ANALYSIS: Ebang International Seeks IPO for US, EU Expansion

The firm designs ASIC chips, or application specific integrated circuits that are used in Bitcoin mining machine applications.

Author: Donovan Jones   

Ebang International Holdings (EBON) has filed to raise $100 million in an IPO of its Class A ordinary shares, according to an F-1 registration statement.

The firm designs ASIC chips, or application specific integrated circuits that are used in Bitcoin mining machine applications.

EBON seeks to go public after Bitcoin mining equipment maker Canaan's (CAN) recent IPO, which has been a disappointment to IPO investors.

Hangzhou, Zhejiang Province-based Ebang was founded to design Bitcoin ASICs to maximize the efficiency and speed of Bitcoin mining equipment for mining operators.

Management is led by founder, Chairman and CEO Mr. Dong Hu, who was previously a teacher of information engineering and has extensive experience in networking and communications.

The firm has three large customers which accounted for 34% of its revenue in 2018 and 2019.

EBON outsources the manufacturing of its ASIC designs to semiconductor foundries located in the Asia Pacific region.

The company produced the first commercially available machines using a 10nm ASIC and has since completed design on an 8nm ASIC and is working on a 5nm ASIC for non-Bitcoin cryptocurrencies such as Litecoin and Monero.

The founder and CEO Mr. Hu owns 41.82% of company stock pre-IPO.

EBON obtains customers through both online and offline direct sales efforts, product launch events, industry conference attendance, and social media activities.

Management seeks to increase its overseas sales and marketing efforts, focusing especially on prospects in North America and Europe "in anticipation of future growth in the blockchain industry in those regions."

Selling expenses as a percentage of total revenue have been dropping as revenues have decreased.

The Selling efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Selling spend, was a negative (173.1x) in the most recent reporting period.

According to a 2019 market research report by Technavio, the market for cryptocurrency mining hardware is expected to grow by more than $2.2 billion between 2018 to 2022.

2018 saw a year-over-year growth rate of 8% and the forecast period is expected to grow at a CAGR of almost 10%.

The main drivers for this expected growth are increasing demand for equipment from North America and Europe as the difficulty of Bitcoin mining increases forces miners to upgrade their equipment for greater efficiency.

Major competitive vendors include:

  • Bitmain

  • BitFury

  • Halong

  • Canaan (Nasdaq: CAN)

Ebang's recent financial results can be summarized as follows:

  • Sharply reduced topline revenue

  • Negative gross profit and negative gross margin 

  • Increased operating losses

  • Reduced negative cash flow from operations

As of December 31, 2019, Ebang had only $3.5 million in cash and $81.6 million in total liabilities.

Free cash flow during the twelve months ended December 31, 2019, was a negative ($19.1 million).

Ebang intends to raise $100 million in gross proceeds from an IPO of its Class A ordinary shares, although the final amount may differ.

Management says it will use the net proceeds from the IPO to develop and introduce new mining machines, for corporate branding and international expansion and working capital needs, and other corporate uses.

Management's presentation of the company roadshow is not available.

Listed bookrunners of the IPO are AMTD and Loop Capital Markets.

Commentary

Ebang is seeking U.S capital market funding for its international expansion plans, especially into North America and Europe.

EBON's financials tell a tale familiar to observers of the crypto markets, with wide swings in revenues and other financial metrics due to the volatile nature of Bitcoin mining demand and Bitcoin price dynamics.

Selling expenses have dropped as revenues have fluctuated; its Selling efficiency rate was highly negative during the most recent period.

The market opportunity for Bitcoin mining ASICs is difficult to determine, since there may be limited ability to deliver sharply enhanced performance with newer technologies.

AMTD is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (34.7%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.

By comparison, another recent Bitcoin mining firm, Canaan (CAN), went public in the U.S. and its stock has been cut in half since the IPO. Not exactly the kind of performance that inspires confidence in the industry.

However, Bitcoin is entering a short period before "the halving," when the block reward is cut in half going forward.

This event is expected to put pressure on less efficient miners to either exit the business or upgrade their equipment to higher efficiency units.

The degree of demand change as a result of the halving event is unknown as to direction and amplitude, so we will have to wait and see the effect on the halving on miner demand.

Expected IPO Pricing Date:  To be announced.

(The analyst has no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 72 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)



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