Canaan's performance is changing rapidly, and it may be missing the best time to "shift mining gears"

On the evening of April 9, Canaan Creative, which had been listed on the Nasdaq for less than half a year, released its first "report card".

According to the 2019 financial performance report (unaudited) released by Canaan Creative, the company's annual operating income was approximately US$204 million (approximately RMB 1.423 billion), a year-on-year decrease of 47.41%. The net loss in 2019 was approximately US$149 million (approximately RMB 1.034 billion).

Judging from last year’s performance, Canaan Creative’s revenue not only fell back to the level of 2017, but its net loss also hit a record high.

Although Canaan explained in its financial report that the main reason for the decline in the company's full-year revenue in 2019 was the decline in the sales price of mining machines due to the decline in Bitcoin prices.

But in fact, the impact of currency price fluctuations is not the fundamental reason for its losses. The bigger bottleneck Canaan Creative is currently facing is that competitors such as Shenma Mining Machine have come from behind. At the same time, because 7nm chip mining machines have been delayed in mass production and 8nm chip production capacity is in short supply, Canaan Creative is missing the best opportunity to "shift gears in mining."

Canaan falls behind as performance changes

In the 2019 prospectus, Canaan Creative's performance once showed signs of recovery.

The prospectus shows that in the first three quarters of 2019, Canaan Creative's operating income was 47.218 million yuan, 240 million yuan, and 670 million yuan, respectively; the net profit in the first three quarters was -67.857 million yuan, -263 million yuan, and 94.625 million yuan, respectively, and the company had turned losses into profits in the third quarter.

But in the fourth quarter, the performance losses began to intensify again. According to the financial report, in the fourth quarter of 2019, Canaan Creative achieved operating income of 463 million yuan, a decrease of 30.9% from the previous quarter; not only that, its net loss in the fourth quarter was as high as 798 million yuan, and the fourth quarter accounted for 77.2% of the net loss in 2019.

Why did Canaan Creative’s performance change so quickly after its listing?

In the financial report, Canaan Creative gave two explanations: First, the revenue cost increased significantly in the fourth quarter of 2019, which was mainly due to the write-down of inventory and prepayments by RMB 729 million. This was due to the sharp drop in the price of Bitcoin during the entire period of financial statement issuance, which led to a decline in the demand for mining machines and the selling price of mining machines.

This means that in the fourth quarter of last year, Canaan Creative cleared a large number of inventory products at low prices. In fact, Canaan Creative has been destocking since the beginning of 2019. According to Wu Blockchain, Canaan Creative's inventory was 585 million yuan at the end of 2018, and it had dropped to 196 million yuan at the end of 2019. Analysts believe that the large-scale dumping of inventory is one of the main reasons for the decline in its revenue level.

In addition, in terms of supplier advance payments, since upstream chip supplier wafer fabs generally give priority to supplying customers who pay in advance, after Canaan Creative's chip supplier changed in the fourth quarter of last year, in order to speed up the mass production of higher-power mining machines, Canaan Creative needed to pay more advance payments to the new upstream wafer fabs, which further increased quarterly operating costs.

In addition to the increase in operating costs, another explanation given by Canaan Creative was that Canaan Creative spent an additional RMB 247 million in equity incentive expenses in 2019.

However, Interchain Pulse noticed that in addition to the above two internal factors, in terms of external competition, Canaan Creative has to face the challenge of the rapid rise of Bitmain's Shenma mining machine in 2019, which has snatched away a lot of mining machine market share.

Zhang Wencheng, sales director of WhatsMiner, revealed at an event hosted by CoinIn earlier this year that the company's flagship product, the WhatsMiner M20 series, sold about 600,000 units in 2019. These mining machines generate an average of about 60 megabytes of computing power per second.

The current computing power of the entire Bitcoin network is about 116EH/s. Based on this calculation, the hash computing power contributed by 600,000 Shenma mining machines to the Bitcoin network in 2019 exceeded 30EH/S, accounting for about 25.9% of the total network computing power.

Financial report data shows that the total computing power sold by Canaan Creative in 2019 was 10.5 million Thash/s. Based on this calculation, the total computing power sold by Canaan in 2019 accounted for only 9.1% of the total network computing power, which is almost one-third of the Shenma mining machine.

In addition, according to a report by Wu Blockchain at the end of last year, Canaan Creative's revenue in 2019 was only a quarter of Shenma Mining Machine and about one-tenth of Bitmain. If the revenue data in the report is true, Canaan Creative's position as the second largest mining machine giant in the world may be shaken.

The mass production of 7nm chips is hindered, missing the best time to "shift mining gears"

However, the greater challenge facing Canaan is that due to the delay in the launch of its 7nm chip mining machines and the insufficient supply of 8nm chip production capacity, Canaan may be missing the best opportunity to "shift gears in mining."

In August 2018, Canaan Creative preemptively released TSMC's 7nm process mining chip, and said that the chip would be used in the Avalon A9 series of mining machines. But until now, its mining machine products have been upgraded to the A11 series, and its 7nm chip mining machine has not been officially released and sold.

Not only that, Canaan's A10 series products have returned to the 16nm process chip. According to its prospectus, its latest product A11 series does not use 7nm chips, but uses 8nm chips that are suspected to be from Samsung.

However, due to the impact of the Japan-South Korea trade war since the second half of last year, photoresist has been banned by Japan, and Samsung's chip shipments are very limited, which may affect the batch shipment of its high-computing power mining machines. At least for now, the Avalon official website has no stock of the A11 series mining machines.

On the other hand, Bitmain's 7nm mining machines have been rapidly iterating. Since the first generation of 7nm Antminer S15 was launched in 2018, the second generation of 7nm chip mining machine S17 was launched in 2019. In March of this year, Bitmain launched the S19 series of mining machines with greater computing power and lower energy efficiency.

More importantly, Bitmain currently almost monopolizes the production capacity of 7nm mining machine chips. According to industry insiders, TSMC and Bitmain have signed a secret bet agreement on 7nm chips, and its 7nm chip production capacity is no longer supplied to other mining machine manufacturers. This may be the main reason for the change of Canaan Creative's chip supplier in the second half of last year.

In addition, even in the field of 8nm chip mining machines, Canaan Creative also has to face competition from Shemma M20S and M30S series mining machines. These two series of mining machine products also use 8nm process chips, and their upstream wafer factory suppliers, like Canaan Creative, are Samsung, which is currently having difficulty shipping chips.

As for the 5nm process chip that Canaan Creative has high hopes for, TSMC is already taping out the chips. However, since Apple's four iPhone 12 series phones to be launched in the second half of this year also use TSMC's 5nm process, they have already occupied two-thirds of TSMC's 5nm production capacity. In addition, some professionals said that the chip taping process is relatively long and it may take 12 months for the chips to reach mass production. Therefore, in the short term, TSMC may find it difficult to provide sufficient 5nm chip production capacity in batches.

But it is worth noting that the entire mining industry is entering a turning point as Bitcoin is currently experiencing its third halving and Sichuan is experiencing its flood season. Low-computing-power mining machines are being eliminated at an accelerated pace, while the era of high-computing-power, low-power mining machines is coming.

For Canaan Creative, if its chip technology research and development capabilities and high-computing-power mining machine shipment capacity cannot keep up with its competitors, it may miss the best opportunity for this round of "mining gear shift."

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