Business Strategy and Outlook Kazunori Ito, Sr Eq. Analyst, 05 December 2019 As technologies and consumer preferences change quickly , it is generally difficult for consumer electronic companies to build up an economic moat that generates sustainable excess returns on capital. The replacement cycle of digital appliances is usually three to six years, but as most products are commoditized, it is hard for manufacturers to build an ecosystem that prevents customers from moving to different manufacturers. In fact, Sony’ s profitability on electronics has been unstable over the years, while Pictures, Music, and financial services have been generating solid results. Exposed to intense competition with Asian manufacturers, Sony’ s TV business generated operating losses for nine consecutive years and recorded asset impairments in fiscal 2012. The company was also forced to revise its growth strategy in smartphones and write off intangible assets in fiscal 2015 as a result. W e praise Sony's recent efforts to restructure its electronics business and regain profitability , but we are still not confident that the firm as a whole qualifies for an economic moat. Meanwhile, we like Sony’ s new challenges in its PlayStation business. In addition to the strong shipment momentum of the PlayStation 4, Sony is aggressively introducing various services, such as PS Plus (monthly subscription service), PS Now (cloud gaming service), and in particular , PlayStation VR (virtual reality service), which launched in October 2016. W e believe these new services may deliver additional users to the PlayStation ecosystem. W e are also interested in Sony’ s strategy to introduce PlayStation 4 Pro, an enhanced version of the PS4. W e believe this will contribute to lengthening the cycle of the current PlayStation generation and constitute an ecosystem that will help maintain existing users on the next-generation platform. Analyst Note Kazunori Ito, Sr Eq. Analyst, 10 August 2020 Despite the coronavirus outbreak, no-moat Sony delivered robust results for the June quarter While hardware businesses were severely damaged by the pandemic, Important Disclosure: The conduct of Morningstar’ s analysts is governed by Code of Ethics/Code of Conduct Policy , Personal Security T rading Policy (or an equivalent of), and Investment Research Policy For information regarding conflicts of interest, please visit http://global.morningstar .com/equitydisclosures Expect Solid PS5 Launch as Stay-Home Measures Are a tailwind; Lifting Sony’ s FVE to JPY 8,000 Bulls Say O PlayStation VR will not only be used for games, but will also be a breakthrough mode of entertainment for media such as movies, music, and sports, and will deliver new demand to the PlayStation ecosystem. O Diffusion of the dual-camera technology on handsets, and new demand from the automotive industry , will boost demand for image sensors, from which Sony will benefit. O While tough competition in the electronics industry will continue, the capable management team can control the risk. Bears Say O Digital appliance businesses, especially handset businesses, are extremely competitive, and so Sony will be unable to generate sustainable excess returns from them. O Because of overcapacity and depreciation of the U.S. dollar , Sony will fail to regain profitability in the image sensor business. O As the PlayStation 4 and PlayStation VR are too expensive, people will be more interested in the AR experience provided on smartphones. Morningstar Pillars Analyst Quantitative Economic Moat None None V aluation QQQ Fairly V alued Uncertainty High High Financial Health — Strong Current 5-Yr A vg Sector Country Price/Quant Fair V alue 1.01 0.98 0.77 0.86 Price/Earnings 16.0 28.8 21.4 15.4 Forward P/E 21.1 — 15.9 14.1 Price/Cash Flow 7.2 5.7 15.6 9.7 Price/Free Cash Flow 10.8 8.9 23.0 18.3 T railing Dividend Y ield% 0.51 0.50 1.89 1.84 content businesses showed resilience. In particular , the game and network services segment far exceeded our expectation, as stay-home measures in various countries became the tailwind for both driving game shipment and increasing the revenue proportion of digital content. W e had been concerned that initial shipments of PlayStation 5 may be slower than that of PS4, as we forecast PS5 console pricing should be higher because of the increasing components cost. However , we revise our view that PS5 will make a solid start this year , as we view people’ s preference on buying console games will continue, and the increasing user base of PlayStation Plus, a monthly subscription service, will contribute to user retention on the ecosystem. As a result, we raise our revenue forecast for the segment by 22% and 9% for fiscal 2021 and 2022, respectively Our fair value estimate for Sony is revised to JPY 8,000 from JPY 7,500 as a result, and we see its shares as currently fairly valued. Sony’ s June quarter operating income was JPY 228 billion, which was 1% above the previous year excluding one-time factors. However , the ongoing pandemic was a headwind for the hardware businesses. The electronics products and solutions segment recorded an operating loss because of the sharp revenue decline; revenue from TV and digital camera dropped 28% and 54%, respectively Operating income for imaging and sensing solutions dropped 49% from the previous year owing to the weak digital camera and smartphone production. On the other hand, content businesses were relatively resilient. Operating income for the music segment was only 9% down from the previous year , as solid streaming sales mitigated the damage of the pandemic, and the pictures segment improved profitability from the previous year through an aggressive cut of marketing costs. Economic Moat Kazunori Ito, Sr Eq. Analyst, 10 August 2020 W e do not believe Sony has an economic moat, as a large percentage of its products have very low switching costs, even though we identify economic moats in some parts of its business. In particular , we are concerned that consumer electronic products (25% of revenue) will be exposed to fierce competition with Asian manufacturers. In other Source: Morningstar Equity Research Source: Morningstar Undervalued Fairly V alued Overvalued Quantitative V aluation a JPN SNE Morningstar Equity Analyst Report | Report as of 11 Aug 2020 04:41, UTC | Page 1 of 13 Sony Corp SNE (XNYS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 11 Aug 2020 04:40, UTC 10 Aug 2020 11 Aug 2020 04:30, UTC 10 Aug 2020 10 Aug 2020 10 Aug 2020 QQQ 80.05 USD 75.00 USD 1.07 0.51 0.57 98.29 Consumer Electronics Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law , Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? words, Sony’ s business is too fragmented to ascribe an economic moat to the company as a whole. Switching costs are critical to forming a moat for consumer electronics companies. Although Sony has improved its profitability by focusing on premium products, we think this is insufficient to generate sustainable excess returns on capital, as the majority of consumer electronic products are matured and commoditized, making it difficult to develop switching costs. From this point of view , however , we positively evaluate Sony’ s challenges in building an ecosystem on its PlayStation business. PS Plus is a monthly subscription program providing various services including monthly games, early access to new games, free access to previous games, and exclusive discounts. While PlayStation 4 accumulated shipments reached approximately 97 million units by the end of fiscal 2019, the number of PS Plus users exceeded 36 million. This not only gives Sony solid cash flows with which to improve the profitability of its gaming segment, but also provides a hook for customers, leading them to again purchase a PlayStation console in the next generation. Likewise, other services such as PS Now (cloud gaming service) could contribute to the PlayStation ecosystem, despite still being small. In addition, PlayStation VR, which was launched in October 2016, not only provides virtual reality games, but is also expected to expand the PlayStation ecosystem to entertainment, sports, medical, and education in the near future. W e also acknowledge strength in the firm's image sensor business. Sony’ s image sensors have two features: backside illumination, or BSI, and a stacked structure. The former helps absorb more light per pixel, and the latter helps save space and thus secures a larger sensing area. As both factors improve picture quality , Sony has increased its market share, owing to growing demand from handsets. For instance, Apple has used Sony’ s image sensor from the iPhone 4 onward for the rear camera, and from the iPhone 6 for the front camera. When handset Close Competitors Currency (Mil) Market Cap TTM Sales Operating Margin TTM/PE Rinnai Corp RINIF USD 4,408 3,114 10.19 16.39 Alps Alpine Co Ltd APEL Y USD 2,897 6,879 1.95 0.00 Alps Alpine Co Ltd APELF USD 2,897 6,879 1.95 0.00 Arcelik AS ACKAF USD 2,391 0 0.00 0.00 manufacturers require better -quality photos, they adopt Sony’ s image sensors. W e estimate that Sony’ s global market share for image sensors was 50.1% in 2018 (the second-largest was Samsung with 20.5% market share, and the third was Omnivision with 11.5% market share), and the operating margin for the business was 20% in fiscal 2018. W e therefore believe Sony’ s image sensors have a competitive advantage in sensing technology , and can thus earn premium pricing. Security and automotive (autonomous driving) fields are the next growth drivers for Sony’ s image sensor business. A critical factor for both fields is high sensitivity under various difficult conditions, and so we believe Sony could leverage its strength to expand this business in the near future. W e also believe the Pictures and Music businesses possess economic moats. While we expect that the number of channels will continue to increase, Sony owns attractive content and artists, which would differentiate itself and generate solid cash flow in the future. Spiderman, Men in Black, Resident Evil, and Ghostbusters are popular IPs for the Pictures business; Beyonce, Justin T imberlake, and Meghan T rainor are popular artists in the Recorded Music business; and T aylor Swift, Lady Gaga, and Michael Jackson are popular catalog contributors in the Music Publishing Business. On the other hand, we do not assess the financial services segment as having an economic moat. The majority of this segment, Sony Life, is a life insurance business that operates in an extremely fragmented industry Sony Life is the seventh-largest life insurance company in Japan, and has achieved steady growth and high profitability over the years. However , because of the negative-interest-rate policy in Japan, we expect competition to become more intense, and because of the commoditylike nature of insurance products, Sony Life will not be able to maintain its profitability in this environment. In addition, we are not optimistic regarding the future of other consumer electronics businesses, such as smartphones, TVs, and digital cameras. Sony has recovered its profitability in consumer electronics businesses by cutting down fixed costs and focusing on premium products. However , as these are all mature products, we expect tough competition to continue. W e estimate that Sony’ s market share in 2018 was less than 1% on smartphones, 5.3% on TVs, and 17.7% for digital cameras. W e believe that these numbers are not enough Morningstar Equity Analyst Report |Page 2 of 13 Sony Corp SNE (XNYS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 11 Aug 2020 04:40, UTC 10 Aug 2020 11 Aug 2020 04:30, UTC 10 Aug 2020 10 Aug 2020 10 Aug 2020 QQQ 80.05 USD 75.00 USD 1.07 0.51 0.57 98.29 Consumer Electronics Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law , Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? to control the market, and to generate sustainable excess returns on capital. While Sony recognizes the importance of developing a hook with customers, these traditional consumer electronic products still contribute 25% of Sony’ s revenue, and so we do not believe the company has an economic moat. Our forecast of returns on invested capital below the weighted average cost of capital in each of our five explicit forecast years supports this. Fair V alue & Profit Drivers Kazunori Ito, Sr Eq. Analyst, 10 August 2020 Our fair value estimate for Sony is USD 75 per U.S. ADR, which implies enterprise value/EBITDA of 5.8 times on a fiscal 2020 basis, which is within the historical range of 4-6 times. In our base-case scenario, we expect that Sony’ s operating profit for fiscal 2021 (financial year ending March 2021) will be JPY 760 billion, which is substantially below JPY 845 billion of the previous year because of the coronavirus pandemic. While PlayStation 4 is moving toward the end of the cycle, profit of game and network services segment will not decline as we had anticipated, as stay-home measures in various countries became the tailwind for both driving game shipment and increasing the revenue proportion of digital content. Meanwhile, hardware businesses will be severely damaged by the pandemic. W e cut the revenue forecast for image sensors, as we expect weaker smartphone shipment and worse-than-expected smartphone product mix for fiscal 2021. However , we think demand for Sony’ s mobile image sensor will remain strong in the longer run for two major reasons: 1) Diffusion of multiple cameras and adoption of larger image sensors for smartphones are creating new demand; and 2) Sony is increasing its market share for front cameras, as higher resolution is required for selfies. In addition, we expect sensing demand for robots and automobiles will give additional growth in the longer term. In fact, Sony had planned to expand its production capacity from 100,000 wafers per month in fiscal 2019 to 138,000 wafers per month in fiscal 2021. W e believe Sony can maintain its advantage against its peers and continue to generate high margins from this segment. Our fair value uncertainty rating for Sony is high. While we expect the music and financial services segments will be stable, we are concerned that the electronics-related segments are vulnerable to the cyclicality of the technology industry As a Japanese company , Sony reports financial results in Japanese yen. Our U.S. ADR fair value estimate is based on an exchange rate of JPY 106/USD 1. Risk & Uncertainty Kazunori Ito, Sr Eq. Analyst, 10 August 2020 Sony’ s profit is vulnerable to movements in foreign exchange rates in general. However , unlike other typical consumer electronics manufacturers in Japan, Sony benefits from appreciation of the yen against the U.S. dollar The firm relocated its production outside Japan and tried to link its cost to the U.S. dollar as much as possible when we observed significant strengthening of the yen from 2008 to 2012. On the contrary , appreciation of the yen against the euro is negative for Sony’ s profitability Therefore, we estimate that overall strengthening of the yen is relatively neutral to Sony’ s profits, as impacts from the two major trading currencies usually offset each other Our foreign exchange assumption for fiscal 2021 and thereafter is JPY 105/USD 1 and JPY 120/EUR 1. The key risk for Sony is that the electronics industry is extremely competitive. While Japanese firms dominated this industry in the 1980s and 1990s, Korean and Chinese manufacturers have been providing intense competition over the past 10 years, and we assume that this competitive intensity will increase in various products. Stewardship Kazunori Ito, Sr Eq. Analyst, 05 December 2019 W e assess Sony’ s stewardship of shareholder capital as Standard. W e recognize the progress made by the current management team. Sony was in the midst of a crisis, owing to the depreciation of the U.S. dollar and the intense competition in the consumer electronics industry , when Kazuo Hirai was appointed as CEO in April 2012 and Kenichiro Y oshida was appointed as CFO in April 2014. The new management team has implemented strong leadership to introduce fiscal discipline to each business domain, cut down on both fixed and variable costs, and spun off the PC business, which was known under the V aio brand name. Y oshida was promoted to CEO in 2018, which we believe will continue to deliver financial discipline to the company Sony’ s financial target laid out in its ongoing medium-term Morningstar Equity Analyst Report |Page 3 of 13 Sony Corp SNE (XNYS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 11 Aug 2020 04:40, UTC 10 Aug 2020 11 Aug 2020 04:30, UTC 10 Aug 2020 10 Aug 2020 10 Aug 2020 QQQ 80.05 USD 75.00 USD 1.07 0.51 0.57 98.29 Consumer Electronics Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law , Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? plan, ending fiscal 2018, is to reach operating profit of JPY 50 billion with a 10% return on equity T o achieve this, Sony classified its businesses into three groups: (1) growth drivers--game and network services, devices, pictures, and movies; (2) stable profit generators--imaging products and solutions, video and audio products; and (3) areas focusing on volatility management--TVs and smartphones. The firm then assigned target returns on invested capital to each domain. W e regard these actions as an improvement in corporate governance. Sony was forced to give up pursuing growth in the smartphone business and to impair intangible assets in September 2014, but we believe this decision was made much more quickly than would have been done previously Morningstar Equity Analyst Report |Page 4 of 13 Sony Corp SNE (XNYS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 11 Aug 2020 04:40, UTC 10 Aug 2020 11 Aug 2020 04:30, UTC 10 Aug 2020 10 Aug 2020 10 Aug 2020 QQQ 80.05 USD 75.00 USD 1.07 0.51 0.57 98.29 Consumer Electronics Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law , Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? Analyst Notes Archive Sony Is Making a T ender Offer for Its Financial Unit for Full Consolidation Kazunori Ito, Sr Eq. Analyst, 20 May 2020 On May 19, no-moat Sony held a corporate strategy meeting and announced the new organizational structure consisting of two major changes. First, Sony will change its company name to Sony Group and separate the headquarter role clearly Sony Group Corp will focus on the management role, such as business portfolio management and strategic capital allocation, and the previous company’ s name, Sony Corp, will be succeeded to its consumer electronics arm, which is the origin of the company Second, Sony announced the commencement of tender offer for Sony Financial Holdings Inc, intending to raise its ownership to 100% from 65%. Sony has offered JPY 400 billion, or JPY 2,600 per Sony Financial share, which is 26% above the closing price of the previous day W e will incorporate the impact after the result of the offer appears, but do not expect to make material change to our fair value estimate of JPY 7,500. Expect Solid PS5 Launch as Stay-Home Measures Are a tailwind; Lifting Sony’ s FVE to JPY 8,000 Kazunori Ito, Sr Eq. Analyst, 10 August 2020 Despite the coronavirus outbreak, no-moat Sony delivered robust results for the June quarter While hardware businesses were severely damaged by the pandemic, content businesses showed resilience. In particular , the game and network services segment far exceeded our expectation, as stay-home measures in various countries became the tailwind for both driving game shipment and increasing the revenue proportion of digital content. W e had been concerned that initial shipments of PlayStation 5 may be slower than that of PS4, as we forecast PS5 console pricing should be higher because of the increasing components cost. However , we revise our view that PS5 will make a solid start this year , as we view people’ s preference on buying console games will continue, and the increasing user base of PlayStation Plus, a monthly subscription service, will contribute to user retention on the ecosystem. As a result, we raise our revenue forecast for the segment by 22% and 9% for fiscal 2021 and 2022, respectively Our fair value estimate for Sony is revised to JPY 8,000 from JPY 7,500 as a result, and we see its shares as currently fairly valued. Sony’ s June quarter operating income was JPY 228 billion, which was 1% above the previous year excluding one-time factors. However , the ongoing pandemic was a headwind for the hardware businesses. The electronics products and solutions segment recorded an operating loss because of the sharp revenue decline; revenue from TV and digital camera dropped 28% and 54%, respectively Operating income for imaging and sensing solutions dropped 49% from the previous year owing to the weak digital camera and smartphone production. On the other hand, content businesses were relatively resilient. Operating income for the music segment was only 9% down from the previous year , as solid streaming sales mitigated the damage of the pandemic, and the pictures segment improved profitability from the previous year through an aggressive cut of marketing costs. Morningstar Equity Analyst Report |Page 5 of 13 Sony Corp SNE (XNYS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 11 Aug 2020 04:40, UTC 10 Aug 2020 11 Aug 2020 04:30, UTC 10 Aug 2020 10 Aug 2020 10 Aug 2020 QQQ 80.05 USD 75.00 USD 1.07 0.51 0.57 98.29 Consumer Electronics Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law , Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? Sony Corp ADR SNE QQQ Q 10 Aug 2020 02:00 UTC Last Close Fair Value Q Market Cap Sector Industry Country of Domicile 10 Aug 2020 10 Aug 2020 02:00 UTC 10 Aug 2020 80.05 79.24 98,356.2 Mil a Technology Consumer Electronics JPN Japan There is no one analyst in which a Quantitative Fair Value Estimate and Quantitative Star Rating are attributed to; however, Mr. Lee Davidson, Head of Quantitative Research for Morningstar, Inc., is responsible for overseeing the methodology that supports the quantitative fair value. As an employee of Morningstar, Inc., Mr. Davidson is guided by Morningstar, Inc.’s Code of Ethics and Personal Securities Trading Policy in carrying out his responsibilities. For information regarding Conflicts of Interests, visit http://global.morningstar.com/equitydisclosures Company Profile Sony Corp is a conglomerate with consumer electronics roots and various well-known brand names, such as Walkman in portable audio players, Vaio in PCs, Xperia in smartphones, Cybershot and Alpha in digital cameras, and PlayStation in video game consoles. It currently has seven main business segments, operating electronic appliances, games, devices and semiconductors, entertainment content, and financial services. Quantitative Scores Scores All Rel Sector Rel Country Quantitative Moat None 14 12 18 Valuation Fairly Valued 13 21 8 Quantitative Uncertainty High 99 98 99 Financial Health Strong 100 96 84 Source: Morningstar Equity Research a JPN SNE Undervalued Fairly Valued Overvalued Valuation Current 5-Yr Avg Sector Median Country Median Price/Quant Fair Value 1.01 0.98 0.77 0.86 Price/Earnings 16.0 28.8 21.4 15.4 Forward P/E 21.1 — 15.9 14.1 Price/Cash Flow 7.2 5.7 15.6 9.7 Price/Free Cash Flow 10.8 8.9 23.0 18.3 Trailing Dividend Yield % 0.51 0.50 1.89 1.84 Price/Book 2.4 1.9 2.3 1.2 Price/Sales 1.3 0.7 1.7 0.8 Profitability Current 5-Yr Avg Sector Median Country Median Return on Equity % 16.2 13.8 12.5 9.2 Return on Assets % 2.9 2.2 6.4 4.3 Revenue/Employee (Mil) 74.3 69.3 0.4 32.0 Financial Health Current 5-Yr Avg Sector Median Country Median Distance to Default 0.9 0.8 0.6 0.7 Solvency Score 419.7 — 449.9 430.9 Assets/Equity 5.6 6.4 1.6 1.9 Long-Term Debt/Equity 0.2 0.2 0.1 0.2 Price vs. Quantitative Fair Value 24 48 72 96 120 2016 2017 2018 2019 2020 2021 Quantitative Fair Value Estimate Total Return Sales/Share Forecast Range Forcasted Price Dividend Split Momentum: — Standard Deviation: 26.03 Liquidity: High 50.94 52-Wk 84.15 19.90 5-Yr 84.15 14.6 61.1 8.0 41.6 18.1 Total Return % 2.2 39.6 13.1 10.4 12.8 +/– Market (Morningstar US Index) 0.63 0.45 0.56 0.54 0.51 Trailing Dividend Yield % 0.63 0.45 0.55 0.54 0.57 Forward Dividend Yield % 75.2 25.3 10.2 11.1 16.0 Price/Earnings 0.5 0.8 0.8 1.1 1.3 Price/Revenue Morningstar Rating Q Q QQ QQQ QQQQ QQQQQ 2016 2017 2018 2019 2020 TTM Financials (Fiscal Year in Bil) 8,106 7,603 8,544 8,666 8,260 8,303 Revenue -1.3 -6.2 12.4 1.4 -4.7 0.5 % Change 339 434 730 826 832 824 Operating Income 37.7 28.0 68.2 13.0 0.8 -1.0 % Change 148 73 491 916 582 663 Net Income 749 809 1,255 1,259 1,350 1,477 Operating Cash Flow -375 -334 -263 -313 -440 -494 Capital Spending 374 476 992 946 910 982 Free Cash Flow 4.6 6.3 11.6 10.9 11.0 11.8 % Sales 117.49 56.89 379.75 707.74 461.23 528.95 EPS — -51.6 567.5 86.4 -34.8 14.7 % Change 2.73 2.50 6.48 8.32 5.78 6.89 Free Cash Flow/Share 19.82 19.10 27.17 35.25 44.44 44.44 Dividends/Share 19.60 17.37 22.49 27.31 32.09 32.26 Book Value/Share 1,261 1,262 1,265 1,270 1,226 1,221 Shares Outstanding (Mil) Profitability 6.2 3.0 18.0 27.3 14.8 16.2 Return on Equity % 0.9 0.4 2.7 4.6 2.7 2.9 Return on Assets % 1.8 1.0 5.7 10.6 7.1 8.0 Net Margin % 0.50 0.44 0.47 0.43 0.38 0.37 Asset Turnover 6.8 7.1 6.4 5.6 5.6 5.5 Financial Leverage 25.1 25.5 27.1 27.7 28.3 27.4 Gross Margin % 4.2 5.7 8.6 9.5 10.1 9.9 Operating Margin % 557 681 623 568 635 654 Long-Term Debt 2,463 2,497 2,967 3,746 4,125 4,331 Total Equity 10.4 9.6 11.4 11.4 7.9 6.9 Fixed Asset Turns Growth Per Share 1-Year 3-Year 5-Year 10-Year Revenue % -4.7 2.8 0.1 1.4 Operating Income % 0.8 24.2 27.6 23.0 Earnings % -34.8 100.9 — — Dividends % 26.1 32.5 — 5.7 Book Value % 12.9 19.6 11.3 1.4 Stock Total Return % 43.4 27.7 24.6 10.3 Quarterly Revenue & EPS Revenue (Bil) Jun Sep Dec Mar Total 2020 1,925.7 2,122.3 2,463.2 1,748.7 8,259.9 2019 1,953.6 2,182.8 2,401.8 2,127.5 8,665.7 2018 1,858.1 2,062.5 2,672.3 1,951.0 8,544.0 2017 1,613.2 1,688.9 2,397.5 1,903.6 7,603.3 Earnings Per Share () 2020 119.22 148.59 182.89 10.10 461.23 2019 174.80 133.43 330.77 68.23 707.74 2018 62.70 101.35 228.91 -13.44 379.75 2017 16.44 3.76 15.24 21.45 56.89 Revenue Growth Year On Year % 5.1 5.8 -10.1 9.0 -1.4 -2.8 2.6 -17.8 2.2 2018 2019 2020 Quantitative Equity Report | Release: 10 Aug 2020, 23:41 UTC | Reporting Currency: JPY | Trading Currency: USD | Exchange:XNYS © Morningstar 2020. 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Please see important disclosures at the end of this report. ß ® Page 1 of 1 Page 6 of 13 Research Methodology for Valuing Companies Qualitative Equity Research Overview At the heart of our valuation system is a detailed projection of a company's future cash flows, resulting from our analysts' research. Analysts create custom industry and company assumptions to feed income statement, balance sheet, and capital investment a ssumptions into our globally standardized, proprietary discounted cash flow, or DCF, modeling templates. We use scenario analysis, in - depth competitive advantage analysis, and a variety of other analytical tools to augment this process. We believe this bot tom - up, long - term, fundamentally based approach allows our analysts to focus on long - term business drivers, which have the greatest valuation impact, rather than short - term market noise. Morningstar's equity research group (“we," "our") believes th at a c ompany's intrinsic worth results from the future cash flows it can generate. The Morningstar Rating for stocks identifies stocks trading at a n uncertainty - adjusted discount or premium to their intrinsic worth — or fair value estimate, in Morningstar terminol ogy. Five - star stocks sell for the biggest risk - adjusted discount to their fair values whereas 1 - star stocks trade at premiums to their intrinsic worth. Four key components drive the Morningstar rating: (1) our assessment of the firm's economic moat, (2) our estimate of the stock's fair value, (3) our uncertainty around that fair value e stimate and (4) the current market price. This process ultimately culminates in our single - point star rating. 1. Economic Moat The concept of an economic moat plays a vita l role not only in our qualitative assessment of a firm's long - term investment potential, but also in the actual calculation of our fair value estimates. An economic moat is a structural feature that allows a firm to sustain excess profits over a long per iod of time. We define excess economic profits as returns on invested capital (or ROIC) over and above our estimate of a firm's cost of capital, or weighted average cost of capital (or WACC). Without a moat, profits are more susceptible to competition. We have identified five sources of economic moats: intangible assets, switching costs, network effect, cost advantage, and efficient scale. Companies with a narrow moat are those we believe are more likely than not to achieve normalized excess returns for at least the next 10 years. Wide - moat companies are those in which we have very high confidence that excess returns will remain for 10 years , with excess returns more likely than not to remain for at least 20 years. The longer a firm generates economic profits, the higher its intrinsic value. We believe low - quality no - moat companies will see their normalized returns gravitate toward the firm's cost of capital more quickly than companies with moats. To assess the direction of the underlying competitive advantages , analysts perform ongoing assessments of the moat trend. A firm's moat trend is positive in cases where we think its sources of comp etitive advantage are growing stronger; stable where we don't anticipate changes to competitive advantages over the next several years; or negative when we see signs of deterioration. All the moat and moat trend ratings undergo periodic review and any changes must be approved by the Morningstar Economic Moat Committee, comprised of senior members of Morningstar's equity research department. 2. Estimated Fair Value Combining our analysts' financial forecasts with the firm's economic moat helps us assess how long returns on invested capital are likely to exceed the firm's cost of capital. Returns of firms with a wide economic moat rating are assumed to fade to the per petuity period over a longer period of time than the returns of narrow - moat firms, and both will fade slower than no - moat firms, increasing our estimate of their intrinsic value. Our model is divided into three distinct stages : Stage I: Explicit Foreca st In this stage, which can last five to 10 years, analysts make full financial statement forecasts, including items such as revenue, profit margins, tax rates, changes in working - capital accounts, and capital spending. Based on these projections, we calc ulate earnings before interest, after taxes, or EBI, and the net new investment, or NNI, to derive our annual free cash flow forecast. Stage II: Fade The second stage of our model is the period it will take the company's return on new invested capital — t he return on capital of the next dollar invested ("RONIC") — to decline (or rise) to its cost of capital. During the Stage II period, we use a formula to approximate cash flows in lieu of explicitly modeling the income statement, balance sheet, and cash flow statement as we do in Stage I. The length of the second stage depends on the strength of the company's economic moat. We forecast this period to last anywhere from one year (for companies with no economic moat) to 10 – 15 years or more (for wide - moat compan ies). During this period, cash flows are forecast using four assumptions: an average growth rate for EBI over the period, a normalized investment rate, average return on new invested capital, or RONIC, and the number of years until perpetuity, when excess returns cease. The investment rate and return on new invested capital decline until the perpetuity stage is reached . In the case of firms that do not earn their cost of capital, we assume marginal ROICs rise to the firm's cost of capital (usually attributa ble to less reinvestment), and we may truncate the second stage. Stage III: Perpetuity Once a company's marginal ROIC hits its cost of capital, we calculate a continuing value, using a standard perpetuity formula. At perpetuity, we assume that any growth or decline or investment in the business neither creates nor destroys value and that any new investment provides a return in lin