Japan’s bicycle-parts company boosted by virus

Rally adds Us$5.6bil to Shimano stock

TOKYO: Shimano Inc, a 99-year-old Japanese maker of brakes, gears and components, is poised to take advantage of the global surge in demand for bicycles across the globe as people embrace new modes of transportation due to the coronavirus pandemic.

As the provider of parts to Giant Manufacturing Co, Merida Industry Co and other brands, Shimano commands a dominant presence in the global market for bicycle components. That gives Shimano’s chief executive officer Yozo Shimano, 71, clear visibility into demand, which is picking up across the globe.

Shares of the Osaka-based manufacturer have surged since mid-march, touching a record and expanding Shimano’s market value by Us$5.6bil. Investors are betting that more and more people will turn to bicycles as a way to avoid congested public transportation as France, the UK and other countries start to ease lockdown measures. London is enacting plans to expand bike lanes and sidewalks to make it easier for citizens to get around, while Berlin erected billboards urging the public to switch to bikes for short commutes.

“People are realizing how effective a bicycle can be,” Shimano, the grandson of the company’s founder, said in an interview.

“People are moving away from crowds and looking for space, even in transit.”

Although prospects are bright, Shimano, like many other companies, had a rough start to the year. The manufacturer pulled its fullyear forecast in the last earnings cycle, reporting a 15% year-on-year drop in bicycle component sales in the first three months of the year.

Sales of bicycles with a price tag of about 1,500 euros, or US$1,600, are doing well,

Shimano said, helped by first-time bike buyers looking for durable mid-range models.

Makers are seeing a surge in orders, he says, with retailers in the US running out of stock. He sees steady growth in Europe, where it “is more progressive in terms of setting aside funds to create bicycle-friendly roads.”

Market research firm Coherent Market Insights sees the global bicycle and components market size to be around Us$54.7bil, and predicts it will grow 3.5% annually through 2027.

Although Shimano took a hit to production when factories in Singapore and Malaysia shut down, the CEO said he’s optimistic of a recovery later in the current year.

The factory shutdowns have forced Shimano to rethink its supply chain, the CEO said. While much of the company’s products are made entirely at a single plant, production that required cross-regional work were impacted during the pandemic.

“Like all the other manufacturing companies, we want to take this opportunity to revisit our supply chain,” he said.

Shimano is among the companies “we have been asked the most in the past 10 days,” Morgan Stanley MUFG Securities Co analysts including Yoshinao Ibara said in a note.

They cautioned, however, that the shares may have been over-hyped. “Shimano may well be another case of share price formation running ahead of actual prospects without sufficient consideration given to the limiting conditions that must be recognized,” they wrote.

Shimano’s strength as a company isn’t anything new, according to Masa Takeda, portfolio manager at the Hennessy Japan Fund, which allocated about 5.6% of its portfolio to the bike maker as of March 31. Even if the rally in shares are temporary, Shimano will continue to dominate the industry, he said.

“What’s important is that Shimano is overwhelmingly the top producer of bicycle parts for half a century, and that track record matters,” Takeda said. “Even without the pandemic, demand for bikes will increase as people pick them up for wellness and environmental reasons.”

Apart from growth in Europe and the US, there is opportunity in China, where economic activity has resumed, Shimano said. City residents are shifting their attention toward share bikes as means of transportation, according to the CEO.

The company, which marks a century of business next year, will continue to focus on its two sporting fields - biking and fishing - for the time being, Shimano said.

“People are realising how effective a bicycle can be. People are moving away from crowds and looking for space, even in transit.” Yozo Shimano