In the first half of 2024, the gross margin of the heating Industry reached 26.5%. With the decline in coal prices, profitability is expected to rebound in 2025, coupled with excellent cash flow and a dividend ratio of 50%, the sector's allocation value is highlighted.
According to the Zhito Finance APP, China Galaxy Securities has released a Research Report stating that the central heating industry has the advantages of stable growth and high dividends, recommending focus on three investment lines: first, the companies with low valuation and significant dividend yield such as Material Energy (603071.SH) and Luenmei Quantum (600167.SH); second, Beijing Jingneng Thermal (002893.SZ) which benefits from asset injection commitments and has considerable installation capacity; third, GCL Energy Technology (002015.SZ) which actively expands its Industry Chain. The report notes that in the first half of 2024, the industry's gross margin is expected to reach 26.5%, and with the decline in coal prices, profitability is expected to rebound in 2025, combined with excellent cash flow and a dividend payout ratio of 50%, highlighting the sector's allocation value.
The main viewpoints of China Galaxy Securities are as follows:
The application prospects of central heating are broad, with prominent energy-saving advantages.
Central heating has various advantages such as saving fuel, reducing pollution, saving land, and improving heating quality, thus gaining wider promotion. Combined heat and power generation is an important production method for central heating, utilizing waste heat with an efficiency of 75-80%, much higher than the 35-37% level of thermal power plants, showcasing significant energy-saving advantages. (1) Residential heating: The increasing urbanization rate is witnessing a stable growth trend, with an annual increase of 0.604 billion square meters in urban central heating area from 2014 to 2023, with a compound annual growth rate of 7.3%; (2) Industrial heating: The large base of industrial parks presents growth opportunities for central heating, with China's steam supply capacity increasing from 0.0847 million tons/hour in 2014 to 0.1255 million tons/hour in 2022, with a compound annual growth rate of 5.0%.
The pricing mechanism for steam is mature, and combined heat and power generation has strong profitability and high stability.
Combined heat and power generation follows the "heat determines electricity" operating model, with steam accounting for 80-90% of the revenue, where electricity prices adhere to government pricing, providing high revenue certainty, while steam prices are adjusted according to coal-heat linkage, gas-heat linkage, and other cost linkage mechanisms, reducing the risk of fuel price fluctuations. Taking Material Energy’s Tongxiang Thaise Energy as an example, when the market coal price changes by 25 yuan/ton (corresponding to a change in standard coal of 31.8 yuan/ton), the steam price corresponds to a change of 4 yuan/ton. Assuming one ton of standard coal produces 7 tons of steam, when 100% of the heat is used for steam production, its coal-heat linkage mechanism can hedge approximately 90% of coal price fluctuations, greatly reducing the risk of profitability fluctuations caused by rising coal prices. Compared to traditional thermal power, the gross margin level of the combined heat and power generation industry is high with a small fluctuation range. Since 2020, the average gross margin range for listed companies in the thermal power business has been between 20-32%, while for thermal power companies, the average gross margin range has been from -3 to 17%.
The combined heat and power industry has excellent cash flow, and the dividends and dividend yield are attractive.
This research analyzes some publicly listed companies in the thermal power industry: (1) Strong profitability and high stability: the average gross margin of the thermal power business has been between 20-32% since 2020, with 26.5% in the first half of 2024, and is expected to rebound in 2025 as coal prices decline; (2) Excellent cash flow: the annual average net income cash content and annual average operating cash ratio are 140-160% and 110-120% respectively, indicating excellent profitability quality and collection ability; (3) High dividend levels: the average dividend payout ratio in the industry in 2023 is approximately 50%, with an average dividend yield of about 3%; (4) Valuation differentiation: according to the current closing price, the industry average PE (TTM) is slightly above 20 times, with an average PB of about 2.7 times, with Ningbo Energy Group, Luenmei Quantum, and Wuchan Zhongda's PB at 1.12, 1.18, and 1.30 respectively, showing a clear undervaluation advantage.
Risk Warning: Risk of macroeconomic fluctuations; risk of product price fluctuations; risk of fuel price fluctuations; risk of changes in industrial policies.
Today, after hitting the high near 24,000 in the early session and entering bearish positions, the index fell sharply by nearly over 600 points, immediately recouping yesterday's losses significantly.
Moreover, today it broke the new high again, reaching a maximum of 24,076, but by the end of the market, it fell back by about 70 points, producing a bearish candle. The current trend has not yet been broken, but from the previous low until now, it has risen close to 6,000 points. It is believed that those with positions can continue to hold until there is a clear trend reversal for profit-taking. Those without positions can wait for a pullback to get in. Actually, it is hoped for a quick pullback, as it allows for entry and also provides a healthy breath.
Currently, the outlook remains the same as before. It is believed that even if there is a pullback, it shouldn't be too deep. However, if Futures fail to stabilize and close below 22,350, there may still be room for decline. The chance of Futures falling below 21,400 in the short term should be low, so it is considered that if a significant pullback occurs, it presents a good opportunity to incrementally go long. Recently, there has been a consistent approach to not hold positions overnight, only focusing on immediate trades, as there is no high chasing and no casual short selling.
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