A research report from blockchain project risk rating agency Standard Consensus High showed in the future when there may be a slight slump of bitcoin miner maker Canaan’s share price as it has a high correlation with BTC price. Canaan announced that its growth of the first three quarters of 2019 was lower than expected, while the growth of the whole industry growth is hindered due to the bear market as well.

However, the company’s free cash flow and revenue have a large decrease accompanied by an increase in the cost of sales. So there may be a slight slump in the future.

The report predicts Canaan’s core mining machinery business will continue to be healthy and capture more market share. The company will use the cash from listing to strengthen research and further accelerate the launch of new products. It is expected that the bitcoin halving will directly lead to the pump of bitcoin price, and the demand for mining machines will be more intense. By December 31, 2018, the negative cash flow of the business activities of Canaan was $1.8 million, which means it may not be able to cover the deficit in the long term. The inability to generate positive cash flow from operating activities will greatly affect the financial cost.

ASIC-based Bitcoin mining market is relatively concentrated in the world, with only a few large competitors. Most of the major players are in China. Six months by June 30, 2019, Canaan’s total share of ASIC-based bitcoin mining machine shipments and computing power ranked second among the world’s and China’s fabless design companies. According to Frost&Sullivan’s data, in the six months by June 30, 2019, Canaan’s market share in computing power sales was 21.9%, higher than 15.3% in the same period of 2018, and its market share in bitcoin mining machine shipments was 23,3%. It is predicted that Canaan will keep this advantage and decrease slightly on this basis.

The report predicts that the successful listing of Canaan will have a significant impact on the mining manufacturing industry. The newly raised $100 million will enable Canaan to improve its balance sheet by paying off short-term debt and invest heavily in research and increase production capacity. Since the birth of Antminers9, Bitmain has been firmly controlling these two fields, which may help to fill the existing technology and production gap of Canaan. In spite of the plan to develop its AI department, it is expected that the miner manufacturing business will still account for the vast majority of revenue by 2022, given the relative growth rate of its business. Due to the impact of the COVID-019, upstream chip supply and mining machine production are expected to decline significantly in the first quarter, mining machine sales will also be negatively affected.

Analysis from Discounted Cash Flow (DCF)

Based on 4.355% weighted average cost of capital, 10% growth rate of operating income and 3.5% long-term growth rate, the report estimates the intrinsic value of Canaan stock to be $2.11.

Analysis from Comps

Based on the analysis of the basic situation, the report concludes that if converting the stock price at 25% percentile P/E and P/TBV, the estimated intrinsic value of Canaan stock is $2.315.

Weighted counting the two analysis methods by 60% (DCF) and 40% (Comps) respectively, and the final target price was $2.21. Studying the implied value based on the 25th percentile P/E ratio and P/TBV multiple. The implied share price in multiples of P/TBV is $1.87 and the median in multiples of P/E is $2.76.