In the current environment of low interest rates and weakened cyclical attributes of the Coal Sector, the dividend attributes of the Coal Sector are highlighted, still possessing high allocation value.
According to Zhitong Finance APP, Guosen has released a Research Report stating that in the current environment of low interest rates and weakened cyclical attributes of the Coal Sector, the dividend attributes of the Coal Sector are becoming prominent, still holding significant allocation value. With the improvement of the long-term contract coal price mechanism in 2022, the fluctuations in corporate coal prices have narrowed, weakening the cyclical attributes, especially in Thermal Coal companies with a higher proportion of long-term contracts, whose performance stability has increased, corresponding to an enhancement in dividend attributes. Furthermore, with sufficient cash on hand, reduced debt repayment pressure, and under the dividend guidance policy, most companies still have the potential for increased dividends. In the context of downward pressure on the central coal price, companies with a higher proportion of long-term contracts clearly show more resilient performance, and the reduction in long-term contract fulfillment rate requirements in 2025 is expected to offset some of the downward impact on coal prices.
Guosen Securities' main points are as follows:
Looking back at 2024.
On the supply side, domestic coal production is expected to grow by about 50 million tons, an increase of 1.2% year-on-year, while imported coal is expected to grow by about 70 million tons, an increase of 14.8% year-on-year, hitting a new high; On the demand side, in light of the rapid growth of New energy generation and unexpected pressure from hydropower, thermal power shows a resilient growth of 1.2%; As for non-electricity demand, chemical coal performs well, expected to increase by 7.7%, but affected by the sluggish real estate industry and the slowdown in infrastructure growth, coal demand in the Steel and construction materials sectors is expected to decline by about 3.3% and 7.4%, respectively; Overall demand is basically flat year-on-year. Throughout the year, supply remains loose, and terminal stock gradually accumulates to a high level.
In terms of prices, the average annual price of Qinhuangdao 5500K is 855 yuan/ton, a decrease of 110 yuan/ton year-on-year, but the amplitude has significantly narrowed. The average annual price of Qinhuangdao Thermal Coal long-term contracts is 701 yuan/ton, a decrease of 13 yuan/ton year-on-year, with price fluctuations much smaller than market coal prices; The average annual price of coke at Jing Tang Port is 2022 yuan/ton, a decrease of 261 yuan/ton year-on-year, with weak downstream demand and the continuous high level of imported coal being the main factors suppressing coke prices.
Looking ahead to 2025
Thermal Coal: On the supply side, domestic thermal coal production is expected to increase by about 70 million tons by 2025, while imported coal is expected to decrease, resulting in a slight increase of 0.2% in total supply. On the demand side, it is expected that the squeezing effect of new energy generation and hydropower on thermal power will weaken, with an increase in electricity coal demand growth rate to 3.3% month-on-month; the demand for chemical coal is also expected to continue its growth trend but with a slowdown to about 5%; with proactive policies, the drag from building materials will decrease; thermal coal demand is expected to improve by 2.5% year-on-year by 2025, but considering the high terminal inventory, the thermal coal price is expected to fluctuate at a high level between 800-850 yuan/ton in 2025, with the average annual price slightly lower than 2024. For listed thermal coal companies, most have a high proportion of long-term contracts, and the performance fluctuations of coal companies are not expected to be significant.
Coking Coal: On the supply side, domestic production is expected to recover, and imports will maintain a certain growth; on the demand side, from the downstream steel industry, it is expected that the impact from the real estate sector will weaken, with increased demand for steel in infrastructure and manufacturing, while export demand remains high, leading to a slight decrease in total demand. Overall, it is expected that coking coal prices will be under pressure in 2025, but the downward space is limited, and if demand improves, there is considerable upward elasticity.
Investment Recommendation: Stick to high dividends and layout for stable growth.
In the current low-interest-rate environment, where the cycle attributes of the coal Sector have weakened, the dividend attributes of the coal Sector are highlighted, still possessing high allocation value. Firstly, since coal prices surged significantly in 2021, although there has been a decline afterward, overall prices remain at historically high levels, leading to significant profits for coal enterprises. Most companies have seen notable improvements in fundamentals, including a substantial increase in cash flow, a significant reduction in debt-to-assets ratio, enhanced debt repayment capabilities, and an increase in dividend rates, thereby raising the investment value of coal enterprises.
From the comparison of financial indicators among various sectors, the debt-to-assets ratio of the coal Sector has fallen to a relatively low level in the Industry (44.6% in the first three quarters of 2024), with both gross margin and net margin ranking among the top in the Industry (29.3% and 14.0% sales gross/net margin respectively in the first three quarters of 2024). The ROE is ranked second in the entire Industry (11.8% in the first three quarters of 2024), indicating that even under the scenario of an 11% decrease in market coal price central tendency in 2024, the profitability of coal enterprises remains impressive.
Secondly, with the improvement of the long-term coal price mechanism in 2022, the price fluctuations of corporate coal sales have narrowed, and the cyclical attributes have weakened, particularly in thermal coal companies with a high proportion of long-term contracts where performance stability has increased, enhancing corresponding dividend attributes. Additionally, with ample cash on hand, reduced debt pressure, and under the guidance of dividend policy, most companies still have potential for increased dividends. Lastly, in the context of downward pressure on the central price of coal, companies with a high proportion of long-term contracts are evidently more stable in performance, and the reduced contract compliance requirements in 2025 are expected to hedge against some impacts of lower coal prices.
In summary, looking ahead to 2025, there are mainly two investment mainlines. Mainline one: China Shenhua Energy (601088.SH), China Coal Energy (601898.SH), Shaanxi Coal Industry (601225.SH). Mainline two: Inner Mongolia Dian Tou Energy Corporation (002128.SZ), Gansu Energy Chemical (000552.SZ), China Coal Xinji Energy (601918.SH), Shan Xi Hua Yang Group New Energy (600348.SH), Jinneng Holding Shanxi Coal Industry (601001.SH).
Risk Warning: Overseas economic growth slowdown; large-scale release of coal production capacity; new energy replacing coal; impact of coal mine safety accidents.
