Company Reports

Although wide-moat Shimano’s March-quarter revenue decline of 20% year on year suggests continued headwinds, we had previously estimated a steeper decline. While bicycle component sales have been affected by the continued high channel inventories (including bicycle frame manufacturers/retailers), this was partly mitigated by resilient demand for high-end road bikes in China, Germany, and Benelux. With sales and capacity utilization not deteriorating as much as we had thought, we raise our fiscal 2024 operating income estimate by 17% to JPY 63 billion, which assumes a revenue decline of 7% and operating margin of 14.3%. Nonetheless, we maintain our fair value estimate at JPY 22,000 per share, as the upward near-term revision is offset by slightly lower medium-term operating margin estimates, due to higher labor costs as well as fixed costs from its record capital expenditure this year.

With a reputation for being the “Intel of the bicycle business,” Shimano’s bicycle components can be found in most high/medium-end bicycles produced by leading frame manufacturers such as Trek and Giant. The firm’s components are part of “groupsets,” which comprise gears, brake-related parts, derailleurs, cranksets, chain, bottom brackets, and cassettes. The newly developed high-end groupsets produced by Shimano tend to be first used by professional cyclists and then the technology ultimately flows to its entry-level groupsets. The company has a history of about 100 years, with a strong brand that is backed by its reputation for quality. As a result, the firm now boasts a leading market share of about 50% in the bicycle components industry. While experienced cyclists will likely choose a brand based on individual preferences in usability, we believe a brand especially influences purchasing at the entry-level within the high-end bicycle product category, which is where Shimano has a particular competitive advantage over its competitors.

Shimano’s weaker-than-expected guidance for fiscal 2024 and high inventory at the end of 2023 suggest that the company's inventory adjustment will take longer than we had previously anticipated. We now expect bicycle component sales to pick up in the December quarter, about two quarters later than we had expected, after channel inventories (which include bicycle frame manufacturers and retailers) normalize and new models begin to roll out. Based on the assumption of a weaker capacity utilization, we cut our fiscal 2024 operating income forecast by about 30% to JPY 54 billion, assuming a sales decline of 11.5% and an operating margin of 13.0%, lowered from flat sales and an operating margin of 17.4% previously. Consequently, we lower Shimano’s fair value estimate to JPY 22,000 from JPY 23,500. We believe the company's shares are currently fairly valued.

With a reputation for being the “Intel of the bicycle business,” Shimano’s bicycle components can be found in most high/medium-end bicycles produced by leading frame manufacturers such as Trek and Giant. The firm’s components are part of “groupsets,” which comprise gears, brake-related parts, derailleurs, cranksets, chain, bottom brackets, and cassettes. The newly developed high-end groupsets produced by Shimano tend to be first used by professional cyclists and then the technology ultimately flows to its entry-level groupsets. The company has a history of about 100 years, with a strong brand that is backed by its reputation for quality. As a result, the firm now boasts a leading market share of about 50% in the bicycle components industry. While experienced cyclists will likely choose a brand based on individual preferences in usability, we believe a brand especially influences purchasing at the entry-level within the high-end bicycle product category, which is where Shimano has a particular competitive advantage over its competitors.

While wide-moat Shimano’s September-quarter results showed weakening demand and additional expenses from a product recall, our outlook is largely unchanged, and we therefore maintain our fair value estimate at JPY 23,500 per share. We project 2024 revenue to remain flat, after a 26% year-on-year decline in 2023, as major OEM customers take at least until the first half of 2024 to digest excess inventory. Based on the company’s estimates, market bicycle inventories remain high in all of its key markets except China, as original equipment manufacturers and retailers overestimated demand during the pandemic-induced bicycle boom. Despite this, we believe Shimano shares are undervalued because the market is underestimating the company’s medium-term top-line recovery. We continue to forecast a 7% revenue compound annual growth rate between 2024 and 2027, driven by future bicycle upgrades, e-bike adoption, and government policies that promote cycling in Shimano’s largest market, Europe.

With a reputation for being the “Intel of the bicycle business,” Shimano’s bicycle components can be found in most high/medium-end bicycles produced by leading frame manufacturers such as Trek and Giant. The firm’s components are part of “groupsets,” which comprise gears, brake-related parts, derailleurs, cranksets, chain, bottom brackets, and cassettes. The newly developed high-end groupsets produced by Shimano tend to be first used by professional cyclists and then the technology ultimately flows to its entry-level groupsets. With a history of about 100 years, the firm has developed a strong brand over time, backed by its reputation for quality. As a result, the firm now boasts a leading market share of about 50% in the bicycle components industry. While experienced cyclists will likely choose a brand based on individual preferences in usability, we believe a brand especially influences purchasing at the entry-level within the high-end bicycle product category, which is where Shimano has a particular competitive advantage over its competitors.

We lower our fair value estimate of Shimano to JPY 23,500 from JPY 25,000, as we now expect weaker near-term sales in Europe (making up over 65% of bicycle components revenue) and a longer period of inventory reductions by bicycle frame manufacturers/retailers. In Europe, the market inventory of completed bicycles is high, contributed by overstocking to meet anticipated demand for high-end bicycles/e-bikes as well as weaker retail sales. This suggests high-end bicycle/e-bike demand is not as resilient as we previously thought; therefore, we think the inventory levels of major original equipment manufacturers remain heavy and will take about another year for their bicycle inventories to be digested. While weaker yen assumptions will offset our lower demand expectations, we now project Shimano’s bicycle components sales to decline 32.5% year on year in 2023 and only grow by 1.5% in 2024 (versus a 31% decline in 2023, followed by 10% growth in 2024 previously). We believe shares are fairly valued.

With a reputation for being the “Intel of the bicycle business,” Shimano’s bicycle components can be found in most high/medium-end bicycles produced by leading frame manufacturers such as Trek and Giant. The firm’s components are part of “groupsets,” which comprise gears, brake-related parts, derailleurs, cranksets, chain, bottom brackets, and cassettes. The newly developed high-end groupsets produced by Shimano tend to be first used by professional cyclists and then the technology ultimately flows to its entry-level groupsets. With a history of about 100 years, the firm has developed a strong brand over time, backed by its reputation for quality. As a result, the firm now boasts a leading market share of about 50% in the bicycle components industry. While experienced cyclists will likely choose a brand based on individual preferences in usability, we believe a brand especially influences purchasing at the entry-level within the high-end bicycle product category, which is where Shimano has a particular competitive advantage over its competitors.

With a reputation for being the “Intel of the bicycle business,” Shimano’s bicycle components can be found in most high/medium-end bicycles produced by leading frame manufacturers such as Trek and Giant. The firm’s components are part of “groupsets,” which comprise gears, brake-related parts, derailleurs, cranksets, chain, bottom brackets, and cassettes. The newly developed high-end groupsets produced by Shimano tend to be first used by professional cyclists and then the technology ultimately flows to its entry-level groupsets. With a history of about 100 years, the firm has developed a strong brand over time, backed by its reputation for quality. As a result, the firm now boasts a leading market share of about 50% in the bicycle components industry. While experienced cyclists will likely choose a brand based on individual preferences in usability, we believe a brand especially influences purchasing at the entry-level within the high-end bicycle product category, which is where Shimano has a particular competitive advantage over its competitors.

We lower our fair value estimate of Shimano to JPY 25,000 from JPY 27,500, after reflecting a larger impact from the inventory reductions by bicycle frame manufacturers/retailers. The company’s March-quarter revenue declined 12.5% from the previous year, and the company lowered its 2023 revenue guidance by 8%, suggesting that order cancellations were worse than expected. Consequently, we lower our 2023 revenue growth projection by about 9.5 percentage points to a 27.5% year-on-year decline (guidance revised to a 26.9% decline from 20.5% decline). However, despite the near-term headwinds, we believe Shimano’s shares have upside potential, as the market is underestimating the long-term growth opportunities, driven by government policies to promote cycling in Europe—such as through emission standards, bike lanes, discouragement of car usage/speeding, and subsidies, e-bike adoption, and future bicycle upgrades from the recent rise in new cyclists.

Shimano’s December-quarter revenue grew 6.6% year on year, exceeding our forecasts of an 8.8% decline, as demand for high-end bicycles and e-bikes in Europe was resilient, amid a slowdown in the overall bicycle market. Despite the strong results, we expect an economic slowdown will cause bicycle frame manufacturers and retailers to reduce their excess inventories. As such, we project a companywide revenue decline of 18.1% year on year in 2023.

With a reputation for being the “Intel of the bicycle business,” Shimano’s bicycle components can be found in most high/medium-end bicycles produced by leading frame manufacturers such as Trek and Giant. The firm’s components are part of “groupsets,” which comprise gears, brake-related parts, derailleurs, cranksets, chain, bottom brackets, and cassettes. The newly developed high-end groupsets produced by Shimano tend to be first used by professional cyclists and then the technology ultimately flows to its entry-level groupsets. With a history of about 100 years, the firm has developed a strong brand over time, backed by its reputation for quality. As a result, the firm now boasts a leading market share of about 50% in the bicycle components industry. While experienced cyclists will likely choose a brand based on individual preferences in usability, we believe a brand especially influences purchasing at the entry-level within the high-end bicycle product category, which is where Shimano has a particular competitive advantage over its competitors.

We retain our fair value estimate of Shimano at JPY 29,000, on the expectation that high-end bicycle/e-bike demand won't be as affected by ongoing headwinds as their lower-end counterparts. Continued demand for high-end bicycles in the September quarter has kept bicycle market inventory levels low (including those of Shimano’s customers), according to the company. On the other hand, demand for middle/entry-class bicycles has cooled, consequently leading to higher market inventory. While recessionary concerns will likely translate to some order decline across Shimano’s product line in the upcoming months, we remain convinced that high-end demand will not fall to pre-COVID-19 levels. In fact, over the medium term, future bicycle upgrades from the influx of new cyclists throughout the pandemic should support growth, and with its wide moat intact, we think Shimano's shares are undervalued.

With a reputation for being the “Intel of the bicycle business,” Shimano’s bicycle components can be found in most high-end/medium-end bicycles produced by leading frame manufacturers such as Trek and Giant. The firm’s components are part of “groupsets,” which comprise gears, brake-related parts, derailleurs, cranksets, chain, bottom brackets, and cassettes. The newly developed high-end groupsets produced by Shimano tend to be first used by professional cyclists and then the technology ultimately flows to its entry-level groupsets. With a history of about 100 years, the firm has developed a strong brand over time, backed by its reputation for quality. As a result, the firm now boasts a leading market share of about 50% in the bicycle components industry. While experienced cyclists will likely choose a brand based on individual preferences in usability, we believe a brand especially influences purchasing at the entry-level within the high-end bicycle product category, which is where Shimano has a particular competitive advantage over its competitors.

Recent comments by Shimano’s management in the June quarter announcement suggested declining demand for entry-level bicycles, as market inventory (including customer inventory) increased from the previous quarter. This, in turn, weakened Shimano’s orders in North America and emerging markets. On the other hand, high-end bicycle demand continues to be strong with record backlogs, which kept market inventory at low levels. Nevertheless, this disparity was expected, and as our medium-term projection remains largely intact, we retain our fair value estimate at JPY 29,000.

With a reputation for being the “Intel of the bicycle business,” Shimano’s bicycle components can be found in most high-end/medium-end bicycles produced by leading frame manufacturers such as Trek and Giant. The firm’s components are part of “groupsets,” which comprise gears, brake-related parts, derailleurs, cranksets, chain, bottom brackets, and cassettes. The newly developed high-end groupsets produced by Shimano tend to be first used by professional cyclists and then the technology ultimately flows to its entry-level groupsets. With a history of about 100 years, the firm has developed a strong brand over time, backed by its reputation for quality. As a result, the firm now boasts a leading market share of about 50% in the bicycle components industry. While experienced cyclists will likely choose a brand based on individual preferences in usability, we believe a brand especially influences purchasing at the entry-level within the high-end bicycle product category, which is where Shimano has a particular competitive advantage over its competitors.

Shimano’s fiscal-year 2022 first-quarter revenue increased 13.9% year on year, as the company continues to capitalize on the pandemic-induced cycling boom that started in the second half of 2020. However, operating margin (while up year on year by 0.6 percentage points) declined from the previous quarter to 26.4% from 27.3%, as the impact from increasing components/logistics costs was worse than expected. We maintain our fair value estimate at JPY 29,000 but lower our 2022 operating margin estimate to 26.8% from 27.5% to reflect our expectations that costs will remain high throughout at least the third quarter.

With a reputation for being the “Intel of the bicycle business,” Shimano’s bicycle components can be found in most high-end/medium-end bicycles produced by leading frame manufacturers such as Trek and Giant. The firm’s components are part of “groupsets,” which comprise of gears, brake-related parts, derailleurs, cranksets, chain, bottom brackets, and cassettes. The newly developed high-end groupsets produced by Shimano tend to be first used by professional cyclists and then the technology ultimately flows to its entry-level groupsets. With a history of about 100 years, the firm has developed a strong brand over time, backed by its reputation for quality. As a result, the firm now boasts a leading market share of about 50% in the bicycle components industry. While experienced cyclists will likely choose a brand based on individual preferences in usability, we believe a brand especially influences purchasing at the entry-level within the high-end bicycle product category, which is where Shimano has a particular competitive advantage over its competitors.

With a reputation for being the “Intel of the bicycle business,” Shimano’s bicycle components can be found in most high-end/medium-end bicycles produced by leading frame manufacturers such as Trek and Giant. The firm’s components are part of “groupsets,” which comprise of gears, brake-related parts, derailleurs, cranksets, chain, bottom brackets, and cassettes. The newly developed high-end groupsets produced by Shimano tend to be first used by professional cyclists and then the technology ultimately flows to its entry-level groupsets. With a history of about 100 years, the firm has developed a strong brand over time, backed by its reputation for quality. As a result, the firm now boasts a leading market share of about 50% in the bicycle components industry. While experienced cyclists will likely choose a brand based on individual preferences in usability, we believe a brand especially influences purchasing at the entry-level within the high-end bicycle product category, which is where Shimano has a particular competitive advantage over its competitors.

Wide-moat Shimano’s companywide revenue surpassed guidance and our projection, realizing a 44.6% year-on-year growth from record bicycle components and fishing tackle sales in fiscal 2021. We raise our fair value estimate to JPY 29,000 from JPY 26,500, as we expect stronger near-term sales of bicycle components in Europe (where most of the high-end components are sold and makes up about 65% of bicycle sales) and raise our medium-term margin expansion assumption. Shares have been fairly valued recently, as they had undergone a correction after peaking out at about JPY 35,000 in September, when market expectations were seemingly too high. Meanwhile, we think the recent recovery in its share price is warranted, as the new fiscal 2022 guidance revenue is stronger than our previous expectation and confirms the likelihood of continued demand.