What are the points worth noting in Canaan Creative’s prospectus?

Author | Qin Xiaofeng

Editor | Hao Fangzhou

Produced by | Odaily Planet Daily

According to Coindesk, Canaan Creative, the world's second largest Bitcoin mining machine manufacturer, officially submitted its initial public offering prospectus to the U.S. Securities and Exchange Commission (SEC) on October 28 local time.

The prospectus shows that the company intends to list on the Nasdaq under the stock code CAN and has set a fundraising amount of US$400 million. The final fundraising amount, valuation and issue price per share are still unknown.

According to Cointelegraph, in July this year, Canaan Creative submitted a draft IPO application to US regulators, with a fundraising amount of US$200 million. In May 2018, Canaan Creative tried to go public in Hong Kong, but ultimately failed. People familiar with the matter said at the time that Canaan Creative's planned fundraising scale was US$1 billion.

AB Share Model

In the application, Canaan stated: We are an "emerging growth company" under applicable U.S. federal securities laws and meet the conditions for reduced reporting requirements for public companies.

(Note from Odaily Planet Daily: "Emerging Growth Companies" require annual total revenue to be less than US$1.07 billion, and can reduce the reporting of relevant information as required.)

The underwriters of this IPO include: Credit Suisse, Citigroup, China Renaissance, China Merchants Bank, Huatai Securities, Tiger Brokers, and Galaxy Digital.

Canaan Creative's IPO in the United States will adopt a dual-equity structure of Class A common stock and Class B common stock. Class A common stock and Class B common stock holders enjoy equal rights except voting rights and conversion rights. Each Class A common stock has one vote, while Class B common stock has 15 votes. Class B common stock can be converted into Class A common stock at any time, while Class A common stock cannot be converted into Class B common stock. Without over-allocation, Chairman and CEO Zhang Nangeng owns all Class B common stock. However, the specific proportion of Class B common stock in the total share capital and voting rights is not disclosed in the prospectus.

In addition, the prospectus disclosed that the company that Canaan Creative is going public in the United States is Canaan Technology. The prospectus shows that "Canaan Technology" is an exempted company registered in the Cayman Islands, and the company's affairs are governed by the Memorandum and Articles of Association, the amended Cayman Islands Companies Law and the general laws of the Cayman Islands.

Revenue decline

The prospectus shows that Canaan's total revenue increased by 106.8% from RMB 1.3081 billion in 2017 to RMB 2.7053 billion (US$394.1 million) in 2018. During the same period, its net profit fell by 67.4% from RMB 375.8 million to RMB 122.4 million (US$17.8 million).

In the six months ended June 30, 2018, Canaan Creative's total revenue was RMB 1.9471 billion; but in the six months ended June 30, 2019, Canaan Creative's total revenue was only RMB 288.8 million (US$42.1 million), a decrease of 85.2%.

In the six months ended June 30, 2018, Canaan Creative's net income was RMB 216.8 million and its adjusted net income was RMB 226 million; in the six months ended June 30, 2019, its net loss was RMB 330.9 million (US$48.2 million) and its adjusted net loss was RMB 109.9 million (US$16 million).

In the application, Canaan also explained the reason for the reduction in revenue: the price of Bitcoin will directly affect the market demand and price of Bitcoin mining machines. "The decline in Bitcoin prices in 2018 also resulted in customers who purchased our Bitcoin mining products on credit being less willing to pay."

The price of Bitcoin fell sharply in 2018 and remained at a relatively low level as of the end of the first quarter of 2019; however, Bitcoin prices have rebounded to a certain extent since the second quarter of 2019. "We expect operating results to improve with the recovery of Bitcoin prices in the second quarter of 2019."

The prospectus also discloses the main sources of revenue. "In 2017, 2018 and the six months ended June 30, 2019, sales of our Bitcoin mining machines and other Bitcoin mining machine parts and accessories accounted for 99.6%, 99.7% and 99.4% of our revenue, respectively. If the market for Bitcoin mining machines no longer exists or significantly decreases, our Bitcoin mining machines will suffer significant sales losses, order cancellations or customer churn."

Among them, Chinese users are the main customers of mining machines. In 2017, 2018 and the six months ended June 30, 2019, revenue from Chinese customers accounted for 91.5%, 76.1% and 87.9% of Canaan's total revenue, respectively. "The vast majority of our revenue comes from sales to Chinese customers. Any adverse developments in the regulatory environment in China could have a negative impact on our business."

In the prospectus, Canaan Creative also disclosed its R&D investment in technology. In 2017, the company invested 25.1 million yuan in R&D; in 2018, it invested 9.6 million yuan, a 60% decrease; in the first half of 2019, it invested 4.8 million yuan, the same as the same period last year.

In addition, Canaan Creative also announced the sales and prices of its mining machines in various batches. Among them, the latest mining machine Avalon A10 series released in March this year has sold 490 units by the end of June this year. The price of this mining machine is 7038 yuan, and the cost is 5640 yuan; the rated computing power can reach 31TH/s, and the energy consumption ratio is 56W/T (the minimum power consumption can reach 50W/T).

Mining machine companies flock to the market

In 2016, Canaan Creative planned to go public on the Shenzhen Stock Exchange by acquiring 100% of its shares through A-share listed company Luyitong (13.900, 0.10, 0.72%). Even though the Shenzhen Stock Exchange sent several letters of inquiry, Canaan Creative's listing plan was eventually shelved.

In August 2017, Canaan Creative applied for listing on the New Third Board. After three rounds of inquiries, it still failed to successfully go public. In May 2018, Canaan Creative formally submitted its IPO application to the Hong Kong Stock Exchange, intending to list on the Hong Kong Main Board in the form of a red chip. However, six months later, the Hong Kong Stock Exchange's official website classified Canaan Creative's listing application as "invalid", and the listing plan was shelved again.

In June and September of the same year, Ebang International and Bitmain successively submitted IPO prospectuses to the Hong Kong Stock Exchange, but both failed to achieve their goals.

There are many reasons that hinder mining machine companies from going public, but the most fundamental ones are the volatility of the crypto market and policy uncertainty.

At present, China's attitude towards cryptocurrencies is still conservative, and the main customer base of the three major mining machine manufacturers is Chinese users. Once the policy announces a complete ban on trading and mining, the blow to mining machine companies will be devastating.

In addition, the volatility of the crypto market will also affect the demand for mining machines. In the bull market of 2017, the price of mining machines was once hyped up to 20,000 to 30,000 yuan, but in the bear market of 2018, mining machines were repeatedly sold at low prices.

At present, it is still unknown whether Canaan Creative will be successfully listed. The final IPO time is expected to be between November 20 and November 25. Once the IPO is successfully completed, Canaan Creative will become the first mining machine company in China to be successfully listed.

Hong Kong-listed companies favor mining machine manufacturers

Just as mining machine manufacturers are in the process of going public, some Hong Kong-listed companies have already begun planning ahead.

On October 27, the Hong Kong-listed company Xiong'an Technology officially announced that since October 27, 2019, the company's wholly-owned subsidiary Hangzhou Xiong'an Weicheng Technology Co., Ltd. and Hangzhou Canaan Creative Information Technology Co., Ltd. have signed a strategic cooperation framework agreement. According to the agreement, both parties agree that Xiong'an Weicheng intends to purchase or distribute blockchain equipment on behalf of Canaan with a total value of no more than US$150 million before December 31, 2020, and Canaan will provide Xiong'an Weicheng with corresponding preferential prices and technical guidance.

This morning, Hong Kong-listed company Madison Holdings (08057.HK) also issued an announcement that it will cooperate with Yibang.

The announcement shows that Madison Holdings Group and mining machine manufacturer Ebang Communications have signed a non-legally binding memorandum of understanding on potential business. According to the agreement, Madison will acquire Ebang's blockchain computing equipment, cryptocurrency mining machines and computing chips with a total amount of no more than US$100 million before December 31, 2020. Ebang will provide corresponding preferential prices and technical guidance; Madison will establish an investment fund to be managed by the company's wholly-owned subsidiary CVP Asset Management Limited to invest in companies and projects in the blockchain industry.

Whether the early layout of Hong Kong-listed companies can pave the way for the listing of mining machine companies remains a question mark.