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Founded in 2001 and with its headquarters in Tainan, Taiwan, Himax Technologies, Inc. (HIMX) is a fabless semiconductor solution provider dedicated to display imaging processing technologies. Himax is a worldwide market leader in display driver ICs and timing controllers used in a wide variety of consumer electronics devices. Additionally, HIMX designs and provides controllers for touch sensor displays, LCOS micro‐displays used in palm‐size projectors and head‐mounted displays, LED driver ICs, power management ICs, scaler products for monitors and projectors, tailor‐made video processing IC solutions and silicon IPs. It also offers digital camera solutions, including CMOS image sensors and wafer level optics, which are used in a wide range of applications.

Executive Summary

HIMX is attractively priced at a trailing twelve months P/E of 5.98, representing a 27% discount to its five-year average P/E of 8.16. It has a strong balance sheet in the form of a net cash financial position, with net cash of $16 million. It is also strongly committed to capital return to shareholders such as dividends and share repurchases. Current dividend yield at 2.6% is misleading, as it reflects a difficult 2011 with HIMX still at 100% of its 2011 EPS. HIMX's projected dividend yield is close to 6% with a minimum dividend payout ratio of 50% historically. HIMX also still has approximately $12.3 million remaining from its $25 million share buyback program announced in June 2011. HIMX is also well-positioned to capitalize on the growth in smartphone display drivers and touch panel controllers.

Business Quality

HIMX is a global market leader in TFT-LCD display drivers and timing controller ICs. HIMX is one of the leading players in display driver IC designs, with a 12.0% and 11.2% market share in the large-sized panel driver market and small/medium-sized panel driver market respectively. HIMX is showing superior growth in the small/medium-sized display driver market, with market share increasing from 5.1% to its current 11.2% market share.

HIMX is moving toward a more balanced product mix, with an increasing proportion of sales of small and medium-sized panel drivers and non-driver products. 3Q 2012 revenue from Chimei is down to 34% from as high as 66.5% in 1Q 2008, reflecting HIMX's increasing strength in its non-large panel driver businesses and successful diversification of product and customer base.

HIMX sees substantial growth opportunities in the area of smartphone display drivers and touch panel controllers. HIMX offers full product coverage in smartphone driver ICs, including HVGA and WVGA for entry-level smartphones, HD720/WXGA for high-end smartphones. It successfully produced and shipped its touch panel controllers to a leading smartphone brand in 2011 and has been awarded new projects by the same customer in 2012. HIMX targets to break into new smartphone brands, tablets and Win 8 laptop, on the back of its high product quality and proven commercial production track record with Tier 1 clients. Other areas of growth include CMOS image sensors and LCOS micro display.

Valuation and Financial Analysis

HIMX is currently trading at a trailing twelve months P/E of 5.98 and a trailing twelve months EV/EBITDA of 5.40. HIMX's current P/E valuations represent a 27% discount to its five-year average P/E of 8.16. HIMX achieved a ROE of 10.1% for the past twelve months and a five-year average ROE of 12.9%. HIMX has been profitable since the IPO and generated positive free cash flow in every single year since 2006. HIMX has a strong balance sheet in the form of a net cash financial position, with net cash of $16 million representing 4% of its current market capitalization of $403 million.

Capital Allocation

HIMX has paid dividends in every single year since 2007, and currently sports a dividend yield of 2.6%. On Jun. 11, 2012, HIMX declared a cash dividend of 6.30 cents per ADS for the year of 2011, representing a 100% dividend payout of 2011 EPS of 6.1 cents. Since the IPO in 2006, HIMX's dividend payout ratio has never fallen below 50% and its five-year average dividend yield is 15.1%. HIMX is projecting 2012 GAAP EPS of between 28.6 to 30.1 cents per diluted ADS. If we apply a minimum dividend payout ratio of 50% to the lower end of the EPS estimates, projected dividend per share and dividend yield of HIMX is 14.3 cents and 5.9% respectively.

HIMX also still has approximately $12.3 million remaining from its $25 million share buyback program announced in June 2011. HIMX has purchased a total of $12.7 million, or approximately 9.1 million ADSs through September 30, 2012. Since 2007, HIMX has initiated four share buyback programs amounting to about $158 million since 2007 and repurchased a total of 46.2 million ADS in aggregate.

Investment Risks

Chimei Innolux Corporation, HIMX's largest customer, is the world's third-largest panel manufacturer and owns 14.9% of HIMX. In 2010 and 2011, HIMX's sales of large-sized panels, for which Chimei Innolux Corporation is its major customer, declined by 25.7% and 26.2% respectively, largely due to Chimei Innolux's change of purchase policy to diversify its display driver supply base. Chimei Innolux Corporation accounted for approximately 40.8% of HIMX's 2011 revenue and has been adversely affected by the impact of the global economic downturn in recent years. Also, HIMX's receivables from Chimei represented 44.1% of HIMX's total accounts receivable in 2011. This exposes HIMX to significant credit risk. For example, in 2008, HIMX incurred significant bad debt expense in relation to one of its largest customers Shanghai SVA-NEC Liquid Crystal Display Co. Ltd.

The shortages of processed tape used in the manufacturing of HIMX's products, and other key components for its customers' products, could impact HIMX's bottom line negatively. The supply of processed tape had been tight in the first half of 2010, as some of its processed tape suppliers either closed or reduced the production of processed tape. In March 2011, Japan, a leader in the production and supply of processed tape, was negatively affected by the tsunami, and this led to a decrease in the production of processed tape. Since the first quarter of 2010, the supply of glass substrates, backlight modules, polarizers and power ICs has also been tight. The tsunami in Japan in March 2011 also adversely affected the production and supply of certain key components of TFT-LCD panels.

Source: Himax Technologies: Cheap At 6x P/E, 6% Forward Dividend Yield