Support seen for Himax following sizeable IPO

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Growth prospects seen outweighing cyclical risks for largest tech IPO this year.

Himax Technologies may have fallen 2.8% in its first day of trading on Nasdaq last Friday, but strong bidding from large investors in the aftermarket indicated good support for the fabless IC design house at current valuations, market watchers said yesterday.

In early US trading Monday, the stock was up 3.4% at an above-IPO price of $9.05.

The company raised $468 million in the largest initial public offering from a technology company globally this year. The sale also marked the largest IPO from a Taiwanese company since Chunghwa Telecom went public in 2000.

With no big block trades expected from either Taiwan Semiconductor Manufacturing Corp or United Microelectronics Corp, Himax could well end up being one of the more sizeable trades out of Taiwan this year, one banker observed.

More than 240 investors bought into the IPO and the order book was six times covered as interested investors honed in on the company's growth prospects rather than warnings by some analysts of another tech sector slump, according to people familiar with the transaction. About 75% of the demand – and the largest orders in particular - came from US investors, many of whom were technology specialists.

Taiwan-listed Compal Electronics, which makes notebook computers and LCD monitors, bought $20 million worth of shares at the IPO price.

Morgan Stanley was sole bookrunner for the offering with Credit Suisse acting as co-lead. The syndicate also included Banc of America Securities, Piper Jaffray, ABN Amro Rothschild and HSBC.

The company offered 52 million American Depositary Shares – each equivalent to one common share - at a price between $7.50 and $9, and fixed the price at the very top end for a 2006 price-to-earnings multiple of 20 times, based on US GAAP. That compares with about 26 times for its Taiwan-listed competitor Novatek Microelectronics.

Three quarters of the shares were secondary and sold by a series of existing shareholders, including company directors and executives. Observers said there had been little adverse reaction among investors to this, with some arguing that it was positive to get such sales out of the way to prevent an overhang on the stock later on.

Investors were said to have been attracted to the company primarily because of its strong position as one of the world’s leading suppliers of display drivers for large-sized panel displays. According to electronics industry research firm iSuppli Corporation it had a 15.8% market share in terms of revenue in 2005.

According to iSuppli, global unit shipments of large-sized flat panel displays are expected to grow by 73% from approximately 203.7 million units in 2005 to 352.7 million units in 2009. Display drivers for such large-sized panel displays accounted for 87.1% of the company’s revenues last year.

Himax also makes display driver for small- and medium-sized TFT-LCD panels that are used in mobile handsets and consumer electronics products such as digital cameras, mobile gaming devices and car navigation displays.

The company has a strong earnings track record dating back to its inception in 2001 and revenues grew by 128% in 2004 and by 80% to $540.2 million in 2005. The net income has turned from a net loss of $600,000 in 2003 to a profit of $61.6 million last year. However, Himax warned that it doesn’t expect those growth rates to be sustainable in the future.

It intends to use part of its net proceeds to fund planned capital expenditures of approximately $26.1 million for the purchase of equipment and software and for the construction of new headquarters in the Taiwan city of Tainan. It will also repay $38.4 million worth of short-term loans.

Among the risks, the company noted that the TFT-LCD panel industry is “intensely competitive and vulnerable to cyclical market conditions (and) the average selling prices of TFT-LCD panels could decline for numerous reasons.”

It went on to say that there has been industry reports of a possible oversupply of large-sized TFT-LCD panels in 2006, which could result in downward pricing pressure on TFT-LCD panel manufacturers and spread to suppliers of display drivers such as Himax.

“We cannot assure you that we will be able to reduce costs to offset such downward pricing pressure,” the company said in the listing document.

On the eve of Himax’ trading debut, US-based Genesis Microchip, which develops image processing technology for flat panel TVs and other display products, said in a pre-earnings announcement that it will miss its earlier guidance for the fiscal fourth quarter, partly due to weaker-than-expected demand for flat-panel TV controllers in Europe.

Bankers said this was likely a contributing reason for Himax’ weak trading debut, and may have prompted more investors to take profits given that it came to market on the final day of the first quarter. Himax did rise to a high of $9.34 before it started to edge lower.

Taiwan-listed TFT-LCD panel manufacturer Chi Mei Optoelectronics Corp is one of the company’s largest shareholders with a post-IPO stake of 12.75% and also its largest customer, accounting for just under 60% of revenues.
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