Himax Technologies (HIMX) is an overlooked jewel that is ready for explosive upside share price movement. Key highlights include the facts that the company is debt free, accomplished triple digit quarterly earnings growth (Year over Year), and is paying nearly a 10% cash dividend to shareholders of record on August 6, 2010. Given the outlook for this company, which I will discuss further below, I am surprised that the majority of the Street has missed it (primarily with the exception of insiders and Fidelity mutual funds which own double-digit shares of the company). This report will first discuss some of Himax’s customers and then illustrate the tremendous growth opportunities available, along with recent developments and market updates.
Despite all the talk of an economic slowdown, consumption amongst end consumers and Himax’s customers, such as OEMs and ODMs, is increasing. Here are some illustrative examples:
1) You - If you bought Apple’s (AAPL) iPad, iPhone, any computer, a television, a portable DVD player, a GPS navigation system, a 3G cell phone, or a digital camera, chances are that you are using products that are made by Himax. The Company's principal products are:
Display drivers for large-sized TFT-LCD panels, which are used in desktop monitors, notebook computers and televisions
Display drivers for small- and medium-sized TFT-LCD panels, which are used in mobile handsets and consumer electronics products such as digital cameras, mobile gaming devices and car navigation displays.
In addition, the Company is expanding its product offering to include LCD TV chipset solution, power management ICs and LCOS microdisplays. The company has hundreds of patents and is a principal leader in several growing market niches.
2) Hannstar – The company manufactures monitors for Dell (DELL) among many others. Hannstar’s Board plans to ramp up the total capacity of its plants in Taiwan and China to 6.25 million square feet a month by the end of 2010 from the current 5.45 million square feet, according to company COO Yeh Shin-jiin
3) Chimei Innolux – The company is the world’s largest manufacturer of LCD monitors and World’s second largest assembler of flat-screen monitors. Chimei is challenging Samsung (OTC:SSNLF) and LG (OTC:LGERF) in the $88 billion market for TV and computer displays. On May 1, 2010, the company beat analyst estimates, announcing 30% sequential growth in April revenues. Also, of great interest, is that Chimei took a large stake in Himax media solutions (a subsidiary of Himax), a strong indicator in the desirability and outlook for Himax’s technologies.
4) Samsung Electronics – The company is the World’s Largest Flat-Panel TV Manufacturer and provider of the Power Management Integrated Circuit (IC) for the Apple iPad. Himax Analogic provides Power management ICs to Samsung. Per the Wall Street Journal on April 30, 2010, Samsung Electronics Co. reported a first-quarter profit of 4 trillion won, or $3.6 billion, its biggest quarterly profit ever, led by a surge in its chip business that's benefiting from an industry upturn and ongoing strength in a TV division
5) TPV Technology Limited- The company is the world’s largest LCD TV ODM. Brand names include AOC, Envision and Amark. Last month, Mitsui & Co., Ltd. announced that it acquired a stake in TPV Technology Ltd of 15.05%. TPV in turn has a minority stake in Himax Mobile, a subsidiary of Himax.
6) Wintek - The company is Apple’s touchscreen manufacturer for the iPad and iPhone. It also provides touchscreen to Nokia (NOK). Quoting from the Taipei Times last month, “ Wintek (WNTSF) posted a revenue of NT$7.53 billion in the first three months of this year, with touch panels accounting for more than 35 percent of the total, up from 30 percent in the fourth quarter of last year, Chen said. Foreseeing a better-than-usual second quarter, “revenues will increase in the second quarter, helped by rapidly growing customer demand for touch panels."
Clearly, the downstream channel for Himax is improving as its customers are seeing better results and increasing demand. On May 7, 2010 Commercial Times reported
Novatek (NVATY.PK) and Himax Technologies both have raised their quotes to reflect strong demand.
The Chairman and CEO had respectively purchased 577,200 and 333,800 ADSs in the Company, through their respective affiliates, in the open market during the period of November and December 2009. The purchases demonstrate strong support for the Company and their tremendous confidence in the Company's long-term prospects.
In its recent earnings release, for the second quarter 2010 guidance, Himax expects revenues to grow by 10% to 15% and gross margin to remain flat. Keep in mind this quarterly growth is quite impressive considering that the company is debt free, cash rich and paying nearly a 10% dividend. Growth will likely come from the following key areas:
1. Growing large panel display driver revs and market share: (expected to grow from 4 billion units in 2007 to 7.4 billion in 2012) Per iSuppli, Himax in 2009 became the world’s largest driver IC company for large size displays. Mr. Jordan Wu, the President and CEO of Himax stated,
We are excited that our 2D to 3D conversion solution is receiving overwhelming interest from the 3D ecosystem, software and hardware makers alike. Our solution is widely praised for offering the best 3D effect and viewing experience in the market place. In addition to the software/firmware version which we announced in February, we recently launched our chip solution, which is now ready for mass production. This puts us firmly ahead of the market. Our IC solutions can accompany all types of 3D displays empowered by a variety of technologies. They are also suitable for a range of applications including TV, monitor, notebook, portable DVD player and digital photo frame.
2. Achieving small/medium size driver leadership (expected to grow from 2.6 billion units in 2007 to 3.6 billion in 2012). Jordan Wu, President and Chief Executive Officer of Himax, commented,
For the first time in company history, our small-and-medium panel drivers accounted for more than a quarter of total revenues. Small- and medium-sized applications accounted for 26.4% of total revenues for the first quarter, as compared to 23.0% for the same period last year, and 21.1% in the previous quarter. The strong sequential growth was driven by our share gain in the global handset display driver market. With an increasing number of compatible panels, our product portfolio is among the most complete and popular in the industry. We expect the strong demand of our handset display drivers to continue into the second quarter.
Small and medium display drivers had also gained share in 4Q2009 and grew 50% YOY.
3. Strategic Alliances - In early 2008, the subsidiary announced a strategic alliance with 3M (MMM), one of the world’s leading companies in optic technology, to commercialize LCOS mobile projectors by combining Himax's proprietary technologies to deliver a complete mobile projection solution to consumer electronic manufacturers such as mobile phones, digital cameras, and other portable devices.
No expected dilution
To clarify some concerns regarding dilution, it should be noted that the recent listing announcement regarding the Taiwan Exchange is non-dilutive.
Given the balance sheets, margins, relative growth and valuation of some competitors such as Maxim Integrated Products (MXIM) and STMicroelectronics (STM), Himax should command a much higher share price. Himax has some of the best technology and growth potential, yet it is trading at a P/S ratio is 0.67 when the industry average is 2.44.
My expectation is that revenues will continue to increase at over 30% for the next several years. Given that assumption and an expectation that the Street will come to notice Himax, I expect it will attain a P/S ratio of 2. Coupled with the 30% sales rise, the share price should increase nearly 4 times over the next year (P/S of 2 divided by current P/S of 0.67 times 1.3 revenue growth = 3.88). Hence my 12-month target is $10.78 (3.88 times the current share price of $2.78). And more applicable to the shorter-term investors, I expect an easy double in share price prior to the ex-dividend date of August 6.
Disclosure: Long HIMX, KERX, VG