Interpreting Canaan Technology's 2021 Annual Report: Revenue of 4.987 billion RMB, where is the moat after achieving record performance?

Author: Xu Cihau/Cailian Press

On March 3, Jianan Technology announced its financial report for the fourth quarter of 2021 and the full year of 2021. The report shows that Jianan Technology's revenue for the fourth quarter of 2021 was 2.1846 billion yuan (approximately 342.8 million USD), an increase of 5611.9% compared to the fourth quarter of 2020, and a 65.8% increase compared to the third quarter of 2021.

Throughout the year, Jianan Technology started low and ended high, achieving significant growth in performance for four consecutive quarters, completing a total computing power sale of 22.342 million T, a year-on-year increase of 238.5%; achieving revenue of 4.987 billion yuan, a year-on-year increase of over 10 times, and setting a historical high net profit of 2 billion yuan.

Jianan Technology predicts that in the first quarter of 2022, the company's revenue is expected to reach 1.5-1.6 billion yuan, with a year-on-year growth of 275%-300%.

After the performance announcement, Jianan Technology's stock surged by 20.88%, closing up 15.53% at 6.25 USD.

1. Impressive Financial Report

The financial report shows that Jianan Technology's revenue for the fourth quarter of 2021 increased from 38.246 million yuan in the same period of 2020. The revenue increased from 1.3176 billion yuan in the third quarter of 2021 to 2.1846 billion yuan. This represents a year-on-year increase of 5611.9% and a quarter-on-quarter increase of 65.8%.

Jianan Technology explained in the financial report that the year-on-year and quarter-on-quarter growth was mainly due to the increase in total computing power sales and the rise in the average selling price per T.

According to the financial report, in the fourth quarter of 2021, Jianan Technology's total computing power sales reached 7.738 million TH/s, a year-on-year increase of 3558.8% compared to the fourth quarter of 2020, and a quarter-on-quarter increase of 15.5% compared to the third quarter of 2021.

"For the first time, we have customers from emerging markets such as Malaysia, the UAE, Argentina, and Peru," said Zhang Nangen, Chairman of Jianan Technology, during the investor conference call. In the fourth quarter of 2021, despite significant fluctuations in cryptocurrency prices, Jianan Technology further expanded its overseas markets, such as Southeast Asia and South America.

According to Zhang Nangen, new customers accounted for 41% of computing power purchases; meanwhile, demand from traditional overseas markets such as Central Asia, North America, and Europe remained strong, with repeat customers accounting for 59% of computing power purchases.

As of December 31, 2021, Jianan Technology's level of advance payments reached 1.34 billion yuan, a historical high, with contracted computing power to be delivered exceeding 6 million T.

Zhang Nangen stated that the company's pre-sold computing power data and the locked production capacity from wafer fabs give the company confidence in its revenue for the upcoming period.

2. Where is the Moat?

The development of the company's business relies on investment in research and development.

Financial report data shows that in 2021, the company's R&D investment reached 332.8 million yuan, a 137.7% increase from 140 million yuan in 2020.

As of the fourth quarter, the number of R&D personnel increased by 99% compared to the same period last year. At the same time, the share-based payment expenses generated from restricted stock granted by the company amounted to approximately 491.5 million yuan.

Zhang Nangen stated that Jianan Technology will continue to deepen its industry focus and provide better products for miners. The company will disclose the specific performance parameters of the new generation of mining machines once the chip production and successful testing of the machines are completed.

Regarding investors' concerns about some large companies entering the cryptocurrency mining chip industry, where is Jianan Technology's moat?

Zhang Nangen responded during the investor conference call that in the niche field of cryptocurrency mining chips, Jianan Technology has accumulated many core technologies, patents, and other technical moats over the years.

According to Jianan Technology, as of December 31, 2021, the company had a total of 156 authorized patents, 70 IC chip layout design rights, and 105 software copyrights.

"The supply chain has also been continuously optimized over the years," Zhang Nangen further explained, noting that healthy cash flow and the mining business can effectively smooth supply chain risks.

Zhang Nangen pointed out that through expanding the global market, the relationship with customers has evolved from simple mining machine sales to joint mining, creating a tighter bond of interests.

"For the past nine years, Jianan Technology has accumulated experience and capabilities from upstream supply chain management to downstream market operations amid the volatility of Bitcoin, allowing us to flexibly adjust based on Bitcoin price fluctuations, strategically diversify risks, and seize opportunities, creating a comprehensive moat."

3. Mining is a Long-Term Strategy

The previous financial report for the second quarter of 2021 indicated that starting from the second half of 2021, the company planned to deploy no less than 10% of its monthly production capacity for self-operated mining each month, with the specific deployment quantity adjusted according to the progress of cooperative mining sites, cryptocurrency prices, and production conditions.

The financial report shows that in the fourth quarter of 2021, the mining business in Kazakhstan faced multiple challenges, including the pandemic, logistics issues, and tight winter electricity supply, but the company still completed the deployment of machines at its partner's site in Kazakhstan.

"Despite facing many challenges, the company still regards the mining business as a long-term strategy," Zhang Nangen stated during the investor conference call. The company will continue to leverage its advantages in mining machine supply, dynamically adjusting capacity between sales and mining operations through broader layouts and deeper collaborations to improve operational efficiency.

According to Zhang Nangen during the investor conference call, as of December 31, 2021, Jianan Technology had deployed mining computing power of 1.12 million T, and as of February 28, 2022, the deployed mining computing power reached 2.38 million T.

Zhang Nangen stated that in 2022, the company will continue to deepen its chip design and enhance product performance. It will explore more customer-centric service methods, including the research and development, manufacturing, transportation, and after-sales service of machines; in 2022, the company will further adopt pragmatic, flexible, and resilient operational methods to respond to uncertainties, maintaining a stable supply to cope with changes in the industry market and fluctuations in cryptocurrency prices, balancing mining machine sales and mining operations to maximize profits.

Based on the current judgment of the company's management, Jianan Technology predicts that in the first quarter of 2022, the company's revenue is expected to reach 1.5-1.6 billion yuan, with a year-on-year growth of 275%-300%.