Earnings Call Transcript - NCTY Q4 2020

Operator, Operator

Good evening and welcome to The9 Limited 2020 Unaudited Financial Results Conference Call. All participants will be in listen-only mode. The conference is being webcasted. I would now like to turn the conference over to Connie Sun from The9 Limited IR Department. Please go ahead.

Connie Sun, IR Department

Thank you, operator. Good evening and welcome to The9 Limited 2020 financial results conference call. I’m Connie Sun from The9 Limited IR Department. First, before we start the presentation and the Q&A, we would like to remind you that this includes forward-looking statements, which are underlined by a number of risks and uncertainties and may not be relied on in the future for various reasons. Information about general market conditions is coming from a variety of sources outside of The9. Next, let me now introduce the management team on the call tonight. The shareholder of The9 Limited; Chris Shen, President of The9 Limited; George Lai, CFO of The9 Limited; and ZhiFang Cai, CEO of NBTC Limited. After our presentation, we will open the floor for questions. Now, I will turn the call over to our CFO, George.

George Lai, CFO

Good day ladies and gentlemen. Thanks for participating in our discussion of The9 2020 financial results and our recent developments in the cryptocurrency mining business. For the year ended December 31, 2020, net income attributable to holders of ordinary shares was RMB397 million or US$60.8 million, compared to a net loss attributable to holders of ordinary shares of RMB190.6 million or US$29.2 million for the year ended December 31, 2019. The net profit for the year ended December 31, 2020 was mainly attributed to the gain on disposal of subsidiaries, which collectively held assets and an office building located at Zhang Jiang, Shanghai. Let's turn our focus to our recent development in the cryptocurrency mining business. In January 2021, we entered into a cooperation and investment agreement with several investors, including Mr. JianPing Kong, in the cryptocurrency mining industry in anticipation of developing our cryptocurrency mining business with the assistance of these investors. We issued certain ordinary shares and warrants to the investors. The warrants are divided into four equal tranches, which are exercisable subject to the market capitalization of The9, ranging from US$100 million, US$300 million, US$500 million, and US$1 billion during certain time periods. In February 2021, NBTC Limited, a wholly-owned subsidiary of The9, signed a strategic cooperation framework purchase agreement with Shenzhen MicroBT Electronics Technology Company Ltd., the manufacturer of WhatsMiner Bitcoin mining machines. We paid a deposit of US$1.4 million and obtained the right of first offer to purchase 5,000 WhatsMiner Bitcoin mining machines from MicroBT within one year. As of today, we have completed two batches of purchases and bought 922 WhatsMiner machines, with an approximate hash rate of 66PH/s. These WhatsMiner machines have already been deployed. In March 2021, NBTC signed a Bitcoin mining machine purchase agreement with Bitmain Technologies Limited. Pursuant to the purchase agreement, we will purchase 24,000 Antminer S19j Bitcoin mining machines, which are scheduled to deliver starting from November 2021, for a total consideration of US$82.8 million payable by installments according to the agreed time schedule. The first installment of US$16.6 million has been paid. In February 2021, we entered into purchase agreements with five Bitcoin mining machine owners to purchase Bitcoin mining machines by issuing ordinary shares. The9 issued an aggregate of 26.9 million ordinary shares, equivalent to 0.9 million ADSs at US$11.18 per ADS in exchange for 26,007 Bitcoin mining machines, with a total hash rate of approximately 549PH/S. In February 2021, we signed six legally binding MOUs with six Bitcoin mining machine owners to purchase Bitcoin mining machines by issuing ordinary shares. As of today, we have entered into definitive purchase agreements with five Bitcoin mining machine owners and The9 has issued an aggregate of 3.8 million ordinary shares equivalent to 0.1 million ADSs at US$23.35 per ADS in exchange for 8,489 Bitcoin mining machines, with a total hash rate of approximately 156PH/S. In March 2021, we signed three legally binding MOUs with three Bitcoin mining machine owners to purchase Bitcoin mining machines by issuing ordinary shares. According to the MOUs, The9 should issue to the sellers approximately 5.9 million ordinary shares equivalent to 0.2 million ADSs at US$38.51 per ADS in exchange for 10,252 Bitcoin mining machines, with a total hash rate of approximately 192PH/S. In February 2021, we signed a framework agreement with a Filecoin mining machine vendor to purchase Filecoin mining machines for US$10 million. In February 2021, we entered into a standby equity distribution agreement with YA II PN, LTD., a limited partnership managed by Yorkville Advisor Global, LP, pursuant to which The9 is able to sell up to US$100.0 million of ADSs solely at our request at any time during the 36 months following the date of the agreement. As of today, we have not started to request funding from this equity line. As of today, our deployed Bitcoin mining machines are contributing a total hash rate of approximately 693PH/S. Under this current hash rate, we have rewarded 3 Bitcoins per day. As of today, we have been rewarded 126 Bitcoins. Based on the Bitcoin mining machines currently owned by us and taking into account the mining machine purchase agreements we have signed, assuming we do not sign any new purchase agreements and assuming the global hash rate does not increase, by October 2022, our Bitcoin mining machines are expected to contribute a total hash rate of approximately 3,558PH/S. Under this hash rate, we are expected to be rewarded approximately 15 Bitcoins per day. The cumulative Bitcoin rewards are expected to be approximately 5,200 Bitcoins. Other than Bitcoin, we are also actively engaged in the mining of Filecoin. As of today, we have executed a US$1.1 million purchase of Filecoin mining machines under the framework agreement with a Filecoin mining machine vendor. Currently, we own an independent node on the Filecoin blockchain and have 8 Pebibytes of effective storage mining power in the Filecoin network. Assuming the global hash rate does not increase, by August 2022, this 8 Pebibyte of effective storage mining power is expected to generate approximately 200,000 Filecoins for us. However, since the hash rate of the whole Filecoin network is continuously increasing, the actual reward to us will be less than 200,000 Filecoins. As we just announced hours ago, we signed a Filecoin mining machine purchase and hosting agreement amounting to approximately US$2 million with another Filecoin mining service provider. When both agreements are fully implemented, we expect to have a total of more than 80 Pebibytes of effective storage mining power in the Filecoin network. We will continue to invest in Filecoin mining machines according to the growth of Filecoin's market value. Thank you for listening to our presentation today. At this time, we will take questions. Operator, please.

Operator, Operator

The first question comes from Martin Chen of Ten Asset Management. Please go ahead.

Unidentified Analyst, Analyst

Hi, management. Can you hear me?

George Lai, CFO

Yes, please.

Unidentified Analyst, Analyst

Yes. You already purchased some secondhand machines, and I would like to know if you have any plan to continue buying secondhand machines? Or have you transferred your strategy to buying new machines?

George Lai, CFO

Yeah, we'll do it at the same time. So, we will buy secondhand machines and at the same time, we will also buy new machines. Based on our experience in the past two months, we prefer to use the new issuance of shares to purchase the secondhand machines and then use cash to buy the new machines. So, we have been working very well with both of these two types of purchases.

Unidentified Analyst, Analyst

Okay. Currently, which channel do you buy from? Which channel can you use to buy more secondhand machines? Because we know everyone is tracing the hash rate, right? So, I don't know if we still have some resources to buy the machines?

George Lai, CFO

Well, as I said in the beginning, we are happy in January 2021 to have very experienced cryptocurrency mining pioneers with us. Their team is very experienced in sourcing secondhand machines. As you can see, over the past two months, we have sourced three batches of secondhand machines. Our share price keeps going up, so I think it's easy for us to use the same method to talk to different Bitcoin or other cryptocurrency machine owners to negotiate. We issued new shares to them, and then they sell the machines to us.

Unidentified Analyst, Analyst

Okay. My second question is about the entire Bitcoin network hash rate. Can you predict the hash rate by the end of 2021?

George Lai, CFO

I think this question, maybe we'll leave it to our CEO of NBTC. Well, based on our estimation by August 2022, our hash rate is expected to reach about 3,500. This is assuming that we do not acquire either new machines or secondhand machines. Of course, we understand that we will continue to buy machines from both sources. So, I think our actual number by the end of 2021 will be much larger than this number. It also depends on our fundraising progress. This is our expectation.

Unidentified Analyst, Analyst

Okay, because we also see other competitors buying a lot of machines, do you see the entire network will increase a lot, maybe by the end of 2021?

George Lai, CFO

When talking about the global network, the Bitcoin hash rate has already been quite high compared to the other digital currencies, so we do not expect a very significant increase in terms of the global network.

Unidentified Analyst, Analyst

Okay. My third question is about Filecoin. Can you talk more about why you are bullish on Filecoin? Do you have any expectation of its market cap in the future?

George Lai, CFO

Since we started to invest in Filecoin in January, we’ve already seen a total market cap ranking increase from around 30 or 40 to now 13. So, we believe that this cryptocurrency has very high potential. I would not be surprised if it goes into the top 10 within one month. This is only my wild guess, but as you can see, there has been a sharp increase in the cryptocurrency price of Filecoin over the past two months. I believe that this is a very promising cryptocurrency that we will further invest in.

Unidentified Analyst, Analyst

Okay. So, do you have any target to invest? How much money in 2021, in Filecoin?

George Lai, CFO

Well, we already signed a US$10 million framework agreement. We will continue to execute under this agreement. As I mentioned, we have just signed another Filecoin machines purchase agreement with another vendor. This also proves that we have numerous sources to purchase these machines. I think this is our unique strength. We will continue to invest more as per our strategy. Additionally, we will also keep investing in Bitcoin and Ethereum. We will have a closer look at how to allocate our funding and resources towards these objectives.

Unidentified Analyst, Analyst

Compared to Bitcoin, how do you allocate your CapEx between Filecoin or Bitcoin? Maybe you can give me some percentage of your CapEx.

George Lai, CFO

Filecoin is a bit special because other than the machines, we also need Filecoin to do the patching to earn more Filecoins. I cannot give you an exact number, but I will say for Bitcoin, if there is a choice between both types of coins, we would definitely allocate the majority of our funding towards Bitcoin. However, we will also invest a lot in Filecoin. So, these are the top three coins that we are focusing on.

Unidentified Analyst, Analyst

Sure. Does Filecoin have any accounting issues, because we know that we may be lending it to the network? So, I'm not sure if it would be recognized in our financial accounting.

George Lai, CFO

In terms of accounting, I believe all the accounting treatments for the coins are the same, unless the specific coin in question is too small or lacks liquidity, in which case we may face difficulties recognizing it as an asset. However, as I said, the Filecoin market cap is already around the Top 15 or Top 20. Therefore, I don't foresee any accounting problems in recognizing this as an asset.

Unidentified Analyst, Analyst

Good, good. My last question is about Ethereum. Do you have any Ethereum mining plans for 2021?

George Lai, CFO

Yes. We are planning to invest in Ethereum. Please expect some updates in our upcoming press release. I hope we can share some good news with the investors very soon.

Unidentified Analyst, Analyst

Okay, thanks. Thanks a lot.

George Lai, CFO

Thank you.

Operator, Operator

This concludes our question-and-answer session and The9 Limited unaudited 2020 financial results conference call. Thank you for attending today's presentation. You may now disconnect.