Shimano Earnings: Order Cancellations Dent Near-Term Sales; Lowering Fair Value Estimate

We lower our fair value estimate for Shimano 7309 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.

Our outlook assumes bicycle component sales in Europe, which make up about 70% of the divisional sales, will remain higher than prepandemic levels, with the expectation of a higher proportion of high-end bicycles (including road, mountain, trekking, and e-bikes) going forward. According to management, while the market inventory of bicycles is high, some of the high-end models remain in short supply in Europe. Further, retail sales of e-bikes have been solid in the region. In 2024, we expect sales to rebound with an 8.9% annual growth, supported by new products/models, as the market inventory reverts to appropriate levels. In the medium term, we maintain our 7.5% segment sales CAGR assumption between 2024 and 2027.