Canaan Creative plans to list on Nasdaq on the 21st and focuses on AI chip R&D and production

Hangzhou Canaan Creative Information Technology Co., Ltd. ("Canaan Creative"), a bitcoin mining machine manufacturer, submitted a prospectus to the U.S. Securities and Exchange Commission (SEC) at the end of October and updated the prospectus for the third time on November 14. The company plans to be listed on the Nasdaq on November 21 with the stock code "CAN".

The latest prospectus shows that Canaan Creative defines itself as a "semiconductor company" and a "leading supercomputing solutions provider" focused on the research and development and production of AI chips, rather than a simple and sensitive "mining machine manufacturer."

Fundraising is 70% less than before

Canaan Creative's road to listing is full of twists and turns.

As early as June 2016, Canaan Creative attempted to "backdoor" A-share listed company Luyitong. That year, Luyitong announced that it planned to acquire all the shares held by Canaan Creative's 14 existing shareholders for 3.06 billion yuan, but the plan failed. A year later, in August 2017, Canaan Creative retreated to the next best option and wanted to be listed on the New Third Board, but failed. In May 2018, Canaan Creative planned to be listed on the main board of Hong Kong in the form of a red chip. Six months later, the official website of the Hong Kong Stock Exchange classified Canaan Creative's listing application as "invalid". In 2019, the market once believed that Canaan Creative could be listed on the Science and Technology Innovation Board, but near the end of 2019, Canaan Creative embarked on the journey to go public in the United States.

The latest prospectus shows that Canaan Creative's planned fundraising amount has been adjusted from the previous maximum of no more than US$400 million to US$90 million to US$110 million, with a price of US$9-11 per share, which is a significant reduction of about 70% compared with the previous IPO application to the Hong Kong Stock Exchange.

Canaan Creative plans to issue 10 million ADSs this time. The underwriters include Citi, China Renaissance Capital, CMB International, Galaxy Digital, Huatai Securities, Tiger Brokers, and a new underwriter, Haitong International (00665) Securities. Credit Suisse has withdrawn from the ranks of underwriters.

Three shareholders are listed on the Hurun Rich List

The Hurun Rich List 2019 released by Hurun Research Institute in October 2019 shows that in the field of blockchain, three people from Canaan Creative are on the list. Among them, Liu Xiangfu and Zhang Nangeng are both worth RMB 3.9 billion, and Li Jiaxuan is worth RMB 3.8 billion.

The prospectus shows that the two largest shareholders of Canaan Creative are the company's technical founders. Li Jiaxuan holds 16.2% of the shares, slightly higher than Zhang Nangeng's 16%. Although the two major shareholders hold similar shares, due to the company's introduction of the AB share system, Zhang Nangeng holds 74% of the company's voting rights and has a say.

CEO Zhang Nangeng was born in 1983. In April 2013, Zhang Nangeng and his partner Li Jiaxuan jointly invested 100,000 yuan to establish Beijing Canaan Creative Information Technology Co., Ltd., the predecessor of Canaan Creative. In April 2013, Liu Xiangfu joined Canaan Creative and became a new shareholder in December after Zhang Nangeng and Li Jiaxuan.

According to the prospectus and public data, Canaan Creative is a company that provides supercomputing solutions through proprietary high-performance computing ASIC chips. In January 2013, Zhang Nangeng and his team invented and delivered the first cryptocurrency mining machines using ASIC technology. As of the first half of 2019, Canaan Creative is the world's second largest designer and manufacturer of Bitcoin mining machines, and the computing power of Bitcoin mining machines sold accounts for 21.9% of the world.

As of September 30, 2019, Canaan Creative has a total of 297 employees, including 43 in the management department, accounting for 14.5%; and 126 in the R&D department, accounting for 42.4%. The official website shows that Canaan Creative's products include Kanzhi AI and Avalon Miner. Currently, the positions being recruited include IC backend design engineer, senior embedded engineer, senior chip verification engineer, senior chip design engineer, senior DFT engineer, etc.

AI chip business will be added

A study of Canaan's revenue structure shows that the sales of Bitcoin mining machines are the company's main source of revenue. In 2017, 2018 and the first nine months of 2019, Canaan's sales revenue of Bitcoin mining machines and other mining machine parts accounted for 99.6%, 99.7% and 98.3% of its total revenue, respectively.

Since the business is directly affected by the fluctuation of Bitcoin prices, the company's performance is highly cyclical and unsustainable. The prospectus shows that Canaan Creative reached its peak in 2018, with annual operating income of RMB 2.705 billion, an increase of more than 100% over 2017. However, as Bitcoin entered the bear market with a high-diving attitude, Canaan Creative not only saw a sharp decline in revenue in 2019, but also turned to a loss in net profit. As of the first half of 2019, Canaan Creative's total revenue fell 85% year-on-year to RMB 290 million, and its net profit was a loss of RMB 330 million.

However, Canaan Creative does not want to be limited to being a "Bitcoin mining giant", but instead defines itself in its prospectus as a "semiconductor company" and "leading supercomputing solution provider" that focuses on the research and development and production of AI chips. In order to reduce the risk of Bitcoin, the company has added AI chip business. The founder has publicly stated that the revenue of AI chips in 2019 is expected to be in the tens of millions of yuan, and plans to achieve a 1:1 ratio of mining machine and AI business revenue in three years.

Regarding the funds raised from this IPO, Canaan Creative stated that they will be used for the research and development of ASICs related to AI algorithms and applications, the research and development of ASICs related to blockchain algorithms and applications, the global expansion of AI and blockchain businesses, the optimization of the supply chain, and the repayment of debts arising from the company's restructuring.