BITMAIN IPO insights
Bitmain Technologies, the world’s largest manufacturer of products used for mining cryptocurrencies, confirmed it was bringing its IPO to Hong Kong (HKEX).
Several days ago, the company filed its 432-page application to be reviewed for listing (Chinese version, English version).
Below are some observations from its filings.
BITMAIN’S FINANCIALS
In the first half of 2018, Bitmain’s revenue was $2.845 billion, with a net profit of $1.123 billion. 95% of revenue comes from the sale of $2.56 million in mining hardware. Surprisingly, only 3.3% of Bitmain’s year-to-date revenue comes from “proprietary mining” (self-mining).
3.3% seems too low, isn’t it? Bitmain provides the following note on this in the disclosures document:
“In additional to offering products and services to our customers, we also engage in proprietary mining. To capture the profitable returns of cryptocurrency mining, we will utilize mining hardware to mine cryptocurrencies ourselves”. In terms of revenue generated by mining, self-mining has been steadily declining from 20.3% of total revenue in 2015, 19.3% in 2016, 7.9% in 2017, and 3.3% in (the first six months) of 2018.
The company’s cost of sales (“COGS”, or production costs) in this time period was up over $1.8 billion — 64% of revenue.
Financial Statement note: Bitmain reported Q1 and Q2 of 2018 on a consolidated basis, so a major missing data point is to understand how COGS changed QoQ. Mining difficulty has been skyrocketing, while prices have more than halved, and Bitmain rigs are market priced almost on a real-time basis. It’s unclear how far gross margin has fallen,but it wouldn’t be surprising if Q1 GM% would be around 50%, and Q2 around 20%. (The craziness of the mining market.)
Aside from selling the crypto mining hardware, Bitmain maintains and operates a number of mining farms and mining pools including 11 in mainland China: Sichuan, Xinjiang, Inner Mongolia, etc. These farms, in aggregate, can hold ~200,000 mining rigs. Bitmain also operates two mining pools (BTC.com and Antpool), the two largest Bitcoin mining pools in the world in terms of computing power.
Together, the two mining pools contributed ~37.1% of the aggregate hash rate of the bitcoin network. While BTC.com mainly targets Bitcoin and Bitcoin Cash, Antpool mines ten types of cryptocurrency, including Bitcoin, Bitcoin cash, Ether, Litecoin, and Dash. Bitmain generally collects up to 5% of the total mining rewards generated from its operation of the mining pools.
GLOBAL OPERATIONS
Bitmain also has three mining farms currently under construction in the U.S.: Washington State, Texas, and Tennessee. The expected operational date is 2019 Q1, and a maintenance/repair center will also be set up in Washington. Bitmain is considering setting up mining farms in Canada’s Quebec province, as well.
Bitmain runs operations (offices, warehouses, operational uses) around the world, including Hong Kong, the U.S., Brazil, Georgia, Israel, Kyrgyzstan, Malaysia, the Netherlands, Russia, Singapore, and Switzerland.
SHAREHOLDERS
Bitmain’s two largest shareholders are, unsurprisingly, its two founders, Micree Zhan and Jihan Wu. But most people don’t realize that Jihan is actually the #2 at the company in terms of ownership. Today, Micree owns 36% of Bitmain, while Jihan Wu owns 20.25%. The CEO of Sogou (a large Chinese search engine) is among the largest shareholders as well.
IPO STRUCTURE
Bitmain plans to list on the Hong Kong Stock Exchange via a weighted voting right structure. [ For those unfamiliar, “weighted voting” was only recently approved by the HKSE earlier this year. This is only allowed for what the exchange deems to be ‘innovative’ tech companies with a $10 billion+ HKD market cap and $1 billion+ HKD revenue in its most recent financial year (divide by eight for the USD equivalent). The structure essentially introduces dual listings in Hong Kong by technology companies who are already listed in the US as ADRs.]
BITMAIN’S TEAM
As of June of 2018, Bitmain had 840 full time engineers on their research and development team. That is ~30% of its entire team, making Bitmain a 2500+ person company. The focus for the engineering team: chip design, algorithm development, platform architecture, software, and hardware development.
On the marketing front, Bitmain claims to rely mostly on ‘word-of-mouth’ branding, as they have “only” a team of 74 people for sales and marketing. Full breakdown:
Interesting facts:
- Bitmain does note it is a risk that none of their current employees are currently represented by labor unions.
- There are rumors that Bitmain was spending $1mm/month just with the *recruiting firm* that was helping them find AI-chip engineers. Just a staggering pace of growth and believable if you back-of-the-napkin things.
BITMAIN’S STRATEGY & BUSINESS MODEL
Bitmain’s own customer base grew from 6,000 customers in 2015 to 80,000 customers in just the first six months of 2018. The 50–50 split between Chinese and international buyers has come down quite a bit as the company has pushed further internationally.
While the core of Bitmain’s business will likely continue to be the front end + back end design of their ASIC mining chips (and ancillary businesses), the company is also making a huge AI play via their new ASIC chips. Their targeted areas of focus: image identification, facial recognition, and big data analysis.
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