ANALYSIS: Crypto Mining Equipment Maker Canaan Begins U.S. IPO Process

Canaan has filed to raise $400 million in a U.S. IPO after a volatile few years in the crypto mining space. Management seeks to diversify its chip-designing expertise into the potentially smoother AI chip markets.

Donovan Jones
    Nov 01, 2019 8:00 PM  PT
ANALYSIS: Crypto Mining Equipment Maker Canaan Begins U.S. IPO Process
author: Donovan Jones   

Short Take

Canaan Inc. (CAN) has filed to raise gross proceeds of up to $400 million from a U.S. IPO, according to an F-1 registration statement.

The firm provides cryptocurrency mining hardware and an edge computing AI chip. 

CAN has been subject to the severe ups and downs of the cryptocurrency industry and doesn't have significant sales for its AI chips.

Management says its AI development program is ‘crucial' to its ability to diversify its revenue sources.

Company

Huangzhou, China-based Canaan was founded in 2013 with an initial focus on developing ASIC applications for Bitcoin mining under the brand Avalon Miner and has since expanded its portfolio with the Kendryte K210 chip.

Management is headed by founder and CEO Nangeng Zhang, who was previously an assistant researcher at the Beijing Remote Sensing and Communication Technology Institution.

The company is the second largest designer and manufacturer of Bitcoin mining hardware globally in terms of total computing power sold in H1 2019, accounting for 21.9% of the combined computing power of all the Bitcoin mining machines sold globally, as per data from Frost & Sullivan.

Kendryte K210, also referred to as ‘Kendryte AI' is an Artificial Intelligence [AI] edge computing chip based on the Risk-V open-source hardware instruction set architecture that has been backed by companies like Alibaba (NYSE: BABA), Google (Nasdaq: GOOG), Samsung, Qualcomm (Nasdaq: QCOM) and Antmicro.

Investors in Canaan have included Tunlan Investments, Jinjiang International and Baopu Asset Management, according to Crunchbase.

Customers & Market

The company has an ‘AI marketing' team and participates in industry associations, including Zhejiang Software Industry Association, the Zhejiang Blockchain Technology Application Association, the Chinese Private Technology Entrepreneur Association, the Hangzhou Association of Enterprises with Foreign Investment and the China Communications Industry Association (IoT Application Branch)

Sales and marketing expenses as a percentage of revenue have been variable and more than doubled in the most recent reporting period.

The sales & marketing efficiency rate, defined as how many dollars of additional new revenue generated by each dollar of sales & marketing spend, has fluctuated widely in recent periods.

According to a 2018 market research report by Technavio, the global cryptocurrency mining hardware market is projected to grow over $2.2 billion by 2022, representing a CAGR of 10% between 2018 and 2022.

The main factor driving forecast market growth is the profitability of cryptocurrency mining ventures. 

Management says that in 2017 the ASIC hardware segment held the largest market share of 74% of the market and is projected to dominate the industry during the period, decreasing by only 3% through 2022, according to a Frost & Sullivan report.

Due to rapid IoT and 5G technology development, it is expected that the combined edge AI chips and cloud AI chips markets will grow at a CAGR of about 45.1% between 2018 and 2023.

The edge AI chip segment alone will register CAGR of about 62.1% as compared to a CAGR of approximately 22.3% for the cloud edge AI chip segment from 2018 to 2023. 

Edge AI chips and cloud AI chips accounted for 43.9% and 56.1%, respectively, of the total AI chips market in 2018.

Financial Performance & IPO Details

CAN's recent financial results can be summarized as follows:

  • Highly variable topline revenue

  • A sharp drop in gross profit and gross margin

  • A swing to operating losses

  • Fluctuating cash flow from operations

As of June 30, 2019, the company had $55.5 million in cash and $91.4 million in total liabilities. (Unaudited, interim)

Free cash flow during the twelve months ended June 30, 2019, was a negative ($28.6 million).

CAN has filed to raise $400 million in gross proceeds from an IPO of ADSs representing underlying Class A shares.

Class B shareholders, who will be the Chairman and Chief Executive Officer, will be entitled to fifteen votes per share versus one vote per Class A share

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

Per the firm's latest filing, the firm plans to use the net proceeds from the IPO as follows:

 - for research and development for ASICs related to AI algorithms and applications;

 - for research and development for ASICs related to blockchain algorithms and applications;

 - for expansion of our AI and blockchain business globally by making strategic investments and establishing overseas offices;

 - for supply chain optimization and repayment of debts incurred by us in connection with our reorganization; and

 - the balance of the net proceeds for general corporate purposes.

Management's presentation of the company roadshow is not yet available.

Listed underwriters of the IPO are Credit Suisse, Citigroup, China Renaissance, CMBI, Galaxy Digital Advisors, Huatai Securities and Tiger Brokers.

Commentary

CAN is attempting to tap U.S. public markets for a large capital raise.

The firm's financials show the ravages of the widely fluctuating cryptocurrency mining markets in recent years.

In response to the highly variable crypto mining industry, management is pursuing a diversification strategy, trying to capitalize on its ASIC chip designing expertise to extend into AI chip making.

The market opportunity for AI (deep learning) chips is likely about the same as the crypto market, but enticing due to its smoother revenue prospects, at least in the short term.

Credit Suisse is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 12.1% since their IPO. This is a top-tier performance for all major underwriters during the period.

The Canaan IPO is a risky investment proposition for two reasons: one, the crypto industry is highly volatile and two, the firm has limited experience or history in successfully designing and selling AI ASICs.

Given the volatility in the U.S. IPO market, Canaan will have to work hard to convince institutional investors of the value of its approach.

(The opinions expressed by contributing analysts do not reflect the position of CapitalWatch or its journalists. The analyst has no positions in any stocks mentioned, no plans to initiate any positions within the next 72 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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