Himax: A Solid Long Idea

| About: Himax Technologies, (HIMX)

Himax Technologies (HIMX) designs display drivers for large, medium and small-sized TFT-LCD panels used in desktop monitors, notebooks, televisions, mobile handsets, tablet PCs, digital cameras, photo frames and car navigation displays. Additionally, it is expanding into developing timing and touch controllers, CMOS image sensors, and 2D to 3D conversion solutions. The company is based in Taiwan, with ADSs trading in US stock exchanges.

Financial Metrics
Looking at Himax's most recent balance sheet, below are some of the interesting numbers:

  • Trading Below Book Value: At the time of writing, Himax’s market capitalization was $228.2 million, whereas its tangible book value (book value - goodwill - intangible assets) at the end of Q2 2011 (ending June 30) equaled $359.5 million. Considering that the company paid out an annual cash dividend of $21.2 million on July 20, its most recent tangible book value will equal $338.3 million. Therefore, its price-to-book ratio is 0.67. This means that the company is trading 49% (1.0/0.67) below its book value. In layman’s language, if the company were to be liquidated today, for every $1 invested, you will get approximately $1.50.
  • 35% of Market Capitalization in Cash: As of Q2 2011, Himax’s cash and short term investments amounted to $104.1 million, the restricted cash equaled $57.5 million, and it had short-term debt of $57.0 million. Deducting the recent dividend paid by the company, the effective cash equaled $83.4 million. This is more than 35% of Himax’s market capitalization.
  • High Current Ratio: The current ratio indicates the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the better the company’s capability to pay its obligations. As of Q2 2011, Himax’s current ratio was 2.1, indicating that the company is highly capable of paying its short-term obligations.

Overall, Himax’s financial metrics look decent. Companies may trade below their book value if their balance sheets are highly leveraged (current ratio less than 1.0), like in the case of solar companies LDK Solar (NYSE:LDK) and Suntech Power (NYSE:STP). It may also happen if the companies have huge debts on their balance sheets, such as oil refiners Valero Energy (NYSE:VLO) and Tesoro (NYSE:TSO). However, Himax has none of these issues, so its undervaluation may not be warranted.

Business Fundamentals
Looking at Himax’s business fundamentals, they are not as bad as investors seem to think. In fact, in some cases they are encouraging. Himax’s revenue comes from three major segments:

  • Display Drivers for Large-sized TFT LCD Panels: This segment made up almost half of the company’s revenues. However, its contribution is declining over the years, and in Q3 2011, it will no longer be the largest revenue contributor.
  • Display Drivers for Medium and Small-sized TFT LCD Panels: This segment which until 3-4 years back was insignificant, will become company’s largest revenue contributor by Q3, 2011. In the recent conference call, the company said: “We remain the leading player in high-end panel drivers for smart phone applications. Our industry-leading HD720 high-resolution cellphone panel driver has been adopted by first-tier smart phone brands with shipments expected to commence at the end of the third quarter. The driver IC offers an unrivaled color and brightness enhancement feature which is very popular among our customers." It is not known who are these first-tier smart phone customers. It may be Samsung (OTC:SSNLF), whose subsidiary Samsung Electronics Taiwan Co., Ltd. is already among its top 10 customers, or it may be other leading brands such as Nokia (NYSE:NOK), (HTC), or even Apple (NASDAQ:AAPL).
  • Non-Driver Segment: This segments consists of CMOS image sensors, LCOS pico-projectors, 2D to 3D solution, touch panel controllers, etc. It will make up 15% of company's revenues by Q3 2011. In CMOS image sensor space, the company is suffering from low margin as it's still shipping a relatively high proportion of older generation products. Also, the company faces stiff competition from OmniVision Technologies (NASDAQ:OVTI), Sony (NYSE:SNE), and Aptina. The good news is the company has already developed newer generation of products with improved cost and margins, and this is the company's fastest growing non-driver product line. For LCOS pico-projector products, the company is seeing increased demand and will increase the monthly panel output from 150,000 units to over 250,000 units. However, in a short-term, this will negatively impact the gross margin. The company's 2D to 3D solution was adopted by several monitor and 3D projector customers. The company has also integrated the 2D to 3D conversion feature into timing controllers designed for handheld naked-eye 3D panel applications. Moving forward, this could be a big catalyst. Finally, its touch panel controller has been adopted by a top worldwide smart phone brand, with shipments expected at the end of the third quarter. The company plans to build upon this success to broaden its market share. However, the company will face a tough task competing against big players like Synaptics (NASDAQ:SYNA), Cypress Semiconductors (NASDAQ:CY), and Atmel (NASDAQ:ATML).

Insider Buys and Share Repurchase Plan
The company recently announced that its chairman, CEO, CTO, and an independent director intend to use their personal funds to purchase up to approximately $4 million of the company's ADSs in the open market. These guys earlier this year bought around 556,418 ADSs. Additionally, on June 20, the company announced a $25 million share buyback program. Share repurchases up to August 10 totaled $0.8 million or 431,583 ADSs. This share purchase plans demonstrate the management's tremendous confidence in the company's long-term prospects.

To summarize, the investors seemed to have valued Himax for bankruptcy. However, if its balance sheets are to be believed, the financial metrics look good. Combine this with its decent business fundamentals and share buyback, Himax looks like a good buy with limited downside risk.

Additional References

Q2, 2011 Earnings Release

Annual Report, 2010

Disclosure: I am long HIMX, NOK, SYNA, STP.

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