Ebang International's stock price fell below the IPO price immediately after its IPO. Why did the Bitcoin mining machine giants all wilted?

From its heyday to its decline, Ebang International, the world’s third largest mining machine giant, saw its stock price fall below the IPO price.

On the evening of June 26, the grand scene of Hangzhou Qiantang River InterContinental Hotel was restored. Half a year ago, Canaan Creative, the "first Bitcoin mining machine stock", held a listing celebration banquet here. Now, it has once again witnessed the Nasdaq "cloud ringing bell" moment of the second mining company, Ebang International.

For Ebang International, this listing was not easy to come by. It had failed twice on the Hong Kong Stock Exchange. During the preparation period for the listing, negative news involving lawsuits came out one after another. Although it coincided with the embarrassing moment of the "post-Luckin Coffee era" of Chinese stocks, it finally realized its dream of listing on the Nasdaq.

However, the two miners who chose to celebrate at the same hotel also showed a great tacit understanding in their stock prices after their listing.

The issue price of Yibang International was US$5.23. After the opening on the first day, it quickly fell below the issue price to US$4.60 and continued to fall, reaching a low of US$3.81, a 27.15% plunge compared to the issue price. The final closing price was US$5.

Canaan Creative, which was listed on the Nasdaq in November last year, had an issue price of US$9. Now its share price is less than US$2, a decrease of nearly 80%.

Why did the Bitcoin mining machine stocks, which once created myths such as doubling revenue in three years and gross profit of more than 50%, collectively wither? When the mining industry recedes, how to tell a new story to make investors pay is becoming an urgent matter for Bitcoin miners after going public.

The listing process was full of twists and turns, and the company was rejected by the Hong Kong Stock Exchange twice.

Ebang International was established as early as January 2010. Its main business in the early stage was the production and development of communication network access equipment. It was listed on the New Third Board in 2015. At the end of 2016, Ebang International launched its first Bitcoin mining machine, Ebit E9+. After the bull market in 2017, Ebit E10 performed outstandingly, thus establishing its top three position in the mining industry.

In March 2018, Ebang International believed that the liquidity of the New Third Board was no longer suitable for its business development, so it delisted from the New Third Board and prepared to reorganize and list in Hong Kong. In June of the same year, Ebang International submitted its first listing application to the Hong Kong Stock Exchange.

At that time, the P2P platform "Yindou.com" was under investigation for suspected illegal fundraising. There were large amounts of financial transactions between Yibang International and Yindou.com, and it was revealed that Zhu, a person involved in the Yindou.com case, was a shareholder of Yibang International's parent company.

According to media reports, the huge amount of funds was suspected to be used to inflate Yibang International's sales revenue to help it successfully list in Hong Kong. Although Yibang firmly denied this, Yibang International, which was involved in a huge illegal fund-raising case, had its hopes of listing in Hong Kong dashed.

In December 2018, Ebang International submitted a new draft IPO application to the Hong Kong Stock Exchange. Six months later, when checking the official website of the Hong Kong Stock Exchange, Ebang International's listing application had been classified as "invalid", and the road to listing ended in failure again.

It is not just Ebang International that was rejected by the Hong Kong Stock Exchange. Bitmain and Canaan Creative, two other leading mining companies, were also rejected by the Hong Kong Stock Exchange. The common reason is that they do not meet the core principles of listing suitability of the Hong Kong Stock Exchange.

In response to this, Hong Kong Exchanges and Clearing Limited Chairman Li Xiaojia responded at the 2019 Davos World Forum, in which he implicitly pointed out that the Bitcoin mining machine business is not sustainable and its fate is in the hands of regulators.

Losses continue to expand, mining machine sales are "living off old capital" and are unsustainable

Li Xiaojia's judgment is not without reason.

Its pessimism about mining stocks has been verified in the latest prospectus submitted by Ebang to the U.S. Securities and Exchange Commission (SEC), which shows that they are extremely dependent on the price of Bitcoin and have weak self-generating capabilities.

According to the prospectus, Yibang International's revenue in 2019 was US$109.1 million, a year-on-year decline of 65.83% compared to US$319 million in 2018.

In its prospectus, Yibang International stated that the decline in the company's revenue was due to the drop in Bitcoin prices and the decline in expected economic returns from mining, which resulted in the sales of mining machines falling from approximately 400,000 units to 300,000 units in 2019.

Against the backdrop of declining revenue, Yibang International's gross profit margin has declined year by year, from 7.6% in 2018 to -28% in 2019.

At the same time, Ebang International's net loss also expanded 3.5 times from US$11.814 million in 2018 to US$41.073 million in 2019. In the prospectus, Ebang International stated that the main reason for the loss was that due to the decline in sales, Ebang International's VAT refunds were greatly reduced. It is reported that Ebang International received less than US$10,000 in VAT refunds in 2019, while the refund in 2018 was as high as US$27.36 million, and the difference was almost the extent of the loss.

The above data shows that Ebang, whose mining machine sales account for more than 80% of its revenue, is severely constrained by the price of Bitcoin, especially the sharp drop in the price of Bitcoin. It also stated in its risk disclosure that if the Bitcoin mining machine market no longer exists or significantly decreases, Ebang's international business, operations and financial conditions will be significantly frustrated.

This is the tragedy of all miners whose mining machines account for too high a proportion of their revenue. However, for Ebang International, the fact that Bitcoin's market performance has not met expectations has had a significant impact, but the competitiveness of its products is also lagging behind the top miners in the same period.

In terms of its core product, mining machines, the main mining machine products currently provided by Ebang International are Ebit E9+, Ebit E9 series, Ebit E10 series, Ebit E11 series, and Ebit E12.

F2pool data shows that the top ten popular BTC mining machines are all occupied by competing products such as Antminer, Shenma Miner and Hummingbird Miner series. Its Ebit series has no advantage in computing power and mining machine power consumption ratio. As the most popular product of Ebang International, the Ebit E11 released in October 2018 is also out of the top 20.

In the rapidly iterating mining machine market, it is clear that Ebang International can no longer survive by relying on its old capital.

The company is struggling with high debt and is heavily dependent on major customers.

It is also worth noting that the mining machine industry chain, which requires heavy investment and long cycles, is destined to make it difficult for miners to quickly recoup their investments, and "debt-financed operations" have become the norm for miners.

Among the leading mining companies, Yibang International is particularly debt-ridden, as reflected in its debt ratio, cash flow and accounts receivable data.

As of the end of 2019, Ebang International had cash, cash equivalents and cash for restricted purposes of US$5.77 million. In comparison, Canaan Creative had cash and cash equivalents of US$74.2 million during the same period.

The shortage of cash flow has forced Yibang to frequently borrow from outside. From 2018 to 2019, in addition to borrowing from commercial banks and credit companies, Yibang International's main loans came from companies controlled by several relatives of its actual controller Hu Dong, including a loan of US$24.1 million from Hong Kong Dewang Co., Ltd. controlled by his relatives, and an interest-free loan of more than 7 million from Zhejiang Wansi Computer Manufacturing Co., Ltd. controlled by his spouse.

In 2019, Ebang International's total liabilities reached 57.04 million, which was 30% lower than that in 2018, but its debt-to-asset ratio reached 69.05%, which was higher than that in 2018. In contrast, Canaan Creative's debt ratio was 30.12%.

Its operating conditions are not only affected by the Bitcoin market, but one of the main reasons is that Yibang International has disadvantages in its operational capabilities of selling inventory and collecting final payments in the mining machine product chain.

Comparison of operational capabilities between Ebang International and Canaan CreativeComparison of operational capabilities between Ebang International and Canaan Creative

The main reason may be that Yibang International relies on the business structure of major customers. According to the prospectus, in 2018 and 2019, the top ten customers of Yibang International contributed about 57% and 58% of its revenue respectively. But at the same time, accounts receivable are also concentrated in a limited number of customers. As of December 31, 2018 and December 31, 2019, 33% and 15% of Yibang International's total accounts receivable came from the same customer, and about 71% and 42% of the accounts receivable came from three customers respectively.

Reliance on a limited number of major customers increases credit risk. If any of them reduces or ceases business cooperation with Yibang International, accounts receivable and collection cycle will be affected accordingly.

As of the end of 2019, Yibang International still had other payables of RMB 13.739 million and accounts payable of US$11.832 million.

The prospectus also disclosed that the global outbreak of the coronavirus COVID-19 and the halving of Bitcoin mining rewards, which reduced the expected economic returns of mining, have led to an increase in the proportion of Ebang International's sales on credit and a decrease in the proportion of sales paid in full, thereby further lengthening the collection cycle.

At present, how to control the purchase of main raw materials for mining machines and reduce inventory, as well as propose a mature credit purchase policy for customers, is becoming an urgent matter for Yibang International.

The three major mining companies have all turned around. Which one is more attractive, AI or digital currency exchanges?

It's not just Ebang International that is having a hard time. Two other highly-watched mining companies, Bitmain and Canaan Creative, are facing similar challenges.

In 2017, Bitcoin once reached the 20,000 US dollar mark. Under the surge in prices, the demand for mining machines in the market grew almost exponentially, giving rise to the birth and rise of a number of mining unicorns.

Take the top three mining companies as an example: According to Bitmain co-CEO Zhan Ketuan, Bitmain's revenue in 2017 was approximately US$2.5 billion (approximately RMB 15.8 billion). In terms of revenue, it had surpassed Spreadtrum at that time to become the second largest IC design company in mainland China after Huawei HiSilicon.

Canaan Creative has witnessed a hundred-fold growth myth. Its prospectus shows that its revenue in 2017 was more than 27 times that of 2015. Its net profit was only 1.51 million yuan in 2015, but it soared to 361 million yuan in 2017, a 238-fold increase in three years.

Yibang International's performance also soared. Yibang International's net profit soared from 92.14 million yuan in 2015 to 978 million yuan in 2017, a 14-fold increase.

The revenue growth rate is fast, the profit growth rate is even faster, and the sales scale has expanded to dilute the R&D expenses, which has led to a rapid increase in the gross profit margin of miners. According to Jiemian News, the gross profit margin of selling a Bitcoin mining machine in 2017 was as high as 50%.

However, after 2017, although the price of Bitcoin rebounded after a rapid decline, it has not reproduced the high point of 2017. It is still a little difficult to break through the $10,000 mark. In the mining machine market where supply already exceeds demand, the halo of miners who lack a second engine to drive rapid growth in performance is gradually fading.

In addition, as Bitcoin enters its production reduction season and miners and mining farms further increase their requirements for the computing power of mining machines, the performance growth of Bitcoin miners has reached a "ceiling."

When the mining machine story is no longer attractive, Canaan Creative, which was the first to enter the capital market, could not escape the dilemma of having its stock price halved and being shorted twice.

Cai Kailong, a senior researcher at the Institute of Financial Technology at Renmin University of China, pointed out: "Whether it is the continued decline in stock prices or the short selling by institutions, Canaan's experience shows that the capital market is concerned about the risks of mining machines, a special business. If Ebang International cannot make innovations and breakthroughs in products and businesses, then after listing, it is likely that its stock price will be sluggish like Canaan Technology, or even shorted."

In fact, like Bitmain, Canaan Creative has already laid out its AI strategy early on, but with little success.

A short-selling report on Canaan Creative pointed out that Canaan Creative currently has problems such as low profit margins for mining machines, failure in its transformation to AI chip business, and unreasonable market value.

Bitmain, which has not yet gone public, is now caught up in a power grab by its founder. In October 2019, co-founder Zhan Ketuan posted a message on WeChat Moments, saying that he was "replaced as the legal representative" without knowing it while on a business trip, and said he would take legal action to return to Bitmain.

An insider close to Bitmain once told Interface News that the main reason why Zhanketuan was expelled was that another co-founder, Wu Jihan, believed that the AI ​​business that Zhanketuan had devoted all his efforts to building had not made any progress; and the obsession with AI also made Bitmain slow in the iteration of mining machines, thus being seized by the competitor Shenma Mining Machine.

What will Ebang do? In its prospectus, Ebang International proposed the following routes, including expanding overseas business and new business, vigorously developing mining machine hosting business, reducing the proportion of domestic customers and mining machine sales business; developing and introducing new mining machines, including 5nm ASIC chip mining machines with higher production performance, and mining machines for currencies other than Bitcoin, to reduce dependence on Bitcoin.

What attracted the most attention from the market was that Ebang International did not mention its AI business, but instead placed its growth point on digital currency exchanges, that is, opening digital currency exchanges for overseas users.

In the industry’s view, digital currency exchanges are highly profitable, but the field is already crowded enough. In addition, there are great regulatory risks, and the prospects remain to be seen.

For Yibang International, going public may ease its financial constraints and allow it to breathe a little, but this is far from being a peace of mind, and more difficult days may be ahead.