Huobi Technology – Your gateway to blockchain in China
(18 minute read)
Since our initial launch, we’ve focused mostly on analyzing the well-known names: Alibaba, JD.com, NIU… This week, we decided otherwise and went for a name not well known to the general public. Despite this, we believe it will only be a matter of time before the company and its industry will become of interest to investors worldwide.
In this report, we’ll often mention both Huobi Technology and Huobi Group, the parent company. We do this because of the explicit link between those companies through ownership and through its activities. To this date, Huobi Technology is one of the few listed companies who is involved with the blockchain industry. Other crypto exchanges are taking action to capture the current momentum in the crypto space: Coinbase, for example, has recently filed its IPO request with the SEC.
Readers who don’t have any prior knowledge in blockchain, decentralized finance and crypto exchanges can read the below 3-paged report to get a better understanding of the industry.
1. The Company
Company overview
Huobi Group was founded in 2013 with a mission to making breakthroughs in core blockchain technology and the integration of blockchain technology in other industries. Huobi Group has expanded into the public chain, digital assets trading and wallet, mining pool, proprietary investment, incubation, Digital Asset Research, etc., established a global digital economy industry ecosystem, by investing in over 60 upstream and downstream companies in the blockchain industry and formed an overall global digital economy ecology. Huobi has over 1,300 employees globally. The Huobi team is dedicated to providing safe, professional, trustworthy, and world-class services to its global clients across 170+ countries. (Huobi Group, sd) . It has subsidiary companies in China, Korea, Japan, Indonesia, Russia, Argentina, Thailand
Huobi Technology Holdings Limited (“Huobi Tech”, former Pantronics Holdings Limited) is listed on the Hong Kong stock exchange under ticker HK:1611. The company can be considered an indirect subsidiary of Huobi Group:
- use of a shared name since 2019
- since August 2018, ownership is largely in the hands of executives and owners of Huobi Group
- Huobi Technology providing services to Huobi Group, mostly Cloud-related
In August 2018, the listed company Pantronics (founded in 1983) was acquired by existing shareholders of Huobi Group. Later, they changed the name to “Huobi Technology”. At the time, the deal was reported as potentially providing Huobi Group the opportunity to go public via a reverse takeover. However, the Hong Kong exchange has since then put restrictions in place that would make this process more difficult, especially if any of the companies are not headquartered in Hong Kong.
Let’s look at how the current ownership is set up. Note that all ownership rights are reflected at the lowest level, without listing the investment holdings through which individuals may invest.
Important equity owners in Huobi Technology include Li Lin (CEO), Sequoia Capital China, Neil Peng (Managing Partner Sequoia Capital China) & Zhen Partners, etc. Publicly available shares, as mentioned before, account for around 14% of Huobi Technologies’ share capital.
Primarily engaged in OEM & EMS[1] manufacturing of power-related and electronic products, Huobi Technology is also expanding its business into technology solutions with an emphasis on blockchain applications. Huobi Tech finished the acquisition of Win Techno Inc. (“Win Techno”) at the end of July 2019. Win Techno mainly provides cloud services and data center services for blockchain-related companies and will also offer other customized services in the future.
Public float in the company is 44.28 mio shares. With 307 mio shares outstanding, this means the company offers around 14% of its shares to the general public. At a price of 19,74 HKD, the public float is around 874 mio HKD (113 mio USD) and the total market cap is around 6.049 HKD or 786,10 mio USD.
[1] Original Equipment Manufacturer (OEM) and Electronics Manufacturing Service (EMS)
2. Qualitative Analysis
Activity Overview
Figure: Huobi Technology Corporate Structure
Electronics Segment (Pantene)
- Its power-related & electronic product business, today, accounts for about 85% of revenue. We’ll discuss this segment more closely in the quantitative analysis section. “Pantene Industrial Co.” was founded in 1983 and its products range from the core business of electronic power supplies, battery chargers, and coils/ solenoids to more recently LED and optical products such as LED lighting. “Shenzen Pantai Electronic” was founded in 1994 as a way to vertically integrate parts of the supply chain. It also has a US branch in Chicago, focusing on supporting activities (engineering, logistics, sales support).
Custodial & Compliance Services (Huobi trust)
- The company has been trying to enter the US market for several years. Huobi US (HBUS), another legal entity related to Huobi Group, ceased its operations in December 2019 citing regulatory concerns. The company said at the time the departure was meant to be the next step in making its businesses more compliant with U.S. laws and regulations. Many global crypto exchanges still face difficulties in acquiring licenses from state regulators in the U.S., especially for their fiat-crypto trading businesses. A big part of the difficulty in providing services related to digital currencies is the compliance aspect.
- With its licenses granted in August of 2020, the company seems to have found its way into the US market. Huobi Trust obtained type 4 and type 9 licenses from the SFC (US Securities and Futures Commission). The first relates to being able to offer advice on securities in the US and the second relates to asset management services. Huobi Trust is led by Aja Heise, whose former role as chief compliance officer at Prime Trust. The company said in a statement that “Its long-term vision is to create an integrated financial service platform, which will offer both traditional and virtual assets” (Huobi Tech, sd).
Cloud / Data Services
- Aimed to target & leverage the blockchain industry, we can consider Win Tech as an important provider for Huobi Global, the holding company. It’s still at the early of setting up operations, mainly providing cloud services and data center services for blockchain-related companies.
- At the end of 2019, it has become a participant of the Amazon Web Services Partner Network. The current objective for WinTech is to facilitate payment of usage fees from Huobi Global Limited (and its cryptocurrency exchange) to AWS Group.
- The payment services over three years account for a total amount of around 4 mio USD, with the amount for cloud-based software and database services (for a period of 1 year) remaining unspecified. It becomes clear that Huobi Technology is and will remain an important partner for Huobi Global.
Digital Wallet & asset management
- In August of 2020, the company received approval for the application of Huobi Wallet for a TCSP license, which allows it to effectively open a Hong-Kong based digital wallet. It effectively did so in September that year. A quick glance at Google Trends learns us the wallet is gaining in popularity (weekly numbers, worldwide).
Furthermore, Huobi Technology also set up an asset management group. Its vision is to bridge the gap between traditional and virtual asset investments and offer integrated investment solutions to professional investors. The fund shall invest in a combination of different asset classes including equities, fixed income securities, and virtual assets.
On March 4th of 2021, the company made a major announced in stating Huobi Asset Management received approval from the Hong Kong SFC (Securities and Futures Comission) to launch a virtual asset fund:
AS THE FIRST LICENSED VIRTUAL ASSET FUND MANAGER APPROVED BY THE SFC TO ISSUE VIRTUAL ASSET FUNDS WITH AN ACTIVE INVESTMENT STRATEGY, HUOBI ASSET MANAGEMENT WILL INVEST IN VARIOUS VIRTUAL ASSETS IN THE FUTURE…
…HUOBI ASSET MANAGEMENT PLANS TO LAUNCH THREE VIRTUAL ASSET FUNDS: BTC TRACKER FUND, ETH TRACKER FUND, AND MULTI-STRATEGY VIRTUAL ASSET FUND. BESIDES, HUOBI ASSET MANAGEMENT IS LAUNCHING ITS MULTI-ASSET FUND WITH 10% ALLOCATION TO VIRTUAL ASSETS WHILST 90% INTO TRADITIONAL ASSETS SUCH AS EQUITIES AND FIXED INCOME.
Link to full statement:
Executive management (Huobi Tech)
It’s remarkable how a lot of the executive roles of Huobi Technology are taken by people who are also high in the ranks of Huobi Global. In our opinion, this shows the commitment of the management in making Huobi Technology a success story more than any other factors considered.
Is there a future for Huobi Technology as a standalone company?
We conclude the qualitative analysis by raising the question to what extent current investors are really looking at the electronic manufacturing business at this point. Given the close relationship with Huobi Global, it seems that some investors might just be looking for a way to gain exposure to Huobi Global. We saw an increase in the stock price of Huobi’s Technology when global cryptocurrency gained traction again in mid-February. The regained interest in bitcoin, and the broader cryptocurrency market, boosted all listed companies who are involved in the industry. This was also reflected in the price of Huobi Token, which saw its value increase threefold over the course of 1 month. Although not directly related, the increased attention for the Huobi Token will ultimately have some effect on the stock price of Huobi Technology. Alternatively, if the token value would decreases, the stock is likely to follow. We don’t expect this correlation to fade away anytime soon. DeFi and other initiatives will likely only increase investors’ awareness of Huobi Group, and therefore also of Huobi Technology.
From a rational viewpoint, current valuation makes little sense (see section 3 – quantitative analysis). You’re effectively overpaying for an old manufacturing company. However, market participants don’t always behave in rational ways. Huobi Group is linking its name, logo, and business with Huobi Technology. It seems likely that one day, the group will eventually decide it’s better to bring Huobi Technology under the holding company instead of it being a separate entity. This might mean a delisting or takeover, with shares likely gaining from both options. After all, the current market cap is “only” 800 million USD, an amount Huobi seems able to afford quite easily.
3. Quantitative Analysis
In the quantitive analysis, we discuss the financial statements (income statement, balance sheet, cash flow statement) and valuation metrics. This data is obtained from the latest annual report, which covers FY 2021 and ended on September 30th, 2020.
Financial Statements – general
Total revenue is down 11,46% year-on-year, related to the economic impact on global trade caused by the pandemic. Total assets of Huobi Tech mainly consist out of current assets: cash & bank balances (400 mio HKD). Its total liabilities include 320 mio HKD in bank borrowings, illustrating the company is somewhat inflating its balance sheet by taking on debt but not really allocating it (for now). Operating Cashflow is highly impacted by accounting for leases through the depreciation of right-of-use assets. The negative total Cashflow, on the other hand, is mostly related to a 160 mio HKD loan repayment of which further details are unknown. The company incurred a minor loss for the full fiscal year 2021.
Financial Statements – Revenue segments
Power-related & electronic products remain the largest segment to date. Given US-china trade tensions and the economic impact on the global markets, this segment had a 21,8% decrease. Revenue from its largest customer fell by 31,5%.
Copper pricing
Note that operating margin was higher on its most important segment, as stated in the financial report: “the higher gross profit margin was due to the decrease in raw material costs, especially copper cost, and the positive impact on the shift in sales mix. Sales to high-margin customers increased while sales to low-margin customers decreased during FY2020”.
We wanted to highlight this point as recently, copper prices have been surging to 10-year highs. This will adversely affect the company in the short run.
If in 2019, the operating margin increased by 3,2% because of a 9% decline in copper prices, 2020 is set to be around 45% higher than last year, likely bringing the margin on this segment close to zero.
Technology Solution Business – Win Techno
On the recently acquired Win Techno Inc., it’s worth stating that the company was able to achieve a 74,8% gross profit margin, largely invoicing itself (through Huobi Global). It should be noted as a positive aspect that this kind of margin is allowed under current (fiscal) regulation requirements. Its other initiatives did not bring any revenues in FY 2020.
Valuation metrics
Regardless of any future outlooks, investors should always keep in mind price action. The current valuation is expensive, looking at the multiples above.
The company is trading at a 21,9 price to sales. For reference: at the time of writing (March 1st, 2021) Alibaba is trading at 7.05 P/S, Tencent at 12 P/S, and NVIDIA at 20,42 P/S. Leaving other factors aside, the market thus assumes revenues to grow by a rate higher than the aforementioned companies. We know by now that there are other factors to consider, as illustrated in the “Qualitative analysis” section.
[2] We’re not associated with Koyfin, but can highly recommend this new platform to investors for fundamental & technical analysis, research and global news.
4. Risks
1. Huobi Group
The performance and any associated news around the parent company can impact the stock price of Huobi Technology, especially at current valuations. Trading history has shown that investors often trade on the basis of news information related to both names, without necessarily taking into account the different business activities of both companies.
The price of the Huobi Token might be a good reflection of the sentiment around the Huobi Group as a whole. Huobi Token (HT) was launched in 2018 and one token is currently worth around $ 15,31. The price has appreciated by over 300% since the beginning of this year (nominated in USD), currently representing a market cap of around 2,9 billion USD.
Huobi Group is also capturing a lot of the momentum in promising areas like DeFi (Huobi Labs), Cloud, and digital wallets, increasing the positive sentiment around the group and therefore also around Huobi Technology.
2. Reduced appetite for crypto mining operations
Bitcoin illustrates the importance of China in the global supply and settlement operations. Between December 2017 and January 2018 China represented 78,9% of the global bitcoin mining. Today, this number stands at around 65% (CNBC, 2021). Back in 2018, the outlook for the crypto mining sector was very uncertain. A multiagency government task force overseeing risks in Internet finance issued a notice ordering local authorities to “guide” the shutdown of operations that produce, or “mine”, cryptocurrencies (WSJ, 2018).
More recently, this issue came up again as China’s inner Mongolia region plans to ban new cryptocurrency mining projects and shut down existing activity in a bid to cut down on the energy-consuming operation (CNBC, 2021). According to the source, inner Mongolia alone accounts for around 8% of all bitcoin mining globally, more than the United States which accounts for 7.2%. We believe this move shouldn’t be regarded as a change of direction by the Chinese government. The industry has become so important for underdeveloped regions and we assume the regime values the strategic element this industry brings as a supplier/intermediary to crypto exchanges worldwide. On the other hand, it’s also clear that China wants to avoid entire regions being dependent on a single – and very cyclical – industry like crypto mining. Lastly, mining requires an enormous amount of energy. China has been making climate change a priority – which can impact the sector going forward.
3. High-risk trade
A couple of elements indicate that this trade can be categorized as high-risk:
- Share price volatility is very high, with the stock moving over 300% upwards over the course of one month.
- Both the electronics manufacturing sector and the cryptocurrency industry (mining & exchange platforms) are very cyclical industries. The electronics manufacturing sector is affected by a lot of factors including raw materials prices, global demand, trade restrictions, etc. The cryptocurrency exchange industry is mostly impacted by investors’ sentiment for crypto (with bitcoin servings as a leading indicator), as well as regulatory changes.
- Future plans for Huobi Technology in relation to the parent group are unclear. A large portion of the current valuation is likely a reflection of investors believing Huobi Group will eventually incorporate Huobi Technology in the group by either transferring the shares (recall that the majority is owned by Huobi Global’s CEO – Leon Li) or delisting the company from the Hong Kong Exchange.
5. Conclusion & Investment Strategies
Our conclusion on Huobi Technology
Based on the factors mentioned in the qualitative analysis, we believe the company will continue to rally as investors look to gain exposure to the cryptocurrency industry. Huobi Technology is currently one of the few companies that allow global investors to (indirectly) participate in the cryptocurrency business through equity stocks.
The sentiment is unlikely to fade as a major crypto exchange, Coinbase is planning its IPO. This offers a great opportunity for investors to capture this attention by investing in Huobi Technology, as we believe the stock price will benefit from the headlines related to the Coinbase IPO. [REMINDER – this is not an investment advice] The IPO is set to be a direct listing instead of going for the traditional method of letting investment banks take care of setting a price and the initial selling process. As shown with other firms, this process typically involves a lot of volatility and increased news coverage.
However, it’s important to highlight that this is a high-risk trade. We believe that the stock – based on the current financial figures and industry performance – is not worth it’s valuation and the market is placing a premium on the stock price because of the company’s connection with Huobi Group and associated activities. We know by now that investors aren’t always rational in their decision making and active portfolio management can find opportunities like this to generate positive alpha.
Trading
The company does not have a US listing. Investors can buy shares (or derivates) of Huobi Tech (HK:1611) on the Hong Kong Exchange. It’s worth noting that not every broker will facilitate trading on Hong Kong Exchanges.
We could not end this analysis in any other way than leaving the reader with this heroic statement from the company in its 2020 annual report:
“Species with the best genes can always survive and grow in the most dramatic volatility, and long-termism will eventually triumph over opportunism. Only by stopping reminiscing about the successes of the past then we can transcend the cognition of the present.”
6. Bibliography
List of references
CNBC. (2021, 03 02). A major Chinese bitcoin mining hub is shutting down its cryptocurrency operations. Retrieved from CNBC.com.
Coindesk. (2020, 10 15). How the DeFi Craze Made Its Way to China. Retrieved from https://www.coindesk.com/china-defi-craze
CoinMarketCap. (2021, 03 03). Top Cryptocurrency Spot Exchanges. Retrieved from coinmarketcap.com: https://coinmarketcap.com/rankings/exchanges/
Huobi Group. (n.d.). The leading company of digital economy. Retrieved 02 27, 2021, from Huobigroup.com/en-us: https://www.huobigroup.com/en-us/
Huobi Tech. (n.d.). Huobi Tech Gets Approval from the SFC to Conduct Type 4 and Type 9 Regulated Activities. Retrieved from huobitech.com: https://huobitech.com/2020/08/03/huobi-tech-secures-a-type-4-and-type-9-licenses-from-the-sfc/
Qu, C. (2020, 11 25). Enter the Dragon: China Will Unlock Value in the DeFi Space. Retrieved from Nasdaq.com: https://www.nasdaq.com/articles/enter-the-dragon%3A-china-will-unlock-value-in-the-defi-space-2020-11-25
Simply Wallstreet. (2021, 02 27). Huobi Technology Holdings. Retrieved from simplywall.st: https://simplywall.st/stocks/hk/tech/hkg-1611/huobi-technology-holdings-shares
WSJ. (2018, 01 11). China Quietly Orders Closing of Bitcoin Mining Operations. Retrieved from wsj.com.
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Disclaimer: Our content is intended to be used solely for informational and educational purposes, and not as investment advice. Always do your research and consider your personal circumstances before making investment decisions. ChineseAlpha is not liable for any losses that may arise from relying on information provided.
