Bitmain-sanity? A closer look at Bitmain's latest IPO application proof to the Hong Kong Stock Exchange


Is Bitmain unstoppable?

The below post originally appeared in the September 27, 2018 issue of the Messari newsletter here. Shoutout to Ryan for the edits.

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After months of speculation, Bitmain is officially on the path to doing an IPO (yes, your traditional stock market kind, not an ICO) on the Hong Kong Stock Exchange. 

Yesterday, the company filed its 432-page application to be reviewed for listing. (Chinese version here, English version here) Of course, I sat down immediately and started pouring through the details. 

Some interesting stats for you to know:

ON 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 billion in mining hardware. Surprisingly, only 3.3% of Bitmain’s year-to-date revenue comes from “proprietary mining”.

It take money to make money: the company’s cost of sales in this time period was up over $1.8 billion - 64% of revenue.

[Ryan’s Note: The company reported Q1 and Q2 of 2018 on a consolidated basis, so a major missing data point is to understand how cost of sales changed QoQ. Difficulty has been skyrocketing, while prices have more than halved, and Bitmain rigs are market priced on a near real-time basis. It’s unclear how far gross margin has fallen, but if I were a betting man (and I am), I’d think Q1 GM% would be closer to 50%, and Q2 closer to 20%. The viciousness of the mining market.

Surprised by the 3.3% revenue figure from “proprietary mining” (aka self-mining)? Bitmain offers 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. 

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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 FOOTPRINT

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. 

ON THE IPO

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 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 Zhan owns 36% of Bitmain, while Jihan Wu owns 20.25%.

ON BITMAIN’S TEAM 

As of June of 2018, Bitmain was up to 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 states that they rely mostly on ‘word-of-mouth’ branding, as they have “only” a team of 74 people for sales and marketing. Full breakdown:

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Not-so-fun fact: Bitmain does note it is a risk that none of their current employees are currently represented by labor unions. 

ON 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.

[Ryan’s Note: During our Hong Kong trip, we heard that Bitmain was spending $1mm a 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.]

TO CONCLUDE:

Tribal controversies aside, Bitmain is one hell of a company. From its inception in 2013 to today, it’s been an impressive growth story, and its IPO comes with a level of disclosures that we simply don’t get from other crypto companies.

Yet.

Katherine @ Messari

Katherine WuComment