Canaan Technology's US listing generates most of its revenue from mining machines, with fundraising shrinking by more than 60% and its transformation into artificial intelligence to be tested

Yangtze Business Daily News ● Yangtze Business Daily reporter Zhang Lu

After three unsuccessful attempts to enter the capital market, the six-and-a-half-year-old Bitcoin miner Hangzhou Canaan Creative Information Technology Co., Ltd. (hereinafter referred to as "Canaan Technology") has finally had its moment of glory.

Recently, Canaan Inc., the ultimate holding company of mining machine manufacturer Canaan Creative, was officially listed on the Nasdaq with the stock code "CAN". The issue price was US$9 per American Depositary Receipt (ADS), which was at the lower end of the issue price range of US$9 to US$11. It issued 10 million shares and raised US$90 million.

According to the prospectus, in 2017, 2018 and the first three quarters of 2019 (hereinafter referred to as the "reporting period"), Canaan Technology's total revenue was RMB 1.308 billion, RMB 2.705 billion, and RMB 959 million, respectively, and its net profit was RMB 376 million, RMB 122 million, and -RMB 236 million, respectively.

As the first listed Bitcoin mining machine company in China, the reporter noticed that the amount of funds raised by Canaan Technology this time has shrunk by more than 60% compared with the previously disclosed US$400 million. In addition, during the reporting period, the sales of Bitcoin mining machines and other Bitcoin mining machine parts and accessories accounted for 99.6%, 99.7% and 98.3% of Canaan Technology's total revenue respectively. Therefore, Canaan Technology's performance is mainly affected by the fluctuation of Bitcoin prices. In order to mitigate the risk of Bitcoin market instability, Canaan Technology began to transform and expand into artificial intelligence chip business in 2016.

On November 28, a reporter from the Yangtze Business Daily sent an interview letter to Canaan Technology regarding the reasons why the amount of funds raised was lower than market expectations and the future development plan for the transformation to artificial intelligence. However, the other party had not responded as of press time.

In this regard, some analysts said that the sharp reduction in the amount of funds raised was mainly due to the strong correlation between Canaan's main business and the price of Bitcoin. As for the future, the next problem that Canaan will face after passing the listing hurdle may be how far it can go on the road of transformation to AI chips.

The amount of funds raised has shrunk significantly, and 90% of the performance depends on the sales of mining machines

On the evening of November 21, Canaan Creative, the world's second largest Bitcoin mining machine manufacturer, was officially listed on the Nasdaq. The listed entity Canaan Technology is an offshore holding company registered in the Cayman Islands by Canaan Creative, with the trading code CAN. Canaan Creative also became the first listed Bitcoin mining machine company in China.

The reporter noted that Canaan Technology determined in the supplementary document that the IPO price range would be set at US$9.00 to US$11.00. The company will issue 150 million Class A common shares in the IPO, equivalent to 10 million American depositary receipts.

Based on the highest issue price, including the 1.5 million American depositary receipts executed by the underwriters for over-allotment, Canaan Inc. will raise a maximum of $139.15 million before deducting various fees and commissions. Therefore, the amount of funds raised by Canaan Inc. through its IPO will be far lower than the originally set $400 million, a reduction of nearly 65%.

In addition, Canaan Technology's stock price fell below the IPO price on the first day of listing. After the opening, the company's stock price rose by more than 40%, but then fell rapidly, falling to as low as $8.21, and finally closed at $8.99, down 0.11% throughout the day, with a market value of $1.42 billion.

The reporter noticed that Canaan Technology's revenue structure includes three parts: product revenue, mining machine rental revenue and service revenue, but the most important part is product revenue. Product revenue is mainly divided into two parts: blockchain products and AI products, and blockchain revenue accounts for the vast majority of product revenue. Blockchain product revenue mainly refers to the sales of Bitcoin mining machines and other parts and accessories of mining machines.

In 2017, 2018 and the first half of 2019, sales of Bitcoin mining machines and other Bitcoin mining machine parts and accessories accounted for 99.6%, 99.7% and 99.4% of Canaan's total revenue, respectively. In addition, during the reporting period, the value of integrated circuits purchased by Canaan from TSMC accounted for 63.5%, 63.1% and 57.8% of the total purchases, respectively.

It is clearly shown from the revenue data of the past three years that mining machine revenue has always accounted for an absolute proportion, and the single main business is considered to be one of the main reasons why mining machine manufacturers have failed in their previous IPO attempts.

In addition, it is worth noting that the sharp drop in Bitcoin prices at the end of 2018 led to a sharp drop in the sales volume and average selling price of mining machines, which directly had a significant adverse impact on Canaan's operating performance and financial condition. According to the financial report data for the first half of this year, the revenue for the six months ending June 30, 2019 was 288.8 million yuan, a decrease of 85.2% from the total revenue of 1.9471 billion yuan for the six months ending June 30, 2018.

In terms of performance, overall, in the first three quarters of 2019, Canaan Technology's total revenue was about 960 million yuan, a decrease of 60.5% compared to the total revenue of 2.43 billion yuan in the first three quarters of 2018; the net profit was about -240 million yuan, a decrease of nearly -260% compared to the net profit of 150 million yuan in the first three quarters of 2018. Previously, in 2017 and 2018, the company achieved net income of 1.308 billion yuan and 2.705 billion yuan respectively; net profit was 376 million yuan and 122 million yuan respectively.

Transforming into the AI ​​chip business, the future is both good and bad

In fact, this is not the first time that Canaan Technology has impacted the capital market. In 2016, Canaan Technology planned to list on the Shenzhen Stock Exchange in disguised form by acquiring 100% of the shares of A-share listed company Luyitong for 3.06 billion yuan, but due to the suspicion of "backdoor listing", Canaan's first listing plan was stopped.

In August 2017, Canaan Technology applied to be listed on the New Third Board, but after three inquiries from the National Equities Exchange and Quotations and securities firms, the listing ultimately failed. In February 2018, Canaan planned to IPO on the Hong Kong Stock Exchange, but the good performance achieved in 2017 did not work, and the IPO application eventually failed.

According to Qichacha data, Canaan Technology is a service provider that provides supercomputing solutions through proprietary high-efficiency ASIC chips. It was founded in April 2013. After 6 years of development and growth, Canaan has become the world's second largest manufacturer of Bitcoin mining machines and maintains a leading position in both blockchain and artificial intelligence.

In terms of equity structure, the current 36-year-old chairman and CEO Zhang Nangeng holds 16.0% of the shares, the 34-year-old co-chairman Kong Jianping holds 12.1% of the shares, the 34-year-old director Li Jiaxuan holds 16.2% of the shares, and the director Sun Qifeng holds 5.8% of the shares. The directors and management hold a total of 50.8% of the shares.

The reporter also noted that in order to mitigate the risk of instability in the Bitcoin market, Canaan Inc. began to transform and expand into the artificial intelligence chip business in 2016. In the prospectus, Canaan also positioned its business as "mainly providing supercomputing solutions through the research and development of high-performance computing ASIC (application-specific integrated circuit) chips."

Specifically for products, Canaan Technology has chosen the more down-to-earth end-end market. Compared with the cloud, the terminal leaves a broader market for AI chip startups, so it has attracted many cross-border players. There are both traditional SoC suppliers, such as Allwinner, Ingenic, Rockchip, etc., as well as AI algorithm suppliers represented by Yitu, Megvii, Unisound, AISpex, etc., and algorithm + chip suppliers, such as Cambrian, Horizon Robotics, DeePhi Technology, etc.

In September 2018, Canaan became the first company in the industry to provide commercial edge computing artificial intelligence chips based on the Risc-V architecture. Canaan is a fabless chip design company whose chip manufacturing, packaging, and testing suppliers include TSMC, Samsung, STATS ChipPAC, ASE, and Siliconware Precision Industries.

However, judging from the data disclosed in the prospectus, the profitability of Canaan's AI business has not yet emerged. In the first three quarters of this year, the company's AI-related products only achieved a revenue of 1.4 million yuan. Industry insiders said that Canaan's layout of AI may encounter fierce competition in the market and difficulties in expanding segmented scenarios.

In response, Canaan Technology said that the company's AI business is currently small in scale, and plans to balance the mining machine business and AI chip business in the future to achieve a 1:1 balance. The company's AI business revenue is expected to reach tens of millions of yuan in 2019. Canaan Technology is currently focusing on edge computing and exploring applications in the fields of smart retail and smart driving.

Some industry insiders analyzed that although Canaan Technology's AI chips are now in mass production and shipment, there are some similarities in the design basis from mining machine chips to AI chips, but it is not easy to develop them. AI chips focus on AI in specific application scenarios, which are quite different from mining.

In this regard, economist Song Qinghui said in an interview with a reporter from the Yangtze Business Daily: "Ninety percent of Canaan Technology's performance depends on the sales of mining machines, and its main business is single. There is a great risk that its performance will change after listing. In addition, the company's transformation to AI will face many "shortcomings" such as talent and management that need to be filled. Whether the company will be able to achieve considerable sales in this direction in the future is still a huge question mark."