This report is provided solely for informational purposes and nothing in this document constitutes an offer or a solicitation of an offer to purchase any security. This report has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient and does not constitute a representation that any investment strategy is suitable or appropriate to a recipient’s individual circumstances. Global Alpha Capital Management Ltd. (Global Alpha) in no case directly or implicitly guarantees the future value of securities mentioned in this document. The opinions expressed herein are based on Global Alpha's analysis as at the date of this report, and any opinions, projections or estimates may be changed without notice. Global Alpha, its affiliates, directors, officers and employees may buy, sell or hold a position in securities of a company(ies) mentioned herein. The particulars contained herein were obtained from sources, which Global believes to be reliable but Global Alpha makes no representation or warranty as to the completeness or accuracy of the information contained herein and accepts no responsibility or liability for loss or damage arising from the receipt or use of this document or its contents. Performance figures are stated in Canadian dollars and are net of trading costs and gross of operating expenses and management fees. Further information about the Global Small Cap Composite is available by contacting the firm. Global Alpha Capital Management Ltd. (Global Alpha) claims compliance with the Global Investment Performance Standards (GIPS ®) and has prepared and presented this report in compliance with the GIPS. Global Alpha has not been independently verified.

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COMMENTARY

September 5th, 2014 Dear clients and colleagues, Summer is soon over; this week was back to school. August has been another strong month for the markets, with major indices shrugging off the escalating conflicts in Ukraine and Iraq, the poor economic numbers from Europe. Instead relying on hope for more stimuli from Central Banks in Europe and Asia. The momentum trade continues to work, with names like Tesla, Netflix and other high flyers making new highs daily and selling at more than 100 times earnings. At Global Alpha, capital preservation is a core value. The good news is that we are still finding many undervalued growth companies. This week we will profile the latest company to be added to the portfolio. Although not necessarily known by name, like many other companies in the portfolio, this week’s company has products that are almost universally known. Sanrio Co (8136 JP – ¥2971) http://www.sanrio.co.jp/english/

Business Overview Founded in 1960, Sanrio’s mission is to make everyone happy. Their motto is “Small Gift, Big Smile”. 40 years ago this year, Sanrio created the character that it is best known for today, Hello Kitty. Today, Sanrio, owns a number of characters and develops new ones. It licenses the use of these characters. It also manufactures and sells gift merchandise, greeting cards, and stationery products. The company also produces books, magazines and movies, and has subsidiaries operating restaurants and theme parks. In 2012 Forbes called Hello Kitty one of the best-selling license entertainment products. 15M fans on Facebook. It has presence in 120+ countries. Revenues generated from Hello Kitty alone is US$7 Billion a year, with no catalogs or TV commercials, no movies or recent cartoons. Market Data Market Cap US$2.5B, net cash $250M, div yield 2.6%, p/e (2016/3) 16.3x, ev/ebitda 9.3x (a 15year-low), gross margin 66.9%, operating margin 24.0%, profit margin 17%, roe 23%, Insider ownership: Tsuji family (founder’s) own 24%.

This report is provided solely for informational purposes and nothing in this document constitutes an offer or a solicitation of an offer to purchase any security. This report has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient and does not constitute a representation that any investment strategy is suitable or appropriate to a recipient’s individual circumstances. Global Alpha Capital Management Ltd. (Global Alpha) in no case directly or implicitly guarantees the future value of securities mentioned in this document. The opinions expressed herein are based on Global Alpha's analysis as at the date of this report, and any opinions, projections or estimates may be changed without notice. Global Alpha, its affiliates, directors, officers and employees may buy, sell or hold a position in securities of a company(ies) mentioned herein. The particulars contained herein were obtained from sources, which Global believes to be reliable but Global Alpha makes no representation or warranty as to the completeness or accuracy of the information contained herein and accepts no responsibility or liability for loss or damage arising from the receipt or use of this document or its contents. Performance figures are stated in Canadian dollars and are net of trading costs and gross of operating expenses and management fees. Further information about the Global Small Cap Composite is available by contacting the firm. Global Alpha Capital Management Ltd. (Global Alpha) claims compliance with the Global Investment Performance Standards (GIPS ®) and has prepared and presented this report in compliance with the GIPS. Global Alpha has not been independently verified.

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COMMENTARY cont.

Target Market

source: rankingthebrands.com, licensemag.com The above chart shows that Sanrio has about 2% market share, 1/5th of Disney (with a market cap that is only 1.6% of Disney’s) The market for branded content is US$44 Billion, growing faster than GDP. Competition The market is very competitive with major groups like Disney, Iconix, Nickelodeon, Warner pursuing a strategy of vertical integration. There have been many takeovers in the character licensing industry, with Iconix acquiring Peanuts, which has the rights to Snoopy. Mattel acquiring the owner of Thomas the Tank Engine. Disney has also been aggressively expanding its character portfolio, acquiring Marvel Entertainment, which owns the Spiderman, X-Men, and Iron Man franchises, for around US$4.2 Billion in 2008, and Lucasfilm, which owns the Star Wars franchise, for US$4.1 Billion in 2012. According to Sanrio, around four or five rival companies are interested in acquiring overseas characters, including the companies mentioned above. Competitive advantages Evergreen Hello Kitty franchise. Ownership of a large number >400, original and popular characters, mainly targeted at young females. Highest operating margins in the industry. Financial strength, no debt and more than US$250 million in cash. Unique licensee model giving licensee the right to vary the design to suit local needs. High character recognition in Asia (Korea, China, Vietnam), due to close culture.

Growth strategy Expand marketing channels, both licensing and own product sales. Extend the brand to new categories such as apparel, shoes, bags, food, etc.

This report is provided solely for informational purposes and nothing in this document constitutes an offer or a solicitation of an offer to purchase any security. This report has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient and does not constitute a representation that any investment strategy is suitable or appropriate to a recipient’s individual circumstances. Global Alpha Capital Management Ltd. (Global Alpha) in no case directly or implicitly guarantees the future value of securities mentioned in this document. The opinions expressed herein are based on Global Alpha's analysis as at the date of this report, and any opinions, projections or estimates may be changed without notice. Global Alpha, its affiliates, directors, officers and employees may buy, sell or hold a position in securities of a company(ies) mentioned herein. The particulars contained herein were obtained from sources, which Global believes to be reliable but Global Alpha makes no representation or warranty as to the completeness or accuracy of the information contained herein and accepts no responsibility or liability for loss or damage arising from the receipt or use of this document or its contents. Performance figures are stated in Canadian dollars and are net of trading costs and gross of operating expenses and management fees. Further information about the Global Small Cap Composite is available by contacting the firm. Global Alpha Capital Management Ltd. (Global Alpha) claims compliance with the Global Investment Performance Standards (GIPS ®) and has prepared and presented this report in compliance with the GIPS. Global Alpha has not been independently verified.

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COMMENTARY cont.

Acquire new characters such as Mr. Men, acquired in Dec. 2011. Management The founder is 86 year old and owns 24% of the company. His only son, who was the COO, died in 2013 of a heart attack. The current president and his executive team are in their 50’s and 60’s and have been with the company and with the company for over 15 years. ESG The Company’s motto “Small gift, big smile”. Says it all. Hello Kitty is a goodwill ambassador for Japan. The company is shareholder friendly: >30% div payout. Bought back shares in 2011, 2012 and 2014.

Risks Copyright infringement. Retail expansion may be overaggressive. Succession planning.

Catalysts for value creation Sanrio is an extremely undervalued company. Despite good results, the stock price is down 46% since last October (the COO and Founder’s son passed away last November). As a result, EV/EBITDA is at a 15-year low, at a time where companies like Disney make all-time high. What are the catalysts: A new mid-term plan should be announced this fall. Theme parks should return to profitability 40-year anniversary of Hello Kitty will see many new and exclusive products. Profit contribution from Mr. Men (#1 character in the UK) Takeover target. Global small cap companies are not always known by name. But they almost always touch our daily lives in an important way. But again, should we call it a small cap company? With sales of US$800 million, Sanrio is the 8th largest brand licensor in the World. Retail sales of Hello Kitty exceed US$7 Billion annually. And at 40. Kitty is a young one, Mickey is 85, Superman 75… Have a nice week. The Global Alpha Team.