary in 2009, the total sales of existing stores increased +2.0% YoY due to the special anniversary products in spite of Lehman shock. ・growth of overseas licensing: Sales per licensee and the number of licensee in South-America and Asia have been lower than these in Europe, Japan and North-America (Figure5,7) because Sanrio is developing in South-America and Asia. Therefore, we expect more development of overseas business especially in these areas, using licensing business model which succeeded in Europe and North-America. ・expansion of licensing business by character acquisition (Exhibit10): Sanrio can make new character Source: the security report acquisition from other companies because of enough available cash (e.g. Mr.men and Little Miss,2011). In the future, we expect that more character acquisition will make Sanrio character portfolio stronger, and tailwind will blow for licensing expansion.
Threat ・Risk to damage brand image: There is possibility that a character redesigning of one licensee damages the consumer image of that character, because licensee can redesign flexibly. If redesigns damaged a character’s image, it diminishes sales of the character which have bad influences Sanrio performance. But presently this is small threat because Sanrio has rigorous process to allow for redesigned character by licensee. But there was opposition to one design of Hello Kitty in 2013 (Exhibit 11). And the more the number of licensee increases, the more approval cost and risk Sanrio takes. ・Possibility that theme park become unprofitable again (Exhibit12): Sanrio renewed the Puroland using 1.5 billion JPY in July, 2013. Sanrio expects theme park becomes profitable in first time since opening because the number of visitor from overseas increases. But if the situation worsens, it will decrease and theme park will become unprofitable again. ・Decline of sales by characters’ overexposure (Exhibit13): Hello Kitty becomes more popular in overseas. But overexposure cause staleness for the character and there is possibility that the total sales Figure 8 decreases greatly as a result. The total sales in 1999 in Japan during the boom of Hello Kitty reached 150 billion JPY, but the total sales in 2007 decreased to 96 billion JPY. Although the company control Performance of Sanrio’s price (JPY) characters’ exposure to avoid unsustainable excessive popularity. If the popularity of Hello Kitty becomes too high, total sales may decrease after instant boom.
We decide not to do 5 forces analysis for licensing business. Because Sanrio has unique licensing business model which allows licensee to redesign its character and contracts multiple licensee in the same product category, there are no matching competitors. Additionally, there are no suppliers. We think 5 forces analysis is not real applicable.
Investment Summary
The reason why our recommendation is SELL Good sales and profit forecast Price target based on DCF method is 4,998 JPY with 17% downside from the current price. Implication of two multiple analysis compared to competitors or more profitable companies than Sanrio also shows that 4,998 JPY is reasonable. Expanding licensing business especially in overseas has been improving Sanrio’s performance in overseas segment. Walmart which is bulk retailer in US and Li&Fung Group which has master license in China are main licensees for example. We expect sales of licensing business will continue to increase because of superiority of Sanrio’s “highly Source: Yahoo! Japan finance flexible” licensing contract with increasing in the number of licensee. Because Sanrio is strategically expanding their business into one region after another and currently developing market of Asia and South America regions.(Exhibit 14)
4 CFA Institute Research Challenge Date
For the next 10 years, Sanrio will increase total licensees to 3,600 in FY03/23 from 2,700 as of FY03/13. In FY03/23, Sanrio’s total sales will reach 110 billion JPY with 3.9% CAGR, its operating profit will reach 44 billion JPY FY03/23 with 8.1% CAGR. In fact, these good perspectives have already reflected into Sanrio’s stock price. Because it rose from 2,754 JPY as of January in 2013 and was around 5,000 JPY from May to August in 2013. Overestimated price compared to fundamentals: However, current price at the end of September is overestimated compared to fundamentals due to following three exciting news. (1) Sanrio’s theme park is likely to become profitable for the first time since its opening. (2)Tokyo will host the Olympic Games in 2020. (3) X-date of interim dividend was September 30th, FY 03/14.(Exhibit 15) As a result, Sanrio’s stock price jumped up by 20% from 5,070 JPY through September, FY03/14. We analyzed these positive news consequently caused price rising overly. Because profit contribution of Tokyo Olympic and improvement of Theme park business is small compared with rich cash from licensing business. Therefore we concluded market was overly optimistic in September and our recommendation is “SELL”.
Financial Analysis Capital efficiency will be diminishing Since FY03/13, Sanrio has been running its business with net cash. Besides, licensing business does not require much additional expenditures. Therefore, the cash pile will increase significantly in the next 10 years to the amount that Sanrio can conduct large character acquisitions or M&As without externally obtaining fund from the market. Sanrio’s ROE which is superior to the competitors will decrease from 25% in FY03/14 to 14% in FY03/23 with our estimates. Currently, ROE is more than double of competitors’ average, which is the strong advantage of Sanrio. However, Sanrio’s cash pile which increase faster than investment will cause gradual decline of ROE. Therefore, Sanrio will necessarily face capital inefficiency.
Unclear capital discipline: When we look at the corporate strategy of Sanrio and consider the difference about strategy between management teams, we can’t have good expectations for efficient capital discipline. The usage of investment such as M&A is vague even though Sanrio purposed to more development of business and a worldwide character company. Therefore, the strategy of allocating capital is the key to maintain good profitability.
Valuation We valued Sanrio using a DCF method. The price target is 4998JPY. We calculate the price target as follows. Further, we divide sales into each region in order to take into account each circumstance: 1st we estimated sales by March 2023 region by region (Europe, North-America, South-America, Asia and Japan) . We calculated ratios of licensing sales to total sales in each region and OPM from ratios. 2nd we estimated consolidated balance sheets, consolidated income statements & consolidated state of cash flows. 3rd we calculated invested capital, NOPLAT, FCF, present value by divisor of WACC and price target. The way we forecasted sales is follows: Licensing sales = sales per licensee * the number of licensees Product sales = calculated in each region Further, in addition to main scenario, we also estimated BULL& BEAR scenario. However, we were confident of Main scenario because Sanrio has strong business model and there are little risk to change our estimates. Europe (Exhibit16) Sales per licensee: According to fiscal statements, European Debt Crisis touch the bottom and in fact, next year it will be considered to be end. Therefore, this fiscal year is 85 thousand EUR, calculated from -25%
5 CFA Institute Research Challenge Date
Figure 9 (YonY) which is compound annual growth rate of recent 3years. Since fiscal 2014, we assumed that sales Product category of licensing per licensee would not be less than 85thousand EUR in 2013. Because each contract has minimum in Europe guarantee. In addition, because majority of licensees are still general apparel and retailer, we assumed that it would grow with nominal GDP growth rate.(Figure ) The number of licensees: Because of room of increasing contracts with promotion category, we assumed that it would continue to grow by 146 per year as same pace as recent 5years since shifted to licensing business. However, Sanrio will control character exposure to avoid instant boom that it has experienced in the past. The point to control exposure is that total sales would approach 1200million EUR referring to 1280million EUR in 2010 which was assumed to be over exposure. Therefore, the company will decrease new contracts. Additionally, in terms of licensees, some of them will perceive the tiredness of character in the market and some contracts with existing licensees will be broken, therefore net growth of the number of licensees will be constantly 1269licensees. Currency rate: Though the company estimated this year rate would be 120JPY/EUR, this rate is much different from present rate. Therefore, we would use 131.02JPY/EUR, averaged for recent 3 months. Product sales: Because Sanrio has finished closing unprofitable stores, it will constantly sales 2million EUR every year. North-America(Exhibit16) Source: company documents Sales per licensee: sales per licensees grew rapidly in 2011, because of contracts with Walmart. According to Sanrio, there are no companies more than Walmart and it focuses on creating character portfolio and expand the product categories. Therefore, we assumed that the company wouldn’t license to bulk companies. From that reason, sales per licensees would decline with following calculation method. Sales per licensee = 0.29*252+0.24*(the number of licensees - 252) Sales per licensee of 252 licensees in 2011 including Walmart and its suppliers is 0.29 million USD. Sales per licensee after 2011 is 0.24million USD, which is standard before contracts with Walmart. The number of licensees: Like Europe, it will continue to grow 49 per year as same pace as recent 5years and SanrioH will control exposure in 2015.The point to control exposure is that total sales will approach 1600million USD converted 1200million EUR, because economic scale of North-America is similar to that of Europe. Since 2015, the number of licensees will be constantly 512licensees every year. Currency rate: Though Sanrio estimated this year rate would be 93JPY/USD, this rate is much different from present rate. Therefore, we would use 98.87JPY/USD, averaged for recent 3 months. Product sales: Because Sanrio have finished closing unprofitable stores, it will constantly sale 22million USD every year. Asian countries (Exhibit17) Sales per licensee & the number of licensees: In Asian countries, because the markets was undeveloped by Sanrio and expected to develop smoothly, income and product categories which Sanrio can contracts with would increase. Therefore we assumed that sales per licensee & the number of licensees would increase. We calculated growth of them for resent 4 years and we assumed that they would continue to grow with these growth rate for 10 years. As for Korea, because the number of licensees was not disclosed, sales for Korea would grow as same pace as growth rate of sales for Taiwan, whose per capital GDP is similar to that of Korea. Unlike Europe & North-America, sales for Asia largely included internal transaction and was not disclosed without internal transaction in fiscal statements. Therefore we estimated rate of external transaction. Rate of external transaction: we estimated rate of external transaction in Asia from2009 to 2012. Comparing sales from fiscal statements and that from security reports, rates of external transaction from 2009 to 2012 was constantly around 90%. Therefore, since 2013 we assumed that the rate of external transaction would be 90% every year. Currency rate: rate estimated by company for 2013 is much different from present rate. Therefore, we would use rate for recent 3 months. Product sales: According to analyst meeting, Sanrio focuses on licensing business. Therefore, there are restriction of strategy & talent and Sanrio will not increase product sales rapidly. We assumed that by 10 years, product sales would be constant value which Sanrio would estimate for product sales in 2013.
6 CFA Institute Research Challenge Date
South-America(Exhibit18) Because Sanrio did not disclose the date of South-America for example the number of licensees and currency rate, we forecast sales by following 2 approach; Effect of market increasing: Because large part of sales for South-America is licensing sales, we assumed that sales would depend on licensing market increase. However, it is considered that South-America would develop rapidly for 10 years, licensing business has been keen competition in Brazil. Therefore, we assumed that it would be difficult for Sanrio to expand share of the markets and sales for South-America would rely on only markets growth. Concentrate on Brazil Large part of sales come from sales for Brazil in 2012.In addition, because of large population in Brazil, major of markets of South-America was that of Brazil and we assumed that Sanrio would sales with focus on Brazil. Therefore sales would depend on licensing sales for Brazil. According to JETRO Brazil contents industry investment, licensing market of character would increase 8~9% per year by 1972, we assumed that sales would continue to grow with this rate. Therefore, we assumed that sales for South-America would come from licensing markets rate in Brazil. we calculate the growth as 8.5% which come from middle of 8~9% rate of licensing sales in Brazil. Japan Licensing sales (Exhibit19) ; Sales = sales per licensee * the number of licensees Sales per licensee: we assumed that sales per licensee would increase gradually because of collaboration of end of deflation, 40th & 45th anniversary of Hello Kitty, existing characters growing by expansion of exposure in Tokyo Olympic 2020 and new character growing. The number of licensees: We assumed that the number of licensees hit the peak in 2012, because sales decreased even though it increased by 60 licensees last year. Although Sanrio will start selling product of Mr. Men, we fixed it on net-based. We took into account that 40th&45th anniversary of Hello Kitty and Tokyo Olympic and it would increase by 15 licensees. Product sales (Exhibit20) We calculated the product sales as follow; product sales = sales per shop * the number of shops. We assumed that sales per shop would not grow. The number of shops would grow by 5 shops per year for 5 years, and for other 5 years, it would grow by 2 shops. As a result, product sales would increase from 30 billion JPN in 2012 to 31 billion JPY.
Figure 10 Theme Park sales (Exhibit 21) OPM the licensing ratio We calculated it as follow; Theme Park sales = off-site revenues + in-site revenues, in-site revenues = the number of visitors* average visitors spending. In order to take into consideration about the location, we forecast visitors of Sanrio Puroland in Tokyo by using date of foreigners and visitors of Harmony Land in Ooita prefecture by using date of Chinese, Korean, Taiwanese foreigners, because it is close to these countries. As for average visitors spending, because of renewal, it will increase in 2013. However, after that, it will decrease gradually to level of 2012 in 2022. Off-site revenues was calculated by the past. As a result, Theme Park sales would increase from 6.1 billion JPY in 2012to 8.2 billion JPY in 2022. In addition, according to Sanrio, the company plans acquisition of characters by March 2015. Therefore, we assumed that the company would purchase by 30 billion JPY and we made B/S based on it. However, we assumed that effect of acquisitions would not appear for 10 years. Because Mr. Men, which was purchased in 2011, will begin to sell in spring 2014. Therefore, we assumed that there would be a time lag to sell the characters(Exhibit 22). Moreover, purpose of acquisitions is not only increasing sales but also diversifying character portfolio to avoid dependence on Hello Kitty. Therefore we assumed that acquisitions would not affect sales for theme park.
Regard of operating profit, we calculated OPM as follows;
Source: company documents OPM = ratio of licensing sales to consolidated sales – 15%, Because sales breakdown was not disclosed and we assumed that the company considered product and theme park sales as marketing. (Figure 10)
7 CFA Institute Research Challenge Date
Figure 11 sales in each region Sales(million JPY) FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 FY03/22 FY03/23 Europe 10,186 11,094 13,253 15,586 16,281 16,982 17,737 18,261 18,801 19,357 19,930 North America 9,852 13,140 14,303 15,465 15,465 15,465 15,465 15,465 15,465 15,465 15,465 Sauth America 1,409 1,529 1,659 1,800 1,953 2,119 2,299 2,494 2,706 2,936 3,186 Asia 6,108 9,191 9,979 10,834 11,754 12,741 13,793 14,912 16,097 17,347 18,664 Japan 46,676 48,297 49,501 50,129 50,700 51,220 51,654 52,439 60,018 53,381 53,130 Total Sales 74,233 83,251 88,695 93,814 96,153 98,527 100,949 103,571 113,087 108,487 110,375 Licensing Sales 31,846 36,215 41,133 46,020 48,126 50,265 52,545 55,024 57,951 59,650 61,391 Licensing Sales/Total Sales 42.90% 43.50% 46.38% 49.05% 50.05% 51.02% 52.05% 53.13% 51.24% 54.98% 55.62% OP margin 27.90% 28.50% 31.38% 34.05% 35.05% 36.02% 37.05% 38.13% 36.24% 39.98% 40.62% Based on above-mentioned sales forecast (Exhibit23), we predicted and made financial statements (Exhibit24,25,26), and calculated invested capital, NOPLAT and FCF (Exhibit27,28,29). And we calculated price target by detecting interest-bearing debt from discounted FCF by WACC (Exhibit30,31) and the present value of terminal value after 2033 (Exhibit32), and dividing it by total stock. Regard of terminal value, we reduce its effect by making ROIC to converge to the level of WACC because terminal value may have a big influence on stock price. The main indexes are as follow. (Exhibit 33,34,35) index number calculation method reference risk free rate 1.581% yield of 20 year government bond in Sept 30, 2013 expected return rate 6.72% annual return rate of the first section of the Tokyo Stick Exchange from 1983 to 2012 Exhibit:33 market risk premium 5.14% expected return rate-risk free rate β 0.753 historical bata by regression of monthly return rate from Jan, 2009 to Sept, 2013 Exhibit:34 equity cost 5.448% risk free rate+β×market risk premium debt cost 1.82% interest expense÷average of interest-bearing debt from 2008 to 2012 tax rate 38.00% from analyst meeting interest-bearing debt(million JPY) 26,807 from security report in 2012 market capitalization(million JPY) 537,064 the number of shares outstanding in 2012×current price in Sept 30, 2012 WACC 5.243% calculated from the above permanent growth rate 2.38% expected nominal GDP growth rate in the end of forecast Exhibit:35 Sensitivity analysis of WACC and growth rate(Figure 12) Figure 12 sensitivity analysis Performing sensitivity analysis, when growth rate rises 1%, WACC β growth rate price target is blurred. But concerning the calculation of 1.38% 2.38% 3.38% the terminal value, treating growth rate is from 2033, 10 6.221% 0.953 3,803 4,259 5,037 years later after sales forecast period. When we think 5.732% 0.853 4,021 4,593 5,651 about this, it is hard to imagine that the rise in growth rate 5.243% 0.753 4,263 4,998 6,523 occurs. Thus, investment recommendation SELL is 4.754% 0.653 4,538 5,519 7,927 validity. 4.264% 0.553 4,859 6,238 10,738 Multiple Analysis(Exhibit36): Price target is reasonable In order to confirm consistency of price target, we perform multiple analysis and calculate reasonable range. We use PBR, PER, PSR based on stock price, and EV/EBIT, EV/EBITDA based on firm value as magnification index. We selected 4 companies in the similar business as comparison companies whose business are developed in worldwide and are including character licensing business and product sales. Mattel(U.S.A), Hasbro(U.S.A), Takara Tomy(Japan), Walt Disney(Global) As a result of analysis, reasonable range is from 1,411JPY to 2,998JPY. Sanrio’s price target calculated by DCF method doesn’t fit in this range. We think the reason is the difference of profitability. In order to estimate how much higher profitability of Sanrio will influence its price, we pay attention to profitability index, ROE and EBIT margin. We carefully selected 13 companies which have ROE more than 20% and EBIT margin more than 25% in Tokyo Stock Exchange as companies which have high profitability., Reasonable range calculated by these companies is from 5,436JPY to 9,202JPY. Price target doesn’t fit in this range but current price fits. However these companies’ profitability is better than Sanrio. Thus, fair price should be lower than this range. Therefore price target is reasonable and current price is overestimated. ROE ROA EBIT margin PBR PER PSR EV/EBIT EV/EBITDA sannrio 32.1% 13.8% 27.2% 11.0 42.8 7.2 26.1 24.4 competitors average 12.5% 5.7% 14.3% 4.1 19.2 1.7 13.2 8.5 high profitability 35.8% 21.9% 40.2% 12.6 41.6 11.0 24.0 23.2
8 CFA Institute Research Challenge Date
Figure 13 ROE Risk of deviating price target Miscalculating WACC, miscalculating terminal value, misread growth rate Financial Analysis In performing financial analysis, we selected four companies which have similar business as competitors; Mattel, Hasbro, Takara Tomy, Walt Disney. Profitability analysis: Sanrio’s ROE(Figure13) had been less than the competitor’s average until 2009. But it reversed in 2010, and has been more than double of the competitor’s average. Performing DuPont analysis, ROE is mainly correlated with profit margin on sales(Figure14). In 2008, ROE and profit margin were both negative by the reversal of deferred tax assets. Since 2009, sales has not changed, however, ROE and profit margin have increased significantly with expansion of licensing business. The income before income tax is the highest in 2012, however, ROE and profit margin decreased due to the following two reasons. One reason is the substantial increase in income tax because loss carried forward decreased in tax effect Figure 14 Profit margin on sales accounting with the substantial improvement of operating income. Another reason is the increase in shareholder’s equity as a result of the increase in earnings. We expect that in the future, ROE will necessarily decrease, however, net income will increase with expansion of licensing business. Asset turnover(Figure15) has been less than the competitor’s average with downward trend. We decomposed assets into the cash and non-cash assets, and compared turnovers(Exhibit36). The non-cash assets turnover has been the upward trend for 5 years, but the cash turnover has decreased constantly. This indicates that cash has increased more than sales growth. The financial leverage also has decreased year by year. To keep high level ROE in the future, the usage of cash and shareholder’s equity will become a key point such as investment, shareholder return and repurchasing. Cash flow analysis: Investment CF is quite small compared to operating CF(Exhibit36) due to the characteristic of licensing business which doesn’t require much additional expenditure. Operating CF will increase with expansion of licensing business, while investment CF will not increase significantly. There is a dilemma that cash will balloon. Sanrio has to use cash efficiently because cash doesn’t generate cash flow. Figure 15 asset turnover Sanrio can’t avoid increasing in surplus cash even with two M&As in the next 10 years and 30% dividend payout ratio following Sanrio’s management policy which is stated in the annual report. Like profitability analysis, the usage of cash is a key for Sanrio’s growth in the future such as M&As and shareholder return. Financial safety: Current ratio(Figure18) and quick ratio(Exhibit36) had been lower than competitors average until 2011. However its ratios kept condition beyond one, and in 2012 they exceeded the competitor’s average. Capital adequacy ratio(Figure17) exceeded the competitor’s average in the most recent 2 years by increasing in surplus. Additionally in 2012, Sanrio became debt-free company because cash exceeded interest-bearing debt. Therefore there is no problem about financial safety. Performance forecast: In 2022 Sanrio’s total sales will be 110.3 billion JPY(74.2 billion JPY in 2012),and operating profit will be 44.8 billion JPY(20.1 billion JPY in 2012). We expect Sanrio can get stable profits from mature market such as Europe and North America; Europe sales will be 19.9 billion JPY and North America sales will be 15.5 billion JPY. We expect Sales will grow significantly in developing countries such as Asia and South America; Asia sales will be 18.6 billion JPY and South America sales will be 3.2 billion JPY. In Japan, sales growth rate is not high. However sales in Japan will be still 50.8 billion JPY which Figure 16 financial leverage accounts for half of total sales. Other Headings Development of Russia, India and Africa: Sanrio has expanded overseas market in order, Europe, North America, Asia and South America. Currently, market of Asia and South America are advancing and Sanrio will develop it. Besides, Russia, India and Africa can be the next target regions after Asia and South America being developed. In our forecast, effects on sales of these regions aren’t considered because it’s not at the stage to create subsidiaries presently. But if Sanrio determine and succeed to advance to these regions at a result of Sanrio’s survey in the earlier future than our expectation, it will possibly affect performance of Sanrio. Economic effect of Olympic: Competitor There is a possibility to increase sales of entire business(product sales, licensee, theme park) in Japan Sanrio because it is determined that Olympic is held in Tokyo in 2020, and Olympics possibly increase demand in Japan and the number of overseas tourists. Of course we considered these effects in our scenario. But if
9 CFA Institute Research Challenge Date
these effects will be much bigger and continue longer than our scenario, it will give positive impacts to Competitor corporate results. Sanrio
FigureSource 17: FACTSET Possibility of M&As of new characters: Capital adequacy ratio A new character, Mr. Men has been added to Sanrio’s character portfolio by the acquisition of Mr. Men in UK in December 2011. Mr. Men hasn’t contributed to sales yet, however, we think Mr. Men may be a Sanrio’s new popular character because it is a popular character originally, particularly in Europe. Sanrio will try to enrich its character portfolio by creating new characters and M&A at the same time. Therefore, it is possible to increase sales if Sanrio can acquire new characters and these characters can fortunately gain much popularity.
Investment Risks Breaking Image of Hello Kitty: As long as Sanrio depends on Hello Kitty in most of sales volume, There is the risk of breaking image of Hello Kitty. If related person to Sanrio or Licensees cause scandals, this will be bad influence to Hello Kitty’s image. However, Sanrio have already recognized this risk, avoid risky licensees and prepared response manual if happening. So, we analyzed this risk is not so big. Down on Sales after instant boom occur. (Exhibit13): In later 1990s, Hello kitty boom happened in Japan. After boom happened in Japan, Total sales was decreasing in long run, and operating income was 1/3 of it in Figure 18 current ratio 90s. Sanrio have already controlled exposure of popular characters. However, once the characters of Sanrio boom, especially Hello kitty boom, happens in overseas, total sales will be decreasing after that. Risk of changing popularity (Exhibit 38): Popularity of characters are easily changeable. Therefore, if popularity of a character of Sanrio will suddenly rise up, it will give positive impact to corporate performance. Currently, Sanrio have already created Jewel Pet as new popular character in recent market of Japan. But, we believe Sanrio face the difficulty to create new popular characters on its own. Since Environment of both Japan and overseas market is heavier than past Because of increasing competitors, less media mix strategy of Sanrio and continuity of recession in some regions. Therefore, as long as this circumstance will continue, this upside risk is not big. Exchange risk: Sanrio depends on most of operating profit from foreign business. If exchange rate to JPY will be cheaper than the rate we predict, the operating profit of Sanrio will be higher and earnings forecast will also. Difference about strategy between management teams and shortage of management person.: We found difference about strategy between management teams. Even after Sanrio was successful after 2008 by policy changing focusing on license business. Foreign business led by Mr. Hatoyama is clearly pursuing profit and progressing license business. On the other hand, business focus in Japan is vague. Even unprofitable store was closed, operating cost of retail sale is still not low and license business is less profitable than foreign license business. Additionally, lack of management person is another risk. Mr. Hatoyama ,one of executives of Sanrio, is assigned in too many executive in overseas business. But, old others are not. So, we predict there are few alternative people in Sanrio. This will be the disturbance of Sanrio to expand foreign business.
10 CFA Institute Research Challenge Date
Appendix Category 対応 Page Financial Data Exhibit1: Past Consolidated Balance Sheet of Asset 12 Financial Data Exhibit2: Past Consolidated Balance Sheet of Liabilities and Net Assets 13 Financial Data Exhibit3: Past Consolidated Income Statements 14 Financial Data Exhibit4: Past Consolidated Cash Flow Statements 15 Company Description Exhibit5: The history of Sanrio 16 Company Description Exhibit6: Calculation of quarterly EPS forecast 17 Company Description Exhibit7: Licensees in various product category 17 Industry Overview & Competitive Positioning Exhibit8: Changing trend in character market 17 Industry Overview & Competitive Positioning Exhibit9: , 17 Industry Overview & Competitive Positioning Exhibit10: Purchasing new character brings the licensing more expansion. 18 Risk that Sanrio cannot control its brand image completely because of Industry Overview & Competitive Positioning Exhibit11: 18 licensing expansion Industry Overview & Competitive Positioning Exhibit12: There is possibility that theme park becomes unprofitable again. 18 Industry Overview & Competitive Positioning Exhibit13: After boom, total sales decreases 18 Evidence for Sales Forecast Exhibit14: Strategy of the company 18 Investment summary why stock price was suddenly rising up in Investment Summary Exhibit15: 18 September. Sales Forecast Exhibit16: Sales forecast for Europe & North-America 19 Sales Forecast Exhibit17: Sales forecast for Asia 21 Sales Forecast Exhibit18: Sales forecast for South America 24 Sales Forecast Exhibit19: Sales forecast for licensing in Japan 24 Sales Forecast Exhibit20: Sales forecast for product sales in Japan 25 Sales Forecast Exhibit21: Sales forecast for theme park business in Japan 26 ’ Evidence for Sales Forecast Exhibit22: 28 sales in the future Performance Forecast Exhibit23: Sales forecast around the world 29 Valuation Exhibit24: Forecast balance sheet 30 Valuation Exhibit25: Forecast income statement 30 Valuation Exhibit26: Forecast cash flow statement 31 Valuation Exhibit27: Calculation of investment assets 31 Valuation Exhibit28: Calculation of NOPLAT 32 Valuation Exhibit29: Calculation of FCF 32 Valuation Exhibit30: Calculation of firm value 32 Valuation Exhibit31: Calculation of price target 32 Valuation Exhibit32: Derivation of terminal value 32 Valuation Exhibit33: Calculation of expected return rate of market portfolio 33 Valuation Exhibit34: Calculation of β 33 Valuation Exhibit35: Calculation of permanent growth rate 34 Valuation Exhibit36: Detail of multiple analysis 35 Analysis of Financial Statement Exhibit37: Financial analysis (other graph) 37 Risk Factor Exhibit38: Risk of changing popularity 37
11 CFA Institute Research Challenge Date
Exhibit1 Past Consolidated Balance Sheet of Asset FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 Consolidated Balance Sheet Cons. Cons. Cons. Cons. Cons. Asset Current Asset Cash and Deposite 13,891 18,562 21,132 25,893 35,627 Trade notes and accounts receivable 9,431 11,019 10,411 9,949 10,752 Merchandise and finished goods 4,703 4,453 3,415 2,771 2,950 Work in process 73 46 20 91 25 Raw materials and supplies 240 229 212 253 135 Other accounts receivable 703 643 687 802 1,030 Deferred tax assets 857 2,865 3,373 3,526 4,391 Other 1,153 1,020 1,046 829 851 Allowance for doubtful accounts -71 -130 -454 -107 -92 Total current assets 30,983 38,710 39,845 44,009 55,672 Fixed assets Tangible fixed assets Buildings and structures 52,804 53,602 53,147 52,517 52,152 Accumulated depreciation and impairment loss -45,432 -45,831 -45,968 -46,002 -45,752 Buildings and structures, net 7,372 7,770 7,178 6,514 6,400 Machinery and vehicles 13,667 13,679 13,669 13,457 13,452 Accumulated depreciation and impairment loss -13,125 -13,230 -13,325 -13,223 -13,295 Machinery and vehicles, net 542 448 343 234 157 Land 11,290 11,307 10,815 10,571 10,035 Lease assets 573 757 898 973 1,169 Accumulated depreciation and impairment loss -217 -419 -527 -534 -518 Lease assets, net 355 338 370 439 650 Construction in process 17 24 0 4 13 Other 4,853 4,965 4,896 4,585 4,598 Accumulated depreciation and impairment loss -4,367 -4,501 -4,443 -4,269 -4,206 Other, net 486 463 452 315 391 Total tangible fixed assets 20,063 20,353 19,161 18,078 17,648 Intangible fixed assets 448 493 338 3,869 4,000 Investments and other assets Investments in securities 5,841 6,250 6,404 6,523 8,165 Long-term loans 1,220 1,833 1,384 727 499 long-term loans to employees 3,261 3,086 2,768 1,957 1,387 Guarantees 3,886 3,379 2,816 2,745 2,224 Deferred tax assets 8,694 6,646 5,931 5,275 2,037 Other 5,516 6,141 6,139 6,387 6,657 Allowance for doubtful accounts -881 -1,204 -1,221 -966 -981 Total investments and other assets 27,539 26,133 24,224 22,650 19,989 Total fixed assets 48,052 26,133 43,724 44,598 41,638 Total deferred assets 51 74 96 141 115 Total assets 79,087 85,765 83,666 88,748 97,425
12 CFA Institute Research Challenge Date
Exhibit2 Past Consolidated Balance Sheet of Liabilities and Net Assets FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 Cons. Cons. Cons. Cons. Cons. Liabilities Current liabilities Trade notes and accounts payable 6,453 7,732 6,566 4,486 4,481 Short-term borrowings 17,947 15,954 18,034 14,066 9,324 Current portion of corporate bonds to be redeemed 1,162 1,682 3,391 3,046 2,528 Lease obligations 196 227 177 169 217 Accrued income taxes 677 1,136 1,000 859 1,168 Allowance for bonuses 370 365 370 370 395 Reserve for adjustment of returned goods 105 118 62 68 49 Other 4,052 5,009 5,154 5,560 6,715 Total current liabilities 30,964 32,226 34,755 28,626 24,879 Long-term liabilities Corporate bonds 5,607 6,225 5,184 6,393 4,765 Long-term borrowings 7,127 7,153 5,324 7,151 9,496 Lease obligations 304 263 290 328 477 Reserve for retirement benefits for employees 6,884 6,963 6,779 6,286 6,011 Reserve for retirement benefits for directors 457 411 429 448 520 Provision for loss on guarantees 0 0 199 79 58 Long-term deposits received 551 547 542 541 543 Long-term accounts payable 158 108 63 116 130 Other 187 272 901 1,697 1,559 Total long-term liabilities 21,278 21,945 19,715 23,043 23,563 Total liabilities 52,243 54,171 54,471 51,669 48,443 Net assets ’ Capital 14,999 14,999 10,000 10,000 10,000 Capital surplus 10,095 8,732 6,147 3,476 3,418 Retained earnings 9,189 13,478 20,953 32,624 41,186 Treasury stock -954 -954 -637 -1,034 -1,884 ’ 33,330 36,255 36,463 45,066 52,719 Accumulated other comprehensive income Net unrealized gain (loss) on other securities -1,893 -563 -973 -381 507 Deferred hedge gain (loss) -51 -45 -21 -1 15 Foreign currency translation adjustments -4,563 -4,083 -6,310 -7,688 -4,465 Total accumulated other comprehensive income -6,508 -4,692 -7,035 -8,070 -3,942 Stock acquisition rights 0 0 0 29 119 Minority interests 22 30 36 52 85 Total net assets 26,844 31,594 29,195 37,078 48,982 Total liabilities and net assets 79,087 85,765 83,666 88,748 97,425
13 CFA Institute Research Challenge Date
Exhibit3 Past Consolidated Income Statements FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 Consolidated Income Statements Cons. Cons. Cons. Cons. Cons. Sales 69,767 73,875 76,625 74,954 74,233 Cost of sales 32,079 33,127 30,513 26,831 24,797 Gross profit 37,688 40,747 46,112 48,122 49,435 Provision of reserve for adjustment of returned goods 25 13 0 6 0 Reversal from reserve for adjustment of returned goods 0 0 56 0 19 Net gross profit on sales 37,663 40,734 46,168 48,116 49,454 Selling, general and administrative expenses 31,088 31,445 31,171 29,210 29,255 Operating profit 6,575 9,289 14,996 18,906 20,198 Non-operating profit Interest income 375 270 296 339 275 Dividend income 105 77 88 113 148 Reversal of allowance for doubtful accounts 0 0 0 234 0 Other income 329 300 235 328 291 Total non-operating profit 811 648 620 1,016 714 Non-operating expenses Interest expense 696 619 576 515 413 Tax and public charges 400 549 766 756 0 Foreign exchange loss 20 269 531 0 624 Provision of allowance for doubtful accounts 43 47 0 0 0 Other expenses 271 202 355 282 228 Total non-operating expenses 1,431 1,688 2,229 1,554 1,266 Ordinary profit 5,954 8,249 13,387 18,368 19,646 Extraordinary gains Gain on sales of fixed assets 0 2 49 45 0 Gain on sales of investment securities 14 6 5 48 157 Reversal of allowance for doubtful accounts 0 0 396 0 0 Reversal of provision for loss on guarantees 2 0 0 24 0 Total extraordinary gains 16 8 451 119 157 Extraordinary losses Loss on disposal of fixed assets 49 53 80 43 84 Impairment loss 2,409 36 433 70 690 Loss on sale of investment securities 0 0 0 55 0 Valuation loss on investment securities 897 959 94 279 137 Provision of allowance for doubtful accounts 4 212 333 2 0 Office transfer expenses 0 0 0 0 209 Reversal of provision for loss on guarantees 0 0 199 0 0 Loss on adjustment for changes of accounting standard for asset 0 0 426 0 0 retirement obligations Loss from inventory revaluation 79 0 0 0 0 Other 36 50 109 2 0 Total extraordinary losses 3,476 1,313 1,676 453 1,122 Net profit before income taxes and other adjustments 2,494 6,945 12,163 18,034 18,681 – 1,342 2,540 2,674 3,187 3,951 – 2,636 18 92 449 2,168 Total income taxes 3,978 2,558 2,766 3,637 6,120 Income before minority interests -1,484 4,386 9,396 14,396 12,561 Minority interests in income of consolidated subsidiaries 11 13 16 17 24 Net profit -1,495 4,373 9,380 14,378 12,536
14 CFA Institute Research Challenge Date
Exhibit4 Past Consolidated Cash Flow Statements FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 Consolidated Cash Flow Statements Cons. Cons. Cons. Cons. Cons. Cash flows from operating activities Net profit before income taxes and other adjustments 2,494 6,945 12,163 18,034 18,681 Depreciation 1,603 1,384 1,321 1,216 1,307 Amortization of long-term prepaid expenses 101 87 68 63 54 Increase (decrease) in allowance for doubtful accounts -178 373 261 -372 -68 Increase (decrease) in reserve for bonuses -50 -4 4 0 24 Increase (decrease) in reserve for retirement benefits for employees 70 78 -184 -493 -274 Increase (decrease) in reserve for adjustment of returned goods 25 13 -56 6 -19 Increase (decrease) in reserve for retirement benefits for directors 6 -46 18 19 71 Interest and dividend income -481 -347 -385 -453 -423 Interest expense 696 619 576 515 413 Loss (gain) on disposal of fixed assets 49 51 30 -2 84 Impairment loss 2,409 36 433 70 690 Loss (gain) on sale of investment securities -3 -6 -5 7 -157 Valuation loss (gain) on investment securities 897 959 94 279 137 Decrease (increase) in accounts receivable 2,882 -2,621 -320 404 -435 Decrease (increase) in inventories 169 304 982 511 46 Decrease (increase) in other assets -177 456 -52 -183 52 Increase (decrease) in accounts payable -1,660 1,539 -528 -1,989 -374 Increase (decrease) in consumption tax payable 96 104 33 43 4 Increase (decrease) in other liabilities -826 686 1,002 441 1,125 Other 250 302 782 259 95 Interests and dividends received 487 340 379 469 413 Interests paid -680 -599 -606 -522 -404 Income taxes paid -1,281 -2,229 -2,801 -3,503 -3,962 Cash flows from operating activities 6,898 8,428 13,211 14,820 17,085 Cash flows from investing activities Payments for time deposits -301 -436 -2,391 -1,914 -1,456 Withdrawal of time deposits 406 266 933 2,923 926 Payments for purchase of tangible fixed assets -1,131 -1,711 -843 -310 -720 Payments for purchase of investment securities -506 -100 -761 -4 -703 Proceeds from sale of investment securities 201 96 65 135 341 Payments for loans receivable -319 -68 -50 -1 0 Collection of loans receivable 136 339 498 1,615 816 Payments for guarantees -- -69 -429 -62 Collection of guarantees 479 407 633 387 858 Other payments -1,010 -456 -314 -1,359 -730 Other proceeds 7 103 179 963 244 Cash flows from investing activities -2,038 -1,559 -2,120 2,005 -485 Cash flows from financing activities Increase in short-term borrowings 1,025 43 0 0 200 Decrease in short-term borrowings -1,486 -956 -2,455 -281 -4,887 Increase in long-term borrowings 6,780 2,200 5,318 5,030 5,400 Decrease in long-term borrowings -6,173 -3,256 -2,612 -9,874 -3,109 Proceeds from issuance of corporate bonds 1,185 2,456 2,450 4,614 983 Payment for redemption of corporate bonds -2,277 -1,362 -1,832 -3,836 -3,146 Payment for purchase of treasury stock 0 0 -7,605 -3,284 -995 Proceeds from sale of treasury stock 0 0 337 217 87 Dividends paid -1,351 -1,367 -1,901 -2,701 -3,968 Other payments -262 -239 -254 -196 -215 Cash flows from financing activities -2,559 -2,483 -8,554 -10,313 -9,651 Effect of exchange rate changes on cash and cash equivalents -1,147 88 -1,338 -676 2,066 Increase (decrease) in cash and cash equivalents 1,153 4,474 1,197 5,835 9,013 Cash and cash equivalents at beginning of period 12,445 13,599 18,073 19,271 25,107 Cash and cash equivalents at end of period 13,599 18,073 19,271 25,107 34,120
15 CFA Institute Research Challenge Date
Exhibit5 The history of Sanrio Year Month Content As the first step towards building the Social Communication Business, Shintaro Tsuji establishes Yamanashi Silk 1960 Aug. Center Co., Ltd. with 1 million yen in capital. 1967 Dec. Sanrio published small picture book series, Gift Book. Then started planning and selling publications. 1969 Dec. Sanrio Greetings Co., Ltd. is established. 1972 Oct. Sanrio merge with Sanrio electric equipment industry Co., Ltd. to unify the business of affiliates. The company is officially established under its new name, Sanrio Company Co., Ltd.Head office is moved to 1973 Apr. Gotanda, in Tokyo's Shinagawa Ward. 1973 Oct. Sanrio Greetings Co., Ltd. is merged with Sanrio Co., Ltd. Film production activities commence. 1974 Feb. Sanrio started selling social communication gifts using original characters made by Sanrio. Sanrio Film Corporation of America (the existing Sanrio, Inc.) is established in Hollywood, California. U.S. film 1974 Dec. production and distribution activities commence. 1976 Apr. Character merchandise licensing activities begin. 1976 May. Sanrio, Inc. is established in San Jose, California. 1982 Apr. Sanrio is listed on the second section of the Tokyo stock Exchange. Sanrio GmbH (the existing consolidated subsidiary) is established in Hamburg, Western India, and starts importing 1983 Apr. and selling social communication gifts of Sanrio. 1984 Jan. Sanrio's listing is moved to the first section of the Tokyo Stock Exchange. 1984 Feb. Kokoro Company Ltd. (the existing consolidated subsidiary) is established. Head office moves from Gotanda to Osaki, also in Shinagawa Ward. Established Sanrio Communication World Co., 1987 Jan. Ltd. (the existing Sanrio Entertainment Co., Ltd.) as operating company for Sanrio Puroland. Sanrio Do Brasil Comersio e Representacoes Ltda. (the existing consolidated subsidiary) was established in Sao 1987 Feb. Paulo, Brazil, and started business to control copylight around Brazil. Established Sanrio Communication World Co., Ltd. (Its name was changed to Sanrio Puroland Co., Ltd. in August, 1987 Nov. 1999 and it was liquidated in March, 2010.) which operates Sanrio Puroland (Tama, Tokyo) , compound culture facilities. Sanrio participates in the establishment of Harmonyland Co., Ltd. (the existing Sanrio Entertainment Co., Ltd.), in 1988 Oct. Hijimachi, Oita Prefecture. It was decided to change fiscal year which is from April 1st to March 31st at the 29th annual shareholders' 1989 Oct. meeting. 1990 Apr. Sanrio Far East Co.,Ltd. is established. 1990 Dec. Sanrio Puroland theme park opens in Tama City, Metropolitan Tokyo. 1991 Apr. Harmonyland theme park opens in Hijimachi, Oita Prefecture. Sanrio Taiwan Limited Co. was established in Taipei and was reorganized to Sanrio Taiwan Co., Ltd. (the existing 1992 May. consolidated subsidiary) in February 1st, 2001. 1994 Apr. Sanrio (Hong Kong) Co., Ltd. (the existing consolidated subsidiary) was established in Hong Kong. 1998 July. Sanrio Korea Co., Ltd. (the existing consolidated subsidiary) was established in Korea. 2000 Aug. The number of Sanrio shares in one round lot is reduced from 1,000 to 100. 2001 Jan. Sanrio Wave Hong Kong Co., Ltd. (the existing consolidated subsidiary) was established in Hong Kong. Sanrio Shanghai International Trading Co., Ltd. (the existing consolidated subsidiary) was established in Shanghai 2003 Jan. to strongthen producing products, to enhance supplying Sanrio goods to domestic and overseas and to establish the sales system. Sanrio Asia Merchandise Co., Ltd. (the existing consolidated subsidiary) was established in Hong Kong to put 2005 Apr. supplying goods into one place around Asia. 2006 Nov. San-Byte Taiwan Co., Ltd. (transfered its shares in July, 2011) was established in Taiwan. 2007 Apr. Sanrio Entertainment Inc. (liquidated in June, 2010) was established in America. 2009 Jan. Sanrio License GmbH (Sanrio GmbH absorbed this company in January, 2011) was established in Germany. The theme park business of Sanrio Co., Ltd., Sanrio Puroland Co., Ltd. and Harmonyland Co., Ltd. are splitted off 2009 July. from those companies, and Sanrio Entertainment Co., Ltd. (the existing consolidated subsidiary) was established. 2010 Mar. Sanrio Puroland Co., Ltd. and Harmonyland Co., Ltd. are liquidated. subsidiary) were established in U.K.. Sanrio acquired all issued stocks of the English character business company, 2011 Dec. , 2012 Mar. Sanrio Global Asia Ltd. was established in Hong Kong. Head office of Sanrio was moved to "Gate City Ohsaki" in Osaki, Shinagawa Ward, Tokyo without changing its 2012 May. location of the head office. 2012 Nov. Sanrio Chile SpA. was established in Chile.
16 CFA Institute Research Challenge Date
Exhibit6 Calculation of quarterly EPS forecast We calculate quarterly EPS in FY03/14 by this process as in the following. We calculate the ratios of every quarterly EPS to yearly EPS. And calculate the average ratios of every quarterly EPS to yearly EPS by arithmetic mean in every quarter. Quarterly EPS/Yearly EPS EPS Stock price P/E Ratio Jun. Sept. Dec. Mar. Year 2010 12.41% 16.67% 40.88% 30.04% 104.76 2462 23.5 = % 2011 19.74% 18.94% 40.16% 21.16% 162.56 3230 19.9 = % 2012 23.20% 21.38% 29.24% 26.19% 142.09 4192 29.5 = % 2013 161.12 6030 = % Arithmetic mean 18.45% 19.00% 36.76% 25.80% We estimate every quarterly EPS forecast in FY03/14 by multiplying yearly EPS in FY03/14 by every quarterly coefficient. But, because it was said in the Sanrio security report that EPS in 1st quarter in FY03/14 is 29.9, there is gap between the theoretical value (EPS=29.725) and the applied value (EPS=29.9). We distribute this gap, - 0.175, to other quarters by using the ratio between other quarterly coefficients. Result is shown as follows. EPS Stock Price P/E Ratio Jun. Sept. Dec. Mar. Year 2010 13 17.46 42.83 31.47 104.76 2462 23.5 2011 32.09 30.79 65.29 34.39 162.56 3235 19.9 2012 32.96 30.38 41.55 37.22 142.09 4192 29.5 2013 29.9 30.56 59.15 41.51 161.12 6030 37.4
Exhibit7 Licensees in various product category As main licensees in domestic companies Samantha Thavasa Japan Limited/Avex Marketing Inc./First Retailing Co., Ltd./Citizen Holdings Co., Ltd./Bridgestone Sports Co., Ltd./crocs. Japan/K.K. kitson Japan/SHO-BI Corporation/FUJIFILM Holdings Corporation/adidas.Japan/Softbank Mobile Corp./Swarovski Japan Ltd./LIBERTY JAPAN LIMITED/Sun-Star Stationery Co., Ltd./NAIGAI Co., Ltd./anteprima Ltd./World Co., Ltd./McDonald's Holdings Co. (Japan), Ltd./Don Quijote Co., Ltd./K.K. Waterdirect/Tokyo Medical University/Pfizer Japan Inc./Shionogi & Co., Ltd./Missha Japan Inc./NIHON L'OREAL/Fukusuke Co., Ltd./Eitaro Sohonpo Co., Ltd./Morozoff Ltd./Bourbon Corp./Izumiya Tokyo-Ten Co., Ltd./Credit Saison Co., Ltd./Yamamoto Noriten Co., Ltd./Morinaga & Co., Ltd./Cedyna Financial Corp./Mizuho Bank, Ltd./Fukoku Mutual Life Insurance Co./MITSUBISHI MOTORS CORPORATION/IKEDA MOHANDO Co.,Ltd./Maxim's de Paris Ltd./Itoham Foods Inc./Nippon Flour Mills Co., Ltd./S.T.CORPORATION/The Fukushima minyu/Nippon Travel Agency Co., Ltd./Hisamitsu Pharmaceutical Co., Inc./Kobe Fugetsudo Co., Ltd./Calpis Co., Ltd./Ezaki Glico Co., Ltd./Kibun Foods, Inc./Paris Miki Holdings Inc./Daiwa House Industry Co., Ltd./Hankyu Hanshin Hotels Co., Ltd./Daiwa Resort Co., Ltd./SAIBU GAS Co.,Ltd./Max Hill Co., Ltd./Japan Racing Association/Rosette Co., Ltd. and so on. There are licensees not only in apparels and toys but also in other product categories, and some of them are large companies. And licensees in overseas companies Wal-Mart Stores, Inc./H&M (Hennes & Mauritz Ltd.)/FOREVER 21, Inc./D. Swarovski & Co./ZARA (Inditex; Industrias de Diseño Textil, S.A.)/Samantha Thavasa/Spain Inditex/Nestle/The Swatch Group and so on As written, Sanrio contracts with many large companies mainly in apparels. (Source : Sanrio HP)
Exhibit8 Changing trend in character market In 2011 the Ministry of Economy published the report, “Investigation for the competitive environment and overseas market trend in character licensing”, and it says about the troubles and barriers which Japanese companies have when they are going to entry overseas market. The most of them is “replicas, pirated copies and parallel imports” (32.5%), and next is “copyright and related rigths” (22.5%). Because of character diversity, a competitive environment becomes harder. For example in investigation for contents in Brazil by JETRO, almost animations shown in Brazil are made in America, and Disney characters are popular. Additionally, The Licensing Letter in 2012 published by EPMcommunications says that character licensing market shrinked by -4.4% YoY in 2010 and by -19% YoY in 2009. Therefore the market is decreasing.
Exhibit9 “Hello Kitty”, stable income resource In the analyst meeting of Sanrio, sales of Hello Kitty goods constitutes of 60% out of domestic licensing sales and 90% out of overseas licensing sales. Additionally in the “Investigation of the popularity in licensing characters to customers in 2013” published by VOICE INTELLIGENCE Co., Ltd, Hello Kitty is 6th position, and in the “Character ranking 100” published by CHARACTER DATABANK, Ltd., Hello Kitty is 6th position, too.
17 CFA Institute Research Challenge Date
Exhibit10 Purchasing new character brings the licensing more expansion. “Mr. Men & Little Miss” is the series character which is in a picture book written by United Kingdom writer of children's books, Roger Hargreaves. It is popular in Europe and Australia and its picture books are sold more than 100 million books in 30 countries. (The Nihon Keizai Shimbun, 2011) In the end of 2011, Sanrio did M&A and they plan to expand their goods widely in some product category from the spring in 2014. Susumu Emori who is a managing director and a general project manager said that he planned to purchase new character using not more than 30 billion JPY until March, 2015 in interview held by Bloomberg L.P. in 2011. We expect that Sanrio continue to purchase new characters through M&As and others.
Exhibit11 Risk that Sanrio cannot control its brand image completely because of licensing expansion For Sanrio licensing contract, the company selects licensees not to damage its brand image and pay attention to licensee’s character designs and licensee’s scandal. If licensee damages Sanrio brand image greatly, the company stops the licensing contract or take other counterplan. However, because it is said there are over 2000 goods using Sanrio characters around the world, Sanrio needs huge cost to pay attention to all designs and all licensees. Therefore, there is possibility for Sanrio not to control its brand image completely. In June 27th, 2013, Sankei Shimbun said that ASUNAROSYA (Kanagawa Pref., Yamato) which produces and sells “Regional Hello Kitties around Japan” sold new Hello Kitty which wears Sumo wrestler's loincloth-belt, and its motif is “Hakata Gion Yamakasa”. But mainly in Internet, customers say critical comment on that new Hello Kitty, for example “It is not cute.”. Sanrio allowed this design, but a certain problem, which damage its brand image, may come about in a place that the company cannot predict.
Exhibit12 There is possibility that theme park becomes unprofitable again. Nikkei Shimbun said that the number of visitor from overseas to Sanrio Puroland increased +50% YoY from April to September in this year because of a low rate of exchange for the JPY, and the number of total visitor to Sanrio Puroland increased +11.6% YoY. For these reason, Sanrio has the perspective that Sanrio Puroland, which was renewed in July, becomes profitable from April to September in this year for the first time since opening. However, because the main reason of this is the increasing number of visitor from overseas, there is possibility that the number of visitor from overseas will decrease because of changing circomstances, for example changing exchange rate. So this remains risk, we think.
Exhibit13 After boom, total sales decreases In Japan, the operating profit decreased two-thirds from 18.8 billion JPY in 1999 when the golden age of Hello Kitty boom to 6.2 billion JPY in 2007 when after the end of its boom. In only cases we can find, there were boom in Singapore in 2000 and in Taiwan in 2005. Especially in Taiwan, the scale of boom was very large as a security unit of Taiwan was dispatched. In the future, because there is possibility that the boom occurs in Japan or in overseas, we decide this as one of risks.
Exhibit14 Strategy of the company According to Sanrio, the number of employee are not a lot of people. Therefore, the company have to develop oversee markets one by one. The company focused on Europe from 2008, North-America from 2011, and Asia →South-America→Russia, India, Africa. In addition, the company afraid decrease on sales due to tiredness of character, and after the markets developed enough, the company will not force to increase sales and focus on next regions.
Exhibit15 Investment summary why stock price was suddenly rising up in September. In 2013, the share price of Sanrio started rising from January as of 2,754 yen, and was around 5,000 yen which is near price target 4,998 yen, from May until September. But stock price was sharply rising from beginning of September and consequently reached to 6,030 yen as of 9/30 from 5,070 yen as of 8/30 near price target. It was first time from 1999 that stock price was over 6,000 yen. We careful analyzed if there is any event which affects fundamentals of Sanrio, we found mainly three incidents. ・the expectation of Sanrio’s theme park business becoming profitable for the first time ・interim dividend which have the expectation of dividend increase was vesting in the end of September. ・the exciting news in September that Tokyo will host Olympic games in 2020 were coming to market of Japan.
Those factor was giving overly optimistic expectation about Sanrio's fundamental(Nikkei Quick News 2013/9/18,Asahi Newes Paper 2013/9/25). Because profit contribution of Tokyo Olympic is too distant after 7 years will have passed, profit contribution of theme park is also small only 7.1% of total sales, and earnings increase have already combined to stock price in of 5,070 yen as of 8/30.
18 CFA Institute Research Challenge Date
Exhibit16 Sales forecast for Europe & North-America We calculated the sales for Europe & North-America as follows: Sales = (licensing sales + product sales) * currency rate Furthermore, licensing sales = the number of licensees * sales per licensee We considered these regions as mature markets because of enough popularity, awareness and little opportunity loss. Indeed, American subsidiary found in 1976, and European one found in 1983. Many celebrities such as Lady GaGa use its products. As for opportunity loss, the company licensed bulk companies such as, H&M and ZARA (inditex) in Europe, and Walmart in North-America . Therefore, Sanrio plans strategy of growing in these regions, which are (1) diverse product categories (in particular, room of expanding the number of licensees in promotion companies) and (2) create character portfolio. In addition, we found out three main factors of sales changes; (3) the markets have lost interest in Hello Kitty because of overexposure, (4) majority of licensees are still general retailers or apparels and depended on markets (reference to graph below) (5) influence of currency rate. In order to take into account these five factors, we adapted the number of licensees to (1), (3), the sales per licensee to (2),(4), currency rate to (5).
Product category of licensing in USA 2010 Product category of licensing in Europe 2010
[sales for Europe] Sales per licensee We found it to divide sales by the number of licensees. Referred to the security report, we calculated sales to use external sales (JPY) for Europe in the past and average currency rate each year. Furthermore, we considered Mr.Men as one of Sanrio’s characters, and include into sales for Europe. Regard of future, effect of European debt crisis and end of Hello Kitty boom caused sales in 2011 and 2012. However, according to fiscal statement in March 2013, market hit the bottom. Actually, media viewed debt crisis would end in main 5 sales drivers, the U.K, Italy, Spain, France and Germany. In addition, every contracts contain minimum guarantee. Therefore, these factors will support the sales per licensee and we assumed that it would not decrease from 8.5 EUR (1.1 million JPY) . Furthermore, Sanrio had already contracted with bulk apparels companies, H&M, ZARA. We assumed that the company would not license such large companies and sales per licensee would not grow rapidly. As for growth, because majority of sales was still general apparels, we assumed that sales per licensee would depend on nominal GDP growth rate and used the rate. (reference nominal GDP source: web site IMF DATA and statistics) The number of licensees Quoted from the security report, Sanrio can license multiple companies in same product category in order to approve flexible design. Actually, according to the company, almost all contracts have been renewal. Therefore, we assumed that the number of licensees would continue to grow same pace in the past by 146 licensees, which is average growth rate for recent 5 years. However, the company would control the character exposure to avoid the instant boom that they have experienced in the past. Sales for Europe in 2010 marked 128 million EUR, but after that, because of rebound of boom, the sales decreased to 99 million EUR in 2012. We created the border of overexposure, which is sales approaching 120 million EUR referred from 128 million EUR in 2013. We assumed that Sanrio would control character exposure to decrease new contracts, and as for existing licensees, it is more likely to cancel the licensing contracts because of their noting the tiredness of characters. Therefore, after reaching sales to 120 million EUR, new contracts will decrease and existing contracts will be cancelled. The number of licensees will be constant on the net basis. We forecast the border will be in 2015, and due to the aforementioned reasons, the number of licensees will be constantly 1269 companies.
19 CFA Institute Research Challenge Date