Nanalyze

A Chinese Augmented Reality Stock

Live in Asia for a while and you’ll quickly conclude that people who label half the world “Asians” and use that category to tick some diversity box are completely clueless about “Asians.” If you ever want to observe how dramatic the differences are between Asian cultures, sit on a plane full of Japanese while a group of mainland Chinese clamor on board and watch the hilarity ensue. Nobody can master the levels of confusion and drama that groups of mainlanders manage to achieve while trying to get seated on a plane, while nobody can quite achieve the polite uncomfortable embarrassment that the Japanese manage to display while observing the whole debacle. Just because people look the same doesn’t mean they behave the same, and while those uncouth mainland Chinese tourists may be a great cause of embarrassment sometimes, the world is quickly becoming their oyster.

While the Chinese have traditionally looked for capital within their own country, lately they’ve been looking to foreign markets for capital as well – trade wars aside. In the past week or so, several interesting Chinese companies have filed for an IPO on U.S. exchanges. The first is a company we hadn’t heard of before called WiMi Hologram Cloud Inc. which recently filed for a $43.7 million IPO to raise money for their growing augmented reality (AR) services offerings.

A Chinese Augmented Reality Stock

Immediately we’re thankful the company filed for an IPO which means there’s an F-1 document we can dig through for more information on this little-known company which doesn’t even appear to be listed in Crunchbase. As for their website, whoever localized their Mandarin website into English should be taken out back and shot. Instead of telling the world of English speakers about this company’s amazing growth story, the website was translated into a complete mess of incomprehensible Engrish and diagrams that make little sense – like this one.

Some good old fashioned Engrish

Source: WiMi website

What we’re left with is sifting through the several hundred pages of their SEC filing so you don’t have to. What we found out was a pretty interesting story that’s unfolding in the Chinese augmented reality market.

Click for company websiteFounded in 2015, WiMi Hologram is a relatively new company that is augmenting reality with hologram technology. It’s a pretty simple concept. We’ve talked before about what holograms are, and WiMi is simply using holograms to embed content into both the real world and digital worlds. (For a good example of how this technology works, you can read our past article titled Can DigiLens Deliver Holographic AR Devices for Cheap?) They’re the largest holographic AR company in China by revenues which immediately tells us they’re well beyond the concept stage. In 2018, the firm generated $32.8 million in revenues – primarily from holographic AR advertising services (80.5% of total revenues) and holographic AR entertainment products (19.5% of total revenues) – both of which appear to be extremely profitable businesses.

WiMi 2018 Financials

Source: WiMi F-1 Filing

The company has different business models for each business segment which means that while AR advertising sported an impressive 51% margin in 2018, AR entertainment blew that out of the water with a 91% margin. Since advertising constitutes the majority of the company’s revenues, let’s talk a bit more about that.

2D Screen-based Holographic AR

Imagine if you will the ability to inject an advertisement into films and shows in such a seamless manner that it just becomes part of the video. There are some real advantages to this method when compared to traditional advertising methods:

Advantages of AR Advertising

Source: WiMi F-1 Filing

The company goes on to describe how Software Develop Kits (SDKs) like the one they’ve developed allow advertisers to seamlessly integrates ads into existing video or real-time environments being viewed through an augmented reality app.

The common example of current 2D screen based holographic AR are smartphone applications created with ARSDK, such as Apple’s ARKit and Google’s ARCore. These applications integrate digital objects into pre-recorded videos or real-time captured surroundings and the objects do not change their relative position against surroundings even if the devices are moved around. Therefore, it creates a perception for viewers that the digital holograms of objects are part of the existing video feeds or surroundings.

In other words, now advertisers can easily integrate advertisements into augmented reality games like Pokemon Go or directly into movies in real-time as the user is viewing them. And it’s not just funny-looking cartoonish stuff, it’s actual objects that appear real.

AR 3D Modeling

Source: WiMi F-1 Filing

Incredibly, augmented reality advertising is already a huge business in China such that there are at least 4 other companies that are generating meaningful revenues in this space (below revenues numbers in RMB – that’s the currency they use in China for all you diversity advocates who think that “Asians” not only behave the same but also use the same money).

Chinese AR solutions providers

Source: WiMi F-1 Filing

Who knew that augmented reality was such a huge deal in China already? In addition, leading Chinese internet companies, including Baidu, Jingdong, Alibaba, NetEase, have also built their own ARSDK platforms, mainly for in-house usage. The amount of expected growth in Chinese AR seems incomprehensible. Take entertainment for example (that’s was a 91% margin business for WiMi last year). The market size of China holographic AR applied in entertainment recorded revenue of $87.18 million in 2016, and it is expected to increase at a Compound Annual Growth Rate (CAGR) of 83.5% from 2016 to 2020 and another 92.8% from 2020 to 2025, reaching more than $26 billion by 2025. You can do the math on what sort of net income that might generate should WiMi capture just a small fraction of that number.

Conclusions

Investing in China comes with its own risks – like Enron-style blowups because some company executive got caught too deep in the shadow-banking maze – but in the case of WiMi, we have to hope that the IPO involved a vetting process that would have uncovered any such irregularities. We’ve not seen many pure-play augmented reality stocks out there – except perhaps for companies like Kopin – so this is a compelling investment if you’re bullish on using technology to more effectively advertise to a fifth of the world’s population. If they can just figure out how to use holograms to make the aircraft boarding process more seamless for the 720 million Chinese that are expected to fly next year, that might be the killer use case that gets us to climb on board with some shares. If the IPO moves forward as planned, shares of WiMi will trade on the NASDAQ Global exchange under the ticker WIMI.

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