Bitcoin mining accident risks spread to mining machine company IPOs

The IPOs of mining machine companies, which are hotly speculated to have fast-growing businesses, are now facing more uncertainties.

Since the beginning of this year, a number of blockchain token mining machine manufacturers including Bitmain, Canaan Creative, and Ebang International have launched listing plans in the Hong Kong market; however, in the nearly one-year bear market for Bitcoin, the IPOs of the above three representative mining machine companies have not progressed smoothly - as of November 27, the application status of Bitmain and Ebang International was shown as being processed, while Canaan Creative had disappeared from the hearing information.

The 21st Century Capital Research Institute believes that although many mining machine companies have achieved good performance growth in the context of the active token ecosystem in recent years, facing the huge volatility risk of crypto asset prices represented by Bitcoin, it will be difficult for such mining machine companies to maintain long-term performance stability. The pricing and valuation of such companies after listing are also highly dependent on the prosperity of the crypto assets and mining industries, which will affect the degree of recognition of their IPOs among institutional investors.

However, we also believe that some mining machine companies planning IPOs still have a lot of room for transformation and development in vertical fields such as chips and blockchain technology.

The story of the mining machine company’s broken dream

As crypto assets such as Bitcoin have received increasing attention in recent years, mining machine companies have achieved unexpected development in recent years.

In May this year, Canaan Creative submitted an IPO application to the Hong Kong Stock Exchange. Its materials showed that Canaan Creative, founded in 2013, has been engaged in integrated circuit design and independent chip research and development for many years. As the token mining industry was booming, Canaan Creative also achieved rapid performance growth.

According to the prospectus, Canaan Creative's operating income in the past three years from 2015 to 2017 was RMB 48 million, RMB 316 million and RMB 1.308 billion respectively; and its net profit was RMB 2 million, RMB 53 million and RMB 361 million respectively, with an annual compound growth rate of nearly 15 times.

Coincidentally, Bitmain, the world's largest ASIC-based cryptocurrency mining company, has also achieved astonishing performance growth. Data shows that from 2015 to 2017, Bitmain's operating income grew rapidly from US$137 million to US$2.517 billion, achieving a compound annual growth rate of 328.20%. In the first half of 2018, Bitmain's operating income further increased to US$2.845 billion.

Yibang International, which plans to switch from a New Third Board company to a H-share company, has also achieved huge revenue. From 2015 to 2017, its operating income increased from 92 million yuan to 979 million yuan.

We believe that the huge mining demand brought about by the rapid expansion of the crypto asset ecosystem represented by Bitcoin is the main reason for the boost in mining machine manufacturers' revenue, and the increase in fork events and innovative coins since last year has further pushed up their potential performance space.

However, the IPOs of the above-mentioned mining machine manufacturers seem to have not yet come to fruition. On November 15, the six-month validity period of Canaan Creative's IPO application submitted in May this year has expired; in the third quarter of this year, Bitmain, which originally planned to go public, also chose to terminate its IPO plan; and Ebang International, which submitted its IPO application in June, has not made any progress so far, and the expiration date is approaching.

The obstacles encountered in IPOs are closely related to the sharp decline in the prices of crypto assets such as Bitcoin.

According to the GDAX platform data collected by Wind, the price of Bitcoin against the US dollar fell from $19,650.02 per unit on December 17, 2017 to $3,672.32 per unit as of November 27, 2018, with a cumulative retracement of 81.01%. The price drop of crypto assets such as Bitcoin has obviously brought multiple impacts to upstream mining machine manufacturers.

On the one hand, the pricing of mining machines is highly correlated with the prices of crypto assets. With the avalanche of crypto asset prices, the payback period calculated by miners when purchasing mining machines will also be lengthened. Even when the cost of mining machines + electricity prices is higher than the price of crypto assets, the demand for mining machines will not only drop to a freezing point, but news of existing mining machines being "sold by the kilogram" will also frequently appear, which will directly affect the sales revenue of mining machine manufacturers.

On the other hand, many mining machine manufacturers accept crypto assets as payment and also hold crypto assets themselves, and the decline of crypto assets has caused them to suffer greater asset losses. For example, Bitmain’s prospectus shows that the company’s collective inventory impairment in the first half of 2018 reached US$253 million, and it also set aside US$103 million in crypto asset impairment provisions; and as of the end of June, Bitmain still had an inventory value of US$887 million in crypto assets, which was 9.71% more than its net assets.

IPO risks behind “mine disasters”

The situation in which the cost and benefits of mining are largely inverted due to the plunge of crypto assets is usually referred to as a mining accident in the industry.

In fact, similar Bitcoin mining accidents have occurred before. At the end of 2013, the price of Bitcoin soared from 1,200 yuan per unit to 8,000 yuan per unit, with a monthly increase of 473.63% in November alone. After the People's Bank of China and five other ministries jointly issued the "Notice on Preventing Bitcoin Risks", the price of Bitcoin fell rapidly, causing many miners to lose all their money.

The 21st Century Capital Research Institute believes that with the drastic fluctuations in crypto assets and the widespread occurrence of mining accidents, the IPO difficulty of mining machine companies will be further increased.

On the one hand, the degree of Bitcoin's high-level retracement and the pressure to digest the selling pressure this time are more serious than in 2013, which may also cause the prices of Bitcoin and other blockchain tokens to be in a longer downward channel, and the long-term decline in marginal mining profits will also lead to a continued decline in mining demand, which will obviously drag down the performance of mining machine companies.

On the other hand, investors need IPO companies to achieve stable performance and predictable and sustainable future revenue, but with the drastic fluctuations in crypto assets, this expectation of stability is obviously out of reach.

However, we also believe that since blockchain mining machines usually have strong computing and processing capabilities, mining machine companies usually also have certain technical advantages in chip manufacturing, blockchain and other fields. For example, on March 23 this year, the "2017 China Unicorn Enterprise Development Report" jointly released by Great Wall Strategic Consulting and the Ministry of Science and Technology even included Bitmain, which was valued at US$1 billion, and ranked it 107th.

We believe that as the risks of Bitcoin mining accidents are further recognized by the market, the probability of mining machine companies successfully achieving IPOs by relying on the relatively large proportion of mining machine sales revenue to attract investors is limited. On the contrary, they can achieve business transformation by exploring more vertical fields to reduce their dependence on the prosperity of crypto assets. It is still possible for them to return to the IPO path in the future.