Idea: 50% Global Share In Premium Motorcycle Helmets – Shoei (TYO: 7839)

Thinking Points

  • Shoei has a 50% global share in premium motorcycle helmets.
  • Made in Japan focus makes the company sensitive to currency fluctuations.
  • Key growth areas are in China/SE Asia and US.

One of the best. One of the most expensive.

I doubt there is a single motorcycle enthusiast out there who isn’t familiar with the SHOEI brand. The company is known to produce fashionable helmets with uncompromising safety and comfort standards. In the most recent JD Power & Associates US Motorcycle Helmet Satisfaction Study (2011), Shoei came in 3rd, behind Arai and Icon, which tied for 1st. I believe this study was discontinued after 2011.

Source: JD Power & Associates

Seeing that there is no such thing as a fender bender with motorcycles, you won’t find too many riders cheaping out on protective gear. That said, everybody has a limit, right?

According to Rich Oliver, renowned road racer and Shoei University spokesperson, there are 3 motorcycle helmet pricing categories: Good, better, and best.

Good helmets are sub-$100, better helmets are $100 to $200, and best helmets are $200+. Shoei exclusively competes in the “best” category. In fact, you won’t find many Shoei helmets under $300. 25% of sales come from good helmets, 50% come from better helmets, and 25% from best helmets. I’m not exactly sure if Rich was speaking to the US market specifically, but it’s probably a good rough figure to have in mind.

 

Made in Japan, sold worldwide.

Shoei only produces motorcycle helmets in Japan. The company holds a great deal of pride in craftsmanship. All helmets are handmade with a few automated processes. The relentless pursuit for quality has garnered the company a 50% global market share in premium helmets, according to Shoei’s Japanese website.

For a Japanese company, Shoei has a well developed global distribution network. The company’s 2016 sales by region looks like this:

Source: Shoei IR

With all helmets produced in Japan and most sales generated outside of Japan, Shoei is sensitive to currency fluctuations. In 2012, the European economy was on shaky ground and the Yen was strong. During this time, Shoei only generated 97M Yen of operating income on 8,606M of revenue (1.1% margin). In comparison, Shoei generated 3,145M in operating income on 14,138M of revenue in 2016 (22.2% margin).

 

China and North America for Growth

The rest of the world accounted for 13.4% of 2016 revenues. In its business update (for 10/2/2016 – 3/31/2017 period), Shoei bluntly mentions that the company hadn’t put much effort into the Chinese market until 2016. According to the update, 1H 2017/9 China revenues were up 200+% vs. same period last year. Meanwhile, Asian sales were up 98% vs. same period last year.

In 2015, the rest of the world only accounted for 6.3% of revenues. The 2016 revenue growth in the rest of the world was mostly offset by the decline in N. America, which accounted for 23% of 2015 revenues. Management attributes the decline in N. America sales to the timing of product model changes and its distributor’s inventory adjustment.

Unsurprisingly, US accounts for 90% of N. American sales (2016). This distributor that Shoei management talks about is Helmet House. Shoei has been dependent on Helmet House for all US sales. However, the distribution agreement expires in September. It’ll be interesting to see whether Shoei continues an exclusive deal with Helmet House. My best guess is that Shoei would reach out to other distributors as well. In fact, Shoei made this move in China recently. The company originally relied on one Beijing-based distributor for all Chinese distribution, but added a second  Xiamen-based distributor late last year.

I’m no China expert, but it looks to me like Shoei just doubled its distribution coverage:

Source: Google Maps (annotations by author)

Of course, distributors aren’t limited to their hometown + surrounding areas. However, in the third world, even large businesses often have closer ties with nearby businesses. And Xiamen is roughly 1,200 miles away from Beijing (hard to believe it’s still the same country!). I think geography is less of a thing in the US, but it wouldn’t be particularly surprising if Shoei signed an agreement with an East coast dealer (Helmet House is California-based).

Tearsheet

 

Key Drivers

Here are some bullet points of what I think the key drivers (from a business perspective) for Shoei are:

  • Currency fluctuations
  • European & Japanese market stability
  • Growth in N. America & SE Asia/China

I won’t go into analysing competition (this post is intended for introducing interesting ideas). However, Arai is probably the biggest threat to Shoei’s strong share in the premium market.

Shoei’s stock price had a nice run up, doubling over the past year or so. It might not be the best investment to make at current prices. That said, Shoei has a strong business. Much of the tightening profitability of the company back in 2012 is a function of currency fluctuations and the broader European economy. Presumably, share prices will be negatively affected the next time a 2012-like scenario presents itself. I think Shoei ought to at least be on a watchlist so informed investors can scoop up some shares when the Yen gets strong, European economy dampens, etc and take comfort in their knowledge of the governing dynamics of the business.

 

Author: Clayton Young

Hi! I'm Clayton. My value investing journey began in 2012 during my college days. It was not until recently (2016!) that I decided to leverage my Japanese language skills to research Japanese equities. I hope to provide valuable insight on Japanese companies to the English-speaking world through this blog!

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