Bitmain IPO Preview (Part 2) - King of Cryptocurrency Mining Rigs but Its Moat Is Shrinking

Bitmain IPO Preview: The Last Hurrah Before Reality Bites

Equity Analyst, LightStream Research

Supun Walpola

Equity Analyst

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Equity Capital Markets

Bitmain Technologies Ltd / Equity Capital Markets

<a href="https://www.smartkarma.com/entities/27408" target="_blank" data-smartkarma-citation="entities:27408:1">Bitmain Technologies Ltd</a> (Bitmain) is the largest provider of cryptocurrency mining rigs in the world accounting for over 70% of global market share. More than 90% of Bitmain’s revenue comes from the sale of cryptocurrency mining rigs, the rest comes from mining farms, shared mining pools, AI chips and blockchain services. Bitmain presents itself as a fabless IC manufacturer.
Bitmain has filed for an IPO on the Hong Kong Stock Exchange. Several early reports suggested that Bitmain is looking to raise around USD18bn in its IPO with a valuation of USD40-50bn. However, according to more recent news, Bitmain is now looking to raise only USD3bn. The valuation and the amount to be raised were redacted from the draft prospectus published last week.
According to the draft prospectus, R&amp;D on ASIC chips for cryptocurrency and blockchain applications and AI applications are among the priorities of the IPO.
Bitmain has met with heavy criticism over the past few months for not providing detailed information about what major investors exactly invested in the company and for not disclosing their (rather disastrous) 2Q2018 results in the pre-IPO funding rounds (note that Bitmain did not disclose their 2Q results – a net loss of USD0.4bn - in the draft prospectus either, and instead have hidden them inside 1H results). This coupled with weaker cryptocurrency markets this year have raised some major scepticism around Bitmain ahead of the IPO.
The bearish thesis for Bitmain revolves around three key points, i.e. 1) weaker cryptocurrency markets will continue strain Bitmain’s profitability 2) Bitmain’s competitors have better technology and 3) credibility issues following the misrepresentation of information during the pre-IPO rounds.  
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In this note, we present a counter thesis for Bitmain:
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Given the excessive pessimism on the Bitmain IPO right now, the actual pricing of the IPO could be much lower than initially anticipated. Assuming Bitmain raises about USD2bn, for a public offering of about 15%, this would come to valuation of about USD13bn. We believe a valuation of USD13bn for Bitmain could be justified even with weaker fundamentals. A USD13bn valuation would mean a P/E of around 22x – which is slightly above the semiconductor industry average of around 20x – but justified in terms of Bitmain’s dominance in the cryptocurrency mining hardware industry.
Bitmain’s competitors have caught up in technology, however, the specs of Bitmain’s latest 7nm chip are still unmatched and look promising – the new chip has nearly 2x the power efficiency of other 7nm chips currently out there. On the credibility side, apart from the noted incidents with SoftBank, Tencent and DST Global, Bitmain seems to have got all other promised investors on board. The company has already raised USD734m in the pre-IPO funding round this year.
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Bitmain Technologies Ltd (Bitmain) is the largest provider of cryptocurrency mining rigs in the world accounting for over 70% of global market share. More than 90% of Bitmain’s revenue comes from the sale of cryptocurrency mining rigs, the rest comes from mining farms, shared mining pools, AI chips and blockchain services. Bitmain presents itself as a fabless IC manufacturer.
Bitmain has filed for an IPO on the Hong Kong Stock Exchange. Several early reports suggested that Bitmain is looking to raise around USD18bn in its IPO with a valuation of USD40-50bn. However, according to more recent news, Bitmain is now looking to raise only USD3bn. The valuation and the amount to be raised were redacted from the draft prospectus published last week.
According to the draft prospectus, R&amp;D on ASIC chips for cryptocurrency and blockchain applications and AI applications are among the priorities of the IPO.
Bitmain has met with heavy criticism over the past few months for not providing detailed information about what major investors exactly invested in the company and for not disclosing their (rather disastrous) 2Q2018 results in the pre-IPO funding rounds (note that Bitmain did not disclose their 2Q results – a net loss of USD0.4bn - in the draft prospectus either, and instead have hidden them inside 1H results). This coupled with weaker cryptocurrency markets this year have raised some major scepticism around Bitmain ahead of the IPO.
The bearish thesis for Bitmain revolves around three key points, i.e. 1) weaker cryptocurrency markets will continue strain Bitmain’s profitability 2) Bitmain’s competitors have better technology and 3) credibility issues following the misrepresentation of information during the pre-IPO rounds.  

In this note, we present a counter thesis for Bitmain:

Given the excessive pessimism on the Bitmain IPO right now, the actual pricing of the IPO could be much lower than initially anticipated. Assuming Bitmain raises about USD2bn, for a public offering of about 15%, this would come to valuation of about USD13bn. We believe a valuation of USD13bn for Bitmain could be justified even with weaker fundamentals. A USD13bn valuation would mean a P/E of around 22x – which is slightly above the semiconductor industry average of around 20x – but justified in terms of Bitmain’s dominance in the cryptocurrency mining hardware industry.
Bitmain’s competitors have caught up in technology, however, the specs of Bitmain’s latest 7nm chip are still unmatched and look promising – the new chip has nearly 2x the power efficiency of other 7nm chips currently out there. On the credibility side, apart from the noted incidents with SoftBank, Tencent and DST Global, Bitmain seems to have got all other promised investors on board. The company has already raised USD734m in the pre-IPO funding round this year.


Bitmain Technologies Ltd

Bitmain: A Counter Thesis