Summary
- HIMX's core business is facing excess inventory issues, causing lower ASPs and gross margins.
- Meanwhile, its 3D sensing opportunity looks overhyped, having been discussed for several years.
- It's time to fade the strong rally in the stock.
I'd fade the Himax ( HIMX ) rally, as the company continues to face a difficult oversupplied environment that will likely hurt ASPs and gross margins. The 3D sensing opportunity, meanwhile, appears to be overhyped and has been discussed by management for many years.
Company Profile
HIMX makes display drivers, timing controls, and power ICs that are incorporated into Thin-Film Transistor ((TFT)) LCD panels. These panels are used in TVs, smartphones, computer monitors, navigation systems, automobile dashboard displays, and other devices.
The vast majority of HIMX’s revenue comes from sales to the TFT-LCD panel industry.
The company claims it has over 200 customers across Taiwan, China, Japan, Korea, U.S. and Europe. However, the majority of its revenue comes from two large customers based on company filings. It has about a 7% market share in the TFT-LCD and OLED DDIC space, behind leader Samsung, which has about a 35% market share.
Outside of the TFT-LCD panel market, the company also produces wafer level optics ((WLO)) and 3D Sensing solutions. WLO optics components include WLO lenses, diffractive optical elements, and micro lens arrays. These components can be used in devices for 3D sensing, AR/VR, and holographic displays.
The company says its WiseEye Smart Images Sensing Technology “brings computer vision AI to endpoint devices with extremely low power. Himax CMOS image sensors include RGB, near infrared ((NIR)) and ultralow power Always-on Sensor ((AOS)).”
In filings, HIMX says it is aggressively working with partner VCSEL on Android smartphone projects covering time-of-flight ((TOF)) for world-facing cameras. According to sensor maker Terabee , “ToF is a method for measuring the distance between a sensor and an object, based on the time difference between the emission of a signal and its return to the sensor, after being reflected by an object.”
Outside of smartphones, it’s looking to use its 3D sensing technology for smart door locks, facial recognition-based e-payments, business access controls, biomedical inspection devices, and eye-tracking applications.
The company also makes LCoS microdisplays. HIMX is looking to use this technology for AR goggle devices and head-up-displays ((HUD)) for automobiles.
Opportunities
HIMX’s biggest opportunity would be breaking into an area outside of the cyclical display panel market. Its technology for WLO and 3D sensing are geared to what are some nascent markets. The company introduced a number of new products along these lines at CES. On its Q4 earnings call , CEO Jordan Wu said:
“At CES 2023, we introduced a series of next generation 3D vision processors to support a variety of state-of-the-art 3D sensing technologies in Time of Flight and structured light.
“Our structured light AI processor can provide 3D eye tracking functionality to report the exact eye positions with the industry's highest response rate and low-friction to enable high precision and dizzy-free spatial reality applications. We featured a live demonstration of our 3D naked-eye display at CES with our eye tracking technologies becoming a hot focus point. Viewers experienced a 3D holographic view from all angles without needing additional wearables to enjoy immersive and advanced visual experience without the side effect of feeling nausea or dizziness.”
The company is expecting 3D sensing to be widely adopted in smartphones, AR/VR, e-payments, and access controls in the future. In April 2022 Dell ( DELL ) announced the adoption of WiseEye technology in their new laptops. The company also said WiseEye has design-ins in areas such as smart meters ((AMR)), shared bike parking, surveillance cameras, panoramic video conferences, endoscopes, automotive, smart home/offices, and smart agriculture.
Risks
HIMX faces a number of risks. The display driver market consists of a limited number of manufacturers, most of which are located in Asia. It’s a capital intensive industry that needs to be run at high capacity to drive down unit costs. However, this can often lead to periods of oversupply, causing ASPs to fall and margins to deteriorate.
This dynamic played out in 2022, and in Q4 HIMX saw price erosion from having to offload excess inventory. This led to a big decline in gross margins, which went from 36% to 30.5%.
On its Q4 earnings call, Wu said:
“Our inventory position has much improved since its peak during the third quarter last year and we anticipate it will continue to decrease to near our historical average no later than the third quarter of 2023.
“With that said, our Q1 gross margin remains under pressure. As Eric mentioned earlier, the cost of our excess inventory is high from being sourced during tight capacity constraint in 2021 when foundry and backend prices were at peak levels. Another contributing factor to Q1 margin contraction stems from market price decline of certain unsold inventories which will necessitate write-downs.
“However, we believe this effect will gradually diminish throughout the year as the market has shown signs of recovery across many business areas. Notwithstanding the pressure from the destocking process, we continue to work diligently towards improving our gross margin as a primary objective.”
Excess inventory is likely to continue to hamper the company in the near term. HIMX's inventory position did improve from Q3. However, while inventory was down sequentially from $410.1 million, year-end inventories of $370.9 million were up from $198.6 million a year ago. That will take some time to work through.
HIMX also has customer concentration risk. In 2021, its largest customer represent over 30% of its revenue and its top-two customers were over 50% of its revenue according to its last annual report.
HIMX also primarily operates in Taiwan. The nation has a lot of political tension around it, as China believes the island is a part of China, and could eventually try to incorporate it into the mainland. Tensions have recently picked up after Russia’s invasion of the Ukraine and the U.S. being more direct that they are willing to get directly involved and defend Taiwan in any conflict.
Valuation
HIMX trades at nearly 11x the 2023 EBITDA consensus of $138.9 million. Based on 2024 analyst estimates calling for EBITDA of $175.2 million, it trades just below a 9x multiple.
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.
HIMX Historical EV/EBITDA (FinBox)
On a PE basis, it trades at 17x the 2023 estimate of 46 cents, and 13x the 2024 consensus of 60 cents.
The company is projected to see a -12% decline in revenue in 2023, followed by a 10.5% increase in 2024.
The company trades at a discount to other semiconductors firms, but its growth rate and gross margins are weaker.
Conclusion
HIMX has been talking about WLO and 3D sensing going back since at least 2016. The company talked about design-ins then, and the industry was supposed to see a benefit from 3D depth scanning at the time. None of that did HIMX much good, and it was never able to meaningfully break into the space.
The company’s core business, meanwhile, is very cyclical, with a lot of ups and downs. Currently it is a down phase, and HIMX will need to work off excess industry at lower prices and margins. It’s not a business I would value highly given its dynamics. Thus, I would fade the recent strong rally in the stock.
For further details see:
Himax: Time To Fade The Rally