Sino-Thai Coal time: March 3, 2022

[1] opinion report

We believe that the driving forces driving the rise of the plate are as follows:

1. In terms of fundamentals, the constraints on the supply side are still stronger than expected, while the demand side in the context of steady growth will expand significantly, the pattern of tight supply and demand will be difficult to change, superimposed by the recent sharp rise in international coal prices, coal prices will continue to be realized at high levels, and the profits of the plate in the first quarter or even for the whole year may be better than expected.

2. In terms of risk release, the previous sector has undergone a substantial adjustment, and has a strong understanding of the policy intention and tolerance. The medium-and high-level coal prices given by the NDRC have enhanced the expectation of industry profit stability, relieved everyone's worries about the uncertainty of medium-and long-term profits in the sector, and helped to enhance the confidence of plate valuation and market allocation.

3. Since 2022, the overall moneymaking effect of the A-share market is weak, and there is a demand for increased allocation of low valuation and high dividend plates, while the coal sector is a plate with high barriers to entry and can constantly create high profits. and there is no capital expenditure, can continue to return to investors through dividends, fully in line with the needs of market allocation.

The above three points, there are no signs of marginal weakening, continue to be strongly optimistic about the performance of the coal sector.

Next, I will report my views from three aspects: the fundamentals of the industry, the feelings of recent research, and the selection of individual stocks.

(1) fundamentals:

1. Thermal coal: supply and demand push up prices, and long-term association pricing adjustment further boosts profit expectations.

2022.3.2 the market price of Qingang thermal coal is 940 yuan / ton (year-on-year + 64%), up 140 yuan / ton from the beginning of the year, while the latest quotation of port 5500 is 1250-1300 yuan / ton. In terms of pit mouth, the weak sticky coal pit price (including tax) in Datong suburb is 860 yuan / ton (compared with the beginning of the year + 180 yuan / ton), which is higher than the average price of 841 yuan / ton in 2021. Internationally, the war between Russia and Ukraine may lead to restrictions on Russia's export of 200 million tons of coal, as well as recent floods in Australia, a major exporter, leading to an even sharper rise in international thermal coal prices. The spot price of Newcastle thermal coal is US $266 per ton, a record high, with a rough calculation that the domestic price has reached more than 1800 yuan / ton. Newcastle 2205 contract futures price is quoted at more than 400 US dollars (to the domestic nearly 3000 yuan).

The recent rise in domestic coal prices is mainly due to the fact that demand is faster than production, coal supply exceeds demand, and inventory continues to digest. Qingang thermal coal inventory 2022.3.2 is 4.93 million tons, compared with 5.85 million tons in the same period in 2021, and the inventory of power plants in eight coastal provinces is 27.98 million tons. Available days are 16 days, while the inventory at the beginning of the year is 33 million tons and the available days are more than 20 days. The inventory and available days of the power plant are in a relatively low position in the same period. From the perspective of the lunar calendar, the average daily consumption so far from the beginning of the year is 1.861 million tons, an increase of 6.2%, while the output is basically no growth, the downstream demand level is high, and the destocking speed is extremely fast.

Overall, the demand for thermal coal has recovered rapidly and will continue to grow steadily in the future (low-cost manufacturing has promoted exports, while infrastructure such as new energy is still highly dependent on traditional energy), while the increment of domestic production at the supply side is not obvious. due to the lack of capital expenditure in the past decade, production has hardly increased significantly. For example, the daily output of 2.9 million tons in Ordos is basically the ceiling, and the recent output is basically around 2.8 million tons. Considering security and other factors, it is unlikely to continue to grow. On the other hand, the international thermal coal price at the import side continues to hang upside down, and it is becoming more and more serious, while the Russian-Ukrainian problem has led to obstacles in the settlement of Russian imports, and various factors have led to a decline rather than an increase in imports. In 2022, the supply and demand of thermal coal is still tight.

The benchmark price of Changsha coal fell at 675 yuan / ton, an increase of 140 yuan / ton compared with 535 yuan / ton last year and before. the increase in the benchmark price of Changsha will significantly enhance the profit center for companies such as Shenhua and China Coal, which account for a high proportion of coal.

2. Coking coal: the production limit pressure of crude steel is reduced, and the downstream demand margin is improved.

2022.3.1 the price of the main coking coal warehouse in Jingtang Port has been increased by 2830 yuan / ton, which is + 315 yuan / ton compared with the average price in 2021. From the price of origin, the plate price of Shanxi Linfen main coking coal and Luliang coking coal car is 2510 yuan / ton and 2710 yuan / ton respectively, up 150,480 yuan / ton from the December low, and also higher than the average price of 2508 yuan / ton and 2380 yuan / ton in 2021. International coking coal prices also hit a record high of US $481 / ton in 2022.3.1 Fengjing Mine, far higher than the average price of US $248 / ton in 2021 and the highest price of US $436 / ton in 2021. According to rough calculation, the current domestic price of Australian coal has reached more than 3500 yuan / ton.

Inventory, from the port to coking plants, steel mills, all links of inventory are in the trend of removal, the current overall inventory level in the same period in recent years low, as of 2022.2.25 Jingtang Port coking coal inventory of 2.3 million tons, down 790000 tons from the beginning of the year, independent coking plant inventory of 11.5 million tons, down 380000 tons from the beginning of the year, sample steel plant inventory of 9.39 million tons, down 670000 tons. The recent demand is strong, the shipment is good, and the speed of going to the warehouse is fast.

Overall, the supply and demand pattern of coking coal is expected to continue to improve. On the one hand, the policy pressures such as flat control of crude steel, double control of energy consumption and production restrictions for the Winter Olympic Games have all been alleviated, the production of coking plants and steel mills has gradually resumed, and the marginal relaxation of infrastructure real estate will also drive demand. On the other hand, it is difficult to have an increase on the import side, which accounts for about 12% of the domestic coking coal supply. as a result of the conflict between Russia and Ukraine, Russian settlement is restricted, which may affect imports from Russia (more than 10 million tons of coking coal imported in 2021). At the same time, the serious reversal of overseas coal prices will also greatly affect imports. Australian coal imports have no signs of liberalization in 2022, and Mongolian coal imports are still limited (epidemic factors). Mongolian coal clearance vehicles have been kept at a low level of 100 vehicles so far this year. We judge that the supply of coking coal in 2022 is expected to be tighter than that in 2021, and the demand for coking coal is less than that of thermal coal, but the supply constraints may be greater than that of thermal coal.

(2) recent research experience:

(1) the quarterly results of coal enterprises will be very good, and the high performance of many companies in the first quarter may not change much from the high performance in the fourth quarter of last year, especially those with a high proportion of long-term associations and better types of coal.

(2) the elasticity of coal supply is small, and the production schedule of large enterprises does not change much this year. Safety is the bottom line and the top priority emphasized by the enterprise. under the condition of ensuring safety, it is basically in the top production at present.

(3) not only at the financial level, but also in the industry that coal is still a periodic product. Except for the continuation of enterprise resources, low enthusiasm for production expansion and tight supply and demand, coal prices are expected to continue to be realized at high levels in 2022.

(3) selection of individual stocks:

In terms of individual stock recommendation, companies with a high proportion of long-term associations have strong certainty of performance growth, companies with a high proportion of coal in the market have more attractive valuations, and companies with large coal advantages or logical production growth have strong alpha attributes. in addition, coal stocks that actively distribute energy transformation will also get the opportunity to improve their valuation. Thermal Coal Unit suggests to pay attention to: Shanxi controlled Coal, Yanzhou Coal, Shaanxi Coal, China Shenhua Energy, China Coal Energy, Diantou Energy, Haohua Energy. Metallurgical coal stocks suggest to pay attention to: Lu'an Huaneng, Pingshan Coal Stock, Shanxi Coking Coal, Huaibei Mining, Jizhong Energy, Shanxi Coking. Anthracite suggests attention: orchid Kechuang.

To make a long story short, I would like to report on the situation of the two companies in detail. if you are interested in other companies, you are welcome to communicate in private.

Shanxi-controlled coal industry: extremely low-valued coal stocks with large room for output growth

1. The company is the leader of Shanxi power coal, with pure business. The annual production capacity of three mining mines is 32.1 million tons, the resource reserves are 5.4 billion tons, and the production capacity of rights and interests is 27.35 million tons.

2. Jinneng Group has a coal production capacity of 390 million tons per year (more than 12 times that of listed companies) and resource reserves of about 52.3 billion tons. It is possible to inject assets (in company annual report language).

3. Flexible pricing method (half of the market / long-term Association). The company's net profit on equity in 2021 is 4.87 billion yuan, a year-on-year increase of 456%. The performance release exceeded expectations, corresponding to about 5 times the valuation of PE (March 2, 2022).

4. The coal industry has entered an era of effective capacity shortage, while the medium-term demand can still maintain positive growth, power coal prices are expected to be high, and the profitability of the coal business is strong.

5. The overall asset quality of the company is high, the valuation is low, and the scale of the group's assets is large, which should be paid more attention to.

Orchid Kechuang (March gold stock): the high-quality performance of coal is flexible, and the rise in international oil prices drives up the performance of the chemical sector.

1. High-quality anthracite enterprises, mainly market-oriented pricing (chemical and steel plant users), the integration of the coal chemical industry, under the circumstances of calculating a large impairment loss in 2021 (affecting the mother net profit of about 427 million yuan), still achieve a net profit of 2.34 billion yuan (+ 525%), and Q1, Q2, Q3 and Q4 are 2.3,4.7,7.1 and 935 million yuan respectively.

2. The coal production capacity is 12 million tons, the equity capacity is 12.12 million tons, and the total capacity under construction is 4.2 million tons, with an increase of 35%. Since 2022, the average price of Jincheng anthracite pit is 1349 yuan / ton, which is only 132yuan / ton lower than 2021Q4, 247yuan / ton higher than 2021Q3, and the price is still high.

3. The company has an annual urea production capacity of 1 million tons, with a urea profit of more than 100 million in the first half of 2021. The average urea prices in the third and fourth quarters are 2593 yuan / ton and 2589 yuan / ton, respectively. Compared with the first half of the year (2130 yuan / ton), the average price has increased by about 460 yuan / ton, and the average price has remained at a high profit level since 2022. Chemical fertilizer supply, coal chemical industry, Tian Yue normal production, improve the company's performance.

4. The company now has an annual output of 200000 tons of dimethyl ether and 140000 tons of caprolactam, making tens of millions of profits in the first half of 2021. The average price of dimethyl ether in the second half of the year was 4130 yuan / ton, an increase of 907 yuan / ton over the first half of the year; the average price of caprolactam was 14702 yuan / ton, up 1757 yuan / ton over the first half of the year; and since 2022, the average price was 3788 yuan / ton and 13957 yuan / ton respectively. Affected by the Russian-Ukrainian problem, the recent sharp rise in international oil prices is expected to increase the company's chemical product profits.

[2] investors ask questions

1. Is the profit forecast of Orchid Science and Technology in the first quarter?

A: the company mainly sells coal in the market, and downstream is more likely to face chemical and steel mills, which is less affected by price regulation. Anthracite is not much lower than last year's high, and profits remain at a high level.

2. The orchid family has created five rhythms in the construction and production of mines.

At present, the company's five integrated mines have a total production capacity of 4.2 million tons (an increment of 35 per cent), of which three may be relatively fast, almost trial production this year, and the other two are slow to build.

3. What are the companies that account for a high proportion of coal in the market?

A: among the larger companies, Yanzhou Mining Energy accounts for about 70% of the market coal, while Shanxi Control and Shaanxi Coal both account for about 50%. The three companies we suggested a long time ago to focus on are Mountain Coal International, Haohua Energy and Orchid Kechuang, which are basically 100% market coal.

Is there any risk of coal price falling after the decrease of daily consumption of power plants in the off-season in March?

A: our view is that the off-season probability is not weak. On the one hand, inventory is low and there is a large demand for replenishment, on the other hand, overseas prices are very high, which will affect imports and support domestic coal prices.