|
In 2018, three Chinese mining machine manufacturers that account for 90% of the computing power of the entire Bitcoin network submitted applications for listing. in, 1. Canaan Creative's prospectus has expired, and it is rumored that it will abandon Hong Kong stocks and switch to US stocks; 2. Bitmain has the largest market share (about 70% based on the computing power sold in 2017), and its prospectus will expire at the end of March 2019; 3. Ebang has the smallest market share (about 10% based on the computing power sold in 2017). It resubmitted its prospectus to the Hong Kong Stock Exchange at the end of December 2018 when its prospectus was about to expire. From the newly disclosed prospectus of Yibang, we can get a glimpse of what this "small mining machine giant" experienced in the first half of 2018 when the cryptocurrency market switched between bull and bear markets, as well as the hidden worries about its entry into the capital market: 1. 99% of operating income comes from mining machine sales, which is closely related to the volatile Bitcoin price 3. Gross profit fell, and net profit growth was halved compared to 2017 4. Increase in inventory turnover days and net operating cycle 5. Net cash flow from operating activities turned from positive to negative, and cash fell sharply 6. Increased reliance on overseas business Among these concerns, the most noteworthy is that in the first half of 2018, Ebang's cash flow from operating activities turned from positive to negative. This was mainly due to its existing orders and the purchase of a large amount of inventory based on its optimistic expectations for the Bitcoin market. However, since 2018, the Bitcoin market has taken a sharp turn for the worse, with a drop of more than 80% at one point, and Ebang's mining machine inventory is facing a backlog. Under such market conditions, can Ebang's financial performance continue? Can its valuation grow steadily? Table: Some financial data of Yibang (currency unit: 100 million yuan) Source: 01 Finance·Binary compiled based on Yibang's prospectus Note: Numbers in brackets are negative values. 1. 99% of operating income comes from mining machine sales, which is closely related to the volatile Bitcoin price In the first half of 2018, the sales revenue of Bitcoin mining machines accounted for 99% of Ebang’s total revenue, and the figures were 31.7%, 42.8% and 94.6% in 2015, 2016 and 2017 respectively. As the original main products could not keep up with the development of the 5G era, and the surge in Bitcoin in 2017 boosted the market demand for Bitcoin mining machines, this communications service provider has completely transformed into a Bitcoin mining machine manufacturer. The sales of Bitcoin mining machines are closely related to the price of Bitcoin. In 2018, the price of Bitcoin plummeted from $17,527 to $3,276, and the market value dropped from $290 billion to $57 billion, both falling by more than 80%. Ebang's main business revenue may be affected, especially after Ebang purchased a large amount of inventory in the first half of 2018 due to its optimistic market outlook. 2. Gross profit fell, and net profit growth was halved compared to 2017 In the first half of 2018, the gross profit margin of Ebang's blockchain business was 53.8%, a significant increase from 39.7% in the same period of 2017. This is mainly because the new mining machines E10 and E9.3 launched by Ebang have higher average selling prices due to their higher computing power. However, the sustainability of this situation is questionable because the E10 has been discontinued. According to the information obtained by Zero One Finance Binary, E10 is involved in a lawsuit in which the plaintiff believes that E10 has quality problems. At present, we have no way to judge whether the suspension of sales is related to this lawsuit. It is also worth mentioning that although Ebang’s net profit exceeded RMB 900 million in the first half of 2018, the year-on-year growth rate was half of that in 2017. This was mainly because 2017 was the first year that Ebang shifted from a communications equipment service provider to a Bitcoin mining machine manufacturer with a higher gross profit margin. In addition, 2017 was a big bull market for Bitcoin, and this growth rate may be difficult to sustain in 2018. If investors use the PE method to value Ebang, its valuation will be greatly impacted in 2018. Yibang's new prospectus revealed some of the situations after the first half of 2018: although the average monthly new contract value of mining machine customers' confirmed purchase orders increased slightly in the second quarter, the amount of monthly new contracts recorded by Yibang has dropped sharply since the third quarter of 2018, resulting in a sharp drop in revenue and gross profit in the first three quarters of 2018 compared with the revenue and gross profit in the three quarters ending June 30, 2018. 3. Increase in inventory turnover days and net operating cycle From 2017 to the first half of 2018, 1. Since most of its revenue in the first half of 2018 came from mining machine customers who paid it in full or settled the remaining amount before product delivery, and its revenue increased significantly during the same period, Yibang's accounts receivable turnover days decreased from 41 days to 28 days; 2. Since the main part of the sales cost in the first half of the year was the advance payment for purchasing wafers (the core raw materials of Bitcoin mining machines) (rather than accounts payable), the accounts payable turnover days decreased from 52 days to 49 days; 3. Due to the preparation for delivery of existing and several new mining machines, outsourced work-in-progress and raw materials increased significantly, and the inventory turnover days increased from 142 days to 151 days. In summary, the net operating cycle (inventory turnover days + accounts receivable turnover days - accounts payable turnover days) rose slightly by 1 day to 131 days. This is not an exaggerated number, but it is worth noting that 72.4% of Yibang's accounts receivable in the first half of 2018 came from its top five customers, while this figure was only 10.3% in 2017, which means that its accounts receivable concentration has increased significantly. In the first half of 2018, Yibang has already made provisions for impairment of accounts receivable of 42.2 million. If these top five customers cannot pay Yibang for goods in time, Yibang will have to make more provisions for impairment of accounts receivable. In addition, in the first half of 2018, the absolute value of Yibang's inventory increased significantly, which is the main reason for its net cash flow from operating activities to turn from positive to negative. 4. Net cash flow from operating activities turned from positive to negative, and cash fell sharply In the first half of 2018, Yibang's net cash flow from operating activities turned from positive to negative (from a surplus of 840 million to a shortage of 530 million), and the net cash and cash equivalents was -710 million, compared with 810 million in 2017. The loss of cash flow from operating activities may be the biggest problem revealed by Yibang's new prospectus. The biggest reason for this problem is the increase in inventory. In the first half of 2018, Yibang increased its inventory by 1.05 billion yuan for outsourced work-in-progress (manufacturer testing, packaging and assembly of special circuits in mining machines) and raw materials for the large number of mining machine orders it had received and the expected orders for several new models of mining machines. Regarding this part of inventory, according to Yibang's new prospectus, Yibang needs to pay the full amount of goods to the wafer manufacturer in advance, and only some orders can be prepaid at only 30%. Although Yibang has included this part of inventory in the cost of sales, Yibang has not yet received the cash generated by its sale. However, the sharp decrease in cash flow in the first half of the year is not an isolated case in the industry. Bitmain's net increase in cash and cash equivalents during this period also decreased from 2 billion to 70 million. 5. Increased reliance on overseas business Finally, it is worth mentioning that in 2017, overseas business revenue accounted for 3.8% of Ebang’s total revenue, which increased to 8.6% in the first half of 2018. Although this figure is far from its competitor Bitmain (62.8% in the first half of 2018), it is nearly doubled compared to Ebang itself. The increase in internationalization means that overseas sales have a greater impact on Yibang, which adds more overseas risks to Yibang's operations. In addition, overseas business may also increase Yibang's sales costs. According to Yibang's new prospectus, due to the increase in sales from overseas, Yibang's sales staff frequently traveled to expand overseas business, and the travel and transportation costs borne by Yibang increased. In the first half of 2018, Yibang's sales expenses increased by 38.5% from the same period in 2017 to 7.4 million yuan. |
