Canaan Creative, the first mining machine stock: knocking on the doors of exchanges like a homeless person

Introduction: Mining machine stocks are more than just cyclical stocks.

Canaan Creative is like a homeless person, knocking on the doors of various exchanges:

In 2016, it failed to go public through a backdoor listing on the A-share Luyi Tong ( 13.500 , -0.03 , -0.22% ) , in 2017, it failed to be listed on the New Third Board, in 2018, it failed to enter the Hong Kong stock market. In 2019, it did not give up. This energetic young man has embarked on the journey of listing in the United States.

This is a company with the spirit of Yugong moving mountains.

It can also be said that this is a "stubborn" company.

Why did the exchange reject it in every possible way? The reason is simple: this is a company that is hostile to the general trend and whose sustainability is questionable.

There is a saying in the outside world that mining machine companies are full of cyclical stocks. They cannot outperform the currency in a bull market and cannot be sold in a bear market! We think this statement is incomplete and misses the most important sentence.

01Founder of the Second Dimension Otaku

The prospectus shows that Canaan Creative's two largest shareholders are the company's technical founders. Li Jiaxuan holds a 16.2% stake, slightly higher than Zhang Nangeng's 16%.

Although the two major shareholders hold similar proportions of shares, due to the company's introduction of the AB share system, Zhang Nangeng holds 74% of the company's voting rights and has absolute say, so Canaan Creative is not likely to have the same palace fighting incident as Bitmain.

CEO Zhang Nangeng was born in 1983. You would never guess that before he came into contact with Bitcoin, he was a typical 2D otaku. What is going on?

It turns out that in 2011, Zhang Nangeng was a graduate student at the Beijing University of Aeronautics and Astronautics, majoring in circuit design. It is said that Zhang Nangeng was very bored at the time and often watched anime to kill time, watching more than 500 anime a year! Hence, he was nicknamed the 2D otaku.

In April 2013, Zhang Nangeng and his partner Li Jiaxuan jointly invested 100,000 yuan to establish Beijing Canaan Creative Information Technology Co., Ltd., which is now Canaan Creative.

But the entrepreneurship did not start at this moment. In 2012, Bitcoin mining machines entered the ASIC (application-specific chips) era. In order to block the American mining machine research and development institution "Butterfly Labs", Zhang Nangeng, who was one of the "Four Heavenly Kings" in the currency circle at the time, announced the development of ASIC mining machines.

In 2012, Zhang Nangeng actually developed the world's first ASIC mining machine, named Avalon. This name once again shows the attributes of a two-dimensional otaku. Avalon is the strongest defensive weapon in the Japanese anime "Fate".

Avalon, the scabbard named after the land of eternal spring and fairies in King Arthur's legend

02The bull market cannot outrun the currency

Looking at the composition of Canaan's revenue, it can be seen that the sales of Bitcoin mining machines are its main source of revenue. The sales of Bitcoin mining machines and other parts and accessories account for 99.6%, 99.7% and 99.4% of the total revenue respectively.

Canaan Creative's revenue structure, click to see the full picture

Canaan Creative had its highlight in 2018, with total revenue increasing by 107% year-on-year to 2.7 billion yuan. Compared with most companies, such growth is of course like a dream.

But if compared with the strongly correlated price of Bitcoin, it is far less. In 2017, Bitcoin soared from US$1,000 to US$20,000, a full 20 times.

In the bull market, mining machines can’t keep up with the coins!

The reason is very simple. Mining machines are an asset-intensive business with physical properties. Production capacity cannot be expanded immediately, while the price of virtual Bitcoin can rise without any constraints.

Although Canaan Creative's revenue growth cannot keep up with the increase in Bitcoin prices, one thing is clear: Bitcoin prices directly affect the market demand for mining machines. Think about it, the cost of mining is deterministic. If the increase in Bitcoin prices exceeds the increase in mining costs, the demand for mining machines will of course increase significantly.

Simply put, Canaan Creative, which is engaged in the mining machine business, is a cyclical stock.

03Can’t sell in a bear market

It is a sad thing that mining machine sales cannot outpace coins in a bull market;

What’s even more tragic is that you may not be able to sell in a bear market!

Bitcoin entered a bear market in 2018 with a high diving posture. In 2019, Canaan Creative not only saw a sharp decline in revenue, but its net profit also turned into a net loss.

In the first half of 2019, Canaan's total revenue fell 85% year-on-year to 290 million yuan, with a net loss of 330 million yuan (adjusted net loss of 110 million yuan). The prospectus reported the reason for the reduction in revenue: "The decline in Bitcoin prices in 2018 also made customers who purchased our Bitcoin mining products on credit less willing to pay."

The problem lies in the sales of mining machines. In Q3 2018, Canaan Creative made a profit of 74 yuan per mining machine. From Q4 onwards, it started to sell mining machines at a loss. In Q1 2019, the situation was so bad that it had to lose 2,518 yuan for each mining machine sold.

Even at low prices, the sales volume has not increased. The average selling price of Canaan's mining machines dropped from 10,420 yuan in the first quarter of 2018 to 1,046 yuan in the first quarter of 2019, and sales volume decreased by 70% during the same period.

In terms of finance, Canaan Creative also made inventory impairment for its mining machines, which amounted to 510 million yuan in the first half of 2019.

The former king of the mining machine field, now only has one Avalon A8 left in the 2019 popular mining machine rankings.

04 Another cycle

The story is not over yet. Do you think that the problem is solved if the mining machines cannot be sold? No, there are two types of cyclical stocks:

One is a cycle of recession, recovery, prosperity, and austerity;

One is a cycle of boom, bust, and then death.

Canaan Creative undoubtedly belongs to the latter. As an appendage that challenges sovereign currencies, where will the hair be attached if the skin is gone? Why is the skin gone? You will understand after reading Huang Qifan’s speech at the Shanghai Bund Financial Summit on October 28:

"In the digital age, some companies have attempted to challenge sovereign currencies by issuing Bitcoin and Libra. This type of decentralized currency based on blockchain is separated from sovereign credit, the basis for issuance cannot be guaranteed, the currency value cannot be stable, and it is difficult to truly form social wealth. I do not believe that Libra will succeed."

This may also be the reason why Canaan Creative has been repeatedly rejected by exchanges in China and Hong Kong. There may be only one way for Canaan Creative, which is to explore the transformation of AI chips (the two founders of Bitmain had conflicts over whether to engage in blockchain or AI). This is a road that must be taken, and it is also a difficult road.

In May this year, Zhang Nangeng shouted the slogan, "It will take three years to achieve a 1:1 ratio between mining machine and AI business revenue. In 2019, the company's AI business revenue is expected to reach tens of millions of yuan."

The reality is that Canaan Creative's AI revenue in the first half of the year was only 500,000, which is just a drop in the bucket. Starting a business is not easy, so I wish this injured unicorn good luck.