Canaan Inc. (CAN) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to Canaan Inc.'s Third Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. Now I'd like to hand the conference over to your speaker host today, Mr. Clark Soucy, Investor Relations Director of the company. Please go ahead, Clark.

Thank you, Mel. Hello, everyone, and welcome to our earnings conference call. The company's financial and operating results were released by our newswire services earlier today and are currently available online. Joining us today are our Chairman and CEO, Mr. Nangeng Zhang; and our CFO, Mr. James Jin Cheng. In addition, Mr. Xiaoming Lu, our Senior VP; Mr. Leo Wang, IR Senior Director; and Ms. Xi Zhang, IR Manager, will also be available during the question-and-answer session. Mr. Zhang will start the call by providing an overview of the company and performance highlights for the quarter. Mr. Cheng will then provide details on the company's operating and financial results for the period before we open up the call for your questions. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release. Today's call will include forward-looking statements. These statements include, but are not limited to, our outlook for the company and statements that estimate or project future results of operations or the performance of the company. These statements speak only as of the date thereof and the company assumes no obligation to revise any forward-looking statements that may be made in today's press release, call or webcast, except as required by law. These statements do not guarantee future performance and are subject to risks, uncertainties and assumptions. Please refer to the press release and the risk factors and documents we filed with the Securities and Exchange Commission, including our most recent annual report on Form 20-F for information on risks, uncertainties and assumptions that may cause actual results to differ materially from those set forth in such statements. In addition, during today's call and webcast, we'll discuss both GAAP financial measures and certain non-GAAP financial measures, which we believe are useful as supplemental measures of the company's performance. These non-GAAP measures should be considered in addition to and not a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release, which is posted on the company's website. With that, I will now turn the call over to our Chairman and CEO, Mr. Nangeng Zhang. Please go ahead.

Hello, everyone. This is Nangeng, CEO of the company. Our CFO, James and I are delighted to share our quarterly results directly in English from New York. Since the beginning of the third quarter of this year, the cryptocurrency and blockchain industry has been experiencing a great deal of turbulence, especially during the past week. There is a lot going on in the industry. And now that we are together on this conference call we want to take this opportunity to speak openly with our investors and the stakeholders. Market conditions have become more severe since the beginning of the third quarter of 2022, the bitcoin price continued to decrease, impacted by several reverses, increased rate increases and market expectations of further hikes. Meanwhile, bitcoin's total network hash rate remained at the high level and minus income decreased. We are fully aware of the great difficulties in the mining industry. The current situation resembles similar bitcoin cycles we have previously navigated through. However, the situation is different today as we are facing more challenges such as globally serving energy prices, miners' private risks and high financing costs caused by excessive leverage and high operating expenses for new miners. These factors have led us to serious issues in miners operations. Furthermore, what has been happening in the industry has a role in industry participant's confidence. Turbulence in the industry is inevitable in the short term. On top of these headwinds, mining machine investors in some regions remain -- sorry, mining machine inventories in some regions remain high. All of these factors will negatively impact customer demand for and the pricing of our mining machines in the near term. What I want to emphasize is that although currently participants in the industry are enduring a particularly difficult time. We remain confident of navigating through the discipline cycle. What we are going through now will turn into a valuable share for us to develop our business as the industry enrolls. During these difficult times, we continue our investment in R&D to increase our product's hashrate and energy efficiency. In mid-October, we released 2 models of our new generation of mining machines, making a breakthrough in computing power and energy efficiency. Regardless of whether we are in a bull or bear market environment, we will launch new products and develop our business strategy. This commitment demonstrates our confidence in the market's long-term prospects. Regarding the sale of mining machines in late October, having received the full testing results, we immediately launched our new generation mining machines, AvalonMade A13 series. Specifically, 2 models are introduced, the A1346 and the A1366, Model A1346 features a hashrate of about 110 terawatt per second and power efficiency of approximately 30 draws per terahash. Model A1366 is increased with a hash rate of about 130 terawatt per second and the power efficiency of approximately 25 draws per terahash. Both models considering power and power efficiency demonstrates a significant improvement over the previous generation of mining machines. After our new products hit the market, we could then corroborate our supply chain to move forward on mass production. We expect to commence mass production and start shipments at the end of this year or early next year. Through prepayments, we have pure production capacity for the next year. This allows us to continuously provide high-performance products with reliable quality by superior services to our clients. As for our existing mining machine products, we delivered a total of 3.45 million terahash per second of computing power, generating revenues of RMB 940 million. Our global headquarters in Singapore continues to attract local tech talents to join us and further enhance its operations. The headquarters has already established R&D, operations, finance, supply chain and other functions. Our Singapore-based chip design team has contributed significantly to the development of our new products as well as the mass production process. The Southeast Asia supply chain headquartered in Singapore is performing well and has been certainly fulfilling shipments since the center entered operation during the previous quarter. It provides diversified parts of our production process and the logistics chain that demonstrates our commitment and ability to continue our internationalization. Although the overall market is relatively sluggish this year, we have built a strong foundation of the trust and the cooperation with our industry-leading business partners. Meanwhile, we also insist on serving our small and the midsized customers in a variety of flexible ways. Our online store for retail customers fill -- augmented our sales system to address demand from all types of customers. Since its launch in the second quarter, it has fulfilled customers' orders from 21 countries and regions worldwide. By the end of the third quarter, having shipped our prepared orders, our total computing power to be delivered has decreased to 1.01 million terahash per second. Under current market conditions, the industry is facing stronger headwinds and more uncertainty. Most customers are taking a wait and see approach. Short demand of mining machines has dropped to a low point, coupled with current macro challenges, our business is likely to face higher pressures over the next 2 quarters. At this point, facing a severe winter in the industry, profitability is no longer our first priority. We will get through this difficult time and prepare for the future by shifting our focus to the stability of cash flows, reducing unnecessary expenses and continue to invest in the [indiscernible] and the development of new products. During the current downturn, we are strengthening the operations of our mining business for long term. With our operation now [indiscernible] we are propelling towards our mining business in overseas markets. Mining trust, builder support and maximize measures between our mining machine sales and our mining business. Notably, our mining corporations of the United States brought 260,000 terahertz per second of computing power online during this quarter. At the same time, the electricity from supply for our mining operations in Central Asia has further improved, delivering more stable operations for our deployed mining machines. Consequently, our mining business total online computing power is approximately 3.2 terahash per second generating mining revenue of RMB 62 million in the third quarter, up 19% quarter-over-quarter. After using a proportion of our bitcoins to cover mining costs, we have 535.5 bitcoins in the total at the end of this quarter. The balance demonstrates an increase of 188.7 bitcoins from the end of the last quarter. We are also actively exploring the geographical diversification of our mining business to mitigate constitution risk while steadily expanding our global layout at the scale of our mining business under a bearish market. Let's now turn to our AI chip business. During the third quarter, sales of our AI chips improved compared to the previous quarter as downstream manufacturers resume building up their inventories. As a result, our AI chips business sales grew by 52% quarter-over-quarter. However, weak end user demand for the consumer groups remained a head wind to our AI chip sales performance. On the other hand, we have achieved good progress in terms of growth in the developed ecosystem. For example, our program AI development for has been used for learning and practice development by college students from over 100 universities across China. At the same time, we have drawn many rotational development platforms, actively participating in constructing the risk file ecosystem, we will continue to closely collaborate with our downstream and the technology partners in the industry, uphold our open source philosophy and prepare for exponential growth in the demand of AI skills. During this quarter, we continued to make good progress on our current share repurchase program approved in March under which we may repurchase up to USD 100 million worth of our outstanding ADS or Class A ordinary shares over 24 months. We have repurchased 3.4 million ADS for a total of USD 11.2 million from August 4 to November 4 this year. As of November 4, 2022, we have repurchased over 6.2 million ADS for a total of USD 21.5 million with an average price of $3.46 over ADS. Our ongoing institution of this buyback program delivers increased value to our shareholders and shows our confidence in the company's current and the long-term prospects. Overall, during the third quarter, we are faced a difficult environment. Under this macroeconomic and the industry headwinds, many miners encountered operating difficulties, leading to the decline in demand of mining machines, lower mining machine prices and more. To overcome these challenges, we worked diligently to deliver products and further contribute to the market, achieving our premise is that guidance. In addition, we successfully completed the check-in progress for the new generation of computing power chips and launched our new series of mining machines. Looking ahead, we see that rising increased risk and other macroeconomic dynamics continue to exert downward pressure on bitcoin prices and erode industry confidence. There is also the possibility of further energy price increases during the coming winter, considering this combined headwinds, weaker demand in the mining industry is expected. As a result, we expect our performance to come under further pressure at least during the next 2 quarters. Based on our current projections, we expect our total revenues of the fourth quarter of 2022 to be approximately RMB 310 million. Please note that this forecast reflects our current and preliminary views on the market and operational conditions, which are subject to change. It has been almost 10 years since Canaan's introduction, and we have navigated through multiple different cycles, regardless of macro environment. We remain firmly committed to always doing our ultimate mode to develop new products and show us the power computing power and power [indiscernible]. We have continued to push forward on our internationalization adhering to our flexible and prudent operating strategy. We endeavor to enhance synergies between our machine sales and mining business. At the same time, we will keep a conservative approach to our capital management and streamline our cash outflows, while continuing our investment in R&D under relations operations is paramount for us to sustain operations across the board and the bear market cycles upholding our responsibility and the commitment to our shareholders. This concludes my prepared remarks. I will now turn the call over to our CFO, James.

Thank you, Mr. Zhang, and good day, everyone, Mr. Zhang I'm with our CEO, [indiscernible]. As we discussed in August on our second quarter earnings call, in the third quarter of 2022 as we expected, the overarching industry environment started to negatively impact our demand and average selling price. We reported a total revenue of RMB 978 million in the quarter, meeting our guidance range despite the year-over-year and sequential decrease. Specifically, as the bitcoin price further decreased to $16,000 recently, we expect the overall demand for mining machine remains constrained. In the third quarter, we delivered total computing power sold of 3.5 million terahash per second. In response to the softening market, we lowered our selling prices leading to a certain decline in the average selling price for the quarter. As a result of the combined effect sales of our bitcoin mining machines decreased to RMB 914 million for the quarter. In a challenging market downside cycle, we take the mining business as a hedge against the weakening mining machine sales, it helps us better utilize our machine inventory and bringing additional revenues. Specifically, our mining business generated mining revenue of RMB 62 million, representing a quarter-over-quarter increase of 19%. In the third quarter, we started mining in the United States by deploying a trial batch of mining machines. Our increased bitcoin production is also due to further improved electricity supply in our mining operations in Kazakhstan. Collectively, we have 3.2 terahash per second of total computing power deployed for our mining business as of the end of the third quarter. After paying certain direct costs, especially electricity bills with bitcoins mined, we held 535.5 bitcoins as of the quarter's end, representing 188.7 additional bitcoins compared with 346.8 bitcoins balance as of June 30, 2022. We remain prudent in machine deployment and are thoroughly exploring multiple geographical regions with favorable mining conditions to diversify our mining operations. Please also note that with the increase of our deployed machines for mining, we expect to have more machine depreciation in our total cost. Our AI revenue realizing a sequential increase of 52%, reached RMB 2.4 million in the third quarter. The total AI chip sales performance reflected the soft demand for its end user -- use consumer IoT products. Our gross profit for the third quarter was RMB 234 million, probably reflecting the impact to the top line level. Additionally, as we lowered the selling price of some old generation machines to even below their cost, we incurred an inventory write-down of RMB 221 million in the third quarter. Resulting from the complex effect of declining ASP inventory write-down and relatively flat product costs, our gross margin was further squeezed to 23.9% for the third quarter. Please note that if we had not implemented this inventory write-down, our sales margin for the third quarter would have been 46.5%. In the third quarter, we continued to enhance our research and development. We launched our new generation mining machines in October as we propelled the commercialization of our R&D efforts. We also made upfront payments to secure the production capacity for advanced node wafers to ensure stable supply in the future. As the vast majority of our sales contracts were denominated in U.S. dollars, we recorded a foreign exchange gain of RMB 101 million in the third quarter due to the depreciation of RMB against U.S. dollars. Conversely, if RMB appreciates against the U.S. dollars. In future, we will incur foreign exchange losses correspondingly. For our bottom line, our net income reduced to RMB 61 million in the third quarter. Turning to our balance sheet. As of September 30, 2022, the company had cash and cash equivalents of RMB 2,003 million. The decrease in cash balance was primarily due to upfront prepayments for securing wafers and payments of operating and tax expenses, which was partially offset by cash inflow from the spot sales of mining machines during the third quarter. With the rollout of mass production for the new generation of mining machines, we expect our cash balance by the end of this year may further decrease as we make additional prepayments to secure production capacity. We don't have any interest bearing debt in a downward market, it's critical for us to preserve cash and sustain cash flows. We will continue to closely monitor our cash balance and manage it prudently. From August 13, 2022 to November 4, 2022, we used approximately USD 11.2 million to repurchase 3.4 million ADS under our current stock repurchase program approved in March 2022 with an average repurchase price of USD 3.29 per ADS. In light of an increasingly volatile macro environment, we may reevaluate our repurchase program in accordance to our cash balance. Looking into the near term, we see unfavorable factors may become even worse in the market, including constrained bitcoin prices and the U.S. rate hike and high energy costs. Recently, the bitcoin price has continued to decline after a series of industry incidents. As such, we expect lingering very soft demand in the near term for worldwide total hashrate expansion and mining machines purchase. To conclude, the third quarter was a difficult one. We strived to maintain sufficient cash balance and seek opportunities in the market downturn. As a company, while the macroeconomic factors and the industry trends are out of our control, we endeavor to control the decision and efforts we make to streamline our business operations, maintain cash flow and effectively manage our liquidity level. To sustain our operation is our minimal and optimal strategy during the hard times. Now I would like to briefly walk you through our financial results for the quarter. Revenues in the third quarter of 2022 were RMB 978.2 million, USD 137.5 million, representing a decrease of 40.8% from RMB 1,652.7 million in the second quarter of 2022 and a decrease of 25.8% from RMB 1,317.6 million in the same period of 2021. Gross profit in the third quarter of 2022 was RMB 234.2 million, USD 32.9 million. Representing a decrease of 74.8% from RMB 929.7 million in the second quarter of 2022 and a decrease of 68.4% from RMB 741.7 million in the same period of 2021. Total operating expenses in the third quarter of 2022 were RMB 275.0 million, USD 38.7 million, representing an increase of 1.7% from RMB 270.5 million in the second quarter of 2022 and a decrease 1.2% from RMB 278.4 million in the same period of 2021. Net income attributable to ordinary shareholders in the third quarter of 2022 was RMB 61.1 million, USD 8.6 million, representing a decrease of 90.0% from RMB 608.9 million in the second quarter of 2022 and a decrease of 88.1% from RMB 512.5 million in the same period of 2021. Non-GAAP adjusted net income in the third quarter of 2022 was RMB 166.3 million, USD 23.4 million representing a decrease of 75.8% from RMB 688.2 million in the second quarter of 2022 and a decrease of 71.7% from RMB 587.5 million in the same period of 2021. Basic and diluted net earnings per ADS for the quarter both were RMB 0.36 and USD 0.05. Contract liabilities as of September 30, 2022, were RMB 300 million, USD 42 million, decreasing from RMB 1,340.7 million as of December 31, 2021. This concludes our prepared remarks. We are now open for questions.

[Operator Instructions] Your first question comes from the line of Jiaji Song from Guosheng Securities.

So you have the established headquarters in Singapore, have you ever thought about being a completely foreign company?

Okay. First and for most, we are a U.S. business company. The globalization of our business -- of our business and operations has progressed along with the global divestiture of our client base. The goal of our company's globalization is to better serve our clients. We established our headquarters in Singapore, we liked its business environment, local R&D and the technique pilots as well as the vigorous Southeast Asia's business hub. It also has open attitude for digital currencies. We have set up local R&D and operation schemes and established Asia's supply chain by leveraging our operations in Singapore. For a long-term perspective, we aim to grow into an international company with operations not only in Singapore but also in the U.S. and the Southeast Asia. By leveraging the geographical advantages of each market, we are pleased that in, we will better serve our customers globally and create values for shareholders.

So considering the recent decline of bitcoin price we will have inventories write down, when will it occur?

I will take this one. Thank you, Song, for this difficult question. I think you might have already noticed in this quarter, we recorded RMB 221.1 million for inventory write-downs as we determined that the estimated realizable value of our inventory will be lower than the holding costs. That was due to the lower sales price for subsequent orders. Of course, it links to the bigger picture, like bitcoin price drop and softening market demand from the miners. The inventory write-down was recorded in the course of revenues and had a material negative impact on our gross margin over the current quarter. If the severe impact of bitcoin price continue to decline in the coming quarters, we may have to consider further decreasing our selling price, which will probably lead to additional inventory write-downs and also lead to P&L losses in the bottom line. I think we should prepare the worst in balance sheet and do our best in operation. On the other hand, going forward, if we could be able to sell such inventories above their cost, the cost of sales for those machines will be net of such write-downs, which in turn will have the effect of increasing our gross profit for the period.

How is your spot sales and future contract sales ratio?

I think currently, vast majority of the sales are future contract sales. The spot sales are at a relatively pretty small quantity. As CEO previously mentioned, our new generation of mining machine is progressing towards mass production. We are still not 100% sure whether shipments will begin at the end of this year or at the start of next year. Therefore, we expect the sales of our new mining machines to be primarily contract sales. And we have already secured production capacity for our new generation machine for next year to maintain a stable supply.

What is the progress of cooperation with foundries?

Okay. We have been seeing our market foundry strategy and utilizing our comprehensive R&D capabilities so as to prepare to capture surplus capacity advances for that node. Therefore, we continue to actively maintain productive collaborations with our foundry partners, supporting their operations to like prepayment holders. In return, our foundry partners are really, let's say working with us to optimize the products' fabrication, and R&D and production. I think mining machines, supercomputing chips can serve as the vanguard for advanced process, having foundries who have stabilized their production. Our collaboration with foundries is definitely a win, win partnership. I think the current challenges across the industry, yes, on which approximately believe will be a short-term issue. We will continue to invest in advanced process and wafer procurement and we [indiscernible] to capture more market opportunities and higher market share.

Our next question comes from the line of Kevin Dede from H.C. Wainwright.

I'm curious now on how much of the cash decline was attributed to foundry prepayments? And how much of the September quarter shipments were to customers versus Canaan's self-mining.

Okay. We typically secure our foundry partners production capacities through prepayments. We have recently paid for production of a batch of the new generation of mining machine chips that because the wafer segregation for that will take about 5 to 6 months. Typically, we will prepare some inventories for new models, machines in the [indiscernible]. Yes. So I think it's really hard for us the actual numbers, but we are also actively having our production selling to better support our foundry partners, which actively managing wafer cost through flexible negotiation. Yes. And during the third quarter, we started our mining operation in the U.S., and we cooperate with local mining farm to bring the first batch of over 2,000 machines online, operating in compliance with laws and regulations. I think due to nondisclosure agreements, we are not able to disclose [indiscernible]. And at the end of third quarter 2022, we have 3.2 terahash billion power online for mining. So this deployed mining -- we are in has already run with the top 10 of [indiscernible] companies in U.S. Compared to our computing power sold, our mining hash is still relatively small. We have mining operations in Central Asia and North America. We are also exploring and pushing forward our business in other regions with favorable energy prices and market dynamics. Given the current growth uncertainties in the industry environment, we adhere to the prudent strategy for exploring partnership opportunities in regions with variable power supply and market policies. That has based on North America and Northeast Asia.

Do you have a target for Canaan's internal mining hash rate for the end of the year?

Yes, I think there's still some opportunities for us to expand our mining business. And you know the demand of the market is relatively low. So I think we will move more machines from selling to start mining. Yes. But I think there's no exact number for a top target at the end of this year.

One last question for me, please, if I may. Can you characterize Canaan's position on immersion and how the company might be working in R&D to develop machines particularly suited for that type of application?

Yes. We have been providing immersion models to customers for evaluation. And they are ready to be mass produced if we have orders from our customers. Our inverter design demonstrates more stable performance under difficult conditions and the kind improvements of producing power by maybe 30% to 50% per chip unit compared to air-cooled products. Some clients will overclock for even higher computing power. Of course, I think overall purchase cost is also a very important factor for customers while choosing between immersion and air cooled products.

Our next question comes from the line of Venis Zhu from China Renaissance Securities.

My first question is how do you see the bitcoin trend, especially in your down cycle?

Okay. I think in the near term, we see the bitcoin remain and the pressure at the Federal [indiscernible] is still driving interest rates. The recent downward trend in the compliance is severely event driven. Entering and going through the low point is the necessary parts of navigating through every cycle. However, I think -- I don't think that anyone accurate repeat the short-term bitcoin project. In regards to the price of bitcoin, I have always believed that there's no need to forecast the bitcoin in the long term. Our bitcoin becomes the most important for currency. It has increasingly large user base. Meanwhile, based on bitcoin having a mechanism, it's foreseeable that the supply of bitcoins will be lower than market demand. As a result, I remain confident in this bitcoin's long-term prospects. From the midterm perspective market work that we are doing now is in preparation of potential business opportunities in the coming maybe 1 or 2 years seeding each opportunities that arrive at this more in our industry.

My next question is we know that recently, the accusation issue has greatly impacted the industry. And just wondering what our view on this event and maybe how we react to this situation?

I think this is a very sensitive question. So I will say something maybe from the industry side not the security exchange. I believe private currencies such as bitcoin actually provide people with decentralized and trackless way to hold high digit assets or 100% on their own. For the operational way of these systems, some transactions trades should be completed on blockchains. However, due to technical bars for ordinary people to hold and trade for currencies, many of them tend to use centralized for the currency exchanges when they invest in trading. This performance makes many transactions switch from blockchain trading to off-chain trading during the last 2 or 3 years. As such users access and treating transaction fee, which has been a way to enhance the security of blockchains have been redirected to private currency exchanges or centralized private currency exchanges more due to lack of a really effective revolutions in this area this kind of exchange-based transaction poses strict requirements on changes management capabilities and attitude offer a more frankly, a test of human nature. I think during improving strong spare markets incidence on private exchanges similar to the issue also poker. Therefore, we are not surprised -- so we easily hope there -- through this round of equivalents the market can return to the blockchains [indiscernible] private currency [indiscernible] demonstrates one figures that are far beyond a model way of speculation. I believe that the industry will better develop with the increased [Technical Difficulty].

And my last question is could you give us the guidance of the ASP average mining machine, selling price, computing power sold and gross margin for next quarter?

I will take this one, [indiscernible]. I think you just noticed from our earnings release, the gross margin decline in the third quarter. I think that this decline was partially because we adjusted down the selling price for some machine models with lower hash rates in response to market conditions. Some models or other certain sales packages were sold at a lower than cost price. So in addition, we -- our new generation of machines launched in October has just become available for preorder. Some machines may be delivered in the fourth quarter. But as of today, we are not able to give a specific guidance. The selling price for contract sales of our new model demonstrates a certain level of gross margin. So in a combination, we expect in the fourth quarter gross margin probably decreased compared to the third quarter, the ASP could be a little bit lower compared to third quarter. So I think currently, that's our prediction.

Our next question comes from the line of Han Chung from D.A. Davidson.

First, I was wondering how much inventory level, how much is the inventory level in the industry right now? And how long this could take for the market to digest the inventory?

Okay. I think it's a good question. Currently, the amount of inventory in U.S. market is relatively high. And the current market conditions each mark take -- I think it's marked at least 6 months is to digest the inventory. As many depends on how the electricity cost will decrease and the speed of mining facility structure. If this split-related issues will be solved soon than the overstocked machine -- mining machine users could be adjusted soon. So we have observed that the big client networks both of using power and showing an upward transition. But bitcoin price is around USD 20,000 for more than 1 quarter and this extend further decrease is [indiscernible]. I think this situation will accelerate the elimination of older models from mining machine inventories in the market and the miners will be more inclined to deploy mining machines with higher computing power and energy and a lower energy efficiency. But I think when bitcoin price return to its upward filter inventory destocking will be…

So did you start to engage with the customer regarding your new A13 generation machine. And then what's the initial feedback, especially with the U.S.-based customer?

I followed in the new series launch late October, A13 machines still in the pre-stage for mass production, and we haven't started to ship the product in large qualities. Currently, we are still introducing our new products to the market and have started to [indiscernible] of the orders, which while having many other orders for intent to discuss this with customers. I think in terms of our older fulfillment plans, we expected to ramp up the production of our 110 terahash model at the end of the year. But the middle of the next year, our production will become concentrated to producing the 110 terahash to 120 terahash model as fabrication technology improvements and the costs reduce over time, machines with over 130 terahash is expected to become our mainstream products. With enhanced power efficient technology and performance, our new generation of mining chips with similar performance parameters compared with our peers mainstream products. We believe that our new machines still will appear at the option for months. North America is a very important market for us. Previously, we haven't shipped a lot positive products to this region. And we had a relatively small market share there. Thus we still need some time to build up our brand recognition in this region. We have set up local teams to work on sale software cell service [indiscernible] operations and other functions to provide more support for local business development. But we are seeing that many miners in the North America area are under significant pressure for financing the operation costs. This situation is likely to result in big changes to the competitive landscape in the region. We will closely monitor market dynamics to reside opportunities for market share gains. At the same time, we have been actively exploring opportunities in other regions such as Southeast Asia and the Middle East.

One last question, if I may. So I was wondering that in terms of the technology roadmap beyond the A15 series, which is based on 5-nanometer process node. Given the U.S. ban on the EDA tool for 3-nanometer, I think as announced in August, how do we make sure the new technology transition and product iteration going forward?

I think this is a tough question. I think in regards to the U.S. ban impact is still unclear. As for now, this has not impacted the R&D at our existing and new narration of mining machines. In terms of fabrication technology, our new generation of mining machines now stands at the same process now as our peers' mainstream products. So far, we are already secured a certain amount of production capacity on the advanced node. I think the ban will also take time to process from a position to execute. We will continue to monitor the --evaluate its impact. As a listed company, we will continue to operate in compliance with related laws and regulations. And over to speed solutions in aligning our product design and the manufacturer's strategy.

Our next question comes from the line of Michael Legg from The Benchmark Company.

Just 2 quick questions. One, could you kind of go over your capital allocation strategy during this period of industry weakness? And then secondly, can you just give us your viewpoint on 2024 expecting having and its impact on the miners and rig demand?

I will take the second one, and James will take the first one. I think this point having mechanism values have been reversed for each new block generated. Thus, this will impact miners' mining revenues to some extent. We expect that this will result in considerable short-term decrease in the bitcoin's total infusion power. However, I don't see the impact lasting for long. The Harvey mechanism have insisted since the inception of bitcoin trading system. It was designed to decrease the supply of bitcoin over time, especially in the context of the over issuance of fiat currency. The Harvey method brings support to bitcoin supply decreasing in the long run. For the long-term perspective, bitcoin will force miners to upgrade their devices to with higher processing power and better energy efficiency. Because of this mining manufacturers, we need to constantly upgrade our technology and that our products provide miners with pure money basically with higher computing power with better cost effective. So this is what we have been doing.

Yes. I will set the capital strategy one. I think at the end of the third quarter, we have a cash balance of RMB 2 billion. So we do not have any interest bearing debt on our balance sheet. That's not like our peers in the other listed companies. We do not need to pay interest. We do not make any principal repayments. So about the allocation in future, I think with the release and the sales of our new generation of mining machines, I think we will definitely deploy a certain amount of cash to secure wafer capacity according to our plans. And also, this will enable us to fulfill clients' demand in time and maintain our close cooperation with foundries. We make sure we can capture more market share when the market recovers in future. That's the first thing. And second thing is that I think we will continue to invest in the R&D part to develop more advanced products. And also in addition, we will prudently carry out collaborations in mining and it's for business opportunities in different regions we may need to pay some upfront fees, but it is an investment we are willing to make to develop a new business. Last but not least, I think we will still use some of our cash to continue share repurchase to show the confidence on our business for longer term. I think that's it, thank you, Mike.

As there are no further questions now, I'd like to turn the call back over to the company for any closing remarks.

Thank you. Hello, everyone. This is Clark. Once again, thank you very much for joining us today for the call. If you have any further questions, please feel free to reach out to us through the contact information provided on our IR website. Thanks again. Thank you.

That concludes the call today. Thank you, everyone, for attending. You may now disconnect.