Bitmain Illiquid Assets And Losses Or Why The Company Plans IPO
On the 4th of September the biggest investment company in Asia Temasek Holdings denied rumours about its involvement in the pre-IPO of the mining giant Bitmain. Earlier, the Japanese company SoftBank and the Chinese IT-corporation Tencent made the same statements. Nevertheless, Bitmain does not give up on the IPO idea and hopes to raise up to $18 bln by the end of the year. What are the reasons for the investors being cautious about financing the leader of the mining sector?
First of all, as we wrote earlier, the Hong Kong Stock Exchange, where Bitmain plans to hold an initial public offering, hesitates to make a final decision on its execution. This may be due to the fact that the greater part of mining equipment manufacture is located in China - a country that is continuously oppressing the crypto business. There is no guarantee that mining companies will not get banned. This uncertainty creates risks for both potential investors and the stock exchange, which may bear the listing costs while generate less commission revenue streams from purchase and sale of the shares low in demand.
Secondly, competition on the mining market is growing. Despite of the fact that Bitmain holds 80% of the market, the company has to fight for customers’ attention against other mining equipment producers, including Canaan Inc. and Ebang International Holdings Inc., that are also planning an IPO on the Hong Kong Stock Exchange. The analyst at Sanford C. Bernstein & Co. notes: "The competitiveness of Bitmain’s chips is in question”. Bitmain is technologically lagging as its equipment still has 16-nanometer TMSC chips, while other manufacturers are implementing new gen chips: GMO, Avalon, Ebang, etc.
However, probably the biggest problem for potential investors has become Bitmain assets in Bitcoin Cash - their amount to be exact. On the 12th of August the Chief Strategic Officer of Blockstream Samson MOW posted on his Twitter page a screenshot of the Bitmain report as a part of pre-IPO presentation for investors, which shows that in the first quarter of 2018 the mining giant obtained a little less than 180 000 BCH at an average price of $869 and sold about 15 000 BTC at a price of $6.712. Since the end of 2016 the company has cut Bitcoin assets by a factor of more than three, while the BCH reserves have exceeded 1 mln coins. Meanwhile the protracted “bearish trend” on the crypto market has lowered the fork rate by 35% (the BCH rate at this writing is $567.54). Bitcoin has also fallen, but remained a liquid asset - the trading volume of the most popular cryptocurrency is more than 10 times bigger than the fork turnover. Moreover, the report demonstrates that the other category of illiquid assets - inventory - amounts to more than 37% of the total assets and equals $1,24 billion in the first quarter of 2018.
The BCH support strategy turned out to cost half a billion of US dollars. If we also take into account the high content of non-current inventory that does not generate income in the short term and the fact that the price for Antminer S9 has dropped by 85% due to the correction of cryptocurrency rates and the increasing challenge of mining coins, the total losses of the company in the second quarter can reach the level of $600-700 mln. Therefore, according to Mr. MOU, the mining giant does not disclose financial statements for Q2-Q3, publicly providing figures solely for the first quarter, when the profit amounted to $1 bln.
Bitmain has supported BCH since its inception as its own mining pool, Antpool, and ViaBTC pool were the first to mine the altcoin. The BCH addiction was fueled when the corporation decided not to sell the mined currency but covered the electricity costs caused by the fork mining and the missed opportunities of reducing the Bitcoin mining by other income streams. As a result, Bitmain has become the holder of a large number of BCH coins and the company can not get rid of such reserves, since there is no demand for the altcoin either on exchanges or on the OTC market. Thus, stuffing the market with a lot of BCH will trigger a greater price collapse.
By holding an IPO, Bitmain attempts to attract funds and will apparently puzzle new investors with the problem of illiquid assets.