The Hong Kong Stock Exchange (HKEX) is reluctant to approve the initial public offering (IPO) applications of Chinese bitcoin mining equipment manufacturers, according to a person involved in the talks.
Following the 2017 cryptocurrency market boom, mining giants Canaan Creative, Ebang and Bitmain applied in May, June and September of this year, respectively, to list shares on the HKEX.
But the recent collapse of the crypto markets, and general volatility of crypto is making the exchange nervous about listing such companies. Canaan Creative’s application has already lapsed, Ebang is weeks away from lapsing and Bitmain will have a tough time convincing the HKEX.
“The exchange is very hesitant to actually approve these bitcoin mining companies because the industry is so volatile. There’s a real risk that they could just not exist anymore in a year or two,” said the person, who requested anonymity because the information is private, adding:
“The HKEX doesn’t want to be the first exchange in the world to approve this and have one die on them.”
Lawyers familiar with the HKEX’s IPO process called its hesitance to list mining firms understandable.
Apart from basic listing requirements such as financial track records, the HKEX also focuses on suitability and sustainability of the business and how risky the business is for retail investors.
Neither Ebang nor Bitmain has disclosed its financial data for the third quarter of this year when the cryptocurrency market started to take a notable dip.
“If there’s a significant drop of their revenue, profits or loss, they have to disclose that. It’s something that worries the exchange,” the source familiar with the talks said.
The source went on to explain the exchange is actually taking the advantage of the fact the crypto market is down right now because while it doesn’t want to approve the applications, it doesn’t have the grounds to reject them outright.
“What they are doing is they are just dragging the case right now,” the source said, adding:
“If the market continues going up, the exchange may be pressured to approve the cases because how well the entire industry is doing. But because the market is down, these companies really have to justify [how] this industry is sustainable.”
Bi said two common reasons for IPO delays in Hong Kong are a failure on the applicant’s part to provide due diligence and disclosure to HKEX’s satisfaction and market conditions where a realistic valuation is different from what existing investors want for their exit.
Another factor that can could make hurt these companies chances of approval is their vast holdings of cryptocurrencies whose value has steeply fallen in the past six months.
“Combined with a limited track record of business operations and the substantial recent decline in crypto values, likely means that regulators will be especially closely scrutinizing their businesses,” Bi added.
Bitmain, for example, disclosed that as of June 30 this year, it had US$886.9 million in crypto assets, including bitcoin, bitcoin cash, ether, litecoin and dash, among others.
Although it didn’t disclose a coin-by-coin breakdown, all of the mentioned cryptocurrencies have seen a major decline by at least 50 percent. Among them, bitcoin cash has seen the most significant drop after the recent hard fork war, in which Bitmain has played a vocal part in leading the Bitcoin Cash ABC camp.
“It [the crypto holding] certainly doesn’t help with the case, because you are just adding more risks. Now it’s not just your revenue that’s at risk, but also your balance sheet,” the source said.
To be sure, going public is not necessarily a life-or-death matter for the Chinese mining companies.
“These companies – Ebang, Bitmain and Canaan – want the regulatory approval and status of being a listed company. But as far as the genuine funding needs, they actually have quite a lot of money because they have made a lot in the past year,” said the source familiar with the discussions.
Indeed, the 2017 boom helped the miner makers in China to generate exponential revenue and profit growth.
Bitmain, Cannan and Ebang made $1.2 billion, $56 million, and $60 million, in profits last year, respectively. Further, the significant growth also led to a whopping increase in the firms’ compensation for their key executives.
Do they really need to do an IPO? Are they short on cash? Are they cashing out? Or is it just for the profile?
Let us know your thoughts in the comments below.