Bitcoin Mining Machine Maker Canaan Plays Up Offshore Sales

Key points:

• Canaan Inc.’s recent series of deals from two major international customers could be worth around $200 million in 2021 and 2022
• Company is trying to highlight its growing global customer base as China shutters most domestic crypto mining in recent crackdown

By Doug Young

Despite being based in China, we’re really quite international.

That’s the message bitcoin mining machine maker Canaan Inc. CAN is trying to tell the world with a recent series of announcements on new orders for thousands of machines from two major customers outside its home China market. That’s quite important for companies like Canaan these days as China bans crypto mining operations within its borders.

Canaan announced its latest major sale to an offshore buyer at the end of last week, saying Australia’s Mawson Infrastructure Group had ordered 17,352 of its mining machines. The delivery timeframe was relatively long, stated simply as in 2021 and 2022.

There’s no value given for the deal. But if we assume a price of about $4,500 per machine, which represents about a 20% discount from the $5,500 price for the company’s AvalonMiner 1246 model, then the deal would be worth nearly $100 million. Put differently, that would translate to about $17 million in revenue over each of the next six quarters – a relatively significant figure for a company that reported 403 million yuan ($62 million) in revenue in this year’s first quarter.

The latest order follows another from Mawson for a separate 11,760 machines earlier this year. That would seem to indicate the Australian company is happy with the machines’ performance and is installing them quite quickly at its operations in Australia and the U.S. This latest order also comes as the price of bitcoin has rebounded over the last month from about $33,000 as of mid-July to its latest close at around $47,000.

The new Mawson order comes less than two weeks after Canaan announced another major order from an overseas customer. In that case it said it had signed an order to provide 4,000 machines to Canadian company Hive Blockchain Technologies for delivery this month and next for Hive’s operations in Canada, Sweden and Iceland. That order was in addition to another order from Hive earlier this year for 6,400 machines.

Repeat business is always a good sign that a customer is happy with the merchandise, and indeed Canaan’s AvalonMiner 1246 is named as one of the industry’s five best machines in a recent list compiled by the website buybitcoinworldwide.com. Here we should note that this particular site may have some bias, as it also offers all five machines for sale on the site.

It’s not difficult to see why Canaan is trying to highlight its offshore customers, since China has been cracking down on bitcoin mining throughout this year to the point where such mining is now essentially banned within its borders. That crackdown culminated with a notice from China’s State Council in May saying that the country would crack down on bitcoin mining and trading.

Since then local governments have been gradually enforcing the action, systematically shutting down mining operations nationwide. Some companies, like the recently minted specialist BIT Mining, have responded by moving operations outside China. But many lack such resources to make such a move and have had to simply shut down.

Positive Reaction

Investor reaction to the latest announcement was relatively muted, with Canaan shares up just 0.4% in Friday trade in New York. But the company’s shares are up a healthier 35% since the end of July, which is roughly the time it announced the first major offshore deal with Hive. We should note the rally in Canaan’s price also roughly corresponds to the recent rally in bitcoin’s price, so perhaps the company’s rally is being propelled by a combination of both factors.

The huge volatility in Canaan’s stock price is quite routine for cryptocurrency stocks these days. Canaan went public in November 2019 at $9 per American depositary share (ADS), and saw its price plummet as low as the $1-$2 range by the fall of 2020. But then it surged to quadruple its IPO price early this year amid surging bitcoin prices, before crashing as bitcoin’s price plunged.

At its latest close of $9.26, the shares are now slightly above their IPO price.

While Canaan wants us to believe it’s getting more business from offshore customers, it’s actually quite cagey about telling investors how much of its sales are coming from outside China these days. It was quite direct in its IPO prospectus, saying offshore customers accounted for 8.5% of its revenue in 2017, and 23.9% in 2018. The figure fell to 20.5% in the first nine months of 2019 just before the IPO, showing the company was still heavily reliant on its home market.

It talked about big plans for the global market in its prospectus, saying at the time it planned to open overseas offices in Singapore, Japan, the U.S. and Israel to facilitate its overseas expansion. So, perhaps those efforts are starting to bear some fruit.

In terms of actual financials, the company appeared to be bouncing back in this year’s first quarter after a weak 2020 when companies in China were hit by pandemic-related disruptions and other factors. Its revenue in the first three months of the year rose to 403 million yuan from just 68 million a year earlier. In that report it pointed out that revenue from overseas customers rose 78.4% year-on-year in the quarter, though it didn’t provide a specific figure.

Canaan did manage to achieve a slight profit of 1.2 million yuan in the first quarter after previously posting losses. But it was still losing money on an operating basis. The company trades at a price-to-sales (P/S) ratio of 7.4 based on its 2019 sales, which look like a better benchmark for the company than last year. On that basis its domestic rival Ebang trades at a lower P/S of 4.2. U.S. giant Coinbase trades at a higher P/S of 11 based on revenue forecasts for this year, though we should note that company operates a platform for crypto traders and doesn’t make actual machines.

At the end of the day, these kinds of ratios are somewhat useful, as they show who investors see as the strongest companies in this field. But the sector is so volatile that one should take these figures with a big grain of salt, as ratios could change very quickly based on bitcoin’s price and also an individual companies’ latest results.