Analysts' bearish report caused Canaan to be investigated by multiple US law firms and its stock price fell

Recently, Bronstein, Gewirtz & Grossman, LLC said that it is investigating Canaan Technology to see if its directors and principals have violated the securities laws of the United States. At the same time, Pomerantz Law Firm, Kirby Mclnerney LLP, Schall Law Firm and other law firms have also issued relevant investigation statements. The above law firms are often involved in investigations and prosecutions of Chinese high-tech companies, such as Tencent Music, Pinduoduo, and JD.com. As of press time, Canaan has not responded to this.

Canaan's current share price is $5.65. It once soared to $8 last week, but then returned to the price range of $5-6. Wu said that in the United States, due to falling stock prices, it is very common for law firms to initiate class investigations and lawsuits and summon investors who have suffered losses. There is no need to make a fuss. The subsequent financial reports released by Canaan in the fourth quarter of 2019 will better illustrate the company's true operating conditions.

The investigation was prompted by a report titled "Canaan Fodder" published by investment analyst Marcus Aurelius on the 20th. The report summary stated: We view Canaan as the latest Chinese company to deceive American investors. After failing to list on Asian exchanges three times since 2016, Canaan took full advantage of the frothy market and completed its IPO on Nasdaq in November 2019. Canaan's stock soared more than 80% in one trading day last week, giving the company a market value of more than $1 billion, thereby attracting thousands of unsuspecting retail investors to speculate. But our investigation into the Bitcoin mining machine manufacturer revealed undisclosed related-party transactions, irregularities involving many customers and distributors, and a business model that we believe is broken. Regardless of your outlook on the future of Bitcoin, we believe Canaan's business is far worse than advertised.

The report mainly consists of the following allegations:

1: Undisclosed related-party transactions. A month before Canaan's IPO on Nasdaq, Xiong'an Technology reached a strategic partnership with it and agreed to purchase equipment worth up to $150 million in 2020. However, Xiong'an Technology's chairman is Canaan's angel investor and owns 9.7% of Canaan's outstanding shares. Canaan's SEC filings do not mention this. In 2016, Hangzhou Weitui became one of Canaan's largest customers. Weitui was first controlled by Canaan's co-chairman Kong Jianping and then by director Sun Qifeng. This information was also not disclosed in SEC filings.

2: Major violations involving customers. 87% of Canaan’s sales come from Chinese customers. The largest customer in 2016 was Chen Jian, the founder of ICO365; the largest accounts receivable in 2017 was Wu Gang of Bixin; the former was suspected of ICO and has closed the website, while the latter has clearly stated that it will close the mining pool.

(Wu said blockchain believes that Chen Jian should be the founder of the current Matcha Exchange, while Wu Gang is the founder of Bixin. The author's point of view here does not seem to make much sense. Chen Jian's career at the Matcha Exchange developed better after closing ICO365, while Wu Gang only closed the mining pool for business reasons, not the mining pool, and still owns a large number of mining farms. People engaged in the virtual currency industry in China will more or less face some regulatory risks.)

3: Canaan's business model seems to have collapsed. The arguments include: Canaan was sued by a Chinese supplier in 2019; the Chinese government's control over miners; and its relatively backward technical level and sales team compared to its competitors Bitmain and Shenma. (What's funny is that Canaan's Twitter followers are relatively small as an argument, but it seems that Canaan has more WeChat accounts and fans)

Finally, the analyst concluded: Even if you believe Canaan's financial statements, Canaan's P/E ratio is over 5 times, which is a huge premium for this company, which saw a significant decline in revenue and losses of more than $50 million in the first nine months of 2019. But what's worse is that we found various irregularities and undisclosed transactions, which make us believe that Canaan deceived its investors. Therefore, we believe that the stock is not investable and has huge downside potential.

Full analyst report:

http://mavalue.org/research/canaan-fodder/