2023-06-15 11:15:46 ET
Summary
- HIMX runs a fabless semiconductor business model, which contracts manufacturing facilities for the commercialization and solution of image processing technologies.
- I am particularly optimistic about future growth of the large display driver IC business and smartphone and tablet TDDI segments because of the results in Q1.
- I believe that higher near-infrared Quantum Efficiency to support the new cameras could bring demand for new products and net sales growth.
In Q1 2023, Himax Technologies, Inc. ( HIMX ) remained cautious about the future Q2 2023 figures, but noted its optimism about the AMOLED business. In my view, growth thanks to the large display driver IC business and smartphone and tablet TDDI segments, infrared Quantum Efficiency to support the new cameras, and the automotive industry could bring significant FCF in the coming years. I see risks from cyclicality, lack of innovation, or supply chain risks, however the company appears quite undervalued.
HIMX Technologies
HIMX runs a fabless semiconductor business model, which contracts manufacturing facilities for the commercialization and solution of image processing technologies. We are going to talk about very innovative technologies, but it is worth mentioning that HIMX is an established business model with close to 2.2k employees and many years trading on the NASDAQ.
Since its inception in Taiwan in 2001, the company has managed to expand significantly in the Asian market and the rest of the world, reaching the United States and having market shares in the United States and China.
Source: Q1 Presentation
HIMX is a leader in the international market in display drivers for televisions, computers, tablets, car screens, digital cameras, and virtual reality devices among others, demonstrating the wide range of utilities on which they can position their products. In addition to these drivers, the company designs and provides solutions for touch screen devices, whether in cell phones or large infrastructure facilities, as well as chips of different formats for virtual reality devices, image sensors, level optics, wafer with applications in the medical industry.
I believe that the most interesting thing about HIMX is its 3D sensing, which was noted in a recent presentation. It includes applications for e-payment, access control, and service robotics among other uses. Considering the current valuation of the company, I personally really doubt that most investors out there did their due diligence about how innovative HIMX intends to be.
Source: Q1 Presentation
Besides, considering the growth of autonomous driving and other technologies related to the electric vehicle revolution, HIMX appears well-positioned to grow. In this regard, investors may want to have a look at the following technologies offered by HIMX.
Source: Q1 Presentation
Clients are mostly manufacturers, product assembly companies, distributors or agents, and to a lesser extent end consumers. Among this list we also find manufacturers of modules for cameras, manufacturers of optical engineering systems, manufacturers of artificial intelligence systems, and embedded systems companies in the field of artificial intelligence. I would invite readers to have a look at the list of clients of HIMX. Most of them are massive corporations.
Source: Q1 Presentation
Recent Guidance For Q2 And Optimism About AMOLED Business
The company remained very cautious about Q2 2023 because of soft consumer consumption and recession fears. With that, it is worth noting that management was quite optimistic about the future of the growth of its AMOLED business and future net sales of OLED displays.
Given the significant contract termination expense, Q2 will mark the trough of Company’s gross margin with sequential expansion expected throughout the second half of 2023. As an important side note, Himax has retained necessary capacity to support the growth of its AMOLED business, which Himax believes will be a major growth driver in the coming years as OLED displays gain traction in a wide range of applications. Source: Quarterly Report
I do not think that the projected figures for Q2 2023 were that beneficial. Non-IFRS profits are expected to remain positive, however net sales are not expected to grow. I believe that taking a long term view is necessary on this name.
Source: Quarterly Report
Stable Financial Situation With A Small Amount Of Debt And Not Significant Liquidity Risks
In the last quarterly report, HIMX reported a small increase in assets and less liabilities, which appears quite beneficial. It is also worth noting that the total amount of cash declined a bit quarter on quarter, and the financial debt/equity ratio also declined. Considering the current amount of cash, I believe that it is more meaningful that the debt/equity ratio continues to decline. In my view, less debt will most likely bring the attention of more investors.
Source: Ycharts Source: Ycharts
More in particular, as of March 31, 2023, the company reported a significant amount of cash, $196 million. It also reported financial assets at amortized cost of $8 million, accounts receivable close to $252 million, and inventories of $335 million. Besides, with restricted deposits of $369 million and other current assets of $106 million, total current assets were equal to $1.288 billion.
Non-current assets include property, plant and equipment worth $124 million, goodwill of $28 million, and refundable deposits worth $224 million. Finally, total assets stood at $1.714 billion, so the asset/liability ratio is close to 2x. In my view, the balance sheet appears quite stable.
Source: Quarterly Report Source: Quarterly Report
The list of liabilities in the last quarter included the current portion of long-term unsecured borrowings worth $6 million, short-term secured borrowings of about $369 million, and accounts payable of about $135 million. Also, with other current liabilities of about $81 million, total current liabilities stood at $697 million, way below the total amount of current assets. With this in mind, I do not see any liquidity issue. Long term liabilities included long-term unsecured borrowings of about $39 million, other non-current liabilities of $67 million, and total liabilities of about $804 million.
Source: Quarterly Report
DCF Valuation
Taking into account the digitalization of the different spheres of life, the transformation towards electronics at an international level, and the deepening of tools based on artificial intelligence, in my view, the future of the company appears sweet. I assumed that these long term trends would most likely bring FCF growth and positive results.
To this we must add the imminent appearance of quantum computing at an advanced stage of development mainly in China, which could give rise to a new type of industry and other manufacturing logics that would in turn lead to the mass development of products of high complexity for which HIMX appears well prepared. In this regard, I would expect significant business growth thanks to Quantum Efficiency to support the new generation cameras.
In addition to advancing our AoS sensor to drive the power as low as possible, we also devote ourselves to developing sensors that have industry leading small pixel (1.12um) with higher near infrared Quantum Efficiency to support the new generation cameras. Their superior performance hugely helps to reduce the system’s power consumption and therefore enhances the system performance. With the high QE in NIR band, we open the doors to building more sensor and camera systems for machine vision. Source: 20-F
The company is currently finishing to line up details to carry out a product diversification strategy towards the non-driver segment. Due to the growth of recent years and the projections of the technology industry at a global level, expanding production and concentrating energy on the development of these products turn out to be, in principle, a good idea to gain market share. With that, I believe that HIMX could acquire competitors because management has expertise in the M&A markets.
In July 2012, our subsidiary, Himax Display, completed the acquisition of Spatial Photonics, currently known as Himax Display USA Inc. Source: 20-FIn June 2018, we completed the acquisition of Emza Visual Sense Ltd., or Emza, which is dedicated to the development of visual sensors that include proprietary machine-vision algorithms and specific architectures that enable always-on visual sensing capabilities. Source: 20-F
It is also worth noting that HIMX is ready to sell assets, which could bring significant cash in hand, and may generate further interests from investors. In 2022, the company reported the sale of Emza for example.
On October 25, 2022, we disposed of 100% of our shareholdings in Emza to a third party. Source: 20-F
With that about potential inorganic growth, under my financial model, I would be expecting further demand from the large display driver IC business and smartphone and tablet TDDI segments. In Q1 2023, the company reported better than guidance sales thanks to these products.
Himax net revenues registered $244.2 million, a decrease of 6.9% sequentially, but markedly better than its guidance of a decrease of 12.0% to 17.0% sequentially. The better-than-guided sales were attributable to increased order momentum particularly in the large display driver IC business and smartphone and tablet TDDI segments as well as Company’s continuous efforts to deplete inventory. Source: Quarterly Report
Under my DCF model, I also assumed that clients will continue to enjoy double digit sales growth from the sale of large display drivers. The company reported double digit sales growth from large display drivers in Q1 2023.
Revenue from large display drivers was $53.0 million, an increase of 21.8% sequentially and substantially above prior guidance of up high single digit from last quarter. Monitor IC sales grew remarkably as expected, increasing by a decent double-digit quarter over quarter. Source: Quarterly Report
The numbers included in my financial model were 2033 net income close to $731 million, depreciation and amortization close to $11 million, and share-based compensation expenses of about $18 million.
Besides, assuming interest income of -$30 million, finance costs of close to $10 million, inventories write downs of about $93 million, and changes in accounts receivable of close to $1.761 billion, I also included changes in inventories of -$806 million.
Finally, my cash flow model includes changes in accounts payable of -$1.331 billion, changes in contract liabilities of -$90 million, and cash generated from operating activities worth $533 million. If we include 2033 acquisitions of property, plant and equipment of -$48 million, 2033 FCF would be $486 million.
I assumed a conservative EV/FCF of 6x, which implied 2033 terminal FCF of $2.916 billion, and a WACC of 15%, which would imply an enterprise value of close to $2.040 billion. If we add cash and cash equivalents of about $196 million, and subtract current portion of long-term unsecured borrowings of about $6 million, short-term secured borrowings of $369 million, and long-term unsecured borrowings of $39 million, the equity valuation would stand at $1.822 billion, and the fair price would be close to $10-$11 per share.
Competitors: New Innovations From Peers Could Be Dangerous For HIMX
The market does not appear to be so fragmented, but with a high number of companies making specific developments, in my view, the likelihood of new technological innovation from some players could quickly make some products obsolete. With this in mind, I believe that having a careful look at some competitors makes sense.
The competition, therefore, varies according to the type of product and the niche, but in general terms we can name Fitipower Integrated Technology, Inc., FocalTech Systems Co., Ltd, Novatek Microelectronics Corp. (NOVKY), Raydium Semiconductor Corporation, Sitronix Technology Co., Ltd., Ilitek Corp., LX Semicon., ESWIN, Chipone, Newvision, Ribbon Display Japan, and Richtek Technology Corp. Besides, there exists major Chinese competition from Ngstrong Tech, and Yuguang Science.
Risks
If we talk about risks, we must first take into account the great dependence of operations on sales from panel manufacturers, which accounted for close to 85% of total sales in recent years. If manufacturers decide to try to renegotiate certain terms, I believe that we may see pressure on the FCF margins, which may lead to lower FCF expectations and lower fair price.
Besides, this industry is highly cyclical, so certain investors may dislike some of the quarterly reports of HIMX, and may sell shares. As a result, we may see certain stock price volatility, which is not for everybody.
The development strategy for the non-driver segment may also imply a risk in its implementation, since despite reading and interpreting the market growth projections, nothing guarantees that this expansion will be favorable. Failed implementation would most likely lower FCF expectations as marketing expenses and capex would put pressure on the FCF margins.
There are also risks from possible disruption in the supply or production chain as well as possible pauses such as the disruption in transport caused by the war between Russia and Ukraine. In this sense, there is a diplomatic tension between China and the United States regarding Taiwan, which is not ideal.
Regarding its clients, it is relevant to know that the company does not maintain long-term contracts that ensure future sales. In addition, due to the concentration of clients, sales depend almost exclusively on a specific industry and its activity. Also, in this sense, the inability to forecast and meet the demands of the market represent a fundamental factor in the future development of products. Ultimately, on this point, the prices of its products and components depend on a large number of factors, and this, accompanied by the volatility of technological innovations, can mean a complication in costs and returns and a need to adapt its operations to avoid problems in this regard.
Conclusion
HIMX remained very cautious about the new figures coming in Q2, however management seems quite optimistic about the AMOLED business. I am particularly optimistic about future growth of the large display driver IC business and smartphone and tablet TDDI segments because of the results in Q1. Besides, I believe that higher near infrared Quantum Efficiency to support the new cameras could bring demand for new products and net sales growth. Even considering risks from cyclicality, recession fears, lack of innovation, or failed implementation of products, HIMX appears significantly undervalued.
For further details see:
Himax: Quantum Efficiency For New Cameras And Cheap