Mining machines “lose money as soon as they are sold”, Ebang International fell 4.4% on its first day of listing, where is the hope for mining machine stocks?

Text | Huang Xuejiao

Editor | Mandy Wang Mengdie

Produced by | Odaily Planet Daily (ID: o-daily)

At 9:30 p.m. on June 26, Ebang International “ringed the bell online” in Hangzhou and officially landed on the Nasdaq, becoming the “second mining machine stock” after Canaan Creative.

Its stock code is EBON, and it sold 19.26 million common shares at a price of $5.23 per share, with a total fundraising scale of approximately $100.75 million and a total market value of $685 million.

After the opening, the price of Ebang continued to fall, reaching a low of $3.81, and finally closed at $5, a drop of 4.4%. This was in stark contrast to another Chinese concept stock, API, which went public in the United States on the same day and soared by more than 150%.

Unlike the listing of Canaan, the "first mining machine stock" that was in the spotlight in the industry at the end of last year, the listing of Ebang did not stir up much public opinion. For this mining machine stock with a price-to-earnings ratio of -14.6, many opinions have clearly expressed pessimism.

Among the leading miners, Ebang International has obvious shortcomings: its mining machine performance is at the bottom, its large customer sales model is risky, and its sales network needs to be expanded. Compared with Canaan Creative, Ebang International also has a significant gap in its operational capabilities to sell inventory and collect final payments.

Canaan, which is deeply mired in public opinion and class action lawsuits, and whose market value has fallen by 78% from its listing, has also made the "mining machine stocks" track itself questionable. With gross profit, net profit and PE both negative, Bitcoin production halved and the price of the currency showing no improvement, and the argument that "mining machines are already a sunset industry", how to get investors to pay for the "supercomputing story" is the top problem.

However, Odaily Planet Daily found that the content related to Ebang's listing currently circulated in the media still contains a lot of biased analysis, misinterpretation of data, and lack of understanding of the mining machine industry.

For example, Yibang International has a certain proportion of debt in its operations, but it is still within the normal range, and the customer lawsuits that some investors are worried about will not affect Yibang International's fundamentals.

Therefore, in this article we will make a comprehensive interpretation of the "second mining machine stock" from the perspective of data information, business development, and industry prospects.

Which of these two mining machine stocks is worth buying?

As the "second mining machine stock", people can't help but compare it with Canaan Creative, the "first mining machine stock".

Ebang International was founded in 2010 and initially focused on the research and development of communication network access equipment. By the end of 2016, when the bitcoin bull market was just beginning, it launched its first bitcoin mining machine, about four years later than Canaan Creative.

The two companies were almost in step with each other in going public. From seeking to go public in Hong Kong to now both listing on Nasdaq, and as the first mining companies to disclose their latest performance, we can see some interesting phenomena in the horizontal comparison between the two.

(1) Market value

Recently, the industry often uses "Ebang = half of Canaan Creative" to describe the relationship between the two.

Canaan Inc. was listed on the Nasdaq on November 20, 2019, Eastern Time, with an issue price of US$9 per ADS (American Depositary Share). The price has plunged several times and shrunk severely. To date, the current price has fallen by more than 78% compared to the issue price.

In terms of total assets, Ebang International's liabilities and shareholders' equity totaled US$82 million, accounting for approximately 59% of Canaan Creative's total assets. Canaan Creative's market value after its IPO was US$1.4 billion, twice that of Ebang's market value after its IPO.

After the first day of trading, Ebang’s market value was US$655 million. Due to the continuous shrinking of Canaan’s market value, Ebang’s current market value is 2.2 times that of Canaan.

If you really want to bet on the mining machine track, compared to buying Ebang International, Canaan Creative's current market value of US$300 million can be described as a "value trough."

(2) Business structure

For both mining companies, mining machine sales and related revenue account for a very high proportion.

The prospectus shows that in the past two years, mining machine sales have accounted for more than 99% of Canaan's total revenue, while Ebang International's mining machine and accessories sales revenue has dropped significantly, from 96.3% in 2018 to 82.4% in 2019. At the same time, the proportion of mining machine operation and maintenance revenue has increased significantly, from 2.6% to 14.5%, and the proportion of non-mining business (telecommunication equipment sales) revenue has also increased slightly, from 1.2% to 3.1%.

Because Ebang International’s mining machine sales account for a low proportion, some people believe that it has a low dependence on the Bitcoin mining industry, which is actually not true.

The prospectus shows that in 2019, Ebang International's revenue from mining machine sales was US$109 million, and its mining machine hosting and operation and maintenance business revenue was US$15.7 million, which together accounted for 96.9% of Ebang International's total revenue. Although they are in different links of the mining industry chain, they are all deeply affected by the rise and fall of the mining industry.

Especially from last year to this year, when the old mining machines were replaced with new ones, one high-computing mining machine could replace four low-computing mining machines, and there was a clear surplus of mining farms used to host mining machines. Therefore, Ebang International does not necessarily have much room for growth in expanding its mining machine operation and maintenance service line, nor can it build a moat for its business.

Therefore, the statement that Ebang International's business is more diversified than Canaan Creative is just a superficial statement.

(3) Business performance

As can be seen from the figure below, Ebang International's sales revenue fell sharply in 2019, from closely following Canaan Creative's performance in 2018 to only half of Canaan Creative's performance.

The most striking performance of the two companies is the gross profit margin, net profit margin and year-on-year data, all of which are negative, which means that the two companies lose money every time they sell a mining machine.

But they are not exactly the same. Ebang International's net profit was negative in 2018, and its gross profit was very low. Compared with Canaan Creative in the same period, it can be seen that Ebang International's sales costs and operating costs are higher.

This year, the situation began to reverse. With the decline in revenue, Ebang International's sales costs and operating expenses also decreased accordingly. However, Canaan Creative's operating costs only decreased by 11.77% while its revenue decreased by 47%, and its operating expenses increased by 43.57%. The corresponding net profit margin also reached an astonishing -72.7%. Therefore, Canaan Creative's possible problems such as improper cost control and poor management have also been criticized.

In its prospectus, Yibang International said that the company's net loss this year expanded 3.5 times due to a significant reduction in tax rebates from local governments.

According to its prospectus, in 2019, Ebang International received less than $10,000 in VAT refunds, while in 2018 it received $27.36 million, close to the amount of losses. However, it is normal for companies to pay taxes, and tax incentives are short-term dividends that cannot last long. Ebang International should take countermeasures early.

(4) Operational capabilities

Other indicators that test a company's operational capabilities include: inventory turnover, accounts receivable turnover and total asset turnover.

Comparing several data of Canaan Creative and Ebang International, we can see that Canaan Creative's inventory is sold quickly, the final payment is collected quickly, and the capital utilization rate is high, which reflects its higher position in the industrial chain and more efficient operation.

Yibang International Financial Report, Source: Eastmoney.com

Canaan Creative’s financial report, source: Eastmoney.com

Potential risk analysis, who is real and who is fake?

After going public, Canaan's first quarter performance "changed", coupled with the "financial fraud" lawsuit, Canaan's stock price has fallen to 21% of the issue price. The poor performance of the big brother "Canaan" made investors worry whether Ebang International will be worse. Indeed, the future performance of mining machine stocks is not optimistic from all aspects.

(1) The least competitive mining machine

As shown in the above figure, Ebang International's Ebit mining machine has the smallest computing power (up to 44Th/s) and the highest energy consumption ratio (57W/J, the lower the better), which puts it at a clear disadvantage among the leading miners; its market share (5.76%) is only half of Canaan Creative's.

Historically, the performance of Yibit mining machines has lagged behind that of leading miners most of the time.

Changes in mining power consumption (J/T) of the five major mining machine brands, source: mining company official website, produced by: BitMEX Research, data as of: June 2020

(2) To B sales model

All along, Ebang International's sales model has been oriented towards enterprise-level customers. Its prospectus shows that all of Ebang International's mining machines are sold directly, without any distributors, agents or channel dealers.

What is very interesting is that in the two years of 2018 and 2019, the top three customers contributed 34% of Yibang International’s revenue, and the top ten customers contributed 57%.

The advantage of the model targeting large customers is that the sales cost is low, but the profit is low and the dependence is high. Once the customer is lost, the loss will be heavy.

(3) Debt-financed operations

In its updated prospectus on June 17, Ebang International raised the maximum amount of funds raised from US$100 million to more than US$144 million, which was interpreted as "Ebang International urgently needs short-term financing." Other media cited its large-scale borrowings (countable outstanding loans amount to US$32 million) as evidence.

But that may not be the case.

Let’s first look at the proportion of Ebang International’s debt-ridden operations.

The prospectus shows that as of December 31, 2019, Ebang International's total liabilities reached 57.04 million, a decrease of 30% from 2018; at the same time, the debt-to-asset ratio reached 69.05%, an increase from 2018, which is quite high compared to Canaan Creative's 30.12%.

But there is no doubt that mining machine production is a business with high investment and long cycle, and debt operation is inevitable.

The prospectus shows that as of December 31, 2019, Yibang International had inventory and accounts receivable of US$62.45 million, which exceeded the total liabilities, and the cash conversion cycle of accounts receivable and inventory was 50-130 days, which means that the US$60 million has most likely been converted into cash flow.

Let's take a horizontal look at Canaan Creative before its listing. In 2018, it had new loans of US$276 million and an asset-liability ratio as high as 82.8%. After its listing, at the end of 2019, the debt-raising phenomenon eased and the asset-liability ratio dropped by 3/4.

(4) Litigation is not a serious problem

At the time of its listing, Ebang International still had a number of pending lawsuits, and many analysts believed that the decisions of these lawsuits would bring uncertainty to its stock price.

But the dispute does not mean that Yibang International is at a disadvantage.

Many of these disputes are lawsuits filed by Yibang International’s customers regarding disputes over product quality, delivery, etc.

Let’s look at a closed lawsuit. On September 3, 2018, a customer filed a civil lawsuit with the Hangzhou Intermediate People’s Court, alleging that Ebang International had (1) delayed delivery of some products in a $1.9 million order in December 2017; and (2) the products failed to meet the advertised performance, and claimed $7.7 million in damages from Ebang.

On November 5, 2019, the Hangzhou Intermediate People's Court rejected most of the plaintiffs' requests and only ordered Zhejiang Ebang to pay the plaintiffs' liquidated damages and logistics expenses totaling US$26,000. The plaintiff's second lawsuit was also rejected.

This just shows that mining machine manufacturers have a greater say in the industry due to their concentration and monopoly. Also, since mining machine products have no industry standards and no laws to rely on, it is difficult for users to protect their rights. Odaily Planet Daily once reported on Bitmain's "problematic mining machines" worth tens of millions of yuan, and miners have not received clear legal support so far.

Therefore, most order disputes are not enough to affect Yibang's fundamentals.

(5) Is mining machinery a sunset industry?

At a time when block production is decreasing, coin prices are flat for a long time but participants continue to increase their investment, Bitcoin mining is gradually reaching its ceiling.

According to a report by Frost & Sullivan, the global market size of Bitcoin mining machines has grown from RMB 1.1 billion in 2014 to RMB 21.4 billion in 2018, with a compound annual growth rate of 110%. In the next five years (2023), the market size of Bitcoin mining machines is expected to reach RMB 31.7 billion, with a compound annual growth rate of 8.2%.

From a growth of 100% to a gross profit of less than 5% and negative net profit, the manufacturer that was once the "mining tyrant" is no longer as legendary as before. The industry's rise still needs to observe the "currency" and "price", but I am afraid that the long sideways and bear market will make investors lose patience.

Yibang development roadmap and concept stocks

In January 2010, Zhejiang Yibang Communication Technology Co., Ltd. was established. It mainly engages in the production and development of communication network access equipment. It began to develop BPU in 2014 and was listed on the New Third Board as "Zhejiang Yibang" in 2015. By the end of 2016, it released its first Bitcoin mining machine Yibit E9+ and entered the market. Yibang, which successfully boarded the bull market express train of the currency circle, was delisted from the New Third Board in early 2018. After restructuring, it switched to the Hong Kong stock market, but submitted two listing applications but both ended in failure.

On April 24, 2020, Yibang International’s prospectus for listing in the United States was disclosed and updated on June 19.

Odaily Planet Daily has made a comprehensive statistics of mining concept stocks in the A-share market. Among them, Yinjiang Shares (SZ300030), Huatie Shares (SH603300) and Zhongying Internet (SZ002464) are strongly related to Ebang International.

Yinjiang Co., Ltd. and Huatie Co., Ltd. have seen encouraging growth since June, with the highest increases reaching 20% ​​and 25% respectively, but this was mainly due to the positive impact of their main business.

Whether Ebang International can deliver a different answer from the “first mining machine stock”, the market and time will give the final result. And the time window left for Bitmain, another mining machine giant that has also sought to go public several times, is not too long.