Scrutinizing Bitmain’s IPO produces more questions than answers

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Only a week ago, it was reported that cryptocurrency mining company Bitmain was preparing to move forward with its long anticipated initial public offering (IPO). The announcement may have had a positive impact on the Bitcoin BCH price, but that excitement was short-lived and now the IPO is beginning to be scrutinized in greater detail. The results are even more disconcerting than previous analysis of the company revealed.

The release of Bitmain’s IPO application (in pdf) has led to more questions about the company’s solvency. Around 28% of the company’s assets are in cryptocurrency, leading some to believe that Bitmain is essentially about to introduce a crypto fund through the IPO. However, this is more than likely not the case, as Bitmain’s physical inventory, for example, provides the company with a certain amount of diversification.

However, that physical inventory has decreased significantly in value. This is due to a market that rapidly shrunk in size, leaving Bitmain with product that it couldn’t distribute. Therein lies one of the problems— having inventory and no market is a dead end.

The lengthy IPO document, in one instance, leads readers to believe the company is a manufacturing firm (despite 50% of its products ultimately failing) and, in another, that it is offering a mining stock. It is also a company that offers services to other sectors, further exasperating attempts to define its operations.

A post on Medium by Ken Lu makes four startling revelations about the company. Lu dissected the IPO in great detail and also reviewed the company’s pre-IPO Investor deck. What he discovered should give pause to anyone considering making an investment in the company.

Lu points out that Bitmain misrepresented its net profit for 2017. Referencing slide #30 of the Investor deck and page 307 of the prospectus, he points out that there is a huge $550-million mismatch between Bitmain’s stated net income and its audited income. Lu asserts, “This massive US$550 [million] Net Income ‘miss’ translates into implied PE multiples being significantly inflated. Many investors relied on this essential figure for doing the analysis, and misrepresenting this and to such a degree is nothing short of financial fraud.”

Bitmain also allegedly misrepresented its net profit target for the current year. Lu points out, “[I]nvestor deck (slide #30) states Net Profit Target for 2018 at US$1.8 [billion] which we now know is a complete sham. But did [Bitmain CEO Jihan Wu] and Directors know of this while fund-raising for Pref B and B+ rounds during summer? This is the key question Hong Kong courts will be asking. And the answer is undoubtedly yes!”

Lu also points out that Bitmain was creative with its financial reports this year. He indicates that the company had tied together the results from the first two quarters without showing the individual quarter results. The first quarter was highly successful, but the second quarter was a virtual failure. This shows a tendency of the company to try and fool investors with smoke and mirrors.

The last misrepresentation comes through Bitmain’s accounting of its inventory. He calls out Bitmain for not breaking down “its actual inventory of cryptocurrency and recording it at cost vs true market value. It’s very odd that for something that constitutes 28% of Assets is a complete ‘black box’ to investors.” Lu adds, “Bitmain holding close to a US$1billion in a ‘black box’ that can at any time plummet to zero, is surely not something the Hong Kong regulator will take lightly.”

Lu concludes, “Investors in the recent pre-IPO round were misled as to the accuracy of the data, and considering complexity and opacity of Bitmain’s business (compared for example to its competitors Canaan and EBang), Hong Kong Regulators will be taking a very close look at the business model, requiring more clarity and explanation. All of that will require more time, and that will coincide with Bitmain having to disclose even more disastrous Q3 results, which will even further damage investors’ appetite for the IPO.”