The ever growing demand for smartphones and the growing trend to acquire smart televisions has helped build a vibrant revenue stream for the semiconductor giant, Himax Technologies (NASDAQ:HIMX). The company was established in 2001 with its headquarters based in Tainan, Taiwan, and CEO Jordan Wu has helped lead the company to becoming a worldwide market leader in this field.
The company saw its stock boom following the announcement that they would become the supplier for the micro display used inside Google Glasses. But the company is currently facing difficulties with poor sales of their driver displays and the devaluation of the yuan. However, Himax should still be a fruitful stock to add to one's portfolio. The reasons for this are expressed throughout this article.
Source: Yahoo Finance
The Chinese Boom
Himax, which trades at $6.81 at the time of writing, is capitalizing on the extraordinary sales growth of smartphone in the Chinese market. At the end of 2013, the number of active smartphones in China surpassed 700 million. Furthermore, with the smartphone industry becoming more competitive, mobile phone prices have been falling dramatically. This resulted in first time mobile phone buyers purchasing 41% of the total number of devices sold in China.
Data collected by Business Insider for 2015 shows how 68% of the 1.3 billion people in China who have mobile connections use smart devices. That is up from 805 million last year, added the industry association, which is made up of nearly 800 mobile network operators worldwide. The diagram below helps to illustrate the growing trends of Chinese mobile sectors.
SCMP
It is estimated that by the end of 2018, there will be 704.1 million smartphone used in China. This, coupled with the estimated number of 435.5 tables to be sold in China by 2018, illustrates Himax is on the right path for the future.
Fundamental Analysis
Following trading on the 7th of August, Himax shares were up by 7.10% to $7.24 due to the 2015 second quarter earnings results. The semiconductor solutions provider reported a second quarter earnings of 5 cents per share on revenue that fell 13.8% year over year to $169.2 million.
A joyful Jordan Wu said "We are pleased to report that our 2015 second quarter revenue, gross margin, GAAP and non-GAAP earnings per diluted ADS all met at the high end or exceeded our guidance for the quarter". It is expected that earnings for the currency quarter will be between 1 cent and 1.6 cents per diluted share versus analysts' expectations for 7 cents per share during the period.
Furthermore, Wu went on to add that "During our first quarter 2015 earnings call, we mentioned the industry's low visibility, especially in China's smartphone market. Yet, we were able to arrive at top end of our revenue guidance and beat EPS guidance because our driver IC business came in better than expected across all applications."
Wu has led his team to a fifth consecutive year of increasing revenue streams, as demonstrated by the chart below. Reason for this is the booming global electronic market, especially in Asia.
Moreover, the company has also managed to sustain an increase in gross profit margins as seen by the graph below.
Himax has shifted to the more profitable large display, which in turn provides higher margins. They have opted against focusing on the small drivers as these are not as rewarding. Although the larger driver display market is not as lively at the moment, it is likely this will change as 4K television will be more affordable to the general public. In fact, the increasing trend in 4K can be seen below:
We see how in two years, 4K TV's have increased by 12.5 million in China alone. Thus, if this trend continues, and does so globally, it is likely that Himax will benefit from being a market leader in the larger driver display market.
Himax is continuing to work to maintain its leadership position in this market, announcing this week design-ins for its single-chip touch and display driver integration (TDDI) solution for key panel makers and original equipment manufacturers. This technology, called HiSIT™, will be ready for mass production during the fourth quarter of this year, when the product could start shipping. This will ensure that the company is able to take full advantage of this growing market.
In terms of net income, the decline in revenue for Q1 halted what was turning into an upward trend:
Himax swoops award
The company is showing innovative initiative, as its Liquid Crystal on Silicon ((LCoS)) microdisplay has won a Taiwan Outstanding Photonics Product Award from the Photonics Industry and Technology Development Association. The 0.22 inch module received the prestige award from the non-profit organization last month and saw a 5.4% stock increase shortly after the announcement. The new LCoS is seen as a technological breakthrough for the development of the microdisplay technology industry.
An excited Joran Wu said, "We are honoured to win this prestigious award". Followed by complimenting his engineers he said, "Our team of engineers are working with some of the most innovative and reputable companies in the world who use our Front-Lit(TM) LCoS modules for their next-generation, head-mounted display products."
The exciting news resulted in a busy few hours as market opened the following morning. 2.8 million shares were traded by 10:07 a.m. This target is usually met only when the day closes, hence highlighting the positive news the announcement had on the firm. The award helps to emphasise Himax's ever-growing innovation within the company and demonstrates how the company is staying positive through these fluctuating times within the Asian market.
Be Wary of Display Driver Trends
Himax produces small and medium sized display drivers. The small drivers are used for smartphones and tablets, and the medium sized ones are used for LCD and the fine detailed 4K televisions.
However, the demand for such drivers has not been performing well, according to the first quarter report published by Himax. The company blames "sluggish consumer demand for smartphones" and blames macro economic conditions such as the poor exports the Chinese market is facing.
Moreover, the large driver displays are also not performing well due to a fall in demand for notebooks and monitors. And the 4k TVs are still only common to early adopters of the technology.
Although, it is true that these reasons are by no way positive, in my opinion they are not too disturbing and are an abnormality.
Himax also produces non-driver products such as touch panel controls and liquid crystal on silicon ("LCOS"). These fall in consumer demand for electronic goods and the devaluation of the Yuan has meant that non-driver products are also underperforming. Yet, Himax can stay optimistic about their non-driver products, as its LCOS monitors will be used in Google Glasses, resulting in a massive financial backing.
Conclusion
Although Himax is slightly unstable due to the poor display drivers, the long-term future looks healthy for the semiconductor giant. This is due to the likely increase in demand for such goods in the long run. In addition, the fundamental analysis demonstrate a strong long term position for the Taiwanese firm. Moreover, the innovative team that leads Himax in achieving the Taiwan Outstanding Photonics Product Award shows the firm is pioneering the future of semiconductors. What is also noteworthy is the positive outlook of the analysts such as Chardan Capital Market. Although we see how the driver displays are currently on a downward trend, I do believe this is temporary and is not a long-term threat. I Know First's algorithm mirrors the bullish stance that the company is showing, further enhancing the argument that Himax's stock price will increase from their current levels.
