2023-07-18 00:27:40 ET
Summary
- Himax Technologies has been dealing with excess inventory issues.
- Issues in the Chinese EV market and the termination of foundry contracts should lead to a weak Q2.
- However, Q2 looks like a trough as inventory gets into a better position and the Chinese EV market improves in the second half.
Back in February , I said it was time to fade the rally in Himax Technologies ( HIMX ) as its core business was facing excess inventory issues and its 3D sensing opportunity looked overhyped. Since then, the stock is down about -6% with a total return around breakeven versus an over 12% gain in the S&P. Let's catch up on the name.
Company Profile
As a refresher, HIMX produces components that are built into Thin-Film Transistor (TFT) LCD panels, such as display drivers, timing controls, and power ICs. The bulk of HIMX's sales comes from sales to the TFT-LCD panel industry, whose panels are used in such applications as smartphones, computer monitors, televisions, automobile dashboard displays, and navigation systems, among other devices.
The company says it has over 200 customers across Asia, the U.S. and Europe. Based on company filings, however, the majority of its revenue comes from two large customers. The company has about the 4th largest market share in the driver space behind leader Samsung at 35%.
In addition, the company also makes wafer level optics (WLO) and 3D Sensing solutions that are used in devices for 3D sensing, AR/VR, and holographic displays. The company has said it is pursuing projects covering time-of-flight ((TOF)) for world-facing cameras with its partner VCSEL. It also make LCoS microdisplays that it is looking to deploy in AR google devices and head-up-displays.
Core Business Issues Continue
In my original article, I noted that HIMX was facing excess inventory issues that was causing ASPs to fall and margins to deteriorate. On that front the company did see some progress, with HIMX CEO Jordan Wu saying that after several quarters of aggressive inventory de-stocking that inventory was at a more comfortable level. He noted was still a bit higher than historical norms, that current inventory has a long life with a strong customer design-in base.
Overall, HIMX's Q1 was decent, with the company beating results on both the top and bottom lines. Revenue of $244.2 million was $15.3 million above the analyst consensus, while adjusted EPS of 12 cents came in a penny ahead of estimates. Revenue was down -6.9% sequentially, but that was much better than the -12% to -17% decrease the company projected. Gross margins continued to deteriorate, down -240 basis points sequentially to 28.1%, and towards the lower end of its 28-30% guidance range.
However, the stock dropped -8% on the back on weak Q2 sales guidance, which the company blamed on weakness stemming from the Chinese EV market. It not expects revenue to be flat to down -9% and for gross margins to be 20-21%.
On its Q1 earnings call , Wu said:
"Next, on the Q2 sales guidance. Sudden demand drop in automotive business is among the main reasons causing the sequential sales decline. As we have talked about previously, automotive has been our largest business contributor for many quarters, accounting for over 30% of the total sales, a far greater contribution than its peers. The sudden decline in the automotive demands, therefore, has a heavier impact on its total sales. Automotive sales are being adversely impacted by recent price turbulence in Chinese EV market as it reported earlier. However, we view the current setback as a temporary and short-term phenomenon. Our outlook for the automotive business remains positive given the megatrend of increasing quantity and sophistication of displays inside vehicles and backed by our undisputed leading market share as well as new design-win pipelines. This is particularly true for automotive TDDI where we have already achieved a global market share leadership position. Our TDDI sales are already on track to resume rapid growth momentum and we remain confident in its potential to be a primary driving force for its long-term business growth."
The sudden disruption in the Chinese EV market comes are time when there is a lot of consolidation in the market. In addition, EV growth had started to slow as consumers worry about charging infrastructure in the country and overall muddled economic outlook. June, however, saw Chinese EV sales surprise to the upside, which could be a sign that the ongoing EV price war in the country may be easing.
Given some of its ongoing issues, HIMX decided after the quarter to terminate some high-cost foundry capacity agreements before their expiration dates. This will result in a one-time early termination expense that will hurt Q2 gross margins (thus the big -700 to -800 basis point decline sequentially). "Moving forward, for those terminated contracts, our new wafer starts will not be subject to minimum fulfillment requirements and fixed contractual prices set at the time of severe industry capacity shortage. This also gives us the flexibility to diversify suppliers," Wu said.
While the company talked about its next-gen products, it didn't offer much in terms of any additional progress outside of it saying that it was continuing to support the production of Dell notebooks with WiseEye, and that the solution was also gaining traction in surveillance and next-gen smart notebooks. As I noted before, the company has been hyping next-gen offerings since at least 2016, so it is best to take the hype with a grain of salt.
Valuation
HIMX trades at nearly 14.4x the 2023 EBITDA consensus of $100.8 million. Based on 2024 analyst estimates calling for EBITDA of $164.7 million, it trades just below a 9x multiple. Note that these estimates are down meaningfully since I last looked at the name, when they were $138.9 million for 2023 and $175.2 million for 2024.
The company has commanded a high EV/EBITDA multiple in the past at over 20x, but it has traded at under 6.5x the last couple of years.
On a PE basis, it trades at 17.4x the 2023 estimate of 42 cents, and 12.2x the 2024 consensus of 60 cents.
The company is projected to see a nearly -13% decline in revenue in 2023, followed by a 11% increase in 2024.
The company trades at towards the lower end of valuations for semiconductors firms, but its growth rate and gross margins are weaker.
Conclusion
HIMX continues to work through issues, although there is an indication that Q2 could be a trough for the company, with second half results improving thereafter. A better Chinese EV market, along with HIMX's of termination of some high-cost foundry contracts, should allow it start to begin to show improvement.
I still have doubts about its WLO and 3D sensing products and the impact they will have, and continue to believe such a cyclical business shouldn't command as big valuation. However, if you can catch the company on a turn, I think you can likely make money off it. I remain "neutral" on the stock, but my bias is now a bit more to the upside.
For further details see:
Himax Technologies: Q2 Should Be The Trough