Virtual Reality:From virtual to reality

In this report, we provide comprehensive analysis of virtual reality (VR) fromseveral aspects: the potential market size, the ecosystem, the participants, thebottlenecks and investible ideas. We conclude that the market is in its nascent stageand could register a 43% shipment CAGR and a 52% value CAGR during 2016-2020E. However, we believe VR’s application may be constrained to a niche marketfocus on gaming/entertainment, while other mass-market uses remain immature. Weestimate the VR market will reach $13.5bn in 2020E, vs $424bn for smartphones,$186bn for PC, $92bn for TV and $59bn for tablets in 2015.

What is VR? Virtual reality refers to a computer-simulated environment whichartificially creates the physical presence in the real or imagined word. The useris not only immersed within this environment, but is also able to manipulateobjects or perform a series of actions. Generally, a true VR experience shouldinclude 3D images in life-size from the users’ perspective, tracking systems todetect users’ motions, and the ability to reflect changes in perspective andprovide real-time feedback.

Smartphone-based VR may boost volume, but only PC/console-based VR is a‘real’ VR experience: We believe smartphone-based VR will see faster pick up,thanks to the lower price, cheaper and more available hardware support(smartphones), and the cable-less user experience. In addition to Samsung,Chinese vendors will be the major drivers (i.e. Baofeng, LeVR). However,handset-bundled VRs lack the ‘wow effect’, as the smartphone’s processor andGPU may not be as powerful as those in ultra-high PC and gaming consoles, andthe smartphone screen may not be comparable to customized VR OLED display.

As a result, we estimate smartphone-based VR to account for 30-35% of total VRrevenue in 2016, but believe the share will decline to 15-20% in 2020E.

Learn from the past & add more to the future: We think VR’s growthpattern may resemble that of successful game consoles in the past, as we believeVR focuses more on gaming/entertainment instead of general/business function.

The average five-year CAGR for Nintendo Wii, Xbox 360, and PlayStation 3were 63%, in line with our PC-based VR CAGR assumption but slightly lowerthan PS VR’s 70%. We believe innovative gaming devices could enjoy robustdemand for at least another five years. We identify a few major technologybottlenecks: image quality, wireless data transmission, motion sickness andhaptic simulation. VR devices available in the market may need to overcomethese areas to enable a truly immersive and interactive VR experience.

Stock implications: We think VR is promising in the way it innovated the waysin which humans interact with machines. However, it remains immaterial formost of the participants, and business models to monetize the development effortsremain drivers. HTC may generate 14% sales from Vive in 2016, but it still failsto offset the loss-making smartphone (here). Goertek (NC) is well positioned inthe VR market, while most of our coverage cannot derive >1% revenue. NVIDIAis the market share leader in GPU, although we believe VR will be more of aC2017 driver for the company. TSMC will be the ultimate beneficiary, in ourview, given robust demand for powerful chipsets and sensors (here).

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