Behind almost every good semiconductor company is an unknown back-end company that does the hard work without getting the notoriety. I'd like to introduce one of them to you today by way of some of its better known customers. ChipMOS (IMOS) provides testing, assembly, and bumping services to 90 customers in the memory, mixed signal/logic, and LCD Driver IC markets. Unique opportunities have presented themselves in each major category, which I believe will result in the continued creation of shareholder value and significant upside to shares.
Micron (MU) is ChipMOS's second largest customer and has employed ChipMOS to do assembly of more than a billion DRAM and NAND chips. Micron recently amended their agreement with Inotera (35.5% joint venture with Taiwanese memory company Nanya) -- they now receive 100% of the chips Inotera produces, and those chips now pass through ChipMOS's doors. More importantly, ChipMOS has publicly stated that they are in talks with Micron for the testing and assembly work of Micron's new acquisition, Elpida. Elpida was bought for about a third its replacement cost and is expected to be highly accretive to Micron's bottom line. Elpida's current testing costs are twice what it costs Micron, so this is an opportunity for Micron to dramatically improve efficiency, and an opportunity for ChipMOS to increase revenue by 10% or more from a single contract. Clearly Micron will be eager to transition to best practices to enhance profitability, so moving more business to ChipMOS would be an easy choice. Looking back, it would seem to be either fantastic forethought or great luck that ChipMOS bought an empty facility just after Micron bid for Elpida.
Himax (HIMX) is a rapidly growing Taiwanese company that supplies LCD drivers for phones, TVs, computers, cameras, or anything else that has a display. Mid-range and low-end phones have been a bright point over the past year as the market has exploded in China. Ultra HD TVs are also a promising growth area in the longer term, as they require up to 40 LCD drivers each, compared to the 10 that an HD TV typically requires. Himax was brought to the attention of the investing world when investigation hinted that they provide the LCoS display for the experimental Google (GOOG) Glass wearable device. This was soon verified by Google's investment in Himax which significantly solidifies Himax's long-term prospects.
ChipMOS is one of only two companies in the world, together with smaller rival Chipbond, that provide gold bumping for LCD drivers. They also together provide about 75% of the world's LCD driver testing, and enjoy strong margins due to lack of competition. Himax is a top ten ChipMOS customer, and both companies should see solid growth in the years to come from the proliferation of mobile devices.
Apple (AAPL) is the subject of a lot of rumors. One rumor that has proved to be particularly persistent since Apple bought AuthenTec, a fingerprint sensor manufacturer, is that the next iPhone will read your fingerprints. Recent evidence seems to support this claim. As an independent company AuthenTec engaged the services of ChipMOS and Chipbond for gold bumping, testing, and assembly. Rumor has it that Chipbond will get the Apple sensor contract. I won't speculate on that, but will instead observe that with just two gold bumping providers and limited supply, I'm not sure it matters. ChipMOS foresees such tight supply in 12" gold bumping that they intend to increase capacity by 50% before the end of the year, from 16,000 wafers/month to 24,000 wafers/month. It's also notable that Apple suppliers Micron, Winbond, Macronix, and Renesas are all major ChipMOS customers.
ChipMOS at a glance: At market close on July 31, ChipMOS had a PE of 10, with a forward PE in the mid-single digits. ChipMOS paid its first annual dividend in the history of the company last year, and is expected to pay a larger one this year. It also declared two buybacks in the past year, a wise move considering that it's sitting just 5% over book value. ChipMOS went from the brink of bankruptcy at the height of the recession to a net cash position by producing more than half a billion dollars (more than its market cap) in free cash flow. Since the beginning of last year its depreciation has dropped by about half while revenue has grown, enabling the free cash flow to fall to the bottom line.
ChipMOS has a number of impending catalysts and sits at a very attractive price. I believe that the recent sell-off creates a buying opportunity, and has been caused by short-term inventory adjustments. Looking over the medium and longer term, this is a company deeply entrenched with market leading and growing customers. Those customers are levered to growth markets. ChipMOS annually produces ~$200+ million of EBITDA, meaning shares are trading at about 2.2x EV/EBITDA, a BEYOND distressed multiple that won't last long.