Why does the Hong Kong Stock Exchange exclude mining machine manufacturers? Li Xiaojia responded

Three companies that monopolize more than 90% of the global cryptocurrency mining machine market share: Ebang Technology, Canaan Creative and Bitmain, applied for listing on the Hong Kong Stock Exchange one year ago with their impressive financial statements, promising blockchain industry and stories of entering the AI ​​field. They were all full of confidence.

But by 2019, bad news continued to come from cryptocurrency mining machine manufacturers who were already in a cold winter.

"For IPOs, the core principle of the Hong Kong Stock Exchange is suitability for listing. Is the business model that the proposed listed company introduces to investors suitable for listing? For example, a company has made billions of dollars through business A in the past, but suddenly says it will do business B in the future, but there is no performance yet. Or business model B is better, then I think the business model A that you used for listing is not sustainable. Another thing is that the regulators did not care before, but later began to care. Then can you still do this business and make this money?"

On January 23, 2019, at the World Economic Forum in Davos, Hong Kong Exchanges and Clearing Limited (HKEX) Chief Executive Charles Li gave an exclusive interview to Tencent News’ “Qian Wang” and made the above statement on the IPO of cryptocurrency mining machine manufacturers.

The hidden meaning is obvious. Whether it is the mining machine business that previously attracted money or the AI ​​business that they want to transform, the three cryptocurrency mining machine manufacturers cannot meet the "listing adaptability" proposed by Li Xiaojia.

Canaan Creative, which submitted its IPO application to the Hong Kong Stock Exchange in May 2018, has already exceeded the six-month effective review period required by the Hong Kong Stock Exchange. An early investor close to Canaan Creative told Tencent's "Qianwang" that the Hong Kong Stock Exchange IPO has long been a failure. After discussion, they changed the listing location to the United States and are currently preparing for Nasdaq and hoping to submit listing materials.

What is more concerning is Bitmain. With its leading edge in the field of mining machines, the company is regarded as the most successful and most promising company in the field of cryptocurrency. However, in terms of the listing adaptability issue raised by Li Xiaojia, the cryptocurrency business that contributed to Bitmain's impressive financial data is facing the double squeeze of the industry winter and government regulation. There is no hope of profitability in the short term for the transformation to AI. There is no hope of listing on the Hong Kong stock market.

Although there are still more than two months before Bitmain's IPO application is valid, Li Xiaojia also said in the exclusive interview that the Hong Kong Stock Exchange will uphold procedural justice and reserve the company's right to appeal, but "we still adhere to the principle of listing adaptability."

"The blockchain industry itself is not easy and full of controversy. There are scammers and idealists, geeks and speculators. It has been five years since the emergence of a Bitmain, and there may not be a second one in the next ten years." A practitioner named Zhang Li said in his public account. As a representative of the blockchain industry, after the IPO suspension, ensuring sufficient cash flow to get through the long winter of the industry has become a top priority.

The good news is that Bitmain, which previously had ample cash flow, did not rely on financial leverage to expand aggressively. Although the previous two rounds of financing had an agreement to go public within five years, because they were in the form of convertible and redeemable preferred shares, even if there was no IPO within five years, the principal and interest could be returned to investors at a fixed interest rate.

Regulatory concerns

Since Canaan Creative submitted its IPO application in May 2018, Ebang Technology and Bitmain also submitted applications to the Hong Kong Stock Exchange in June and September respectively and disclosed their prospectuses.

The mining machines of the three companies are named Avalon, Ebit and Antminer, which together account for more than 90% of the market share. In 2017, when the virtual currency market was booming, the sales performance and profits of the three companies increased several times or even dozens of times.

Good financial data is the cornerstone of their confidence in listing on the Hong Kong stock market. Canaan Creative, the first to take the lead, hoped to raise US$1 billion in IPO funds at that time, with a valuation of RMB 100 billion.

However, the biggest problem for the three mining machine manufacturers is the future prospects of the virtual currency market, which is often hot and cold. At the same time, as the virtual currency market represented by the POW mechanism is expected to gradually become saturated in the future, how can they guarantee investors continued profitability under such prospects?

This is also the biggest concern that the Hong Kong Stock Exchange currently has for the three companies that have applied for IPOs. A person close to the Hong Kong Stock Exchange told Tencent's "Qian Wang" that if the digital currency market continues to be bearish, we cannot predict their future financial data under the current business model of mining machine sales, so how will the exchange explain to investors?

As early as the beginning of the IPO, the three companies had prepared for this problem. They all presented themselves as chip R&D and manufacturing companies, and also promoted their investment in AI (artificial intelligence) business to show that digital currency is not their only or main business.

In addition to its efforts on AI, Canaan has even tried to expand its customer base to a wider range of ordinary consumers. At this year's 7nm mining chip launch conference, Canaan released TVs and heaters that can mine, intending to extend the mining scenario to the home appliance field and provide incremental growth.

However, these increases have not yet been reflected in the financial data. It does not seem to be a feasible path for ordinary users to accept that the income they earn is not enough to compensate for the high energy consumption of electrical appliances.

On the R&D side, in addition to the investment in AI, the iteration speed of mining machine chips has also accelerated, the industry competition has become increasingly fierce, and the cost has also increased. On the sales side, the serious imbalance between supply and demand a year ago no longer exists. The previously popular mining machines may not be sold even if they are promoted at the mines.

This is exactly the problem of listing adaptability that Li Xiaojia mentioned. The company applied for listing with the financial statements of its profitable business, but used the transformation to AI as the story it told investors. How can the business model be sustained in the future?

Li Xiaojia even joked that a university graduate who studied Chinese ended up working on a farm in Iceland, where people around him didn't even speak English. Did he meet the "adaptability" requirement? Even if they switch to other markets, these companies have already missed the best financial data in 2018. An investment banker in Hong Kong said bluntly that the hope of a successful IPO in the future is even slimmer. Prospects of the industry

As the capital market suffered setbacks, the business on which the three mining machine manufacturers rely most for cash flow was also facing a crisis.

The recent plunge in Bitcoin prices, coupled with the dry season in hydropower-rich regions such as Sichuan, has meant that mining farms can only rely on relatively expensive thermal power, which has already broken through the cost price of multiple mining machines. In other words, the profits from mining are not enough to pay for electricity and management fees.

Fear has spread among the miners, who are the biggest source of cash flow for the three companies.

This is completely different from what Tencent's "Periscope" saw a year ago in Shenzhen Huaqiangbei Market, a major sales center for mining machines. At that time, the price of a single Bitcoin was approaching the 100,000 yuan mark. In the hot market, the supply and demand of mining machines that can bring huge wealth were seriously unbalanced. The original ex-factory price of mining machines was around 10,000 yuan, but the price was hyped up to more than 30,000 yuan, but it was still in short supply.

"As long as you have the goods, you are the boss." A merchant said. Second-hand mining machines discarded by some miners have also become popular. "For example, the Antminer S9, some mines have stopped operating for various reasons, or bought the latest machines and discarded them, and one can still be sold for more than 20,000 yuan."

A mining farm owner in Sichuan experienced this kind of madness. At the end of 2017, he replaced the old mining machines in the mine and entrusted them to a familiar merchant in Huaqiangbei to resell them. "The second-hand machine that I used for a year was actually more expensive than the price I paid for it."

The industry is in recession, and the supervision of mines is also tightening. According to some media reports, mines in Xinjiang and other places have been required by relevant departments to shut down for rectification. The government has checked the tax, capital transactions and customer information of the mines, required the mines to register with real names, and required local mines to sign a guarantee letter, which clearly requires:

"According to the needs of the public security department for network information security, our company will implement the real-name system for our business at a higher standard in the future. For customers who have not completed the latest standard real-name system, the data center will have to suspend related work such as reinstallation, restart, migration in and out, etc."

(Tencent News "Periscope" author: Liu Peng; Source: Tencent News)