In this series, we will explore what insights can be gained by reviewing public company disclosures and results. We’ll focus on the indicators that provide the most insight into the broader market. Naturally, these documents are written with the intent of communicating an individual company’s performance and there is a base level of bias to be aware of. However, as will be seen, we can still find quality indicators in the data.
KMC (Kuei Meng) International Inc. is the self claimed largest chain manufacturer in the world. In this post, we will explore their investor disclosures, which can be found on their website. Their primary business line is bicycle chains, which accounts ~75% of their revenue, with Auto, Motorcycle, and Garage Door units accounting for the remainder.
Within bicycles, they sell both through OEM channels for new complete bicycles, as well as aftermarket replacement chains. These two distribution channels represent different places in the market. OEM sales are much farther up the supply chain, as they are a production input to complete bicycle manufacturing. As such, this business unit is likely reflective of lagging demand from bicycle brands. We say lagging, because orders will slow from bicycle brands when they see demand from their consumers falling, relative to their inventory levels, resulting a slowing of orders to OEM bicycle assemblers, and in turn a slowing of input demand. On the other hand, aftermarket sales are a more direct measure of end consumer demand. This division sells both direct to consumer, and through bicycle retailers.
From 2017 through 2022, KMC tracked sales into OEM bike sharing partnerships. This was during the aggressive boom times of bike sharing expansion throughout the world. Many of us in the industry are aware how this story played out with bicycle graveyards of discarded bike-share bikes showing up around the world. Large capital investments pushed supply up substantially, while downstream obstacles, such as competition and local regulations slowed efficient utilization. As a result, many of the aggressive players in the market have pulled back, leaving a more stable and established landscape for this channel.
As seen in the above chart, bike-share was a significant source of demand for KMC for four years. However, in line with the general fervor surrounding the bike share boom, this appears to be more representative of a short term supply push, rather than a long term sales channel. KMC, being the largest manufacturer of chains is likely to be a bellwether for the bike share segment. Does this falling supply indicate that bike share has failed in general? We don’t think so. We see this chart as demonstrating that the wasteful oversupply of has subsided, and this market channel can resume stable growth.
The chart above shows quarterly inventory snapshots since 2019, when KMC first started including the data in their quarterly reports. In 2022, they only reported inventory as a year end number, so we assigned that amount to all quarters in that year.
It is interesting to note that the overall inventory is pretty stable given the substantial inventory swings in US wholesale inventory throughout the pandemic. This may be a reflection of the quality of KMC’s management, supply flexibility, or may hide some product mix challenges due to its aggregate nature.
At Bicycle Market Research, we have tools to infer inventory and sales data from some individual web pages. Using this proprietary technology, we took a snapshot of kmcchain.us, which implies roughly 680,000 units and ~$2.8m in US inventory if assuming keystone margins at landed cost. This gives us a reasonable idea of their US aftermarket relative to the global reach of KMC overall, at roughly 8% of current inventory holdings. This business is smaller than OEM, but has higher gross margins for KMC as their quarterly reports have indicated.
Ebike Premium Chains
KMC has published reports on High End Ebike chains for nearly a decade now, which gives us a unique view on the global growth of the ebike market. We should note here that hub driven ebikes do not benefit from a premium chain, as their torque is not translated through the chain. In stead, all of their torque goes straight into the wheel and tires. However, mid-drive motors, which are prevalent in many higher end ebikes, do benefit from added chain performance. As such, the following charts are indicative of the global mid-drive ebike market.
The dramatic chart above shows a substantial slowdown in these premium ebike specific chains. Although most of the bicycle industry is bullish on ebike growth globally, it may be that oversupply of premium ebikes has led to cut backs in orders from brands. In addition, the pandemic induced purchasing by bike shops may have left the aftermarket channel similarly saturated with product.
As we can see from the following chart, although premium ebike chain sales contribute significantly to KMC’s overall sales, they are not perfectly coupled. The pandemic induced purchases from KMC started in early 2020, while the most significant growth in premium ebike chain shipments did not take off until 2022.
In our opinion, we expect KMC overall quarterly revenue to reach a local minimum in the coming quarters and subsequently stabilize in 2024 in line with a market recovery predicted by the People for Bikes S&P Global quarterly report. In addition, we expect high end ebike chain shipments to continue trending downward, with a lagging recovery by one quarter to return to the longer term growth trajectory seen prior to 2022.