Himax Technologies Stock: Exposure and Margin Risks in China Still Exist (NASDAQ:HIMX)

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Himax Technologies (NASDAQ:HIMX) is a Taiwan-based semiconductor company that has established itself as a leading provider of display image processing technology. It provides semiconductors used to run televisions, computers, data centers and more. The use of Himax semiconductors in screens or monitors is widespread and can be seen everywhere. Himax holds numerous patents that cover image processing and displays, found in dashboards and televisions as well as smartphones and tablets, which is always a welcome sight for investors. The stock appeared on many traders’ radars when semiconductor stocks took off due to pandemic-induced semiconductor shortages, but its fortunes have since cooled dramatically.

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Today we will review the current situation of Himax and discuss what investors can expect from the company.

Profile and outlook

Himax is divided into 3 main segments: Himax Technologies, Himax Display and Himax Imaging. They do not manufacture the products themselves. They outsource production to partner companies and work with them to get the final products.

Sector breakdown

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HIMX is a fabless company that relies on its partners to deliver its products. The semiconductor industry has been under capacity constraint for 2 years, with extraordinary demand for memory and no relief in sight. As a result, gross margins and revenues skyrocketed. This led to another impressive quarter for the company. Net revenue for this quarter was $412.8 million. First quarter sales increased 33.6% year on year; however, gross margins declined to 47%. Historically, HIMX had margins between 20% and 25%, so they have done a good job of sustaining margin improvements, but there are signs that things may materialize with the recent decline. They’ve been increasing their sales in the automotive market, which tends to have higher margins, but there are signs that we’re starting to see some margin compression in this top flight, as the company is now seeing a decline by compared to its record gross margin of 51% last quarter.

Mix of Himax product categories

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Product line-up has been particularly important to Himax, and the company really relies on its higher-margin products. The company hopes to be able to sustain some of its strong margin improvements as supply chain issues resolve. Faced with capacity constraints, HIMX manages to charge more for its goods by leveraging its reputation and high-end positioning so far. Although some of its suppliers have increased their prices, HIMX has still been able to pass on these costs, which means that the cost of goods sold as a percentage of revenue has decreased year over year. Again, investors will want to focus on margin trends over the next few quarters, as supply chain issues could quickly distort the pricing power of Himax’s suppliers. This is especially important if other companies are adapting or stepping in to solve the constraints.

Himax Gross Margin Trends

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Nevertheless, Himax still flies high. At current levels, the company is still in a strong position with the strong demand for its offerings. But with the recent tensions in China, Himax faces a new challenge.

COVID lockdown in China

The “zero COVID” policy has led to further lockdowns, factory closures and worsened the global supply chain crisis. No less than 40 cities in China have been blocked. The major impact this has had is that many Chinese companies cannot operate undisturbed and outside companies find it difficult to manufacture products as they are a key part of the supply chain. Shanghai is home to 25 million people and is the commercial center of China. Unfortunately, they have been confined to their homes since April 1 due to the strict policy, which borders on total confinement. This issue has caused more serious problems with Himax’s suppliers and customers, but it hasn’t affected their performance much so far. What is vital is how things continue to evolve over the long term. It is important to note that Himax is extremely heavy in China from a revenue perspective.

Himax's strong exposure to China

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Smoke margin improvements?

Himax is pinning a lot of hope on Auto. The increasing complexity of cars has greatly helped Himax. Automakers are trying to meet growing customer demand for more advanced technology in their product offerings. Much of this involves the internal LCD/TDDI display. This change was a boon for Himax, which established itself as a leader in the field. The company expects automotive to remain the largest business segment in the future. The company is also exposed to the electric vehicle and autopilot markets. They also hold a prominent position in the field of TDDI tablets and have recently made waves in the AI ​​industry with their always-on AI detection devices. These are notable green shoots, but the smartphone business is expected to slow due to supply chain disruptions and longer production cycles.

The biggest challenges for Himax are geopolitical, macroeconomic and pandemic issues. Should any of these issues worsen, it may be difficult to do business in the near future. Shutdowns across China have led to a significant drop in demand for consumer electronics. This means that we are likely to see significant supply shortages and an abnormal trading environment in the future. Poor order visibility caused by ever-changing order patterns is driving smaller forecast sizes and shorter demand forecasts for major global brands. To address this, many stakeholders began taking steps throughout the first quarter to reduce their CI inventories.

Due to the difficult market conditions, Himax expects to see lower margins this quarter due to its gross margin covering the prices of previous quarters. They are also planning slight price adjustments for non-automotive customers to deal with the global economic slowdown. However, since smelter and backend prices are already stabilizing, their production costs shouldn’t continue to rise for too long.

Despite the possible margin reduction, Himax recently announced a cash dividend of $1.25 per share, totaling approximately $217.9 million.

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They pay a lower percentage of their net profit than they usually do, with a payout ratio of around 50%. The low payout ratio is the result of the company maintaining sufficient working capital in response to economic uncertainty and in anticipation of continued growth over the next few years.

Bad conditions for growth games

Reports from the Federal Reserve have shown that they will likely raise interest rates this year. This may temporarily decrease the value of certain investments and stocks. This does not mean that a company is a bad investment if it performs well even if its stock suffers, because the stock will probably catch up with the company eventually. You might be wondering what rising interest rates and overseas disputes mean for investors. For those who are long-term investors, the impact is not as bad as one might think. In fact, these pressures can even uncover hidden growth opportunities in some companies. But even with this approach, Himax has some notable question marks. The exposure to China is one thing, but the normalization of margins is more troublesome.

Takeaway meals

In turbulent markets, the focus should be on quality names at a reasonable price and Himax is not yet a bargain. The leaders have done a great job, but they seem ready to suffer from some of their short-term past successes. This is a great business, but I would look for better entries in the near term due to poor market conditions and possible supply chain headlines. Until then, I consider Himax as a hold.

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