Since 2024, the Hang Seng Index has been consolidating at the bottom. Many sectors and individual stocks are still struggling with intense consolidation, but the coal sector's performance is still strong. Since the beginning of this year, the coal sector of Hong Kong stocks has accumulated 22%, surpassing the annual increase of 16% last year. While rising rapidly, it continues to hit new highs.

Judging from individual stock trends, smaller companies such as South Gobi (01878) and China's Qinfa (00866) have doubled their stock prices since this year. Meanwhile, leading companies such as China Shenhua (01088), Yankuang Energy (01171), and China Coal Energy (01898) achieved 22.24%, 19.95%, and 16.2% respectively during this period. Among them, the stock price of China Shenhua, the “big brother” in the industry, recently hit a record high level.

What exactly is the reason behind the continued popularity of the coal sector? And how long can this “black gold market” last?

Industry performance under pressure from coal prices

Judging from performance trends, 2023 is actually not a good harvest year for coal companies. According to Guoxin Securities data, the overall revenue of the coal sector fell 10.49% year on year in 2023, and net profit to mother fell 26.15% year on year.

According to Wind data, 20 companies in the Hong Kong coal sector announced their 2023 annual results. Of these, only 5 companies achieved positive net profit growth, namely Mongolia Energy, Anyu Asia, Mongolian Coking Coal, Yidazong, and China Coal Energy. Among the companies whose net profit declined, Huili Resources and China Shenhua declined slightly, at -7.31% and -11.38%, respectively.

The Zhitong Finance App learned that among the leading targets in the industry, the revenue performance of China's three major companies, Shenhua, Yankuang Energy, and China Coal Energy, was under pressure during the period, falling 0.39%, 23.46%, and 12.5% year-on-year respectively, achieving revenue of 343,074 billion yuan (RMB, same below), 118.892 billion yuan, and 192,969 billion yuan respectively. On the profit side, the performance of these three companies was divided.

As the company with the smallest decline in revenue among the three major companies, China Shenhua relied on its integrated development, production, distribution and marketing operation model for coal, electricity, transportation and coal chemical businesses during the period. With effective coordination among various business segments, while the company's revenue performance was steady, it also hedged the impact of some of the decline in profits.

During the period, sales revenue from the coal sector reached 262,868 billion yuan, a slight decrease of 2.3% over the previous year. Among them, the domestic sales price of the company's coal sector was 581 yuan/ton, -8.9% year-on-year. The drop in the company's sales price was less than the drop in coal prices. The company's annual long-term cooperation accounts for 80% of its own coal production. The high proportion of the company's coal sales price mitigates the volatility of the company's coal sales price. In terms of power business, the company's annual electricity sales revenue reached 85.616 billion yuan, an increase of 9.8% over the previous year. The sector's gross margin increased by 2.6% to 16.9%, and total profit increased 34% to 10.6 billion yuan.

And as the only company among the three leading companies to achieve profit growth, China Coal Energy continues to optimize its industrial layout and build a “coal-coal-electricity-coal chemical-new energy” industrial chain. During the period, sales of self-produced coal with high gross profit per unit increased. Sales volume reached 133.91 million tons, an increase of 11.3% over the previous year. The gross margin of the company's coal sector fell only slightly by 0.5 percentage points to 24.9%. Furthermore, although the company's coal chemical sector increased in volume and price, it benefited from an increase in gross margin, which led to a year-on-year increase in profits in this sector. During the period, the company's coal chemical sector achieved gross profit of 3.295 billion yuan, an increase of 8.8% over the previous year, and achieved a gross profit margin of 15.4%, an increase of 2.1 percentage points over the previous year.

Orient Securities pointed out that in an unfavorable external environment where the coal price center fell year on year in 2023, one reason for the year-on-year increase in the company's performance was the increase in production and sales of coal and coal chemical products, which stabilized performance with volume compensation. In 2023, the company produced 134.22 million tons of commercial coal, up 12.6,% year on year, and 6.04 million tons of major coal chemical products, up 6.5% year on year. Furthermore, the reduction in the company's asset impairment losses compared to 2022 is another major reason driving the company's performance improvement.

In comparison, Yankuang Energy's performance was much worse. The company's revenue and net profit declined by 23.46% and 41.55% respectively during the period. Excluding one-time expenses mainly used for asset depreciation, the company's recurring net profit was 17.1 billion yuan, a year-on-year decrease of more than 48%. Although Yancoal Australia increased significantly during the period, production increased by 3.977 million tons compared to 2023, an increase of 13.51% over the previous year. However, the comprehensive gross margin achieved by the company's coal business declined in 2023, down 7.93 percentage points from the previous year to 51.65%. The comprehensive sales price of the company's commercial coal was 803.15 yuan/ton, a year-on-year decrease of 25.49%. At the same time, the company's coal chemical business also showed a downward trend of falling prices and pressure on profitability. The company's chemical business achieved a gross profit margin of 19.95% during the period, a year-on-year decline of 1.23 percentage points.

Overall, in 2023, when coal prices continued to decline, the revenue of leading coal companies all experienced varying degrees of decline, yet some companies still relied on their excellent industrial layout to withstand the downward pressure on the industry. Although the overall performance of the industry is under pressure, the market's enthusiasm for coal stocks has not waned. The reason for this is related to the high dividend nature of the coal industry.

The new “National Nine Rules” are here, and the high-dividend sector is receiving attention again

The Zhitong Finance App notes that since 2022, as global interest rates have risen sharply, and in an uncertain market environment, capital is chasing certainty. The market favors companies with stable fundamentals and high margins of safety, and high-dividend stocks have become the target of market pursuit.

In fact, due to profit fluctuations in 2023, the total dividends of most coal companies declined. According to statistics from Guoxin Securities, among the top targets, only one coal company from China Coal Energy achieved an increase in total dividends, from 5.476 billion yuan in 2022 to 5.860 billion yuan in 2023. Meanwhile, the total dividends of China's Shenhua and Yankuang Energy declined to varying degrees.

However, judging from the dividend rate, China Shenhua is also the most prominent. Its dividend ratio is significantly higher than that of other listed companies with dividends exceeding 10 billion yuan. It plans to distribute a discovery dividend of 44.903 billion yuan, accounting for 75.22% of the company's net profit to the mother in 2023, and 72.8% for 2022. However, Yankuang Energy's dividend rate in 2023 is around 60%, and the company said the cash dividend ratio will not be less than 60% from 2023 to 2025. In comparison, the dividend rate for China Coal Energy is lower; in recent years, it has been around 30%.

It is worth mentioning that recently, with the new “National Nine Rules” emphasizing dividends, focusing on dividends, and mandatory dividends, the advantages of the coal sector as a high-dividend sector have been further strengthened.

In response, China Development Securities pointed out that in recent years, the phenomenon of low valuation levels of listed central and state-owned enterprises has received widespread attention from the market. Encouraging and stimulating interest in dividends and promoting an increase in the level of dividends is an important channel for increasing investors' recognition of listed companies, and it is also a matter of focus for supervisory authorities. According to the data, the number of listed companies that implemented dividends for 5 consecutive years in 2018-2022 reached 1,600. Among them, 220 listed central enterprises have implemented continuous dividends in the past five years, accounting for 50% of all listed central enterprises; local state-owned enterprises account for more than 40% of the total number of listed central enterprises. Compared with other industries, coal, which has benefited from the optimization of the industrial pattern, has performed more prominently in this round of market. However, it emphasized that due to the relatively high level of congestion in the coal industry, the continuation of the subsequent market may weaken.

According to the “2023 Annual Report on the Development of the Coal Industry” recently released by the China Coal Industry Association, according to a comprehensive judgment, supply and demand in the coal market will maintain a basic balance in 2024. Among them, the medium- to long-term contract system will effectively play the role of a “ballast stone” and “stabilizer” for the smooth operation of the coal market.

Debon Securities pointed out that at present, safe production in coal mines has become a national priority. Safety inspections are expected to remain at high pressure, capacity utilization is constrained, and supply contraction expectations are strengthened. The fundamentals and expectations of the coal industry have changed significantly. The third quarter of 2023 is expected to be the low annual performance. In 2024, industry profits may increase year-on-year, low and high.

Cinda Securities said that it is currently in the early stages of a new upward cycle of the coal economy. Fundamentals and policies resonate. At this stage, it is the right time to allocate the coal sector to the low. Currently, the coal sector has the attributes of high performance, high cash, and high dividends. Combined with the characteristics of high prosperity, long cycle, and high barriers in the industry, low valuation levels and reversal of level 1 and 2 valuations, the coal sector has both offensive and defensive investment.

Taken together, the coal stock market, which began in the second half of 2023, continues until now, and is inseparable from the company's advantages in this sector with high dividends and high dividends. With the release of the new “National Nine Rules”, the coal sector was once again ignited. Meanwhile, in the fundamental market, CITIC Securities analysis indicates that the average net profit of the coal sector fell 25% year on year in the first quarter of this year. Currently, the sector has gradually absorbed expectations of declining performance. In the future, as coal prices gradually stabilize, compounded by expectations of an improvement in mid-term demand in the second quarter, the short-term sector is expected to pick up amidst shocks.