I presented my ‘Buy’ thesis on Himax Technologies (NASDAQ:HIMX) in my previous coverage published in February 2024. Since my initiation, the stock price has surged by more than 43%. I highlighted its global leadership in display driver ICs and timing controllers used in automotive and electronics. The company released its Q1 result on May 9th, beating the market expectations. In the near term, I continue to anticipate automotive market will be the main growth driver for Himax. I reiterate ‘Buy’ rating with a fair value of $11.5 per share.
Q1 Recap
In Q1 FY24, Himax delivered an 8.8% decline in revenue quarter over quarter, better than the original guidance of -9% to -16%. Additionally, the gross margin stood at 29.3% in Q1, exceeding the guidance of 28.5%.
The better-than-expected financial results were primarily driven by a couple of factors:
- As mentioned in my initiation report, Himax is a leading player in the automotive display IC market, owning more than 40% of market share. The company is benefiting from the increasing demands of sophisticated display installed in automotives. In Q1, Himax’s traditional DDIC ((Driver IC)) and TDDI ((Touch and Display Driver Integration)) products experienced a single-digit decline, compared to the guidance of mid-teens decline. Due to the weak consumer consumption, the automotive market is experiencing a challenge year in 2024. S&P Global Mobility forecasts that the global automotive production will decline by 0.4% in 2024, a big reversal compared to the 9% increase in 2023. During the earnings call, the management indicated that Q1 would be the bottom for their automotive display business, and expected a rebound from Q2.
- For the non-drive business, Himax has been quite successful in selling its TCON ((The Timing Controller)) to high-end markets including gaming and automotive markets. Their management expects TCON will grow by 30% sequentially in Q2, representing around 3% of total revenues.
FY24 Outlook
For FY24’s growth, I am considering the following factors:
- Automotive Business: The business includes traditional DDIC, TDDI, TCON and OLED products. As indicated over the earnings call, the automotive business accounts for around 46% of total revenue. The global automotive production is facing strong challenges in 2024, primarily due to the normalization of demand and supply, and weak consumer consumption caused by high interest rate in US. As depicted in the chart below, the US consumer confidence index is expected to be weak in 2024, which would put considerable pressure on the demands for automotives.
I anticipate the global automotive market will decline in low-single-digit in 2024, and Himax could outpace the market trend. As automakers are promoting advanced displays, the megatrend would help Himax penetrate the high-end market and achieve a higher ASP. Considering the share gains and weak overall market production, I anticipate Himax to achieve flat revenue growth in its automotive business in FY24.
- Non-Driver business accounts for around 15% of total revenue, and the main growth driver is Himax’s TCON products. The management is quite confident that its TCON products could continue to penetrate high-end markets including automotive and gaming. I expect its non-driver business will increase by 30% in FY24, which could contribute 4.5% to total revenue growth.
Assuming the rest of businesses achieves flat growth, I anticipate Himax will deliver 4.5% revenue growth in FY24.
Valuation Update
As discussed above, I assume Himax’s revenue will grow by 4.5% in FY24. For the normalized growth after FY24, I am considering:
- Automotive display market is expected to grow at a CAGR of 10% from 2024 to 2032, according to Global Market Insights. The main drivers are the penetration of EVs, and rising demands for in-car infotainment systems. As Himax has been outgrowing the market growth in the past few years, I anticipate the company will continue gaining market shares, especially in the high-end markets. I assume Himax’s automotive will grow by 15% annually.
- Smartphone and other electronics devices: the end-markets are largely mature, and I anticipate Himax can achieve low-single-digit growth in this segment, primarily driven by replacement cycles and consumer preferences towards large-screen devices.
Putting all the pieces together, I expect Himax will deliver 10%+ growth in revenue after FY24.
On the margin side, the main growth drivers are the gross profits and operating leverage of R&D expenses. Due to the increasing business mix towards high-end and large-size displays, I anticipate Himax will expand its gross margin by 50bps per year. Additionally, Himax’s R&D expenses could benefit from operating leverage in my view, and I estimate the company can generate 50bps leverage from R&D expenses.
The DCF summary can be found below:
The WACC is calculated to be 11.7% assuming: risk free rate 4.25% ((US 10Y Treasury Yield)); Beta 1.6 ((Seeking Alpha)); equity risk premium 7%; equity balance $856 million; debt $493 million; and tax rate 22.5%.
Discounting all the future free cash flow, the fair value is estimated to be $11.5 per share, as per my calculations.
Key Risks
Himax has been benefiting from the growth of TDDI since 2020, with increasing penetration in auto, smartphone, tablet, and notebooks. The smartphone TDDI market has already peaked in 2023, as illustrated in the chart below. Himax needs to penetrate its business into other end-markets such as auto and notebooks. In these new markets, Himax faces strong competitions from companies like Samsung (OTCPK:SSNLF), Novatek and other small players. It is uncertain whether Himax can extend its technology and sales advantages into these markets.
Conclusion
While the automotive industry face challenges in 2024, Himax has positioned itself well with innovative products like TCON. The management is quite confident about a demand pickup starting from Q2. I remain confident that Himax can achieve double-digit revenue growth in the near future. I reiterate ‘Buy’ rating with a fair value of $11.5 per share.
Lighting Rock Research
I am a growth-oriented investor, conducting fundamental research. Long-term focus, independent thinking. I prefer companies with deep moats and high recurring sales growth.Disclosure: Hunter Wolf and I are working in the same investment team. I am writing here independently.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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