Feitian Yunzuo is a leading provider of AR/VR content services in China. The company started from the game, accumulated many years of game development technical experience and game distribution user data and media resources, and comprehensively transformed AR/VR content and services since 2017. at present, the related business has fully covered retail, culture, travel, education and other subdivision scenes, and reached in-depth cooperation with Tencent, JD.com, Kuaishou Technology, BABA, Baidu, Inc. and other head Internet companies. According to iResearch, Feitian Cloud Motion ranks first in the market share of domestic AR/VR content and services. The company's performance maintained rapid growth, with operating income CAGR 54% in 2019-2021 and adjusted net profit CAGR 59%.

The AR/VR industry is booming: policy encouragement, continuous optimization of hardware experience, and huge increment of content services. 1) Policy, the Ministry of Industry and Information Technology and other five departments jointly issued the Action Plan for the Integration of Virtual reality and Industrial applications (2022-2026), which put forward the industrial quantification target for the first time, and pointed out that by 2026, the overall scale of China's virtual reality industry will exceed 350 billion yuan. 2) hardware, 2H22 to 23 bytes, Skyworth Digital, Meta, Apple Inc, Sony Group Corp and other key domestic and foreign manufacturers VR new products intensive, hardware upgrade direction is mainly thin and interactive enhancement, Pancake replaced Fresnel lens as the mainstream optical scheme; higher-end version uses a brighter Mini-LED screen, interactive way to increase eye movement tracking, facial recognition and full-color VST functions. AR consumer hardware is available. 3) content services, C-end not only games, fitness, live video, social and other scenes continue to be rich; B-end marketing, virtual office gradually started. Take marketing as an example, according to iResearch, the click conversion rate of traditional ads is 0.3% to 15%, while the click conversion rate of AR/VR ads is as high as 25%.

First-mover advantage and business synergy to build the competitiveness of the company. The company has transformed from a game company, and its technical experience in games and interaction has been transferred to AR/VR technology development, and the AR/VR SaaS platform has been launched earlier. Various business sectors cooperate with each other, including customer accumulation, technology development and IP resources sharing. AR/VR marketing service is the main revenue of the company at present, providing comprehensive AR/VR marketing services for customers, and the high conversion rate drives the growth of the number of customers and single customer input. AR/VR content business produces customized projects for customers, covering industries including entertainment, games, education, travel, technology, health care and automobiles. There are many benchmarking projects such as Qiao's compound and Old Summer Palace. AR/VRSaaS platform was launched in 2017, with a rich variety of analysis tools and functional modules, high growth after commercialization in 2019, Tencent Qianfan Plan partner in 2020, the only AR/VR product supplier stationed in Tencent Qianfan Plan, and recently reached in-depth cooperation with Kuaishou Technology and Aliyun to expand customers.

For the first time, coverage gives buy rating: the company's overall operating income in 2022-2024 is expected to be 1.9294 billion yuan, corresponding to a year-on-year growth rate of 90%, 70%, 53%; the adjusted net profit is 1.92, 348, and 551 million yuan, with an increase of 85%, 81%, 59%. The 2023 target PE 30x, with a market capitalization of HK $11.6 billion, is 54 per cent higher than the current share price, covering the buy rating for the first time.

Risk tips: increased competition in AR/VR content and service industry; risk of high customer concentration; risk of high supplier concentration.