Will Semi announced better-than-expected 3Q results. Revenue came in at RMB6.2bn, representing 44.4% YoY growth and 37.6% QoQ growth, respectively. 3Q revenue marked the second-highest quarterly revenue in the company's history. Net profit was RMB215mn, turning positive from 2Q. We think the sound results were driven by: 1) better-than-expected recovery in consumer electronics, noticeably in domestic Android phone markets; and 2) strong growth in auto CIS as the company booked more orders across both existing and new manufacturers. We think the worst has passed. As its inventory went down to a relatively healthier level, we expect Will Semi's pricing power to improve in the future and revenue to resume growth. Meanwhile, we believe the company's net income will follow its revenue's recovery and increase meaningfully in the next few quarters (GPM is currently at 21.8%, vs previously30%+). Hence, we upgrade to BUY with an adjusted TP of RMB117.5.

The company has reported a significant rebound in 3Q revenue, aboveour previous expectations. This strong growth can be attributed to the top two largest segments (smartphone and auto) by revenue contribution (over half of total 1H23 revenue). In the mobile CIS sector, there has been a notable influx of new Android smartphones (e.g., Xiaomi 14) to the market in 2H23. The latest products, such as OV50H, have been quickly adopted by domestic Android brands. The company also experienced growing demand for its products in the auto market.

Inventory returned to a healthy level: The company's inventory fell by46.5% YoY and 23.2% QoQ to RMB7.5bn in 3Q23 from its peak of RMB14.1bn in 3Q22. We think this indicates the end-market demand is recovering. The current inventory is around 4 months of sales (based on 3Q revenue). As its inventory level returns to a healthier level, we expect Will Semi's revenue and net profit to resume sound growth.

Upgrade to BUY and adjust TP to RMB117.5. We revise up 2023/24/25Erevenue by 11%/12%/14% and NP by 4%/44%/15%, considering 1) resumed good growth in both top and bottom lines, 2) competitive advantage of its latest products, and 3) the continued, strong localization trend. Our new TP is based on a higher 35x 2025E P/E (vs. previous 29.3x 2025E P/E). We believe the valuation is fair considering the NP CAGR of 36.5% over 2024-25E. Potential downside risks: 1) lower-than-expected Andriod smartphone shipments, and 2) weakening global macro.