Lenovo:AR is taking effect

Event

As we highlighted in June, Lenovo launched the global first AugamentedReality (AR) smartphone (Figs 1-3). Although we don't expect a high entrybarrier to equip with this advanced application, we appreciate Lenovomanagement's consistent commitment to enhance its smartphone business(US NDR report, link, Jun 18) and we are impressed by new advancedtechnology links to Lenovo for the first time. We expect Lenovo's brandawareness and margin to improve by reducing operator channels (lowerASP/margin and hurting brand).

We reiterate our non-consensus Outperform rating with a PT of HK$8.80(TSR 79%). Key beneficiaries in AR phones include advanced cameramodule suppliers such as Sunny Optical (2382HK, HK$28.60, Outperform,TP: HK$32.00) (New features, link, Jun 16).

Impact

AR phone – no need to block your eyes: More than presenting 3D images,the core value of AR phones is the ability to overlay virtual objects or info /data to real world. For example, before purchasing appliances or furniture,end users could use AR phones to remodel by virtually envisioning how it willlook in their house. Potential applications for AR phones include gaming,online shopping, education, tourism, etc. (Figs 5~12)

. Lenovo's paving the way in both hardware and software: Lenovoshowcased Phab 2, the global first AR smartphone, in Jun and the model isexpected to be available in late 2016. The company also has invested iniDreamsky (DSKY US, NR) via LeFund, an angel investment agency underLenovo group. iDreamsky Game is the largest mobile game platform in Chinawith ability to develop AR games.

AR vs VR; more mobility, larger market: Recent Pokemon Go fever(Nintendo, David Gibson, Jul 15) Nintendo (7974JP, ￥31,770, Outperform,TP: ￥21,300) has driven the Street's interests in the AR area. Unlike VirtualReality (VR), targeting to send end users into a virtual world, AugamentedReality (AR) focuses on bringing virtual objects into our real world. In otherwords, AR does not require a full immersion feature and thus does not needhead-mounted displays, allowing more mobility and thus embracing a largermarket. Digi Capital expects the AR market size to reach US$120bn by 2020with VR only at US$30bn.