Interpretation of Canaan Inc.’s 2021 annual report: Revenue of RMB 4.987 billion, where is the moat after record-breaking performance?

On March 3, Canaan Technology released its financial report for the fourth quarter of 2021 and its full-year financial report for 2021. The report showed that Canaan Technology's revenue in the fourth quarter of 2021 was RMB 2.1846 billion (US$342.8 million), a year-on-year increase of 5611.9% from the fourth quarter of 2020 and a quarter-on-quarter increase of 65.8% from the third quarter of 2021.

Throughout the year, Canaan Technology started low and ended high, achieving substantial performance growth for four consecutive quarters, with sales of 22.342 million T of computing power completed in the year, a year-on-year increase of 238.5%; revenue of 4.987 billion yuan, a year-on-year increase of more than 10 times, and a record high net profit of 2 billion yuan.

Canaan Inc. predicts that in the first quarter of 2022, the company's revenue is expected to reach RMB 1.5-1.6 billion, an expected year-on-year increase of 275%-300%.

After the results were announced, Canaan Inc.'s stock price surged by 20.88% at one point, and by the close of U.S. stocks it had risen by 15.53% to close at $6.25.

1. Impressive financial report

The financial report shows that Canaan Technology's revenue in the fourth quarter of 2021 increased from RMB 38.246 million in the same period of 2020 to RMB 2.1846 billion in the third quarter of 2021, up 5611.9% year-on-year and 65.8% month-on-month.

Canaan Technology explained in its financial report that the year-on-year and month-on-month growth was mainly due to the increase in total computing power sold and the increase in the average sales price per T.

According to the financial report, Canaan Technology's total sales computing power in the fourth quarter of 2021 was 7.738 million TH/s, a year-on-year increase of 3558.8% from the fourth quarter of 2020 and a quarter-on-quarter increase of 15.5% from the third quarter of 2021.

"For the first time, we have customers from emerging markets such as Malaysia, the United Arab Emirates, Argentina and Peru." Zhang Nangeng, chairman of Canaan Inc., said in an investor conference call that in the fourth quarter of 2021, although the currency price experienced relatively large fluctuations, Canaan Inc. further expanded overseas markets such as Southeast Asia and South America.

According to Zhang Nangeng, the proportion of computing power purchased by new customers reached 41%; at the same time, demand in several major traditional overseas markets such as Central Asia, North America, and Europe remained strong, and the proportion of computing power purchased by repeat customers reached 59%.

As of December 31, 2021, Canaan Inc.'s prepayments reached RMB 1.34 billion, a historical high, and the computing power of contracts to be delivered exceeded 6 million T.

Zhang Nangeng said that the company's pre-sale computing power data and the wafer factory's locked-in production capacity for this year also allow the company to maintain confidence in its revenue in the future period.

2. Where is the moat?

The development of the company's business is inseparable from investment in research and development.

Financial report data shows that the company's R&D investment reached RMB 332.8 million in 2021, an increase of 137.7% from RMB 140 million in 2020.

As of the fourth quarter, the number of R&D personnel increased by 99% compared with the same period last year. At the same time, the share-based payment expenses generated by the restricted stocks granted by the company were approximately RMB 491.5 million.

Zhang Nangeng said that Canaan Technology will continue to deepen its presence in the industry and provide better products for miners. The company will disclose the specific performance parameters of the new generation of mining machines after the chips are successfully cast and returned and the whole machine is tested.

As investors are concerned about some large companies entering the cryptocurrency mining chip industry, where is Canaan Inc.'s moat?

Zhang Nangeng answered in an investor conference call that in the cryptocurrency mining chip segment, Canaan Technology has mastered many core technologies, patents and other technical moats after years of accumulation.

According to Canaan Technology, as of December 31, 2021, Canaan Technology has a total of 156 authorized patents, 70 IC chip layout design rights and 105 software copyrights.

"The supply chain has also been continuously optimized in recent years." Zhang Nangeng further explained that healthy cash flow and the mining business can effectively smooth out the risks of the supply chain.

Zhang Nangeng pointed out that by expanding the global market, Canaan Technology's relationship with customers has evolved from simple mining machine sales to joint mining, and the interests are more closely bound.

"Over the past nine years, Canaan has accumulated operational experience and capabilities from upstream supply chain management to downstream markets amid the drastic fluctuations of Bitcoin. It is able to flexibly adjust according to the fluctuations in Bitcoin prices, strategically differentiating risks and seizing opportunities to form a three-dimensional moat."

3. Mining is a long-term strategy

Previous second quarter 2021 financial reports showed that starting from the second half of 2021, the company plans to deploy no less than 10% of its monthly production capacity for self-operated mining each month. The specific actual deployment quantity will be adjusted based on the progress of the cooperative mining farms, currency prices and production conditions.

The financial report shows that the mining business in Kazakhstan in the fourth quarter of 2021 was faced with multiple challenges such as the epidemic, poor logistics, and tight electricity supply in winter, but the company still completed the deployment of machines at its partner site in Kazakhstan.

"Despite facing many challenges, the company still regards mining business as a long-term strategy of the company." Zhang Nangeng stated in an investor conference call that the company will continue to leverage its advantages in mining machine supply and dynamically adjust production capacity between sales and mining business through a broader layout and deeper cooperation to improve operating efficiency.

According to Zhang Nangeng's disclosure at an investor conference call, as of December 31, 2021, Canaan Technology had deployed 1.12 million T of mining computing power, and as of February 28, 2022, the deployed mining computing power had reached 2.38 million T.

Zhang Nangeng said that in 2022, the company will continue to deepen its chip design and improve product performance. It will explore service methods that are closer to customers, including machine research and development, manufacturing, transportation and after-sales service; in 2022, the company will further use pragmatic, flexible and resilient operating methods to deal with uncertainties. The company will respond to changes in the industry market and fluctuations in currency prices with continuous and stable supply, balance the sale of mining machines and mining business, and maximize profits.

Based on the current judgment of the company's management, Canaan Technology predicts that the company's revenue in the first quarter of 2022 is expected to reach RMB 1.5-1.6 billion, an expected year-on-year increase of 275%-300%.