Willsemi's 1H23 revenue and net profit were RMB8.9bn and RMB153mn, down 20% and 93% YoY, respectively. Margin continued to contract in 2Q23, suggesting the Company is marking efforts to digest inventory. 2Q NP was negative again, failing to continue its profitability from 1Q. This has confirmed our previous prediction that "inventory digestion continues, however, not necessary a hint of market turnaround". (link) Looking forward, we think the de- stocking process is likely to persist till the end of the year, which will continue to hurt the Company's overall margin. Maintain HOLD, with adjusted TP at RMB85.

Margin erosion in a declining market (mobile/security CIS). 2Q's GPM dropped to 17.3% from 24.7% in 1Q23 and 33.3% in 2Q22, mainly due to weak mobile and security market demand and inventory digestion.

Mobile/security sensor sales declined 45%/23% in 2022 and further declined 14%/25% YoY in 1H23. Inventory was RMB9.8bn, down by 30% from the peak in 3Q22. However, MOI (months of inventory) was still 6M.

As de-stocking will continue into 2H23, we expect the overall GPM will remain under pressure. Once the inventory is back to normal level (3-4M), GPM can be expected to gradually return to previous 30% level.

We are more conservative than the consensus as we expect a gradual recovery in 2024. Counterpoint estimated smartphone shipment will decline 6% to 1.15bn in 2023, "worst in ten years", remain cautious on 1Q24 and show elevated risk of a delayed recovery into next year. Given Willsemi's large inventory and low consumer sentiment, we expect total revenue will decrease modestly by 5% in 2023. Recovery may come in 2024, when the Company's sales resume double-digit growth. 2024/25E revenue is estimated to reach RMB22.9bn/RMB26.4bn, which is 11%/14% lower than consensus.

Maintain HOLD with TP adjusted to RMB85, based on rollover 29.3x (unchanged) FY25E P/E. Current price is trading at 55x 24E P/E and 32x 25E P/E, which is fair valued. We think investors should watch Willsemi's GPM trend and inventory levels in the following quarters. Potential upside includes earlier-than-expected consumer demand recovery, better sales of new products.