Research from Drawbridge Research, Drawbridge Research

Drawbridge Research

Research from Drawbridge Research

The team at Drawbridge Research believes that to take advantage of market mispricing a first principles understanding must be obtained on what a company fundamentally does, the purpose that gives that company a reason to exist, and how that company executes on serving its purpose and function.

Once a first principles understanding is obtained, we believe it becomes possible to discern real world fact from market fiction. A fundamental understanding, coupled with this separation, allows for an evaluation of a company’s inherent value that is not biased by market sentiment.

This approach requires significant qualitative research coupled with a detailed understanding of company financial accounts to understand what attributes drive and protect profitability. These two parts of Drawbridge’s research approach are not viewed separately by the research team but instead as two interdependent parts of a broad, exhaustive, and complete investment research process.

Price is equally paramount. This means that a company must be priced at a level where it offers significant growth in value, as our goal is to achieve outsized returns, not to simply collect quality companies. In addition to the upside potential, a company must be attractively priced enough to ensure the preservation of capital in the case our thesis turns out to be wrong.

Equity Bottom-Up

This is the third and final part of our three part series on Sony Group. In this note we look at Sony’s Gaming and Network Services (G&amp;NS) segment and the fundamental pillars supporting its profitability. By doing this we uncover that the business is dependent on the technical competitiveness and the catalogue of game titles available on PlayStation, Sony’s console platform. We look at the primary known threat to the business’s profitability, which is cloud gaming. Breaking down how cloud gaming is technically achieved we are able to compare the technical limitations and advantages of both console based and cloud based gaming. Through this we can determine whether cloud gaming posses a disruptive threat as a substitute to Sony’s entrenched console platform, or if instead cloud gaming can be viewed as a complimentary service supporting further growth. In regard to the PlayStation business, we also analyse the current heightened level of deal activity in the game development space. Consolidation amongst game developers and increased ownership by the platform operators is seen as being indicative of a maturing gaming industry. Given this we look at Sony’s level of investment in gaming software to ascertain whether the company’s consistently strong performance over the past 2 decades in the home console market has allowed the company to gain a critical mass of IP and third party titles on its platform to continue attracting gamers.Final comments outline how the company’s subsidiaries are effectively collaborating to create value no other company can, and why this second layer of value creation is being missed. The research note then concludes the series by valuing Sony via a sum of the parts valuation and valuing the financial business at the implied valuation Sony paid in early 2020.

This is the third and final part of our three part series on Sony Group. In this note we look at Sony’s Gaming and Network Services (G&amp;NS) segment and the fundamental pillars supporting its profitability. By doing this we uncover that the business is dependent on the technical competitiveness and the catalogue of game titles available on PlayStation, Sony’s console platform. We look at the primary known threat to the business’s profitability, which is cloud gaming. Breaking down how cloud gaming is technically achieved we are able to compare the technical limitations and advantages of both console based and cloud based gaming. Through this we can determine whether cloud gaming posses a disruptive threat as a substitute to Sony’s entrenched console platform, or if instead cloud gaming can be viewed as a complimentary service supporting further growth. In regard to the PlayStation business, we also analyse the current heightened level of deal activity in the game development space. Consolidation amongst game developers and increased ownership by the platform operators is seen as being indicative of a maturing gaming industry. Given this we look at Sony’s level of investment in gaming software to ascertain whether the company’s consistently strong performance over the past 2 decades in the home console market has allowed the company to gain a critical mass of IP and third party titles on its platform to continue attracting gamers.Final comments outline how the company’s subsidiaries are effectively collaborating to create value no other company can, and why this second layer of value creation is being missed. The research note then concludes the series by valuing Sony via a sum of the parts valuation and valuing the financial business at the implied valuation Sony paid in early 2020.

Latest News from the World’s Leading Innovators

Granite Bay Capital

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Granite Bay Capital is an innovation focussed investment company with a deep focus on the companies at the leading edge of innovation across major themes such as AI, ubiquitous computing, sustainability, automation and longevity.

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<h2>Headline Developments</h2>The verdict is out in the Apple (AAPL) vs Epic (private) case, with the court ruling that Apple cannot stop app developers from directing users to third-party payment options, whilst ordering Epic to pay damages for violating Apple’s in-app purchasing system.

Headline DevelopmentsThe verdict is out in the Apple (AAPL) vs Epic (private) case, with the court ruling that Apple cannot stop app developers from directing users to third-party payment options, whilst ordering Epic to pay damages for violating Apple’s in-app purchasing system.

This is the second of three research notes covering Sony Group. Part 1 looked at Sony’s semiconductor and electronics businesses and how they have both collaborated to redefine the interchangeable-lens camera market whilst both having their own idiosyncratic growth drivers. This note covers the company’s music business, the incredible behavioural biases currently affecting its perception and the first principles of digital and analog audio that lead to this perception. Secondly, the company’s pictures business is examined with an emphasis on the fact that Sony is the only major Hollywood studio to not have invested in its own streaming service. We show how this strategy to not pursue streaming has resulted in Sony being the sole major Hollywood studio able to supply exclusive content to streaming services, with all other majors unable to due to the fact they are competing with each other in the streaming market themselves. Finally, we look at how walls continue to be broken down between Sony’s business units whilst analysing PlayStation Productions, a collaboration between Sony’s music and gaming business. PlayStation Productions aims to leverage Sony’s extensive catalogue of renowned and maturing gaming IP into Film and TV adaptions, all at a time when exclusive content is commanding a premium price.

This is the second of three research notes covering Sony Group. Part 1 looked at Sony’s semiconductor and electronics businesses and how they have both collaborated to redefine the interchangeable-lens camera market whilst both having their own idiosyncratic growth drivers. This note covers the company’s music business, the incredible behavioural biases currently affecting its perception and the first principles of digital and analog audio that lead to this perception. Secondly, the company’s pictures business is examined with an emphasis on the fact that Sony is the only major Hollywood studio to not have invested in its own streaming service. We show how this strategy to not pursue streaming has resulted in Sony being the sole major Hollywood studio able to supply exclusive content to streaming services, with all other majors unable to due to the fact they are competing with each other in the streaming market themselves. Finally, we look at how walls continue to be broken down between Sony’s business units whilst analysing PlayStation Productions, a collaboration between Sony’s music and gaming business. PlayStation Productions aims to leverage Sony’s extensive catalogue of renowned and maturing gaming IP into Film and TV adaptions, all at a time when exclusive content is commanding a premium price.

Headline Developments On the back of the Epic v Apple case, documents were released highlighting that Google (GOOG) had considered buying Epic outright.  During the case, Epic Games outlined Google’s plans to develop “a series of internal projects to address the ‘contagion’ it perceived from efforts by Epic and others to offer consumers and developers competitive alternatives and has even contemplated buying some or all of Epic to squelch this threat”.

Headline Developments On the back of the Epic v Apple case, documents were released highlighting that Google (GOOG) had considered buying Epic outright.  During the case, Epic Games outlined Google’s plans to develop “a series of internal projects to address the ‘contagion’ it perceived from efforts by Epic and others to offer consumers and developers competitive alternatives and has even contemplated buying some or all of Epic to squelch this threat”.

Headline Developments: Another week, another major cyber attack!  Last Friday, a global ransomware attack hit up to 1,500 companies in what is believed to be the biggest supply chain attack to date.  In the attack, American software company Kaseya was compromised, opening a door for hackers to spread ransomware to managed service providers that use it’s technology, and in turn their clients.

Headline Developments: Another week, another major cyber attack!  Last Friday, a global ransomware attack hit up to 1,500 companies in what is believed to be the biggest supply chain attack to date.  In the attack, American software company Kaseya was compromised, opening a door for hackers to spread ransomware to managed service providers that use it’s technology, and in turn their clients.

Japan

Panasonic Corporation manufactures electric and electronic products. The Company produces home appliances, car navigation systems, digital devices, computer peripherals, telecommunications, industrial equipment, and electronic parts. Panasonic has associated companies around the world.

Sony Corporation manufactures audio, home video game consoles, communications, key device and information technology products for the consumer and professional markets.  The Company's other businesses include music, pictures, computer entertainment, and online businesses.

Sekisui House, Ltd. builds and sells steel-frame and wooden housings. The Company constructs single-family houses, condominiums, and apartment buildings.  Sekisui House also operates real estate brokerage and leasing businesses.  Additionally, the Company sells construction materials.

Sumitomo Forestry Co., Ltd. sells lumber and wood-related construction materials.  The Company constructs and markets a variety of homes, including custom-built wooden houses, and also manufactures and distributes high-value added wood-based products.  Sumitomo Forestry also maintains a significant amount of Japan's forests.

Sekisui Chemical Co., Ltd. builds and sells unit residential houses in addition to parcels of land. The Company also manufactures and sells polyvinyl chloride and other plastic products used in, for instance, drainage pipes and bathtubs. Moreover the company is engaged in the production and sale of high performance plastic films, tapes and sheets.

HASEKO Corporation builds residential, commercial, and institutional buildings such as condominiums and office buildings.  The Company also operates real estate brokerage, leasing, and management businesses.  Additionally, Haseko provides construction consulting services.  The Company, through its subsidiaries, operates hotel and financial businesses.

RINNAI CORPORATION manufactures and sells a variety of gas appliances.  The products include cooking equipment for household and commercial use, room and water heating equipment, and laundry dryers.  The Company has subsidiaries in South-eastern Asia, Australia, and the United States.

Iida Group Holdings Co., Ltd. is a holding company established by the merger between Hajime Construction, Iida Home Max, Touei Housing, Tact Home, Arnest One and ID Home. Its subsidiaries engage in design, construction and sales of residential properties such as single-family houses and condominiums and construction related works.

NIKON CORPORATION manufactures and sells cameras, lenses, semiconductor-related equipment, eyeglasses, microscopes, and measuring instruments.

Fujitsu General Ltd. manufactures air-conditioning units, refrigerators, and information-communication equipment. The products include air conditioners, and purifiers. The Company also manufactures computer software and electronic devices.

Techtronic Industries Company Limited designs, manufactures, and markets power tools, outdoor power equipment, accessories, hand tools, layout and measuring tools, and floorcare and appliances. The Company's products are used by consumers, professional, and industrial users in the home improvement, repair, and construction industries.

Toll Brothers, Inc. builds luxury homes, serving both move-up and empty nester buyers in several regions of the United States.  The Company builds customized single and attached homes, primarily on land that it develops and improves. Toll Brothers also operates its own architectural, engineering, mortgage, title, security, landscape, insurance brokerage, and manufacturing operations.

Haier Smart Home Co. Ltd. manufactures and distributes appliances. The Company produces air conditioners, refrigerators, freezers, small household electrical appliances, and other related products. Haier Smart Home markets its products domestically and internationally.

Gree Electric Appliances, Inc. of Zhuhai manufactures and sells a series of air conditioners.  The different series of air conditioners include window type, split type, floor type, mobile type, mobile split type and ceiling type.  The Company also produces air purifier.

LG Electronics Inc. manufactures and markets digital display equipment and home appliances. The Company produces and markets flat panel televisions, A/V products, washing machines, air conditioners and refrigerators as well as telecommunications equipment such as smart phones and tablets.

TopBuild Corp. provides insulation installation services. The Company offers residential insulation products and related accessories. TopBuild serves customers in the United States.

D.R. Horton, Inc. constructs and sells single-family homes designed primarily for the entry-level and move-up markets.  The Company operates in the Midwest, Mid-Atlantic, Southeast, Southwest, and Western regions of the United States. D.R. Horton also, through its financial services operations, provide mortgage financing and title agency services to homebuyers.

NVR, Inc. builds and markets homes and conducts mortgage banking activities. The Company builds single-family detached homes, townhomes, and condominium buildings under the Ryan Homes, NVHomes, and other tradenames.  NVR provides a number of mortgage related services to its homebuilding customers and to other customers through its mortgage banking operations.

PulteGroup Inc. sells and constructs homes, and purchases, develops, and sells residential land and develops active adult communities.  The Company also provides mortgage financing, title insurance, and other services to home buyers. Pulte has operations in various markets across the United States and Puerto Rico.

Lennar Corporation constructs and sells single-family attached and detached homes, and to a lesser extent multi-level buildings as well as buys and sells residential land. The Company also provides mortgage financing, title insurance, closing services and other financial services.

Sony Group Corporation manufactures and distributes electronics products and provides related solutions. The Company produces televisions, cameras, mobiles, audio and video products. game equipment, and more. Sony Group also engages in game production,  movie production, music production, and other businesses.

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Sony Corp (SONY US)

Sony Part 3: State of Play

In this note we look at Sony’s Gaming and Network Services (G&NS) segment and the fundamental pillars supporting its profitability.

Drawbridge Research

Weekly Innovation Review (WIRE) #49

The verdict is out in the Apple (AAPL) vs Epic (private) case, with the court ruling that Apple cannot stop app developers from directing users to...

Granite Bay Capital

Sony Part 2: Arms Dealer in an Arms Race

This note covers the company’s music business, the incredible behavioural biases currently affecting its perception and the first principles of...

Drawbridge Research

Weekly Innovation Review (WIRE) #44

Headline Developments On the back of the Epic v Apple case, documents were released highlighting that Google (GOOG) had considered buying Epic...

Granite Bay Capital

Weekly Innovation Review (WIRE) #39

Headline Developments: Another week, another major cyber attack! Last Friday, a global ransomware attack hit up to 1,500 companies

Granite Bay Capital

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