24 Jul 2024
Cuteness and investments are two words that are rarely paired together in the same sentence, but one of Japan’s most recognisable cultural and iconic exports stands out in its potential to deliver growth beyond current market imagination. To mark Hello Kitty’s 50th anniversary, Investment Director, Sunny Romo, sat down with Valentina Luo, an Analyst in the Asia Pacific equities team, to discuss the elements of the successful investment story in Sanrio, the creator of the much-loved feline character.
Sunny Romo (SR): As a long-term investor in Sanrio, what have been the key elements of this successful investment story?
Valentina Luo (VL): Whilst the essence of Hello Kitty has remained unchanged as a cultural icon for the past half century, Sanrio itself has become an almost unrecognisable company since M&G first invested in it four years ago in July 2020. At that time, the market ascribed a value to Sanrio of just $1.4 billion. This modest valuation reflected the company’s prevailing strategy at the time; one which had yet to fully embrace digitalisation trends that had already been re-shaping media assets worldwide for a decade or more.
In 2021, the arrival of a new management team caught our attention. Through meetings and communication with the new team, we gained confidence that positive changes lay ahead for the company. We watched Sanrio redefine its strategy, which embraced digitalisation and thoughtful global expansion.
Since this time, the company, quarter after quarter, has delivered the changes promised to the market. This achievement has translated into impressive revenues and profits, which reached record highs last fiscal year. As shareholders, we have been rewarded by a share price that has celebrated this corporate reform, rising multiple-fold since we invested. In fact, Sanrio has been one of the largest contributors to performance of the M&G Japan strategy in recent years.
SR: If we really drill down, what did Sanrio do to achieve such a knockout result?
VL: The change really started with a shift in mindset. A great deal of credit must go to President Tsuji for this. In 2020, Tsuji-sama was handed a business founded by his grandfather that had excelled at intellectual property (IP) creation but had fallen behind commercially. Sanrio had not adapted to changing technologies which were disrupting the monetisation landscape for creative companies like Sanrio. The result was a decade of poor financial performance before he took over.
As a digital native himself, the new CEO fast-tracked the company’s online transition, by expanding e-commerce via top-portals and also growing Sanrio characters’ presence on key social media platforms. This better connected the company’s characters to a new generation of customers. Under his helm, the company has also made significant efficiency improvements thanks to a streamlining of its unique product lines and prioritising the asset-light franchise/royalty business. As a result, Sanrio’s profit margin and earnings have both grown to all-time-high levels1.
Sunny Romo, right, spoke to Valentina Luo, left, about recent changes at Sanrio and the company’s growth potential.
SR: Given M&G’s value-added shareholdership approach, how have you been actively engaging with this company?
VL: We are proud to have played a part, admittedly a small one, in the changes Sanrio is spearheading. We have a strong, honest and constructive dialogue with the company. The company has always been happy to hear our thoughts and advice on commercial strategy. In return, we have gone out of our way to be helpful to management, making various industry connections that we hope have been helpful along the way.
Our general approach to engagement is to follow the ‘servant-leadership’ model; rather than tell companies what they should be doing, we ask them how we can help. Part of the art of investing in Japan, is knowing which companies will be open to such collaboration. Sanrio’s management deserves credit for its open-minded and transparent approach.
“Our general approach to engagement is to follow the ‘servant-leadership’ model; rather than tell companies what they should be doing, we ask them how we can help.”
SR: Sanrio’s stock price has gone up 5.5x since 2021. Do you feel there is still room for the company to grow?
VL: Our question at the very outset of the investment was simple: how much is Sanrio’s character IP worth if managed to a strategy that reflects the current digital opportunity set? The answer to that is still a number that far exceeds the current share price, in our view.
A broad portfolio of amazing character IP sits within Sanrio; it’s not just about Hello Kitty. Management has been pulling various monetisation levers and this has been generating good results. However, over the long-term, we believe significant further upside exists. Hello Kitty alone has outsold the likes of Mickey Mouse and other great global character franchises since the icon’s inception2. It is our belief that Sanrio’s current market cap of $4.5 billion still does not reflect the long-term earnings potential.
The company’s China strategy-revamp has only just started and the partnership with a key local e-commerce partner has yet to reveal its potential earning power. Furthermore, we believe the market has yet to price in the growth from many of the content-centric developments, such as games and movies.
A glance at some of its peers with similarly influential IPs may provide some clues to the growth potential lying ahead: Disney’s consumer products sales alone is 5 times that of Sanrio’s, which only makes up 5% of its total revenue (with the rest mainly from content)3.
We are not suggesting it would be easy to close this gap, but we think the current management team has the commercial instincts required to deliver growth well beyond the market’s current imagination.
Hello Kitty has turned 50 this year and Sanrio launched an epic celebration for her anniversary around the world. The past 50 years have been remarkably successful and we believe Hello Kitty can bring even more happiness to Sanrio’s investors in the years ahead. Happy Birthday to the cutest cat on the planet!
1 Source: LSEG Datastream, July 2024.
2 Source: Visual Capitalist, The World’s Top Media Franchises by All-Time Revenue, April 2024.
3 Source: Sanrio Financial Results 2023, Bloomberg July 2024.
The information provided should not be considered a recommendation to purchase or sell any particular security.
The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.
