Shimano Earnings: Outlook Intact Despite Ongoing Headwinds and Product Recall

While wide-moat Shimano’s 7309 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.

Although the company recorded an extraordinary provision for expenses of JPY 17 billion related to the free inspection/recall of selected products, the market reacted positively on the day after the results due to the upward revision of sales and operating income. Shimano revised its 2023 revenue guidance to a year-on-year decline of 26.5% from 28.4%, as orders were not as bad as the company expected. Accordingly, it raised its 2023 operating margin guidance to 16.7% from 15.6% due to better capacity utilization. We have adjusted our 2023 projections to reflect the latest guidance but largely maintain our assumptions after 2024.