WiMi Hologram Cloud Inc (WIMI)

[StockpickerCAPC]

Self-research strength is questioned, and frequent acquisitions and investments, can WIMI prove its technical barriers?

Source
https://finance.sina.com.cn/chanjing/gsnews/2022-08-12/doc-imizmscv5931723.shtml

August 12, 2022

After the "metaverse" concept has benefited a large number of companies, most companies realize that they need to fill their imaginations as soon as possible. Perhaps in order to prove its technical strength to the outside world, after its listing in 2020, WIMI Hologram (WIMI.US), the "first AR holographic stock", continued to invest intensively.

Jiemian News found that from the beginning of 2022 to the present, the company whose main business is AR advertising and entertainment [color=greenhas invested in more than 15 upstream and downstream companies, covering areas including underlying technology research and development, digital content production, etc. According to Tianyancha information, since the establishment of the company, WIMI has invested in nearly 50 companies.[/color]

Although it is called "the first AR holographic stock", WIMI Hologram, founded in 2015, is not a well-known company on the C-end. The company's businesses include AR advertising services, AR entertainment and semiconductor businesses. On April 1, 2020, WIMI officially landed on NASDAQ.

WIMI's road to listing can be described as bumpy, and it has postponed its IPO six times. In 2016, the domestic VR and AR market investment boom ushered in a high point. According to IT orange data, since 2014, the amount and quantity of financing in the domestic VR/AR industry has increased exponentially, and until 2016, the industry reached a peak of 241 financing transactions. WIMI also tried to land on the New Third Board in 2016, but failed in the end. In the past two years, WIMI has multiplied the east wind of the Metaverse, and the stock price has skyrocketed because of this concept.

However, focusing on the AR industry, a number of AR company technology executives analyzed to Jiemian News that the market has not really exploded. More importantly, from the date of listing, WIMI's low R&D expenditure has been criticized. As an AR company, after intensive investment in industry chain companies, can WIMI prove its imagination to the outside world?

According to the official introduction, WIMI's business covers a wide range, including holographic computer vision AI synthesis, holographic visual presentation, holographic interactive software development, holographic AR online and offline advertising, holographic ARSDK payment, 5G holographic communication software development, holographic Face recognition development, holographic AI face changing development and other aspects of holographic AR technology.

From the prospectus, the company's revenue is mainly concentrated in three major businesses: AR advertising services, AR entertainment and semiconductor business.

Among them, AR advertising services accounted for the bulk of the total revenue for a long time. According to the prospectus, in 2019, the company's total revenue was approximately RMB 318 million, of which 82.7% came from holographic AR advertising services and 17.3% came from holographic AR entertainment services. In 2018, the revenue of holographic AR advertising services also accounted for more than 80%.

However, the company has significantly adjusted its revenue structure after its listing. According to the financial report, for the whole year of 2021, the revenue of WIMI Hologram reached 934 million yuan, a year-on-year increase of 21.90%. Among them, AR advertising revenue accounted for 46.7%; AR entertainment revenue accounted for 1.5%. In 2020, the proportion of AR entertainment revenue has been as low as 3.89%.

Instead, the increase in semiconductor revenue:
After listing, WIMI announced in June 2020 that its Hong Kong subsidiary will set up a joint venture company to conduct business in the semiconductor market. In 2020 and 2021, WIMI's semiconductor business revenue will account for more than 50%. In 2021, this segment's revenue will grow by 12.8% year-on-year.

At the same time, the adjustment of the revenue structure also led to a decline in the company's gross profit margin.

Before the company generates semiconductor revenue, the company's AR business has a very high gross profit margin: in the first half of 2019, the gross profit margin of the AR advertising business was as high as 63.1%, mainly due to the increase in revenue while controlling costs; AR entertainment business in the first half of 2019 The gross profit margin was 93.2%, mainly due to the increase in revenue from the mobile game business with a higher gross profit margin. However, due to the high cost of products sold and third-party software development costs in the semiconductor business, the gross profit margin of the semiconductor business is far less than that of the AR business. By 2021, the company's overall gross profit margin will drop from 54.2% in 2019 to 26.7%.

At the beginning of its listing, WIMI was more like an "advertising company", providing software services. The company pointed out in its earnings report that AR advertising services refer to the use of holographic VR materials to integrate them into advertisements displayed on online media platforms or offline. The company earns a certain amount of revenue based on the performance of the ad (that is, the number of user views of the ad).

AR entertainment revenue includes revenue from software development kit (“SDK”) payment channel services, software development, mobile game services and technology development, primarily for program developers.

Although WIMI's business serves the B-end, while the AR advertising holographic service is aimed at C-end users, the industry generally believes that this is an AR application that is relatively easy to implement at this stage. It does not require users to wear devices to watch, and the technical threshold is relatively low. On the first day of listing, WIMI did not make too many splashes due to the halo of "the first AR hologram". On the same day, WIMI fell by more than 8% at the opening, and then fell by 14.55%.

However, like many companies that have been flat in the past but have become popular due to the "metaverse", WIMI has also caught up with several hot spots in holographic technology and the metaverse.

At the 2020 World Artificial Intelligence Conference (WAIC), Jack Ma, the founder of Alibaba, presented and delivered a speech in the form of a holographic projection. After that, the share price of WIMI has risen by 544% for two consecutive trading days since July 10, 2020.

On August 24, 2021, WIMI announced the establishment of the "Holographic Metaverse Division" to lay out the research and development of the underlying holographic technology of the Metaverse. Shi Shuo, founder and CEO of WIMI, said: "With the continuous development of the Metaverse and related applications, we are in an ideal position to seize growth opportunities, improve our Metaverse product matrix, and expand our Metaverse market share. After the news was announced, the company's stock price rose 30% for two consecutive days.

It is not uncommon for listed companies to invest intensively, but for WIMI, investing in the industrial chain may be an important means to make up for technology research and development.

The skeptical view is that WIMI has not invested enough in AR self-research, and revenue growth depends on the income obtained by the acquired company. According to the prospectus, from 2017 to the first half of 2019, WIMI’s R&D expenditures were 9.696 million, 8.02 million, and 2.9262 million, respectively, accounting for 5.05%, 3.56%, and 1.83% of the revenue during the reporting period.

In addition, since 2015, WIMI has frequently acquired companies. According to the prospectus, WIMI started commercial operations through Beijing WIMI in May 2015, and then in February 2016, Beijing WIMI established a wholly-owned subsidiary Micro Beauty Lightspeed Investment Management HK Limited in Hong Kong. On October 21, 2015, Beijing WIMI acquired 100% of the shares of Shenzhen Yidian Network, a mobile Internet marketing service company . In August 2015, it acquired Shenzhen Yitian Internet and Shenzhen Kuxuanyou, both of which are game-related companies.

In 2020, the company's revenue reached 766 million yuan, but most of the growth came from the company's acquisition of Singapore FE-DA (Singapore Feida Chip Company). In both 2018 and 2019, Feida Chip's revenue exceeded WIMI's overall revenue.

But at the same time, the company has disclosed more technological prowess than its competitors. WIMI disclosed in the prospectus that according to data from Frost & Sullivan, as of 2018, WIMI had 485 customers, 242 holographic AR patents, 4654 holographic AR content, and 4,654 software copyrights. 147, far surpassing the second largest manufacturer in the industry.

What is not clear is how exactly WIMI's own R&D strength is?
After its listing, WIMI has significantly increased its R&D expenditure. According to the financial report, in the first half of 2021, WIMI’s R&D expenses increased by 463.6% to 86.1 million yuan, accounting for 16.7% of total revenue. For the whole year of 2021, WIMI's R&D expenditure is about 156 million yuan, a year-on-year increase of 83.1%, but the main reason is that the outsourcing technology development services increased by about 70 million yuan.

According to the financial report, as of the end of 2021, the company has 201 employees, and the proportion of technical R&D personnel does not exceed 50%.

Continuing to invest in the layout of the industrial chain may be a common way for WIMI to enhance its technical strength.

When the prospectus was submitted in 2019, WIMI has disclosed that it has invested in more than 17 high-quality upstream and downstream enterprises in the industrial chain. According to public information, as of now, WIMI has invested in 49 companies, and this number does not include undisclosed investments. Taking the companies that have invested since 2022 as an example, WIMI's investment chain covers the upstream and downstream of the industrial chain, from chip research and development to content production.

In addition, WIMI also stated its plans for foreign investment when it went public: the company plans to use about 40% of the raised funds for research and development, including holographic facial recognition systems, holographic artificial intelligence facial changes, holographic digital life systems, holographic Research and development of educational intellectual property, holographic car navigation system, holographic shopping system and holographic tourism navigation system; 40% for strategic acquisitions and supplementary business investment; 20% for other general corporate purposes.

Companies particularly favor companies with patents and core technologies. For example, in 2020, the company strategically invested in Avatar Rehabilitation Technology, which has two R&D centers and a clinical laboratory, and has obtained a number of related patents and software copyrights. The company also established the WIMI Holography Academy in August 2020, claiming to carry out research on basic science and innovative technologies. However, according to public information, most of the R&D and technical research of the academy comes from external cooperation.

It is undeniable that the profitability of WIMI has been confirmed in the financial reports of the past few years. However, in terms of the company's focused AR advertising services, IDC predicts that AR training, industrial maintenance, and AR labs and on-site practice will become mainstream application scenarios in 2026, accounting for about 30.1% of China's AR market investment. A number of industry insiders have told Jiemian News that even with the blessing of the "metaverse", the AR market will give priority to industrial scenarios.

For WIMI, the "Metaverse" certainly helps it continue to open up space in the capital market, but it is one thing to stabilize its position in the AR advertising market, and how to prove its core technical strength to the market is another problem. challenge. As of press time, WIMI's share price was reported at US$1.94, down 64.7% from the issue price, with a market value of US$168 million.