Intchains Group (ICG) Begins U.S. IPO Effort

A Quick Take On Intchains Group Limited

Intchains Group Limited (ICG) has filed to raise an undisclosed amount in an IPO of its American Depositary Shares representing underlying Class A ordinary shares, according to an F-1 registration statement.

The firm designs ASIC chips for the blockchain mining industry.

ICG has produced very strong revenue growth and cash flow generation but faces a volatile industry and regulatory uncertainties in China.

I’ll provide an update when we learn more about the IPO from management.

Intchains Overview

Shanghai, China-based Intchains was founded to develop advanced application specific integrated circuits [ASIC] and related mining algorithms to assist cryptocurrency blockchains and miners.

Management is headed by founder, Chairman and CEO Qiang Ding, who has been with the firm since inception and was previously director of research at Shanghai InfoTM Microelectronics Co.

The company’s primary offerings are a family of ASIC chips optimized for a variety of blockchain mining algorithms.

Intchains has booked fair market value investment of $29.5 million as of December 31, 2021, from investors including a variety of private capital entities.

Intchains – Customer Acquisition

The firm sells its chips to crypto machine assemblers and seeks to avoid the highly competitive Bitcoin chip market by focusing on other mining algorithms.

The company is also aiming its products at home/small mining rigs and end-user markets, with less energy requirements resulting in lower cooling noise generation.

Sales & Marketing expenses as a percentage of total revenue have risen slightly as revenues have increased, as the figures below indicate:

(Source)

The Sales & Marketing efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Sales & Marketing spend, was 192.7x in the most recent reporting period. (Source – SEC)

Intchains’ Market & Competition

According to a 2022 market research report by Brand Essence Research, the global cryptocurrency mining hardware market was an estimated $2.3 billion in 2021 and is forecast to reach nearly $5.3 billion by 2028.

This represents a forecast CAGR of 28.5% from 2022 to 2028

The main drivers for this expected growth are a growth in the use of cryptocurrencies by consumers and an increase in the number of applications used by blockchain technologies.

Also, the market share for ASICs has historically been a majority of the market for several years now while the pace of chip technology advancement has generally slowed in recent years as many early gains have already been commoditized.

The overall ASIC chip market is fairly fragmented, with some sectors more concentrated than others.

Management says the firm’s ASICs have ‘dominated the computing power of several algorithms commonly used for alternative cryptocurrencies in terms of the accumulative computing power sold for the years of 2019, 2020 and 2021,’ although I could not independently confirm that.

Intchains Group Limited Financial Performance

The company’s recent financial results can be summarized as follows:

• Sharply higher topline revenue

• Growing gross profit and gross margin

• Increasing operating profit

• Growing cash flow from operations

Below are relevant financial results derived from the firm’s registration statement:

(Source – SEC)

As of December 31, 2021, Intchains had $78.8 million in cash and $5.2 million in total liabilities.

Free cash flow during the twelve months ended December 31, 2021, was $61.8 million.

Intchains Group Limited IPO Details

Intchains intends to raise an undisclosed amount in gross proceeds from an IPO of its American Depositary Shares representing underlying Class A ordinary shares.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

Management says it will use the net proceeds from the IPO as follows:

approximately [25.0]% […] is expected to be used for the continuing development and enhancement of our “Xihe” Platform and “Wangshu” Platform;

approximately [25.0]% […] is expected to be used for [i] the establishment of research and development centers in China, Singapore and selected locations overseas, [ii] research and development projects in cooperation with software companies in China and overseas, and [iii] the expansion of our research and development team;

approximately [25.0]% […] is expected to be used for the establishment of an overseas operating center in Singapore, which will have business operation management functions, end application development capabilities and overseas sales operations;

approximately [15.0]% […] is expected to be used to purchase wafers and other raw materials from qualified suppliers; and

the balance of the net proceeds for other working capital and general corporate purposes.

(Source – SEC)

Management’s presentation of the company roadshow is not available.

Regarding outstanding legal proceedings, management says the firm is not currently a party to any legal or administrative proceedings that would have a material adverse effect on its financial condition or operations.

The sole listed bookrunner of the IPO is Maxim Group.

Commentary About Intchains’ IPO

ICG is seeking U.S. public capital market investment to fund its continued research & development plans and expand its operations footprint.

The company’s financials have produced materially higher topline revenue, increasing gross profit and gross margin, growing operating profit and higher cash flow from operations.

Free cash flow for the twelve months ended December 31, 2021, was $61.8 million.

Sales & Marketing expenses as a percentage of total revenue have risen slightly as revenue has soared; its Sales & Marketing efficiency multiple was 192.7x in the most recent calendar year.

The firm currently plans to pay no dividends and plans to reinvest any future earnings back into the company’s growth plans.

The market opportunity for providing ASICs to the consumer cryptocurrency market is large and expected to grow at a substantial rate of growth as adoption of cryptocurrencies and related technologies is forecast to increase markedly in the coming years.

Like other firms with Chinese operations seeking to tap U.S. markets, the firm operates within a WFOE structure or Wholly Foreign Owned Entity. U.S. investors would only have an interest in an offshore firm with interests in operating subsidiaries, some of which may be located in the PRC. Additionally, restrictions on the transfer of funds between subsidiaries within China may exist.

The recent Chinese government crackdown on IPO company candidates combined with added reporting and disclosure requirements from the U.S. has put a serious damper on Chinese or related IPOs resulting in generally poor post-IPO performance.

Prospective investors would be well advised to consider the potential implications of specific laws regarding earnings repatriation and changing or unpredictable Chinese regulatory rulings that may affect such companies and U.S. stock listings.

Maxim Group is the lead underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 83% since their IPO. This is a top-tier performance for all major underwriters during the period.

The primary risks to the company’s outlook are the uncertain regulatory environment in China and the highly volatile nature of various cryptocurrency prices which can affect demand for mining equipment.

When we learn management’s assumptions about the IPO’s pricing and valuation, I’ll provide a final opinion.

Expected IPO Pricing Date: To be announced.