Detecting Static in Himax's Prospects

This company will likely struggle to gain favor with investors.
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Some of the best bargains in the stock market can be found in the small percentage of initial public offerings that receive little fanfare from the media. That's because most investors don't take the time to read a company's prospectus before shares debut, and thus miss out on critical information and avoid the stock as a result. However, these IPOs can also be a recipe for disaster for the same reason.

One offering that caught our attention was the March 31 debut of Taiwan-based

Himax Technologies

(HIMX) - Get Report

, a semiconductor company that makes chips for televisions and other electronic devices that use flat-panel displays. However, after researching the company thoroughly, we believe shares should be avoided.

The company sold 52 million shares at $9 each, the high end of the indicated pricing range of $7.50 to $9 a share. Shares quickly sold off, however, as competitor

Genesis Microchip


issued an earnings warning the prior evening that weighed on the entire group.

The market for chips that go into high-end televisions has been on fire, as flat-panel televisions now make up about half of all sets sold each year, and as industry forecasts call for volumes to double again in 2006 to about 40 million flat-panel sets sold. Himax's revenue growth has been equally as impressive. The company turned in sales of $540 million in 2005, a full 80% ahead of 2004 levels and a fourfold leap from 2003 sales of $131 million.

However, we gleaned several red flags from the company's prospectus, which is filed with the

Securities and Exchange Commission


The first one was that of the 52 million shares being offered in the IPO, just 12.562 million were actually coming directly from the company. The rest -- 39.438 million -- were shares being sold into the market by insiders and large shareholders. In other words, a majority of the proceeds from the offering are going to individuals and not into Himax's corporate coffers.

What's of greater concern, though, is that the company's take from the deal, which is worth about $113 million, will be used in part to pay back a small loan that financed a special cash dividend in November 2005 and to build a new corporate headquarters. So the company financed a $13.6 million one-time dividend that disproportionately benefited its largest shareholders, including its largest customer, CMO, through debt that new shareholders helped to repay.

Another red flag comes from the fact that Himax's cash flow from operations in 2005 benefited from an extension of payment terms with certain vendors, a move the company said was made to better align the terms of its supplier and customer agreements.

This led to a spike in the company's accounts payable to $105.8 million in 2005, from $38.6 million in 2004. An increase in payables is a source of cash on the cash-flow statement, as the company has received goods and services from its vendors for which it has not yet paid. Himax reported cash from operations of $12.464 million in 2005, which would have likely been negative had the company not received the extension from some of its suppliers.

Himax also reported that it has had internal control issues in the past, something it will have to get a quick handle on if it wants to succeed as a public company in this post-Sarbanes-Oxley world. According to the company's filing, at the end of 2004 its accountants noted a lack of personnel with significant experience using generally accepted accounting principles (GAAP) in the U.S., a skill that is necessary to identify and resolve certain complex matters in a timely manner.

Then, at the end of 2005, Himax's accountants noted that the company's use of a manual accounting system marked a control deficiency. The company is working to improve its accounting, but there is a risk of negative headlines in the near term that could weigh on the stock.

When you overlay weak near-term industry trends -- based on Genesis' earnings warning -- with Himax's dependence on one customer, CMO, for more than half of its revenue and its use of a portion of IPO proceeds to pay back a loan created to fund a one-time dividend, we believe this is one IPO that will struggle to gain favor with investors. As such, we will look for better opportunities from future IPO deals.

William Gabrielski is a research analyst at In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gabrielski welcomes your feedback;

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