Top bitcoin mining manufacturer, Canaan Creative, filed its IPO application to the Hong Kong Stock Exchange (HKEX) about six months ago. Immediately thereafter, other bitcoin mining manufacturers, Yibang International and Bitmain, also submitted their listing applications to the HKEX in June and in September, respectively.
Canaan Creative’s IPO application may be in doubt, however, as the Chinese bitcoin mining maker’s filing has now lapsed, which is only valid for six months through the HKEX.
According to the Reuters report, an insider source said the HKEX and financial regulators in Hong Kong expressed doubts about Canaan’s business model and financial prospects. Since there hasn’t been any update about listing hearing from the HKEX, Canaan’s IPO may ultimately be delayed this year.
Recently, due to the P2P silver bean network explosion, Yibang International was accused of money laundering, inflating sales revenue, and using fictitious sales contract. Now, the IPO of Canaan Creative faces expiration. The future of bitcoin mining manufacturers is riddled with roadblocks.
Canaan’s IPO application has now exceeded a lifespan of 185 days, which on average takes 65 days
Xiaomi Corporation, led by serial entrepreneur Lei Jun, filed its IPO in Hong Kong in May this year, only 10 days earlier than Canaan. Just 65 days after, however, Xiaomi debuted on the HKEX and Lei Jun hit a gong at the listing ceremony of Xiaomi in Hong Kong.
Xiaomi and Canaan filed their IPO applications almost at the same time. While it took Xiaomi roughly two months to go public, major mining manufacturers waited for more than 180 days for the result of a listing failure. Is it because bitcoin mining manufacturers are closely related to the cryptocurrency industry, they are treated differently by the HKEX?
In fact, the reason Xiaomi can successfully go public in a short period is the inevitable result of years of development. Lei Jun founded Xiaomi in 2010 and released the first generation of Xiaomi smartphone the following year. Back then, Xiaomi was not valued highly by traditional mobile phone manufacturers. Thanks to the internet boom, however, Xiaomi smartphone grew in stature and the company is now the fifth-largest smartphone vendor globally.
From the launch of its first generation of smartphone to the official listing on the HKEX this year, Xiaomi has gone through eight years. The first generation of Xiaomi smartphone sold 300,000. Eight years after, this number has reached 28 million yuan. According to the prospectus submitted by Xiaomi, in 2015, 2016, 2017 and the first quarter of 2018, Xiaomi’s operating income was 66.811 billion yuan, 68.434 billion yuan, 141.625 billion yuan, and 34.412 billion yuan respectively. While the smartphone industry has a downward trend in recent years, the overall performance of Xiaomi’s business is strong.
Compared with Xiaomi, even the top three mining manufacturers in the bitcoin industry, Bitmain, Canaan and Yibang International, look less promising. Bitmain and Canaan were established in 2013. While Yibang International was founded as early as 2003, it has involved in the mining business for only four years.
It is rare for a company to apply for listing just four or five years after its business is established. Even Bitmain, the biggest crypto-oriented company in the world that enjoys a near-monopoly on the cryptocurrency market, only has a total revenue of 17.341 billion yuan in 2017, as shown by its prospectus. That number is not even comparable to the total revenue of Xiaomi in 2017. Canaan and Yibang International are not even worth mentioning, with total revenues far less than that of Bitmain.
Hence, the reason Bitmain, Canaan and Yibang International haven’t been approved for listing on the HKEX after half a year is more complicated than we thought. In fact, the prospectuses of the three companies only meet the most basic requirements of the HKEX.
The fact that Xiaomi can go public successfully on the HKEX within two months is not unrelated to its robust performance and strategic dominance. Yet, in theory, business performance does not dictate whether a company will have a successful listing or not. Although the revenue of the three mining giants is not comparable to that of an internet enterprise, the strength of the three bitcoin manufacturers is well acknowledged by the market.
The success of the three mining manufacturer depends on a lot of external factors, which include the market and policy regulation.
Lack of a diverse industrial structure, mining business accounts for 90 percent of the total revenue
As mentioned in the Reuters report, the HKEX has doubt about Canaan’s business model and financial prospects. Although there isn’t enough evidence to prove that Canaan’s IPO listing has been delayed for this reason, the HKEX concern is reasonable.
Although large mining manufacturers prospered in past years whenever the cryptocurrency market became bullish, they face a very serious problem: the lack of a diverse industrial structure.
According to the prospectuses of Bitmain, Canaan, and Yibang International, company profits are mainly derived from the sales revenue of bitcoin mining chips and hardware. For example, the prospectus of Bitmain shows that 90 percent of its revenue comes from bitcoin mining chips and hardware. This means that when the cryptocurrency market is strong, mining companies make a profit; once the market becomes bearish, the cryptocurrency price becomes lower than the mining cost, and mining companies lose their profits.
On the other hand, once the bitcoin is mined, the corresponding type of mining chips and hardware becomes useless. The source of income for bitcoin mining manufacturers has also collapsed.
The three major mining companies are actively and keenly seeking transformation. Canaan and Bitmain are both involved in the artificial intelligence chip industry. Yibang International will continue its old business, yet also focus on the telecommunications equipment sector.
These companies have recognized the lack of diverse industrial structures in their business models and take the correct initiative to seek transformation. But whether the HKEX will acknowledge the effort is another matter.
Let’s take the example of Xiaomi. Although Xiaomi made tremendous profits by selling its smartphone at an affordable price, Lei Jun did not just bet on the smartphone market. Since 2014, Xiaomi has begun to expand its industrial structure. Releasing an eco-chain is another way for Xiaomi to succeed.
Up to now, Xiaomi has invested in a number of ecological chain companies, producing and selling smart digital products that cover all aspects of people’s lives. These ecological companies are fully developed and have even begun to launch their independent brands. Hence, while smartphone revenue is an essential part of Xiaomi’s income source, it doesn’t account for all.
Given this, Xiaomi can be listed on the HKEX in a short period of two months is no surprise.
On the contrary, while Bitmain and Canaan touted for artificial intelligence chips in their prospectuses, this new investment has not brought any notable change to the two companies. Mining machines still dominate their businesses. Moreover, the artificial intelligence chips industry is more competitive because traditional chips manufacturers are drawn to the same business.
There are many uncertainties facing these bitcoin mining manufacturers, making it somehow inevitable for Canaan to have a delayed, if not failed, listing on the HKEX. The P2P fraud of Yibang International and its fake financial reports are all attempts in despair to secure a successful listing.
National cryptocurrency policy becomes stricter
Besides market volatility, bitcoin mining manufacturers also face the risk of uncertainty in government policies. There are very few countries that are completely open to cryptocurrencies. Most countries are very cautious. In mainland China, cryptocurrency transaction is completely banned.
Although the three major manufacturers can still produce and sell mining machines in mainland China, if the Chinese government extends its ban on cryptocurrency to the production of mining hardware and chips, the impact on manufacturers is even greater. Canaan once tried to file an IPO prospectus for a public listing on the Shanghai Stock Exchange, but eventually failed for some reason. This is more or less related to domestic regulatory policies.
On November 11 this year, regulators in Guizhou and Xinjiang conducted strict inspections on bitcoin mining manufacturers and demanded business rectifications. The inspection was reportedly very strict, covering these companies’ tax information, capital transaction, and customer information. In addition, companies were also required to sign letters to ensure network information security.
The success of bitcoin mining manufacturers depends on local government policies.
The reason the three major manufacturers chose to list on the HKEX might be more directly related to mainland policies. The government policy on cryptocurrency in Hong Kong is much looser than that in mainland China.
Earlier, a South China Morning Post reporter interviewed Tang Jiacheng, chairman of Securities & Futures Commission of Hong Kong. Tang said the commission’s scope of legal supervision is limited to securities. The ban on cryptocurrency transaction “does not work in today’s Internet world.”
The Securities & Futures Commission of Hong Kong issued policies on virtual assets earlier this month. Eligible virtual asset business platforms will be issued licenses for legal operation.
As far as Hong Kong is concerned, the government is not likely to obstruct the listing of mining manufacturers on public exchanges. The obstacles come mainly from the cryptocurrency policy in mainland China.
The importance of the Chinese market to the three major mining companies is self-evident. If the ban on selling mining machines becomes extreme in mainland China, bitcoin mining manufacturers will have no other way to generate income and eventually die out from the market.
The future remains uncertain for bitcoin mining manufacture
The fact that Canaan’s filing at the HKEX is inaccessible does not mean the listing will fail. It means that the relevant company should update materials in time for the HKEX to assess whether it can be listed.
These various constraints, such as the lack of a diverse industrial structure, incomplete transformation, and strict cryptocurrency policy in mainland China, cannot be solved in a short time. To begin with, bitcoin mining manufacturers must ensure positive market prospects and robust operational performance in order to boost their IPO applications.