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  • Greater China

PE-backed Chinese crypto player set for Hong Kong IPO

  • Tim Burroughs
  • 28 September 2018
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Bitmain, a five-year-old Chinese company that is the dominant global player in manufacturing chips for bitcoin mining, with revenues ballooning nearly tenfold to $2.5 billion last year, has filed for a Hong Kong IPO.

Aggregate private funding for Bitmain stands at nearly $785 million, including rounds of $292.7 million and $442 million – described in the prospectus as Series B and Series B-plus – that closed in June and August, respectively. The earlier of these rounds is said to have valued the company at $12 billion.

According to AVCJ Research, Sequoia Capital China and IDG Capital took part in a $50 million Series A in September of last year. The Series B featured Coatue Management, Singapore’s EDBI, and Sequoia’s China growth and global growth funds, while China International Capital Corporation (CICC), SBCVC and Tencent Holdings reportedly came into the extended round.

Sequoia is listed as the largest external shareholder with 3.13%, followed by Advantech Capital with 1.17% and Sinovation Ventures with 1.13%. Temasek Holdings, Frees Fund, Crimson Partners, and several government-linked technology funds are among the other investors. Founders Ketuan Zhan and Jihan Wu hold a majority interest and they will retain control post-listing because the company is adopting a weighted voting rights (WVR) structure.

Bitmain produces fabless chips for cryptocurrency mining and artificial intelligence (AI) applications. It accounted for nearly three-quarters of global cryptocurrency mining hardware sales in 2017, primarily through application specific integrated circuit (ASIC) chips sold under the Antminer brand. The hardware has algorithms covering major cryptocurrencies such as bitcoin, bitcoin cash, ether, litecoin, and dash.

Other business lines include AI chips – the company launched its second-generation product in the first quarter of 2018 – and managing mining farms. Bitmain can put its customers’ hardware to work in these farms, operating mining pools where miners combine computing power and split the rewards. As of June, the company had 11 mining farms in China and operated the world’s two largest mining pools.

Antminer hardware accounts for the vast majority of revenue, which jumped from $277.6 million in 2016 to $2.52 billion in 2017. However, the cost of sales – principally contract manufacturing and raw materials – rose tenfold over the same period, putting pressure on gross margins. Bitmain posted net profit of $701.4 million for 2017, up from $113.6 million the previous year.

While the global cryptocurrency industry was worth $13.2 billion last year and mining hardware revenue reached $3 billion – and is projected to hit $17.1 billion by 2022 – the company notes that its sales are largely driven by Bitcoin prices, which have a history of volatility. For example, it placed significant orders with manufacturing partners on the back of strong price growth towards the end of 2017, but the subsequent drop in early 2018 dampened customer demand.

Moreover, Bitmain received $855.3 million in cryptocurrency last year as payment for its hardware and its cryptocurrency balance was $886.9 million as of June, or 28% of total assets. This is classified as investing cash flow, rather than operating cash flow, conversion into standard currency.

The size and pricing of the offering have yet to be decided. The company plans to use the proceeds for R&D, increasing production output of ASIC and AI chips, and global expansion.

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  • Sequoia Capital
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