Canaan Creative's IPO: A bumpy road ahead, but still unable to escape the IPO price drop

According to multiple sources, Canaan Creative, the second largest cryptocurrency mining machine manufacturer in China, will disclose its prospectus in mid-to-late October, start roadshows and subscriptions at the end of October, and list on the Nasdaq in early November, or on November 25 at the latest. It plans to issue 126 million new shares, with an overall valuation of $2 billion to $3 billion, and an estimated PE of 8-10 times. This company, which was founded in 2013 and began to impact the capital market in 2016, has finally "passed the starting point."

There is no doubt that Canaan Creative is a respectable entrepreneur and one of the few good companies in the industry that is qualified to go public, but the risks behind its listing cannot be ignored.

What are the differences between the 4 attempts?

Canaan Creative’s road to listing can be said to be extremely difficult. It attempted to enter the capital market three times and failed three times.

In 2016, Canaan Creative tried to list on the A-share market by using Luyitong as a shell company.

On June 9, 2016, Shandong Luyitong Intelligent Electric Co., Ltd. (stock name: Luyitong, stock code 300423) issued the announcement "Luyitong: Issuing shares and paying cash to purchase assets and raise supporting funds and related transactions". The transaction plan is that Luyitong intends to purchase 100.00% of the equity of Hangzhou Canaan Creative Information Technology Co., Ltd. held by Zhang Nangeng and 14 other parties by combining the issuance of shares and payment of cash. The transaction pricing is intended to adopt the results of the income method valuation, and the final transaction price is 306,000.00 million yuan.

As the target of acquisition, Canaan Creative was questioned at the time. Single product, unstable customer base and sustainable operation ability were the three most frequently mentioned issues. Under repeated questioning by the regulatory authorities, Luyitong gave up the transaction application.

In August 2017, Canaan Creative once again sought to be listed on the New Third Board.

However, this was not a good time, because one month later on September 4, the domestic cryptocurrency market encountered a policy regulation storm. Relevant departments began to ban all cryptocurrency transactions and 1C0 in the country. Canaan Creative also received four consecutive inquiries from the stock transfer company in October and November of that year, and finally gave up the listing in March of the following year.

In May 2018, Canaan Creative went to Hong Kong for listing, which was also Canaan Creative's third effort.

On May 15, Canaan Creative officially submitted its IPO application to the Hong Kong Stock Exchange, intending to list on the main board of Hong Kong in the form of red chips, with Morgan Stanley, Deutsche Securities, Credit Suisse and CMB International acting as joint sponsors. However, six months later, the official website of the Hong Kong Stock Exchange classified Canaan Creative's listing application as "invalid", and its listing process failed again.

Reasons for the failure of the first three listings

- Doubts about the prospects of the digital currency market;

- Complex regulatory situation;

- Risks such as the main business accounting for too high a proportion and unstable customers.

The above three reasons have not changed fundamentally for the listing on the US stock market this time. In addition, the market has missed the stage of rapid growth. The current BTC price has fallen by 60% compared to its historical high in early 2018.

Valuation is in a reasonable range

According to the prospectus, Canaan Creative's revenue in 2015, 2016 and 2017 was RMB 48 million, RMB 316 million and RMB 1.308 billion respectively, and its gross profit was RMB 14 million, RMB 132 million and RMB 604 million respectively; the gross profit margin was 29.1%, 41.7% and 46.2% respectively, and its after-tax profit was RMB 2 million, RMB 53 million and RMB 361 million respectively.

In 2017, Canaan Creative's global Bitcoin mining machine shipments are expected to total 294,500 units, accounting for 20.9% of the global market share in terms of shipments; and 19.5% of the global market share in terms of computing power, making it the world's second largest cryptocurrency mining machine manufacturer.

Referring to the industry average of the US stock market, the valuation of 1.5 billion US dollars and 8-10 times PE are at the average level of the manufacturing industry. If we look at the valuation and PE level of the chip industry, this is obviously underestimated. Obviously, a large part of the reason for the market's underestimation is that the price of digital currency assets is highly volatile, and the impact of relevant policies on enterprises remains to be observed. Just a few days ago, the US Internal Revenue Service officially issued tax guidance for digital currency assets, and the impact on enterprises is still unknown. However, if the digital asset market stabilizes and rises, the market's valuation of Canaan Creative should increase.

Is it just a matter of time before it breaks?

If Canaan Creative successfully goes public, it will immediately face the challenge of maintaining its stock price.

First, judging from the current industry and valuation, especially the PE multiple of 8-10, the market is not particularly optimistic about it. The reasons are as analyzed in the previous part of this article: the overall industry trend is slowing down, the regulatory environment is complex, and there are operating risks. In particular, the problem of too high a proportion of the main business is the main risk in operation.

Some industry insiders believe that Canaan Creative's current PE multiple is not high, and with the short-term upward trend of the digital currency market, it is estimated that there will be more room for growth. However, risks still exist: the main business accounts for a high proportion, and the linkage with the industry cycle is stronger, which is a double-edged sword for the company. In the rapid growth stage of the industry, it can reap greater dividends, just as in 2017, the mining machine giants have achieved several times growth, but the resistance to market downside risks will also be relatively weak.

At the same time, mining machine manufacturers are facing the problem of single main business and being greatly affected by the fluctuation of currency prices. For enterprises that have developed to a certain scale, such as Canaan Creative and Bitmain, they have already actively laid out new businesses, mainly in two directions. One is to do mining pools, lending, and custody businesses from the financial dimension, and the other is to strengthen the research and development of diversified chip types from the technical dimension and expand application scenarios. Whether these scenarios meet the compliance requirements and how many can be listed is still a question.

Some industry insiders are relatively optimistic. The impact of the Bitcoin halving cycle next year is conservatively expected to grow by more than 50% without considering policy factors; but given the current Sino-US relations and macroeconomic conditions, it is necessary to be cautiously optimistic about the stock price.

Secondly, in the U.S. stock market, the performance of Chinese concept stocks is generally poor. According to statistics, among Chinese companies listed in the U.S. in 2018, the proportion of broken issues exceeded 60%. Take blockchain-related companies including Xunlei and Baidu as examples. Xunlei hopes to transform through blockchain, but it is not successful. The stock price was around US$14 when it was listed, and now it has fallen to US$2; Baidu's issue price was nearly US$200, and now it has also fallen to nearly US$100. The U.S. market does not have a high degree of recognition for Chinese concept stocks, and Canaan Creative's performance after listing does not seem to be suspenseful. From the perspective of investors, it is also unattractive. As a mining machine manufacturer, the stocks after listing have no additional appeal to those in the blockchain industry or those who have already participated in digital currency investment; for people outside the industry, there is a lack of differentiation.

How will the future develop?

In terms of business layout, Canaan Creative has sent out signals that it will invest heavily in the field of AI chips and try to transform from general manufacturing to the integrated circuit industry. This will also result in a higher PE multiple and a significant increase in valuation.

However, whether from the current competitive situation in the industry or from Canaan's own current situation, it will be difficult to successfully transform in the short term. The field of AI chips is a capital-intensive and technology-intensive field, and Canaan has no advantages over its competitors in these two aspects. In terms of capital, the valuation of companies in the AI ​​field will be much higher than Canaan's current level: Huawei's HiSilicon Semiconductor has a market value of nearly 15 billion, and the post-round B valuation of AI chip company Cambrian in June 2018 was 2.5 billion US dollars. In terms of technology, Canaan started from scratch, and compared with its competitors who have accumulated decades of experience in the AI ​​industry, its disadvantages are very obvious.

However, from the perspective of business structure, if we rely on computing power to take root in the AI ​​industry, it will be a promising development path.

Some industry insiders said: In the future, the digital economy must be driven by the combined efforts of various information technologies. Both AI and blockchain rely on computing power, and chips are the carrier of computing power, the "silicon base" of the digital economy, and the link between various technologies. Canaan Creative started with mining chips, and has an early layout in AI chip research and development, and has continued to invest, which gives it a first-mover advantage in seizing the cross-border track.

Some industry insiders also pointed out that AI is more of a story. In fact, in addition to some existing large companies, Internet companies such as Alibaba and Tencent have also invested heavily in this field. Large-scale investment in this field is not worth the cost.

Compared with transformation, it seems relatively safe to continue to cultivate mining and related industries in the short term. However, the window period for market prosperity is only in the first half of next year, before the Bitcoin halving. After the halving, there is a high probability that performance will decline. Some industry insiders suggest that Canaan Creative should stick to its core business. After listing, it will have lower capital costs and more funds, and it should find ways to invest in the upstream and downstream industries of its core business to form a matrix effect.

It is difficult to shake up the industry situation in the short term

If Canaan Creative can successfully go public, it will undoubtedly be exciting news for the industry.

Some industry insiders said: If Canaan Creative is successfully listed, it will be a recognition of blockchain companies by the traditional capital market. As the first stock mainly engaged in blockchain-related businesses, it will play an effective connecting role in the two markets and is beneficial to the positive development of the blockchain industry.

However, according to the data, Canaan only has a 20% market share in the mining machine market and less than 10% in the computing power market, so it is difficult to make significant changes to the market in a short period of time. In addition to the relatively promising total computing power market, it is difficult to change the current competitive landscape by relying on fundraising to increase R&D investment.

At the same time, Wu Jihan shared the situation of Bitmain's new mining machine at a conference in Frankfurt two days ago. The technology of the new generation of mining machines has gradually matured. In addition to Bitmain, Canaan's competitors also include new competitors such as Shenma Mining Machine. However, in this rapidly growing market, everyone is more competing for stable production capacity rather than technology. The market demand is huge, and stable production capacity determines market share.

From the industry's perspective, it is difficult to say whether Canaan Creative's successful listing can bring a demonstration effect to other digital currency companies. Take Bitmain as an example: a large proportion of Bitmain's assets are digital assets, and the overall value is more affected by the market; its many digital asset-related businesses will face more complex compliance issues when listed in the United States.