IPO Analysis: Himax Technologies Appears Solid (HIMX)

| About: Himax Technologies, (HIMX)

Story: Himax is a Taiwanese fabless designer of integrated circuits for the LCD industry. That's an enormous growth industry, with some parts of it pulling in handsome profits (large screen TV's), some parts rapidly becoming commoditized (17" monitors selling at cost), and some parts transitioning to yet newer technologies (cell phones going from LCDs to OLEDs). We like this industry.

On the other hand, there are some very large fabs whose stocks have all been struggling lately and for the past couple of years (for example), despite very high utilization rates. The reason is that the margins in the fab component of the industry are very low. Is there room for a new player who specializes in the display area?

Company: From their prospectus, they give full year numbers for 2003, 2004 and 2005, and they have had:

* Rapid Y/Y top line revenue growth of 128% and 80% ($300M/$131M and $540M/$300M), or absolute Y/Y revenue growth of $168M and $240M. That looks good, except that their cost of revenue is also high.
* Subtracting that out, gives them annual operating revenue of $31.7M, $64.3M and $120.8M, and an operating revenue growth rate of 90-100% Y/Y.
* That gives them a gross margin of 24%, 21%, and 22% ($31.7M/$131.8M, $64.3M/$300.3M, and $120.8M/$540.2M). That reflects some slight variation in their costs, but the variation is not significant, and the values imply that about 20% of their top line revenue is available to the company.
* After other business expenses, they had operating income of $3.4M, $32.9M, and $68M.
* That gives them an OP margin (operating income/revenue) of 2.6%, 11%, and 12.6% ($3.4M/$131M, $32.9M/$300M, and $68M/$540M). While those numbers are low, they are actually a bit higher than we expected since this is known to be a low margin business. It's also good that the OP margins are expanding, showing that they are getting slightly more efficient each year.
* The more important OOP margin (operating income/operating revenue) of 11%, 51%, and 56% ($3.4M/$31.7M, $32.9/$64.3M, and $68M/$121M) shows that about half of the cash they get to keep drops to the bottom line, and they use the other half to run the business.
* Fully diluted annual operating EPS were $0.03, $0.19, and $0.38.

So, they are doubling their operating revenue each year, and half of it drops to the bottom line, for an operating growth rate of about 50%. That's pretty darn good. In addition, these are not small numbers, and they have shown some nice Y/Y consistency. Solid.

Just shows that it always pays to check - I expected these guys to be weak, but they are not.

Stock: HIMX ADRs are not public yet, but at a 50% operating growth rate, and we'll say a 10% share dilution rate, for a roughly 40-50% operating EPS growth rate, they could probably get something like a 2x market multiple. We'll hold off to see what they price at, and then decide if they are worth picking up.

[Disclaimer: At writing, long AUO, LPL, GLW, EK, CAJ]

** UPDATE 3/31/06:

Himax Technologies priced today at $9/share. At our previous calculation of $0.38/share of 2005 operating earnings, that gives them a trailing operating P/E of 24 ($9.00/$0.38), which is only slightly above the tech market P/E, and seems low for a company with ca. 80% top line revenue growth, 100% operating revenue growth, and 50% OOP margins.

[Disclosure: As of a few minutes ago, long HIMX]