MagnaChip Semiconductor: Limited Downside, Huge Upside Potential

Includes: MX, ON
by: Andy Li, CFA

MagnaChip Semiconductor Corporation (NYSE:MX) was founded in 2003 and is headquartered in Chungbuk, South Korea. MX designs and manufactures analog and mixed-signal semiconductor products for high volume consumer applications such as mobile phones, digital televisions, flat panel displays, notebook computers, mobile multimedia devices, and digital cameras. The company supplies a broad range of semiconductor devices for LCD displays and power management and provides specialized manufacturing services for mixed signal applications. MX has an extensive portfolio of over 2400 semiconductor products and over 500 direct and indirect customers that include LG (LG), Samsung (OTC:SSNLF), Sharp, Hitachi (OTC:HICTF), Nintendo (OTCPK:NTDOF), and Nokia (NYSE:NOK), among others.

According to the World Semiconductor Trade Statistics, the global semiconductor market grew from $152 billion in 2000 to $298 billion in 2010, at an annual CAGR of 7.0 percent and was expected to continue to grow at an annual CAGR of 6-8 percent. According to the Semiconductor Industry Association, representing United States leadership in semiconductor manufacturing and design and the heartbeat of American innovation, semiconductor sales for 2010 showed an annual increase of 31.8 percent from the $226.3 billion recorded in 2009. All major semiconductor product categories showed double-digit growth on a yearly basis in 2010. "Semiconductor sales are a bright spot in our current economic picture, delivering a record high in the billions. The year-over-year growth is due in part to the increased use of semiconductor technology in a wider range of electronic devices that we have come to enjoy in modern life," said Brian Toohey, president of the Semiconductor Industry Association. The Asia Pacific region now represents more than 50 percent of the global worldwide semiconductor market, while the U.S market currently accounts for less than 20 percent of the world market.

One of the key growth areas for MX is its solid design wins that include Apple's (NASDAQ:AAPL) iPad and Atmel's touch screen controllers.The iPad appears to be selling well in Asia, despite the fact that Apple's official overseas launch isn't until the end of May. The rollout of Apple's iPad 2 in Asia drew thousands of interested customers looking to be among the first to officially purchase the touchscreen tablet in their countries. I believe that MX will grow revenues faster with this high growth opportunity. MX will expand existing customer relationships and become a leader in innovation.

In the recent quarterly report, the company reported a gross profit of $56.5 million, or 30.1% of revenue for the first quarter of 2011. This compares to a gross profit of $49.4 million or 27.5% for the first quarter of 2010. The company also raised the outlook for 2011 and the expected gross profit, as a percent of revenue, should increase from 1.5% to 3.0% quarter-over-quarter. The company also has a very healthy balance sheet with combined cash balances totaling $194.2 million at the end of the first quarter of 2011, an increase of $22.0 million from the end of the prior quarter.

MX went public in March of 2011 and it just ended the quiet period. The joint book runners for MX are all renowned I-Banks, including Goldman, Sachs & Co. (NYSE:GS), Barclays Capital (NYSE:BCS), Deutsche Bank Securities (NYSE:DB), Citigroup (NYSE:C) and UBS (NYSE:UBS). In fact, most of the I-banks are beginning to add coverage for MX with an average target price of $19.

Compared to its competitors, MX now has a very attractive valuation as shown below.





MagnaChip Semiconductor




ON Semiconductor Corp




Fairchild Semiconductor International Inc.




In my opinion, MX is an undervalued gem and its strong performance in a quarter that is typically down for the industry, demonstrated 2011 as being another solid year for its growth in both revenue and margin expansion.

Disclosure: I am long MX.