Mining machines are like money printing machines, Canaan Creative’s capital dream

Even though Canaan Creative was rejected by the A- shares, the New Third Board, and the Hong Kong stock market, it never gave up its dream of going public.

On July 31 , it was reported that Canaan Creative, the world's second largest Bitcoin mining machine manufacturer, has secretly submitted an application for listing to the U.S. Securities and Exchange Commission ( SEC ), planning to raise $ 200 million. Canaan Creative may become the first domestic "mining machine giant" to officially go public in the United States.

According to Zhitong Finance APP , Canaan Creative is a fabless IC design company that provides advanced semiconductor solutions for complex computing problems. It mainly supplies and sells system products designed for Bitcoin mining under the AvalonMiner brand. The development of Canaan Creative is closely related to Bitcoin. It was once at its peak when Bitcoin was skyrocketing, but it also entered a cold winter after the craze subsided.

Nowadays, more and more countries are aware of the risks of digital currency, and the regulation and restrictions on digital currency transactions are becoming more and more stringent. In China, regulatory policies on virtual currency have been frequently introduced and implemented in recent years. The future of Canaan Creative is also full of variables.

Listing plans have been repeatedly disrupted

Canaan Creative's road to listing was quite bumpy, and it was successively rejected from the A- shares, the New Third Board, and the Hong Kong stock market.

In June 2016 , Canaan Creative attempted to "backdoor" and list on the A- share market. At that time, Luyitong Electric, a company listed on the Shenzhen Stock Exchange's Growth Enterprise Market, announced that it planned a major asset reorganization and intended to acquire all the shares held by Canaan Creative's 14 existing shareholders for RMB 3.06 billion. At the same time, Canaan Creative promised that the net profit attributable to it in 2016 , 2017 and 2018 would not be less than RMB 180 million (the same below), RMB 260 million and RMB 350 million respectively.

However, the transaction was questioned by the Shenzhen Stock Exchange several times and was eventually terminated due to suspicion of "backdoor listing" and excessive performance commitments. Luyitong announced that the acquisition failed because of recent changes in the domestic securities market environment, regulatory policies and other objective conditions, which made the company face major uncertainties in continuing to promote the restructuring. Therefore, Canaan Creative's A- share listing plan also came to an end.

In August 2017 , Canaan Creative considered listing on the New Third Board. However, it was unlucky because the relevant departments began to ban all cryptocurrency transactions and ICOs in the country. Canaan Creative was repeatedly questioned by the National Equities Exchange and Quotations and securities firms, all of which mentioned the impact of factors such as the policy environment on the company's ability to continue operating. In the end, Canaan Creative took the initiative to give up listing in March of the following year.

In May 2018 , the "Phoenix" Canaan Creative made a comeback and pinned its hopes on the Hong Kong market. Canaan Creative submitted an IPO application to the Hong Kong Stock Exchange, intending to be listed on the Hong Kong Main Board in the form of red chips, with Morgan Stanley, Deutsche Securities, Credit Suisse and CMB International as joint sponsors. However, Canaan Creative's listing application was not smooth, and the funds raised dropped from US$ 1 billion to US$ 400 million. Canaan Creative plans to use the funds raised to develop artificial intelligence algorithms, blockchain algorithms and ASIC chips for applications, as well as optimize the supply chain.

However, Canaan still failed to achieve its goal and was rejected by the Hong Kong Stock Exchange. Six months later, the official website of the Hong Kong Stock Exchange classified Canaan's listing application as "invalid". People familiar with the matter revealed that the Hong Kong Stock Exchange had many questions about Canaan's business model and prospects, and Canaan could not complete the IPO in 2018 , so the Hong Kong Stock Exchange did not update the listing hearing.

Interestingly, in addition to Canaan Creative, Bitmain, the world's largest cryptocurrency mining machine manufacturer, and Ebang International, the world's third largest Bitcoin mining machine manufacturer, both failed in Hong Kong stocks.

According to Zhitong Finance APP , mining machine companies, which are at the upstream of the Bitcoin industry chain, are extremely sensitive to the price of the currency, so the fluctuation of the currency price has a greater impact on their profits. Therefore, mining machine companies hope to "tell a new story" outside of the blockchain. Therefore, " AI " became the protagonist of their new story. As a result, it is obvious that this story did not impress the Hong Kong Stock Exchange.

Regarding the fact that mining machine manufacturers cannot be listed on the Hong Kong Stock Exchange, the official attitude is that “they do not meet the core principle of the Hong Kong Stock Exchange - suitability for listing.”

For this reason, Hong Kong Exchanges and Clearing Limited (HKEX) CEO Charles Li told the media at the World Economic Forum in Davos, Switzerland this year, “You made billions of dollars through business A in the past, but suddenly you said you wanted to do business B in the future, but you haven’t achieved any results yet. Then I think the business model A that you used to go public is no longer sustainable. Can you still do this business and make this money?”

The official statement of the Hong Kong Stock Exchange basically shows that it wants to "keep mining machine companies out". Therefore, the US stock market is the last hope for Canaan Creative, Bitmain and Ebang International.

In fact, compared with the Hong Kong Stock Exchange, the US Securities and Exchange Commission (SEC) is relatively tolerant of cryptocurrency and mining businesses, and does not have biased regulatory requirements. After all, the US Securities and Exchange Commission (SEC) focuses on disclosure for IPO issuance, and only ensures the logic, completeness, objectivity, and relevance of information. Its approval of IPOs does not mean that it has certified the quality of its securities. Hong Kong IPOs adopt a highly market-oriented approval system. The current listing standards in Hong Kong mainly include tests on profits, market value / income or market value / income / cash flow, as well as suitability reviews. The listing review standards are divided into two parts: objective conditions and listing suitability requirements (such as insufficient profitability, declining performance, a large proportion of related transactions, etc.).

However, to be on the safe side, Canaan Inc.'s US listing, from initiation to communication, to the current secret application submission, is all done by a small team, keeping a low profile. According to people close to Canaan Inc., based on Canaan Inc.'s previous communication with the SEC , there will be "no major problems" in passing the review this time. If it passes the SEC review, Canaan Inc. may choose the New York Stock Exchange as its listing location.

Avalon as a money printing press

Since Canaan Creative submitted its listing application to the U.S. Securities and Exchange Commission (SEC) in secret, its latest prospectus has not been disclosed, but its operating conditions can still be seen from its previous Hong Kong stock prospectus.

According to the official website of Canaan Creative, Canaan Creative was founded in 2013 and has become the world's leading supercomputing chip developer, digital blockchain computing equipment manufacturer, and digital blockchain computing software and hardware overall solution provider. From the FPGA -based digital blockchain computing device Icarus in 2011 to the world's first ASIC supercomputing chip A3256 that can be used for digital blockchain computing and the corresponding mining machine product Avalon1 in 2013, Canaan's R&D team has pioneered the ASIC era of digital blockchain computing equipment through innovative solutions and efficient engineering implementation methods.

Simply put, Canaan is mainly a mining machine sales manufacturer. The Avalon series of mining machines are professional customized servers developed by Canaan. Since 2013 , they have been updated many times with the continuous upgrading of ASIC chips. According to the prospectus previously released by Canaan, the revenue share of Canaan's main sales product Avalon mining machine increased from 74.9% in 2015 to 99.1% in 2017. Judging from revenue alone, the company is very dependent on the sales of mining machines.

It is worth noting that Canaan Creative’s Avalon series of mining machines were only officially put on sale in the second half of 2015. In just a few years, its performance soared.

According to Canaan's previous prospectus, its revenue increased from 47.69 million yuan in 2015 to 1.308 billion yuan in 2017 , with a compound annual growth rate of 424.6% . Its net profit soared from 1.511 million yuan in 2015 to 360 million yuan in 2017 , with a compound annual growth rate of 1451.3% . It is simply a "money printing machine". At the same time, Canaan's capital liquidity has significantly increased. In 2017 , the company's current ratio was as high as 340.7 times and its quick ratio was 265.6 times. From the high growth of performance to the strong liquidity of assets, it all reveals a sense of "upstarts".

In addition to its rapid performance growth, Canaan's valuation has also risen faster than expected. In May 2017 , Canaan received nearly 300 million yuan in Series A investment from Jinjiang Group, Tunlan Capital and others, and the company's valuation after financing was 3.3 billion yuan. According to the "Hurun Greater China Unicorn Index for the Second Quarter of 2018 " released by Hurun Research Institute, Canaan's valuation has risen to 20 billion yuan in a blink of an eye, entering the unicorn list. In early 2019 , people familiar with the matter revealed that Canaan had just completed a round of financing of hundreds of millions of dollars. After this round of financing, the valuation reached billions of dollars.

Regulatory pressure continues to emerge

Judging from the twists and turns in Canaan Creative's road to listing, it can be seen that its future is full of variables.

The sales of Canaan Creative's Avalon series of mining machines are closely related to the trend of Bitcoin. According to Zhitong Finance APP , Tongfang Securities Research Report pointed out that the price of Bitcoin determines the income of mining behavior. The fluctuation of Bitcoin price will theoretically affect the shipment volume of mining machines, thus achieving a dynamic balance. There are three reasons:

1. The essence of mining can be simply understood as all mining equipment in the world drawing lots by calculating the hash value of random numbers. The probability of winning is the device computing power / total computing power of the entire network. 2. The price of Bitcoin will affect the mining yield, thereby increasing or reducing the purchase of mining machines and affecting the total computing power of the entire network. Since the change in the total computing power of the entire network will reversely adjust the probability of winning, the mining income will eventually reach a new dynamic equilibrium state. 3. The emergence of new and higher-performance mining machines will significantly reduce the mining yield of old mining machines, thereby driving the replacement cycle of mining machines.

In fact, due to the sharp rise in Bitcoin prices in the past few years, speculative demand will drive a super-rational increase in the purchase of mining machines. When Bitcoin falls, some investors will bear short-term losses and not exit the market due to their expectations of future price increases.

In addition, more and more countries have noticed the risks of digital currencies, and the regulation and restrictions on digital currency transactions have become increasingly stringent. In China, regulatory policies on virtual currencies have also been frequently introduced and implemented in recent years.

In December 2013 , the People's Bank of China and five other ministries issued the "Notice on Preventing Bitcoin Risks", which clarified the nature of Bitcoin and stated that Bitcoin is not issued by monetary authorities, does not have monetary attributes such as legal tender and compulsory nature, and is not a real currency.

In September 2017 , the People's Bank of China issued an announcement on its website stating that all types of token issuance and financing activities ( ICO ) should be stopped immediately. Organizations and individuals that have completed token issuance and financing should make arrangements for liquidation, reasonably protect the rights and interests of investors, and properly handle risks. Subsequently, the three major domestic virtual currency trading platforms, Bitcoin China, Huobi.com, and OKCoin , announced that they would stop domestic trading business.

In January 2018 , the China Internet Finance Association pointed out that the model of "issuing virtual digital assets with mining machines as the core" ( IMO ), represented by the issuance of Xunlei's "Chaink" (formerly known as "Wanke Coin"), deserves vigilance and has hidden risks. It also called on consumers and investors to invest rationally and not blindly follow the hype.

In July 2019 , the central bank held a press conference. Zhou Xuedong, director of the General Office and spokesperson of the People's Bank of China, said that the People's Bank of China is also very concerned about Facebook's currency project Libra . However, whether it is legal tender or virtual currency that has emerged in recent years, there is a consensus that it must be regulated. In China, the legal tender is the RMB, and only the RMB is legal tender. No matter who issues the virtual currency, it is not legal tender in our country.

Although, under various uncertainties, Canaan Creative plans to enter the field of artificial intelligence based on the original technology, and grasp the two major fields of artificial intelligence chips and blockchain hardware. Canaan Creative's senior management previously revealed in an interview with the media that Canaan Creative's goal is to achieve a 1 : 1 ratio of the company's mining machine and AI business revenue in three years, and the company's AI business revenue is expected to reach tens of millions of yuan in 2019. However, industry insiders said that the production of chips is divided into front-end design and back-end design. Canaan Creative is currently limited to the front-end design and development of chips, and then finds TSMC for foundry production, and cannot independently complete the mass production of chips.

Therefore, the future of Canaan Creative remains unclear.