Source: A look at the general trend
Author: Guotai Junan Strategy Team
Original title: Apple MR: A New Species

1. Apple MR is expected to lead a new wave of consumer electronics

1.1. Apple MR enters the countdown to release, which is expected to ignite the consumer electronics market

Apple's MR release time is approaching, which is expected to ignite the consumer electronics market and lead a new round of the industry cycle.The repeated delays in the release schedule have not dampened market enthusiasm. More and more information indicates that Apple will officially release the first MR device at the World Developers Conference (WWDC) in June 2023.

As early as 2013, Apple began R&D preparations related to headsets. In ten years, it acquired a number of startups in the fields of motion capture, eye tracking, augmented reality, mixed reality, etc., and launched the headset operating system RoS in 2017. At the end of 2022, Apple launched the Reality OS system, preparing for the release of MR products at the system level. On March 14, 2023, the famous informant “MrWhite128” shared four photos of what is claimed to be the internal components of the Apple headset on social platforms, which also indicates that the release time of the Apple MR headset is approaching.

Apple MR will be the most complex consumer electronics product designed by Apple in its history, and the application of a large number of cutting-edge technologies will accelerate the innovation process of companies in the industrial chain.

Apple MR may become a game changer in the headset industry. According to The Information, the main body of Apple MR is made of aluminum, glass, and carbon fiber, weighs only 200-300 grams, and will have the following functional characteristics:

1. The battery is external and connected to the headband of the headset through a magnetic power cable. The battery lasts no more than two hours, but you can replace the battery yourself;

2. The dial on the right side of the headset can quickly switch between the virtual world and the real world;

3. Supports automatic pupil distance adjustment;

4. FOV (field of view) is 120°, exceeding Meta Quest Pro's 106°;

5. Using a dedicated ISP, the distorted image captured by the external camera is converted into a stable low-latency video image;

6. Equipped with a micro OLED screen with a monocular resolution of 4K, the screen may be provided by Sony;

7. Each eye is tracked by at least one camera, and the eye tracking function can also be used for point-of-view rendering;

8. Built-in more than ten cameras and sensors to capture facial expressions and body movements.

1.2. Apple's MR technology has significant advantages and is expected to lead the trend of industrial innovation

Apple headsets may be a game changer in the headset industry.The device will be the most complex consumer electronics product designed by Apple in its history, and is expected to lead a new round of the industrial cycle and drive supply chain innovation and development. According to Bloomberg, Apple's first AR/VR product, internally codenamed N301, will be the most powerful and most expensive device on the market. The first flagship product, named Reality Pro, will be released in 2023, and it is also planned to release another low-cost MR headset in 2024 or 2025.

Apple MR is expected to use a digital crown to quickly switch between AR/VR modes, making it the world's first headset device with this function.To enable Reality Pro devices to switch between virtual and real environments, Apple may add a digital crown (Digital Crown) knob similar to the Apple Watch on the right, which can quickly switch between AR/VR modes with one click. From a technical perspective, 6 to 8 optical modules on the headset device are mainly used to achieve position tracking and VST perspective. After the user switches from VR to AR mode, the virtual image will fade out of the factory, and the user will experience images combining the real environment around them with virtual messages and objects. This function will make Apple MR the world's first headset device capable of virtual and realistic switching.

Apple MR has significant advantages in the fields of hardware configuration, operating systems, and content applications.The Apple MR will be paired with two SONY 4K micro OLED screens, reaching 3,000 pixels per inch to achieve 8K ultra-high resolution. The outside of the headset will be equipped with an LG Display OLED display with an ultra-low refresh rate and lower power consumption. The external OLED display can show the wearer's expression status to the surroundings. Apple MR will adopt the “ultra-short focus optical folding light path” (Pancake) scheme, which is gradually becoming a trend, which can greatly reduce the size of AR/VR lenses. It has the advantages of better imaging quality, less image distortion, and adjustable refractive index, which will significantly improve the user experience and wearing comfort.

1.3. Hardware costs such as optical displays/chips/modules account for a high proportion of investment opportunities for domestic supply chain companies

Optical displays and modules account for the majority of headset hardware costs, and domestic companies have significant advantages in the supply chain.Judging from the hardware cost structure of headsets, optical displays, chips, and cameras account for relatively high costs, and the optical display cost of AR glasses is significantly higher than VR glasses. Among mainstream VR glasses, Meta Quest Pro accounts for 25% of optical display costs, and the cost of the chip, camera, storage and battery is 16%, 15%, 10%, and 5% respectively. The optical display cost of Pico's new product Pico4, which accounts for the highest proportion of domestic shipments, is significantly higher than the Quest Pro by 35%, while the cost of the chip, camera, and storage is 16%, 7%, and 10% respectively.

AR glasses generally account for a high proportion of optical display costs. Microsoft HoloLens accounts for 40% of optical display costs, 30% of chip costs, while domestic brand Huawei Vision Glass's optical display costs are as high as 72%. Looking at the global supply chain from the perspective of the global supply chain, Sony is ahead in the field of mico-OLEDs. Dali Light and Yujing Optoelectronics are leading in the field of lenses and pancake lens modules. Companies such as Gaowei Electronics, Zhaowei Electromechanical, and Changying Precision have strong competitive advantages in the fields of camera modules, pupil distance adjustment, and metal supports.

2. The new wave in the consumer electronics industry needs to be driven by popular products

The consumer electronics market needs to be led by popular products, and MR is expected to be Apple's Macintosh moment.Apple released the personal computer Macintosh in 1984, which is known as a critical moment in the history of personal computers. The Macintosh brought a revolutionary user experience and made the concept of “personal computer” become deeply entrenched in the hearts of the people. Bertrand Nepve, founder of VR startup VRVana acquired by Apple, said in an interview with Canadian television that the launch of Apple's first MR will be a “Macintosh moment.”

On 2007/1/9, when releasing Apple's first-generation iPhone, Jobs said, “An iPod, a phone, an internet mobile communicator... these are not three essential devices, this is one device, and we are calling it iPhone.” (An iPod, a mobile phone, an Internet communication device... (These aren't three separate devices; this is a device, let's call it iPhone.) The release of the iPhone completely changed the mobile phone industry, and at the same time led a huge wave in the consumer electronics industry.

2.1. The release of the popular product TWS earphones, leading a new cycle in the industrial chain

At the stage of a sharp increase in TWS headphone shipments, the stock index came out of a sharp rise.In September 2016, Apple released the first generation TWS headphone AirPods. In that year, only 9.18 million TWS headsets were shipped globally. After the Apple iPhone 7 removed the 3.5mm jack in 2017, the TWS headphone market developed rapidly, and global shipments of TWS headsets reached 300 million units in 2021. There was the first negative increase in TWS headphone shipments in 2022. The annual shipment volume was 288 million units, of which Apple shipped 91 million units, with a global share of 31.8%. It is estimated that in 2023, global TWS headphone shipments will be 281 million units, a growth rate of -2%.

Global TWS headphone shipments increased dramatically in 2017-2021. The TWS headphone index also experienced a sharp rise during this period, up 3.56 times. However, as global shipments peaked and declined, the TWS headphone index also showed a significant correction.

2.2. iPhones set off the smartphone wave, and industry chain companies fully enjoyed the development dividends

The release of the Apple iPhone blew up the smartphone market, and at the same time led the industry's 10-year boom cycle.Since the first iPhone was released in 2007, the global smartphone penetration rate has increased dramatically, from 9.6% in 2007 to 74% in 2015. During this period, Apple's stock price soared nearly eight times, far exceeding the NASDAQ index during the same period.

China's smartphone market is booming under Apple's leadership. The smartphone penetration rate rapidly increased from 15.8% in 2011 to 90% at the end of 2015. The stock price of Apple Chain companies also rose sharply during this period. Domestic Apple supply chain companies fully enjoyed the iPhone dividend with large-scale precision manufacturing capabilities, while also laying the foundation for the subsequent rise of domestic mobile phones such as Huawei and Xiaomi.The release of Apple MR will also lead a new preparation cycle in the industrial chain, and domestic precision manufacturing companies are expected to fully enjoy its development dividends.

3. AR/VR headsets will be a key entry point into the metaverse world

3.1. Building a metaverse industry chain from hardware and software to application services

Headsets will be a key hardware entry into the metaverse world.The metaverse industry chain consists of hardware, software, content production and distribution, applications and services. Among them, the hardware link includes core devices such as chips and sensors, and terminal devices such as PCs and smartphones, and headsets can bring users the most immersive sensory experience and will be the best terminal equipment to enter the metaverse world. On the software and content production side, content creation surrounding the metaverse is growing rapidly, and advances in AI technology will also enhance powerful tools for generating metaverse content and scenarios.

As a production tool, AI can be used to generate metaverse content and scenarios.Cloud universe company Roblox launches generative AI creation tool. Roblox has launched two AI tools, Code Assist and Material Generator. Users can instantly generate code through conversational AI and perform material design through description, which is expected to accelerate and simplify object design and deployment in the metaverse space.

3.2. Headsets will be the key link between virtual and real worlds

As a hardware entry point, headsets can enhance the human-computer interaction experience and become a key link between virtual and real worlds.Rapid advances in underlying technologies related to the metaverse, such as improvements in computing power infrastructure and breakthroughs in technologies such as artificial intelligence, blockchain, and human-computer interaction, have all laid the technical foundation for the popularization of virtual reality devices. The release of major headsets, led by Apple's MR, is expected to accelerate the interconnection of the virtual and real world. At the same time, Apple also has significant advantages in building a content ecosystem. Application scenarios such as education, medical care, finance, and industry on the To-B side continue to be implemented, while To-C games, cultural tourism, film and television already have a certain application base.

4. Global headsets are returning to the growth trend, and China is expected to become the fastest growing market

Global virtual reality equipment shipments have entered a period of rapid growth, and China is expected to become the fastest growing market.IDC determined that global shipments of AR and VR headsets in 2022 were 9.7 million units, down 12.8% year-on-year from 2021. At the same time, it believes that the growth trend will resume in 2023, while shipments will increase 31.5% year-on-year. IDC expects AR and VR headsets to continue to grow by more than 30% over the next few years, with shipments reaching 35.1 million units by 2026.

In terms of the Chinese market,According to IDC's forecast data, China's AR/VR market will maintain rapid growth at a CAGR of 42.2% in 2021-2026, surpassing eight other regions such as the US and Western Europe in terms of growth, ranking first in the world.IDC predicts that total global AR/VR investment is expected to increase to 50.88 billion US dollars in 2026, with a five-year compound growth rate of 32.3%. Among them, China's total AR/VR investment will exceed 12 billion US dollars in 2026, accounting for 24.4% of the world, and the market volume is second only to the US.

4.1. The industrial ecosystem continues to improve, and virtual reality ushered in the hardware era

A number of blockbuster products have been released one after another, and shipments of headset devices are expected to return to high growth.IDC predicts that global AR/VR equipment shipments will increase 31.5% year-on-year in 2023. CCS Insight predicts that global AR/VR equipment shipments will reach 11.4 million units in 2023, and XR equipment shipments are expected to reach 67 million units in 2026. According to RUNTO's forecast data, VR equipment shipments will exceed 10 million units and reach 12.7 million units in 2023, an increase of 40% over the previous year. TrendForce Consulting estimates that global VR equipment shipments will reach 10.35 million units in 2023, an increase of 20.6%.

The industrial ecology continues to improve,Meta/Headphones such as Sony/HTC/Rokid have all released major products.Meta, a leading headset company, launched a next-generation product, Quest 3 in 2023. Using the Pancake optical scheme, the Qualcomm XR2 Gen 2 chip, the left and right sides of the headset are equipped with a 6DoF positioning camera module on each side, which allows users to mechanically adjust the distance between the headset and eyes through buttons. Sony officially unveiled PS VR2 at CES 2023. It uses monocular 2K, binocular 4K resolution, 120Hz refresh rate, 110-degree field of view, and supports eye tracking and point-of-view rendering technology. HTC VIVE officially launched the first XR all-in-one VIVE XR Elite Package. It is equipped with an RGB color perspective camera that combines VR and MR functions, and is equipped with 4K resolution, 110 degree field of view, and a 90Hz refresh rate. The product can adjust the refraction of the lens, and there is a built-in pupil distance fine-tuning slider on the outside.

In the AR field, Thunderbird Innovation launched a new generation of binocular full-color microLED optical waveguide AR glasses, Thunderbird X2, at CES 2023, while RokID launched a new generation of consumer-grade AR smart glasses, RokID Max, which uses the BirdBath module to achieve an ultra-high-definition large screen effect, and supports a maximum 120Hz refresh rate.

4.2. VR all-in-one has become the mainstream product line in the domestic market, and Pico products occupy the largest market share

VR all-in-one devices are shipped more than one million a year, making it a mainstream product route.In 2022, China shipped 1.206 million AR/VR headsets, including 1.103 million VR units and 103,000 AR units. Among VR headsets, Standalone VR has shipped 1,014 million units, and Tethered VR has shipped 89,000 units. This is also the first time since the introduction of Standalone VR that it has broken the annual shipment volume of 1 million units in China. Judging from the Standalone VR product models, Pico Neo 3, Pico 4, Nolo CM1, Adventure Dream Pro, and Adventure Dream are the top 5 models shipped in 2022. The annual shipments were 50.5, 21.7, 6.6, 5.4, and 24,000 units, respectively.

5. China's virtual reality industry has entered a window for product upgrades and major development of integrated applications

5.1. Policies promote the integrated development of virtual reality and industry to empower economic transformation and upgrading

On November 1, 2022, five departments including the Ministry of Industry and Information Technology jointly issued the “Action Plan for the Integrated Development of Virtual Reality and Industry Applications (2022-2026)”. China's virtual reality industry entered a window for product upgrades and major development of integrated applications. The plan proposes goals such as the total scale of China's virtual reality industry reaching 350 billion yuan by 2026, terminal sales exceeding 25 million units, and cultivating 100 key enterprises.

Various regions have introduced action plans for innovation and development in the metaverse industry, and the industrial system has entered a stage of accelerated improvement.In July 2022, Shanghai released the “Shanghai Action Plan for Cultivating a New Track in the “Metaverse” (2022-2025), which proposes “using virtual reality” to cultivate and expand new momentum for metaverse development. It is the first complete metaverse development plan launched by a provincial administrative district in China. It proposes to promote the digital transformation of the metaverse to better empower the economy, life, and governance; strive to build 10 leading enterprises with international competitiveness, 100 “specialized and innovative” enterprises, and launch 50+ demonstration models, 100+ benchmark products and services by 2025.

On December 15, 2022, the Zhejiang Development and Reform Commission and 5 other departments jointly issued the “Zhejiang Metaverse Industry Development Action Plan (2023-2025)”, which proposes that by 2025, by implementing 5 key tasks and 5 key projects in the metaverse, 3 “1050” will be achieved: nurture 10 industry leading enterprises and build 50 “specialized, special and innovative” enterprises; promote 10 industry benchmark products, create 50 innovative demonstration application scenarios; build 10 industrial platforms to continuously enhance the level of industrial development and competitiveness.

5.2. Consumer applications are still the main battleground for AR/VR applications, and domestic financing in the digital human sector is quite active

Consumer applications are still the main battleground for headliners, and the commercial sector has great potential for expansion.From an end user perspective, the consumer market will still account for the largest share of the AR/VR market by 2026, accounting for 53.6%, followed by professional services, discrete manufacturing, and education. IDC expects the five-year CAGR of the consumer market to be about 57.5%, maintaining a high growth rate while maintaining a high market share. Looking at specific application scenarios, in addition to mature scenarios such as AR/VR games and VR video/programs, AR/VR is accelerating penetration in the fields of discrete manufacturing, education, and healthcare. Looking ahead to future application scenarios, AR is expected to expand in fields such as industrial maintenance, laboratory and field practice, and AR anatomical diagnosis; VR is expected to achieve breakthroughs in the fields of remote viewing, panoramic educational video viewing, and physical rehabilitation treatment.

Looking ahead to 2023-2026, China's AR/VR content and service markets will all achieve significant growth.According to iResearch's forecast, China's AR/VR content market is expected to increase dramatically from 10.39 billion yuan in 2020 to 106.2 billion yuan, an increase of more than ten times, while the service market will also soar from 1.13 billion yuan in 2020 to 23.96 billion yuan in 2026.

The domestic digital human sector financing incident far surpassed other links, and education and training developed rapidly in overseas markets.Judging from the structure of AR/VR financing events at home and abroad, the fields with the most financing incidents in overseas markets were concentrated in the fields of education and training, tool software, and games. The number of financing incidents was 27, 26, and 23, respectively. Funding incidents in the domestic AR/VR field are mainly concentrated in the fields of virtual images (digital people), AR headsets, optical devices, etc. Among them, the number of financing incidents in the virtual image (digital person) sector reached 23, far exceeding other fields, indicating that China's digital human resources industry has entered a stage of rapid growth.

6. Recommended direction for Apple's MR industry chain

The release of Apple MR and the gradual expansion of subsequent shipments will directly drive up order demand in the hardware industry chain. The continuous improvement of the VR/AR industry ecosystem will also drive the explosion of consumer and commercial content ecosystems in the fields of digital people, games, marketing, etc. At the same time, metaverse development is expected to accelerate with the support of popular hardware, increasing requirements for network latency and reliability, and driving demand for cloud infrastructure construction under the new traffic cycle.Optimistic: 1. Apple MR supply chain related components, production/testing equipment, and machine assembly companies; 2. Application development companies for digital people, virtual reality games, etc. that benefit from the continuous improvement of the content ecosystem; 3. Optical modules, optoelectronic devices, and sensor parts companies related to cloud infrastructure construction.

Recommended direction 1: Apple MR hardware supply chain

Recommended:Zhaowei Electromechanical(Microelectromechanical adjustment such as pupil distance adjustment),Huaxing Yuanchuang(silicon-based OLED screen testing equipment),Changying Precision(large and small structural parts),Lixun Precision(Machine assembly/SMT/structural parts/acoustics, etc.); Benefits: Gaowei Electronics (optical camera module), Desai battery (lithium battery), Smart Cube (space sensor testing equipment), JPT (lens inspection equipment).

Direction 2: Content Ecological Vendors

VR game and content producers (recommended:37 Mutual Entertainment/Gigbit/Kaiying Network/Mango Supermedia, Benefit: Baotong Technology/Shengtian Network/Bingchuan Network/NetEase, etc.); Digital Human Development (Benefit: Jebsen Corporation/Tianyu Mathematics).

Direction 3: Construction of cloud communication infrastructure under the new traffic cycle

Optoelectronic devices such as optical chips, optical lenses, sensors, etc. (recommended:Juguang Technology; Benefit: Yuanjie Technology), network communication equipment such as switches, servers, optical modules, and wireless devices (recommended:Guangxun Technology/Tianfu Communications/Optical Library Technology/Shijia Photonicsetc., benefiting: Zhongji Xuchuang/Huagong Technology/Ziguang Co., Ltd., Cambridge Technology, etc.)

7. Risk Reminder

Apple's MR launch was delayed and sales fell short of expectations; competition in the industry intensified.

Editor/Somer