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Bitmain and Ebang's Hong Kong IPO dreams in question

Likelihood of listings fades as rival Chinese bitcoin miner Canaan's application lapses

Bitmain, Canaan and Ebang together accounted for 87.1% of global mining system revenues last year   © Reuters

HONG KONG -- China's Bitmain Technologies Holding and Ebang International Holding, the two largest bitcoin mining equipment makers in the world, are widely expected to follow peers in delaying planned floats on the Hong Kong stock market, analysts warn, as regulatory headwinds and market volatility have disrupted plans by crypto-related companies to sell shares.

Canaan, another leading Chinese bitcoin mining equipment maker, let its application for an initial public offering lapse on Thursday, when the company's filing -- first submitted in May -- surpassed its six-month lifespan, according to the Hong Kong Stock Exchange.

The Hangzhou-based company is the second largest cryptocurrency mining equipment maker in the world after Bitmain and reportedly sought to sell its stock for $400 million.

It remains unknown why Canaan failed to complete its listing during the last six months, but the delayed application has cast a shadow over the future of Bitmain and Ebang, the two other companies with similar business models that have also filed for IPOs in Hong Kong this year.

Bitmain submitted an application on Sept. 26, while Ebang filed its paperwork on June 24, which now leaves the company five more weeks to convince regulators before its application also expires.

"There is a very high chance that Ebang's IPO application will lapse," said Jasper Lee, a managing director at financial trading platform eToro in Shanghai. "Fundamentally, there is no big difference between Canaan and Ebang. If Canaan couldn't respond to questions regulators have had, I don't see how Ebang would be able to do so," Lee said.

The circumstances of Canaan's IPO delay are not being disclosed, a common practice in Hong Kong, but "this often happens because of issues related to due diligence and disclosure, or because of market conditions when the valuations expected by legacy shareholders are at odds with what investors are prepared to pay," said Philippe Espinasse, an independent investment banking expert in the city.

Neither company disclosed its valuation in the draft prospectus, but they are reportedly worth billions of dollars, thanks to booming bitcoin prices in recent years. However, bitcoin's price has slumped by more than two-thirds this year. On Monday, bitcoin's price plummeted by about  3% to reach $5391 as a new form of cryptocurrency competed with bitcoin for investors' attention. 

Given the price slump, the three companies might have been asked to adjust their valuation, and Canaan might simply have run out of time before it could come up with a new calculation, Lee said. He added that Ebang, with a deadline as soon as Dec. 24, is likely to suffer the same fate, while Bitmain stands a chance of going public as "they still have plenty of time" to address regulators' concerns.

Other market observers, however, held a more pessimistic view.

"If it is a conscious decision by the government to let it lapse, then it is certainly not very positive for Bitmain or Ebang to succeed in their listing," said Zennon Kapron, the founder of Shanghai-based financial technology research and consulting firm Kapronasia.

"Those are bitcoin mining companies which are somewhat controversial," Kapron said. "Getting an approval is never going to be easy. So the fact that there is a delay is not entirely surprising."

China, where the three companies sell most of their mining machines, has banned domestic cryptocurrency trading and stepped up its crypto clampdown in recent months. While Hong Kong -- a former British colony that operates under laws different from the mainland -- has yet to issue any regulations against cryptocurrencies, the government there has shown a growing interest in bringing "virtual assets" such as bitcoin further within its regulatory net.

Earlier this month, the Hong Kong Securities and Futures Commission announced that it would require licenses from companies that manage or intend to manage portfolios investing in virtual assets, "in light of the significant risks virtual assets pose to investors," it said. The financial watchdog will also prevent retail investors from trading bitcoin via the funds or bitcoin exchanges but will keep the door open for professional investors.

"I can imagine that regulators are putting a lot more scrutiny on cryptocurrency companies than they would on business models they understand," said Leonhard Weese, president of the Bitcoin Association of Hong Kong. "The sentiment is still that this is just a fad, and why allow companies to IPO that they believe will go bankrupt soon?"

Bitmain, Canaan and Ebang have tried hard to present themselves as chipmakers that not only produce hardware for creating digital money but also serve other industries, with technology such as artificial intelligence and blockchain. But until now, turnover from bitcoin-related services still makes up the lion's share of their revenue.

That, in the view of regulators, is a problem. "The Hong Kong Stock Exchange is generally quite cautious and risk-averse in its vetting process," said Ivy Wong, a partner in the Capital Markets Practice at Baker McKenzie in Hong Kong.

"Sustainability or at least a strong track record of sustainability of a business through high and low times is one of the main focuses of the Hong Kong Stock Exchange," Wong said. "It's well acknowledged that the cryptocurrency market is still at its developing stage [and] has yet to be tested through low times, even if it's considered to have proven its success [at a] high time."

After an application for an IPO has lapsed, Hong Kong Stock Exchange rules state that a new application can be submitted within three months as a "continuance" of the original one. But few expect Canaan to make such a move.

"Their numbers in the second quarter and the third quarter won't look good. If they update their financial figures, it could make it even more difficult to get listed," Lee said.

Canaan has not released any financials for 2018 yet, but it is widely expected that the downturn in the segment will have had an impact. The company did not immediately respond to the Nikkei Asian Review's request for comment, nor did Bitmain and Ebang.

Akane Okutsu, Zach Coleman and Dean Napolitano contributed to this report.

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