Bitmain listing lifts lid on crypto finances

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By:
Chris Wright
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The prospectus for the forthcoming Hong Kong IPO of Bitmain, which dominates the market for cryptocurrency mining hardware, unveils the highs and lows of businesses linked to bitcoin. It will cause crypto ideals to collide with institutional expectations about business transparency.

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The forthcoming listing of Bitmain Technologies, the company that produces the processors through which most of the world’s bitcoins are mined, brings not only the world’s largest cryptocurrency IPO but one of the most fascinating prospectuses in recent memory.

The Hong Kong listing of the Chinese company lifts the lid on an often-overlooked section of the cryptocurrency world: the mining hardware. The prospectus makes frequent reference to research conducted for it by Frost & Sullivan, including the headline finding that Bitmain accounted for a 74.5% market share of cryptocurrency mining in 2017, in terms of sales revenue. Most of it is through an efficient little gizmo called an Antminer.

It also sheds light on the places where mining takes place. Bitmain has 11 mining farms in China – in Sichuan, Xinjiang and Inner Mongolia – where miners pool their computing power and split mining rewards. Two of its mining pools, BTC.com and Antpool, together contribute 37.1% of the “aggregate hashrate” of the bitcoin network, meaning the total block rewards (people who mine new blocks of bitcoin are rewarded with more bitcoin).

But it’s the revenue numbers that really confound. You don’t read many prospectus lines like this one: “Our revenue increased from $137.3 million in 2015 to $2,517.7 million in 2017, representing a CAGR of 328.2%, and increased by 936.6%... for the six months ended June 30, 2018.” Profit was up 279.9% CAGR from 2015 to 2017, and 794.8% for the six months ended June 30, 2018, year-on-year.

Bitmain’s adjusted return on equity stands at 58.9%.

Volatility

That said, a look at the prospectus in conjunction with further information given to pre-IPO investors shows that this is not necessarily a one-way street. That first half figure includes the steady decline of bitcoin prices, which at the time of writing stand at one-third of the December peak. In the second quarter, it appears that revenues were $860 million lower than in the first quarter, with negative operating cash flow.

The prospectus addresses this “significant volatility” too. “The expected economic return from cryptocurrency mining has been adversely affected, which in turn may require us to make significant provisions with respect to our inventories, and lower the selling prices of our mining hardware, and our profitability… may be adversely affected.” 

The FT sent a correspondent to check electronic stores in Shenzhen’s SEG Plaza, where three entire floors are devoted to crypto mining hardware, and found retailers selling cryptocurrency processors for one-tenth of the price they were going for in December.

These write-downs are already showing up in the accounts. In the first half, the company recorded an impairment loss of $102.7 million on its cryptocurrency assets, and an impairment provision on inventory of $252.7 million.


Temasek is not an investor in Bitmain, and has never had discussions with, or an investment in, Bitmain 
 - Temasek statement

Indeed, one might argue that its holding of cryptocurrencies is either its biggest risk or biggest opportunity, depending on your point of view. In the first half, Bitmain held $886.9 million of cryptocurrency, compared to $343.3 million of fiat cash.

Volatility like this has put off some institutional investors. During the pre-IPO funding round, Singapore’s sovereign wealth fund, Temasek, put out a statement on August 30: “We have seen commentary about an IPO involving a cryptocurrency company, Bitmain,” it said. “Temasek is not an investor in Bitmain, and has never had discussions with, or an investment in, Bitmain.”

Nevertheless, this is the sort of listing that Hong Kong was seeking when it changed its governance position around dual-class share IPOs, a shift that won it the Xiaomi listing earlier this year.

Bitmain, like Xiaomi, will involve such a structure, meaning that co-founders Wu Jihan and Zhen Ketuan will retain operational control. (One other interesting revelation in the prospectus is that although Wu is the public face of Bitmain, Zhen owns a bigger stake.)

Transparency

From a banking point of view, one thing stands out about the deal: the bank that is handling it. Yes, that’s bank, singular: in contrast to most Chinese IPOs, where the number of joint bookrunners can soar into the 20s, Bitmain has just one sponsor, CICC. For more on CICC and other mainland-backed securities houses in Hong Kong, see our November edition.

The IPO will also test the market’s willingness to suspend usual norms of business evaluation in order to believe in the more ethereal business models of cryptocurrencies. Granted, at least Bitmain is easy to understand: it is almost entirely a hardware manufacturer. But since it gets 30%-40% of its payments in cryptocurrency, will investors see that as cash, or more specifically cashflow? 

In its accounts, Bitmain has two numbers: operating cashflow – which is cash as we know it – and investing cashflow, which is what’s coming in in cryptocurrencies.

The transparency involved in a listing will give us a sense of whether the formal investment community thinks the cryptocurrency world is sustainable, or finds it all too opaque.

Its success or otherwise will be closely watched, especially by Canaan and Ebang International Holdings, two rivals to Bitmain, both of which are seeking IPOs in Hong Kong.

Meanwhile, it is providing plenty of opportunity for the balls-out bravado commonplace to the sector. “We can easily break the IPO record set by these guys,” says Deepak Jha, inviting Euromoney to invest “anywhere from $50K to $2 million” in his “utility-scale crypto mining” business.