Miami, FL–(EmergingGrowth.com Newswire – February 26, 2019) – EmergingGrowth.com, a leading independent small cap media portal with an extensive history of providing unparalleled content for the Emerging Growth markets and companies, reports on Himax Technologies, Inc. (NASDAQ: HIMX)

If you are looking to bet on the growth of 3D sensing and next generation Augmented Reality (AR) technology this year, then Himax Technologies Inc. (NASDAQ: HIMX) could be the perfect stock for you.

If you are looking to bet on the growth of 3D sensing and next generation Augmented Reality (AR) technology this year, then Himax Technologies Inc. (NASDAQ: HIMX) could be the perfect stock for you.

Company overview

Himax is a Taiwanese fabless semiconductor company and a market leader in display driver ICs and timing controllers used in TVs, laptops, monitors, mobile phones, tablets, digital cameras, car navigation and virtual reality (VR) devices.

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Source: Himax investor presentation 2019

In addition to this, the company also makes controllers for touch sensor displays, incell Touch and Display Driver Integration (TDDI) single-chip solutions, silicon IPs and LCoS (Liquid Crystal on Silicon)  micro-displays for augmented reality (AR) devices and wafer level optics (WLO) for AR devices, 3D sensing and machine vision.

LCOS displays are used to project images on surfaces close to the user’s eye while the WLO process produces cost-effective, miniaturized optical chips that significantly shrink down camera modules for consumer electronics.

In 2016 and 2017, the company’s biggest share of revenue, about 80 percent and 77.3 percent respectively was from display drivers used for large-sized applications, mobile handset applications, and consumer electronics applications, with non-driver (LCoS and WLO) business accounting for the rest. Going forward the company expects to continue deriving a substantial portion of revenues from the driver business.

Investment thesis

In early 2016, Himax decided to re-shape its strategies and put more focus on the following three domains: ultra-low power computer vision- Always-On Sensor (“AoS”), Near Infrared (“NIR”) sensors for 3D scanning, and big pixel BSI sensors in automotive and surveillance. 

This was driven by the fact that, the core display drivers business matured over the past few quarters, leaving limited potential for the overall display driver market to grow, or for Himax to further grow its market share. 

In our view, Himax is strategically positioned to capitalize on the opportunities presented by 3D sensing and AR which could offer a viable path to diversify from the traditional display driver business. 

To illustrate just how big this opportunity is, in a recent 3D Imaging & Sensing report, 2018 Edition, market research company Yole Développement estimated that the global 3D imaging and sensing market would grow from $2.1 billion in 2017 to $18.5 billion in 2023 representing an impressive 44 percent CAGR.

In CEO Jordan Wu’s 2017 letter to shareholders, he noted: “We are very excited about the growth prospects it represents and believe 3D sensing will be our biggest long term growth engine. SLiM™ (Structured Light Imaging Module), our structured light based 3D sensing total solutions, which we announced jointly with Qualcomm (NASDAQ: QCOM) in August 2017, brings together Qualcomm’s industry leading 3D algorithm with Himax’s cutting-edge design and manufacturing capabilities in optics and NIR sensors as well as our unique know-how in 3D sensing system integration.”

Apple (NASDAQ: AAPL) already set the pace for 3D sensing in consumer electronics with the launch of the iPhone X which featured Face ID to unlock the phone. Himax was responsible for supplyingthe WLOs but lost this business in the subsequent versions. 

Both management and a number of industry observers were optimistic that there would be mass adoption of similar features by Android OEMs in their high-end flagship models by the end of the second half of 2018, but this prospect never materialized.

In spite of this, other smartphone parts suppliers such as Lumentum Holdings Inc. (NASDAQ: LITE) have no doubt that Android smartphone makers will make more smartphone devices with Apple-like 3D sensing technology in 2019, which bodes extremely well for Himax.

“During calendar 2019, based on customer engagements we have today, we expect new and existing customers will announce and release additional new 3D sensing-enabled products,” Chief Executive Officer Alan Lowe said on a post-earnings call.

Investors should be aware that the Qualcomm/Himax solution is by far the best performing 3D sensing and face recognition total solution available for the Android smartphone market right now according to the company. The way Himax explains it is that, the total solution approach is best for most of the Android OEMs because it substantially reduces the customer’s integration complexity to a minimum.

Ultimately, it is important to note that 3D sensing can have a broad range of applications that go beyond smartphones such as IoT, automotive, AR/VR, and robotics. A critical function of an AR device is that it can “see” what’s happening in the real world. Alphabet’s (NASDAQ: GOOG) discontinued Google Glass and Microsoft’s (NASDAQ: MSFT) HoloLens, two of the most popular AR headsets in the world are prime examples of such devices and Himax also supplied chips to drive both.

The common theme between Google Glass and HoloLens was that they were experimental products so the market’s reaction when both decided to end the collaborations, was completely overblown. This is because the subsequent share price declines indicated that investors were completely writing off Himax’s ability to make a play for the AR market and at the same time underestimating the size of the market. 

Source: consultancy.uk

During the fourth quarter earnings call, management reiterated that the main focus of the LCoS business was AR goggles and head-up-displays (HUD) for automotive and that LCoS would remain the mainstream technology for AR. LCoS for both goggle device and HUD are expected to bring in much higher ASP and gross margin and be a long-term growth driver for the company.

In the call, Wu noted: “Our technology leadership and proven manufacturing expertise are evidenced by the growing list of AR goggle device customers and ongoing engineering projects. In addition, we continue to make great progress in developing high-end holographic head-up displays for high-end automotives. One of our customers had demonstrated a state-of-the-art HUD product with Himax LCOS inside at the 2018 CES with extremely positive market reception.”

So what kind of impact will these opportunities have on Himax’s top and bottom line? The non-driver business for Himax rakes in more than $100 million annually and accounted for more than 15 percent of revenue share as of 2017. Overall this represents roughly 5 percent market share in 3D sensing or 2 percent in AR markets.

Since Himax is the only company capable of high-volume production runs of LCoS displays for the launch of mass-market devices, capturing just an additional 3 percent of the AR market seems extremely probable. Back of the envelope calculations show that this could translate to additional revenue of roughly $120 million with almost $30 million in incremental earnings for the company.

Financial review and valuation

For the fourth quarter of 2018, Himax booked net revenues of $191 million, an increase of 1.4 percent sequentially and an increase of 5.5 percent year-over-year. The revenue increase in the quarter was attributed to the production outputs of newly added foundries for both large display driver ICs and TDDI chips. In line with expectations, the company’s WLO shipment volume to an anchor customer also significantly increased sequentially.

The gross margin was 24.3 percent, up 90 basis points sequentially, due to a more favorable product mix. Earnings per diluted share were 4.9 cents, better than the guidance range of 1.5 to 3.6 cents. The better than expected earnings were due to revaluation gain of 1.7 cents per diluted share from an AI startup investment made in November 2017.

Large size display driver revenue was $74.2 million, up 12 percent sequentially, and up 27.1 percent year-over-year, on the backdrop of Chinese panel customers’ continued ramping of new LCD fabs.

Revenues from non-driver businesses were $37.1 million, up 18 percent sequentially but down 32.5 percent from last year. Non-driver products accounted for 19.7 percent of total revenues, as compared to 17.4 percent in the second quarter of 2018 and 27.9 percent a year ago, with the sequential increase mainly being driven by significantly higher WLO shipments to an anchor customer. 

The year-over-year decrease was due mainly to certain one-off customer reimbursement totaling $13.3 million booked in Q3 2017 in relation to the AR goggle business. Going forward Himax expects WLO shipments to continue to increase strongly into 2019.

Looking at the balance sheet, the company had $117.7 million of cash and cash equivalents as of the end of December 2018, compared to $148.9 million at the same time last year and $102.9 million a quarter ago. The cash position dropped $23.8 million in the preceding quarter due primarily to the dividend payout of $17.2 million and CapEx of $8.2 million. 

Currently, Himax’s debt-to-equity is relatively high at 32.1X compared to the industry average of 19.71X. However, total current assets stand at approximately $654 million compared to current liabilities of about $391 million, indicating that Himax is able to meet its short term commitments with its holdings of cash and other short term assets. 

At the time of writing, Himax had a market cap of $659 million, trading at $3.8 per share representing a decline of more than 30 percent from its November highs. Looking at the company’s valuation, Himax appears to be trading at a discount relative to peers going by its trailing P/E of 27X compare to Qualcomm’s 33X and Lumentum’s 32X. At similar valuations, this would mean that Himax has roughly 20 percent upside from the current share price. Additionally, the highest price target from six of the analysts offering 12-month price forecast for Himax is $5 per share which implies upside potential of at least 30 percent from current prices. 

Therefore, a position in Himax could have an upside potential in the range of 20 to 30 percent on a valuation basis only without pricing in the massive growth prospects of 3D sensing and AR markets and their effect on the company. One risk to be aware of however, is that as can be seen from the chart below, China has been gradually becoming the biggest market for Himax’s products with the share of revenue from PRC growing from 53.9 percent in 2015 to approximately 66.4 percent by 2018. As such, any tension between the ROC and the PRC, or between the United States and the PRC, could materially and adversely affect the short-term share price trend.

Source: Himax investor presentation 2019

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All information contained herein as well as on the EmergingGrowth.com website is obtained from sources believed to be reliable but not guaranteed to be accurate or all-inclusive. All material is for informational purposes only, is only the opinion of EmergingGrowth.com ,  should not be construed as an offer or solicitation to buy or sell securities and was supplied to EmergingGrowth.com by a contributor. The information may include certain forward-looking statements, which may be affected by unforeseen circumstances and / or certain risks.  EmergingGrowth.com, or its associates may have a position either long or short in any company mentioned herein. Please read our full disclosure, which can be found here, http://emerginggrowth.com/disclosure/. Please consult an investment professional before investing in anything viewed within this article or any other portion of EmergingGrowth.com. In addition, please make sure you read and understand the Terms of Use, Privacy Policy and the Disclosure posted on the EmergingGrowth.com website.


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