Himax is fairly valued based on its core display driver business alone.
The non-driver segment is a high-margin, high-growth area that should go from losses to profits in 2015.

The array camera and LCoS products provide massive long-term growth opportunities for patient investors.

Investors will receive a 4% dividend and continued core growth while they wait.
Famed value investor Benjamin Graham wrote in his 1949 book "The Intelligent Investor" about the allegorical Mr. Market who oscillates between periods of euphoria and pessimism. Nowhere is this bipolar nature more apparent than with Himax Technologies (HIMX), which went from unknown and unloved to overhyped, and then back to oversold, all in the space of a year and a half.

Himax closed out 2012 at $2.40, a bargain considering its 2012 earnings per ADS of 30 cents, and dividend of 6.3 cents per ADS. 14 months later, Himax reached a high of $16.15, and 3 months after that, it was back below $7. Quite a wild ride, and yet little changed fundamentally to drive these wild swings in price. The changes were in perception. Initially, the price rose as value investors recognized an excellent business at a low price. Then, it shot still higher as word got out that Google's (GOOG, GOOGL) Glass wearable product (still in alpha release) used Himax's LCoS (liquid crystal on silicon) display. The froth and frenzy in the stock became remarkable as sell-side analysts sought to top each other for ridiculous prognostications. Some were modeling earnings based on sales of 25 million units of Google Glass, an unlikely number considering that it's still a product in the development stage. This suddenly dawned on the analysts, and the bipolar pendulum swung back towards pessimism, with various doomsday rumors accompanying their new models. These rumors included loss of the Google Glass contract to various other display makers, loss of Samsung (OTC:SSNLF) as a customer, and future loss of business to the integration of touch controllers and display drivers (also known as TDDI) to companies such as Synaptics (SYNA). It's my opinion that the rumors are unfounded and that Himax is in a healthy position, with a stronger future coming in 2015 and beyond.

I recently spoke with Himax CFO, Jackie Chang, as well as Stephanie Kuo in Investor Relations, and would like to thank them for an excellent education on the company. However, any mistakes or speculations in this article are my own.

The unrealistic valuation at the high this year was due to investors buying, thanks to excitement over products that aren't yet shipping. When the products are shipping, and volumes and revenue can be more accurately judged, that valuation may again be reasonable. Until then, a conservative valuation should be based on product lines with significant revenue -- the display driver business, which constitutes 80% of revenue, and substantially all of the profit.

Himax: Brean Starts at Hold; Lots of Potential, But a Rough 2014

Shares of image sensor and display technology maker Himax Technologies (HIMX) are down 9 cents, or 1.3%, at at$6.72, after Brean Capital‘s Mike Burton initiated coverage of the stock today with a Hold rating, and a fair value estimate of $6.75 to $8.75, writing that the company has “growth potential in several image processing end markets,” among other opportunities, but that it faces “unfavorable headwinds in the 2H as the Samsung inventory correction continues, and the 4K TV and LCOS [liquid crystal on silicon] end markets (Google Glass) remain in their infancy.”

Burton models Himax making $797.2 million in revenue this year and 40 cents EPS, which is below the Street consensus of $832.6 million and 45 cents.

Himax’s display technology is poised to benefit from rising resolution of smartphone screensbeing put out by Chinese smartphone vendors such as Xiaomi and Coolpad, writes Burton:

We believe that Himax is poised to benefit from increasing content in smartphones and tablets as the move towards higher resolutions continues, driven in part by greater content consumption over 3G and 4G networks. Currently, we believe that more than 40% of Himax’s revenue comes from the Chinese smartphone and tablet market, and while China’s smartphone shipments increased ~64% Y/Y from 190M in 2012 to 354M in 2013, we believe it will continue to climb another ~20% to 420M in 2014 (Exhibit 1 below). In addition to higher unit volumes, the dollar content for Himax doubles when a WVGA phone (800×480 resolution) is replaced with an HD720 (1280×720) and triples for Full High-Definition (FHD = 1920×1280). We believe nearly 50% of Himax’s revenues are currently WVGA, which is poised to be replaced by higher resolutions as developing markets adopt smartphones on both the low end and at the high end from emerging OEMs such as Coolpad and Xioami.

The company is not without competition in its core business of display technology: “In general, the markets for Himax’s products are intensely competitive, especially for the display driver market. Samsung and Novatek Microelectronics are the market leaders in the display driver market and enjoy a more than 400 bp gross margin premium over Himax.”

Then, too, Himax received an investment from Google (GOOGL) for its LCOS technology, notes Burton, and that could yet play out well for the company in the wearables market, for future devices like Google’s “Glass” smart eyewear:

Himax was a beneficiary of a significant amount of positive “buzz” around Google’s investment into its LCOS business, and almost as quickly fell victim to the recent concerns about losing its position as the sole provider to Google (we note the stock is down 41% in the last 90 days vs the SOX 9% rise). As the LCOS business is just ~2% of revenues, we believe much of the buzz and subsequent concerns have already been absorbed into the stock. We do see HIMX’s non-driver businesses (CIS, Timing, PMICs, Touch and LCOS) as its growth leaders in 2015 and 2016, but expect very little contribution from Google Glass in 2014. That said, we note that IDC has estimated that shipments of smart glasses may rise to as high 7M units in 2016, up from just 125k shipments in 2013. Considering that Himax has very high dollar content ($15-25 per LCOS module) at gross margins that are well above corporate average (~45%), if Google Glass is anywhere near as successful as IDC has estimated, we believe HIMX stands to benefit handsomely. In the meantime, Himax’s CMOS Image Sensor business (~5% of revenues), its timing controllers for TVs and Notebooks (~5% of revenues), its power management ICs (PMICs; 3% of revenues), and its touchscreen controllers (~2% of revenues) have been the reason for the non-driver segment’s outperformance: up 45% Y/Y in 1Q14 vs. +21% for small/medium drivers and -19% for large-sized panel drivers.

Burton even includes a chart from research firm IHS iSupplie that purports to project the smart eyewear market out to 2016:

Despite all that promise, estimates are too high at the moment for the what is being projected into the remainder of this year, as the largest smartphone maker, Samsung Electronics(005930KS), is working its way through a smartphone inventory correction, he writes, before a rebound in panel sales lifts its fortunes:

We believe that the drop in HIMX shares is at least partially reflecting the headwinds the company faces in the 2H. We believe the Samsung inventory correction is affecting the small/medium display business, the 4K adoption has been slower than expected due to lack of content and pricing still needing to come down, and Google Glass is still a very small contributor. Himax’s modest growth of 5% in 2013 and our expectation for 3% in 2014 has been despite a significant long-term contraction in its historically largest business of display drivers for large-sized panels. The business was down 25% Y/Y in 2013, down 19% in 1Q14, and we estimate will be down 25% in 2Q14. However, we believe that the comparisons get easier in 2H14 and are expecting modest growth in 2015 and 2016. Consumers worldwide continue to demand larger-sized TVs with increasing resolution, which we believe makes 4K an eventual evolution as pricing for the displays comes down. While 4K is still a very nascent market in 2014 with rather disappointing uptake to date, we expect the 4K TV market to benefit Himax both from a competitive position as well as from increasing its SAM in 2015 and 2016. We expect HIMX to be one of the key beneficiaries of 4K adoption since its content per set will increase 2x.

資料來源：奇景光電