The news of Bitcoin ETF and Ethereum ETF being approved for listing has attracted more and more investors to pay attention to the cryptocurrency market. According to the latest report from cryptocurrency exchange Crypto.com, the number of global cryptocurrency holders has significantly increased in the first half of 2024, growing by 6.4% from 580 million at the end of 2023 to 620 million people.
In this context, the capital market's attention to enterprises related to the industrial chain is also increasing. Among them, Conglian Group (ICG. O), as a chip design company that designs ASIC chips (Application Specific Integrated Circuits) for computing devices used in cryptocurrency mining, is one of the beneficiaries.
Conglian Group was established in December 2017 and took less than 7 years to land on the NASDAQ stock market in March 2023, becoming one of the representative enterprises in the domestic blockchain field. Its latest Q2 2024 report shows that it achieved revenue of $16.93 million, a year-on-year increase of 78.51%, and a net profit of $6.93 million, a year-on-year increase of 345.5%. As a result, on the last trading day of August, the stock price of Conglian surged by 28.7%, and the trading volume of 218000 shares also reached a new high for the year.
So, what kind of enterprise is Conglian Group?
Engineer Entrepreneurship: A Chip Designer with a New Path
Conglian Group is a typical engineer startup enterprise. Its founder, chairman, and CEO, Ding Qiang, first worked as an engineer at Freescale Semiconductor before joining Yingfangwei (000670) in 2009. He has held positions such as R&D director and executive assistant, accumulating rich experience in the application and implementation of technologies such as blockchain and artificial intelligence.
In 2017, Ding Qiang resigned from Yingfangwei and founded Conglian Group, devoting himself to the blockchain industry.
This year, Bitmain and Canaan Technology (CAN. O) have already occupied 87.5% of the market share in mainstream cryptocurrencies such as Bitcoin for computing devices, and the latest generation of computing device chips has begun to iterate towards 7nm processes, leading to intense competition. So, Conglian Group turned its attention to the emerging and niche market of alternative cryptocurrencies (referred to as "tokens").
Since 2017, with the continuous rise of Bitcoin prices and the explosion of Ethereum, many investors have not only focused on mainstream currencies, but also turned their attention to token markets with lower investment barriers and greater volatility. Emerging tokens such as SBTC, BCX, DASH, QTUM have sprung up like mushrooms after rain.
The activity of the token market provides opportunities for the business development of chip designers. On the one hand, due to the different blockchain algorithms involved in mining different types of tokens, it is necessary to develop various unique ASIC chips to improve mining efficiency. On the other hand, emerging tokens have relatively low performance requirements for computing device chips, which also provides more breakthrough space for startups in the field of chip design.
In 2018, two ASIC chips from Conglian Group, one for Scrypt and the other for Cryptonight V2 blockchain algorithms, were successfully taped out and entered the computing device market for tokens such as Litecoin and Dogecoin. According to the prospectus, from 2019 to 2021, Conglian Group was in a leading position in various types of blockchain algorithms. During the same period, the company's market share in Blake2s and Eaglesong blockchain algorithms reached 61.5% and 92.5% respectively, which can be used for mining tokens such as KDA, CKB, XVG, etc.
2021 is the most prosperous year for the cryptocurrency market, with the price of Bitcoin continuously rising from $28000 at the beginning of the year to $69000, creating a historic high and driving the explosion of the token market. When a large number of investors joined the mining industry, the performance of Conglian Group also experienced explosive growth in 2021, with a revenue of 86.94 million US dollars, an increase of 1057.2% compared to 2020, while maintaining a gross profit margin of 82% and a net profit margin of 71.2%.
However, other blockchain chip designers listed on NASDAQ have lower profit margins than Conglian Group due to the more intense competition in the mainstream cryptocurrency market and higher requirements for research and development quality. According to statistics, the average gross profit margin and net profit margin of comparable listed companies of Conglian Group in 2021 were only 57% and 22.8%, respectively.
The Core of Token Chip Design: Becoming a 'Monster Hunter'
The business model of token chip design carries unique risks - compared to mainstream currencies such as Bitcoin, emerging tokens have lower stability, and ASIC chips require a certain cycle from design to mass production. If the company's bet on the development of tokens falls short of expectations, chip sales will also be affected. Therefore, companies in this industry need to have the ability to identify the potential development of emerging tokens like "orcs" and design ASIC chips for them in the early stages to capture the dividends of their future development.
Based on the prospectus, the first way for Conglian Group in this field to resist risks is to shorten the research and development cycle of chips, enter the market earlier than competitors, and seize the relatively short explosive period of emerging tokens.
At the beginning of its establishment, Conglian Group built a technology development platform called "Xihe", which drives the efficient, low-cost, and high-quality research and development of ASIC chips by integrating self-developed blockchain POW algorithms, system data analysis processes, and more.
As of 2023, the 22nm and 12nm ASIC chips developed by Conglian Group using the "Xihe" platform have completed 9 chip layouts, with a 100% success rate for all chip layouts. It is worth noting that its past ASIC chips only took 5 to 8 months from design to mass production, which is more efficient than the average production process of 10 to 14 months required by peers.
In 2024, the three latest ASIC chips developed by Conglian Group will officially enter mass production. Conglian stated that the average selling price of the new ASIC chip is higher than that of the old product, which has driven a significant year-on-year increase of 785.1% in the company's performance in the second quarter of 2024.
In addition, after completing its IPO in 2023, Conglian Group will use some of the financing funds to establish research and development centers and operation centers in Singapore, extending its business from chips to computing devices.
In the past year, Conglian Group first sent executives to Singapore to explore distribution cooperation, and then in December 2023, reached an asset acquisition agreement with a computing equipment company in Singapore called "GOLD SHELL PTE. LTD" to acquire the assets of the "Goldshell" brand.
Goldshell is one of the most recognized computing device brands in the WEB3 industry. The so-called WEB3 refers to the development concept of the third generation Internet applications. Ding Qiang said, "This acquisition will enable us to enter the downstream production and sales of hardware and software products related to computing devices and other WEB3 infrastructure with an effective multi brand strategy. We will leverage our technological advantages in chip development to form synergies with the Goldshell brand in products, solutions, and marketing, further driving the company's growth and development
In March 2024, Conglian Group began selling Goldshell branded computing devices to individuals and businesses, specifically designed for mining tokens such as Kaspa, Alephium, Litecoin, and Dogecoin.
It is worth mentioning that by 2023 and earlier, the overseas sales revenue of Conglian Group will be basically zero, and its chips will mainly be purchased through downstream distributors and integrated for sales. By establishing a Singapore operations center and acquiring Goldshell, Conglian Group quickly established overseas sales channels. According to the announcement, in the second quarter of 2024, its overseas revenue accounted for 71.7%.
The innovative track selection, effective self research, and business chain extension have been clearly reflected in the performance of Conglian Group in recent years. In 2023, due to the downturn in the cryptocurrency market and inventory impairment, its gross profit margin dropped significantly from 81.6% in 2022 to 11%. However, in the first half of 2024, its gross profit margin quickly rebounded, reaching 61.9%.
Stabilize cycle: asset allocation, leveraging blockchain application software
The "wealth creation" effect of cryptocurrency has led to a massive influx of funds into this market, and its huge fluctuations have also placed certain operational risks on industry chain enterprises.
For example, in 2023, due to the overall price drop in the cryptocurrency market and a significant decrease in demand for computing devices, Conglian Group only achieved a revenue of $11.32 million, a decrease of $53.87 million or 82.6% from 2022.
Starting from 2024, in order to mitigate the impact of market fluctuations on product sales, Conglian will begin to promote its cryptocurrency acquisition strategy and optimize its asset allocation structure. According to the announcement, as of the second quarter of 2024, it has invested a total of $7.481 million to purchase Ethereum virtual currency assets. As of the end of the period, the asset value of this portion was 8.324 million US dollars, with an appreciation of 843000 US dollars. On the other hand, it regards blockchain application software as a long-term research and development direction, striving to develop towards platform based enterprises.
In 2024, the US Securities and Exchange Commission officially approved the listing and trading of Bitcoin ETFs and Ethereum ETFs in January and July respectively, marking the elevation of the status of cryptocurrencies in global asset allocation. Whether Conglian Group, closely tied to the cryptocurrency market, can capture more opportunities in this rapidly changing market is worth continuous attention. (Wen Sui)