Blogvesting

Himax is a Taiwanese company which make semiconductor components that go into an LCD display, including display drivers, timing controllers, and power management ICs. It has a 20% market share in display drivers, and is the industry leader in this niche. Its stock has been dropping in recent months due to worries about the drop-off in sales of large-screen LCD televisions, as well as to the potential industry switch to OLED displays. OLED displays have many technical advantages over LCD displays, but were previously unstable. However, several companies have now managed to overcome the instability issue, and OLED may now be on the brink of commercial introduction.

HIMX has $420M of excess assets, about $131M in inventory and $279M in receivables, and a share base of 191M shares. It is thus worth about $2.20 per share just based on excess assets, although there might be some softness in the inventory and receivables. Revenue growth has been in excess of 25% recently, although that is almost certain to slow. Its 2007 income was $112M, and free cash flow was $57M. If we assume income falls to $50M, or $0.26 EPS, and apply a PE of 10, then it is worth $2.60 in earnings, and another $2.20 in assets. If assets fall to 50% of book value, then it will minimally be worth $3.70.

I believe that the selling in HIMX has been massively overdone. A moderation of the growth in LCD demand is likely, but demand is unlikely to halve overnight. While OLED introduction may be imminent, this new technology will initially be available only in the highest end products, and it will typically take 1-2 years before the technology reaches mainstream products, meaning there will be plenty of LCD sales in the meantime. Furthermore, HIMX does have OLED drivers, and is actively working on products for OLED displays, so HIMX may yet be able to leverage its knowledge of LCD semiconductor components into the OLED arena.

HIMX reminds me of Komag and Read-Rite. Komag made thin-film platters that go into hard disks, and Read Rite made heads that need to hover above the platters at nearly supersonic speeds. Both had specialist technology and were dominant in niche markets, but their strengths were largely overlooked because they were highly industry-specific. Both companies ended up being acquired by Western Digital at a substantial premium. With LCD manufacturing industry now in the process of consolidating, there is a chance that HIMX may get acquired by one of the major LCD manufacturers. Sure, the manufacturers could spend a few years and many millions to research a serviceable product that is slightly inferior in performance to the top-of-the-line industry standard, or it could just buy the company that makes the top-quality product while it is substantially undervalued.

Lastly, management in the company has been responsive to shareholders. To bolster share prices, management has repurchased $30M of shares and issued a presumably one-time $0.20 dividend (costing about $40M). Management is conservative and shows restraint in spending.

I have just initiated a position in HIMX at $3.61. I estimate that the company should realistically be worth in excess of $5.