The Zhitong Finance app learned that Cinda Securities released a research report saying that, based on research and judgment on the energy production cycle, under the situation of increasing coal production and supply across the country, the tightening of coal supply may continue throughout the “14th Five-Year Plan” or even the “15th Five-Year Plan”, and a new batch of high-quality production capacity is needed to guarantee China's medium- to long-term energy coal demand. Against the backdrop of an accelerated westward shift in coal layout and a sharp increase in resource costs and tonnes of coal investment, the rise in rigid costs of economic development is expected to support the coal price center to maintain a gradual upward trend. In addition, asset injection work for central coal enterprises has already begun, further highlighting the high certainty of profit and growth of high-quality coal companies. Currently, the coal sector has the attributes of high performance, high cash, and high dividends. Combined with the characteristics of high prosperity, long cycles, and high barriers in the industry, as well as the obvious inversion between undervaluation levels and level 1 and 2 valuations, investment in the coal sector is both offensive and defensive.

Continue to be optimistic about the coal sector across the board, and continue to suggest focusing on the historic allocation opportunities for coal. From the bottom up, the focus is on: first, Yankuang Energy (600188.SH), etc., which has large room for endogenous epitaxial growth and excellent resource endowments; second, China Shenhua (601088.SH), etc., a central coal enterprise with a lot of room for asset value revaluation and improvement driven by central reform policies; third, Pingmei Co., Ltd., a high-quality metallurgical coal company with particularly scarce global resources, Pingmei Shares (), etc.; fourth, it is recommended to focus on anthracite related targets for metallurgical injection. 601666.SH 600123.SH

▍ The main views of Cinda Securities are as follows:

Main characteristics of the coal industry in 2023:

First, increasing production, securing supply, and price stability is still the main tone of this year's coal work. It also indirectly reflects that the current coal supply and demand situation in China has not fundamentally improved. Second, the growth rate of raw coal production has narrowed markedly from month to month. The utilization rate of coal mine production capacity has remained high but has not continued to increase rapidly compared to 2022. Combined with the tightening and stricter normalization of coal mine safety supervision, the potential of stock production capacity is approaching the limit, and the rigid constraints on domestic coal supply are highlighted. Third, the phased easing and structural adjustment of the global coal trade pattern, compounded by the continuation of China's zero-tariff policy on imported coal, has led to a sharp increase in coal imports. Relieving the pressure on coal supply to a large extent also shows that the domestic output gap is large.

Fourth, domestic and foreign coal prices have fluctuated and adjusted. The thermal coal and coking coal price centers have declined year over year under the high premiums of panic purchases last year, yet they are still operating at a relatively medium to high level. Fifth, against the backdrop of a weak economic recovery, demand for electricity, coal, and chemical coal has shown outstanding performance, driving steady growth in overall coal consumption, and the role of coal underwriting is still the same. Sixth, the growth rate of fixed asset investment in the coal mining industry has clearly slowed, and the scale of mines under construction is also relatively stable. There is an urgent need to start a new round of production capacity cycle to meet the medium- to long-term coal gap.

Supply side:

From January to October 2023, China's raw coal production according to statistics was 3.83 billion tons, an increase of 3.9% over the same period in 2022. The growth rate was significantly slower than the same period in 2022, and the monthly year-on-year growth rate narrowed month-on-month. It is worth noting that key state-owned coal mines produced 1,696 billion tons of raw coal, an increase of 2.3% over the previous year. The growth rate was lower than the overall growth rate of the industry, indicating that the increase in raw coal production was more contributed by the increase in production in small and medium-sized coal mines. In view of the higher risk of safety accidents in small and medium-sized coal mines, against the backdrop of stricter coal mine safety supervision, China's coal supply side faces the risk of further contraction.

Looking ahead to the coal market in 2024, it is expected that production in major coal exporters will not increase significantly, import cuts in Europe, Japan, and South Korea have narrowed, and import demand from India and Southeast Asia is still strong, etc. China's coal imports may remain flat or even fall slightly. At the same time, domestic coal stock and production potential have basically reached the limit, space for approval of new production capacity is limited, and coal production in central and eastern provinces is declining at an accelerated pace. Under the high-pressure situation of safety regulations, it is difficult to even rule out that domestic coal supply is not clearly ruled out. sexual contractions.

The current sharp increase in coal imports has alleviated the supply-side conflict to a certain extent, but the problem of insufficient effective supply during the production capacity cycle is still prominent. The core contradiction is still insufficient additional continuous production capacity. Although the country is expected to speed up the pace of coal approval and construction at the end of the “14th Five-Year Plan” or the beginning of the “15th Five-Year Plan”, the basic characteristics of large-scale coal mine investment and a long construction cycle also mean that the underlying logic of short- to medium term production capacity shortages is still established.

Demand side:

From January to October 2023, China's commercial coal consumption was 3.81 billion tons, an increase of 6.6% over the previous year, mainly for electricity and chemical coal. Among them, it benefited from a 5.7% year-on-year increase in thermal power generation, which led to a 10.3% year-on-year increase in coal consumption in the power industry; the coal chemical industry maintained a high capacity utilization rate driven by high oil prices and cost advantages, driving a 4.6% year-on-year increase in chemical coal use.

Looking ahead to 2024, in terms of thermal coal, 2024 may usher in an industrial stock replenishment cycle to drive a recovery in secondary production. Combined with global El Niño, hot weather is expected to support electricity consumption. At the same time, as the living standards of Chinese residents steadily improve and industrial upgrading continues, the elasticity of energy and electricity consumption is expected to remain rigid. Combined with new energy consumption issues, electricity and coal consumption is expected to continue to grow. In terms of coking coal, the negative impact of the downturn in real estate on demand for coking coal has been greatly weakened due to infrastructure and manufacturing hedging and a series of steady growth policies underpinning real estate and infrastructure, total crude steel production is expected to remain stable. Coupled with the increase in the proportion of long-term processes in the steel industry and the decline in scrap ratio, demand for coking coal, especially high-quality primary coal, is expected to continue to grow slightly as a scarce resource.

It is worth noting that, as the main downstream demand end for coal, electricity and coal is expected to be concentrated and put into operation over the next 1-2 years under the accelerated approval and construction of coal and electricity installations since 2022, forming strong support for electricity and coal consumption, which in turn will drive continued growth in coal consumption.

Price side:

As of November 27, in terms of thermal coal, the spot price center for 5,500 kcal thermal coal in Qingang was 969 yuan/ton, and the price center for 5,500 kcal in Qingang was 714 yuan/ton, down 23.6% and 1.1% respectively from the average price in 2022. In terms of coking coal, the central price of coking coal in Jingtang Port and Shanxi is 2,243 yuan/ton, and the median price of the Xinhua-Shanxi Coking Coal Long-term Coking Coal Index is 1,587 yuan/ton, down 20.8% and 7.6% respectively from the 2022 average price.

It should be noted that in 2023, coal prices fluctuated clearly, and the price center declined markedly, but it was more of a normal adjustment after the high premium caused by global coal rush under the Russian-Ukrainian conflict in 2022. This does not mean that coal prices have entered a downward channel. In particular, from the end of May to the beginning of June, the price of 5,500 kcal thermal coal fell to close to the bottom of 800 yuan/ton and quickly stopped falling and rebounded due to many adverse factors such as high downstream coal inventories, a sharp increase in imported coal, and centralized sell-off among traders. This further shows that domestic coal prices have been confirmed at the bottom of coal prices, supported by rigid and marginal costs, that is, as major low-cost mining areas in Jinshan, Shaanxi, and Mongolia are being excavated, pricing is more influenced by high-cost mining areas in the central and eastern part of the country and incremental mining areas in Xinjiang, which are far from being transported, causing the cost of developing coal production capacity in China, which is economical and can be developed, to continue to rise.

It is expected that in the context of long-term cooperative insurance and supply, the two-track price system may persist for a long time (similar to 2003-2012). The upper limit of the long-term agreement price range for the 5,500 kcal in Qingang can basically be seen as the new bottom of the long-term price of electricity and coal. Around 800+ yuan can be seen as the new bottom of the market's spot coal price, and the bottom coal price tends to rise further as the gap between supply and demand widens.

The industry boom cycle & the establishment of bottom coal prices promote the value restructuring of coal companies.

Based on previous research, the pace and span of China's coal production capacity cycle is slow and long. When the inflection point of the business cycle falls, it often simultaneously shows characteristics such as a continuous decline in coal consumption, a sharp decline in the coal price center, a significant decline in industry profit levels, and a high level of fixed asset investment. This round of production capacity cycle began with supply-side reforms to remove production capacity from coal. It is due to the tightening of the coal supply and demand situation. Limited by the “double carbon” target strategy, enterprises are not very willing to spend capital on mining, and still use the potential for nuclear expansion as a compromise. As a result, large-scale coal mine construction approval has not yet begun. As a result, the current round of coal production capacity cycles may be relatively longer. Currently, it is still in the early to middle stages of a new cycle of production capacity and the beginning of the upward boom cycle in the coal industry.

On the other hand, the current valuation and pricing of the primary and secondary coal market is clearly inverted, and the undervaluation and high dividend attributes of the coal sector are highlighted. Judging from Yitai's 50% premium share repurchase and the overall high premium transaction of mining rights in Shaanxi and Mongolia since this year, and from the PE, dividend return, and PB-ROE dimensions, the current market value of the coal sector is still clearly underestimated, and there is plenty of room for restoration (based on replacement cost, the reasonable value of most coal companies is generally over 110% premium over the current market value).

Overall, in the next 3-5 years, coal will still be in a boom cycle. High-quality coal companies will still have the attributes of high barriers, high cash, high dividends, high dividends, and undervaluation. Combined with coal price consolidation, driving sector value restructuring, and sector investment in both offense and defense, it is recommended to actively allocate against dips.

Risk Factors:

Changes in domestic and foreign energy policies have short-term effects; domestic and foreign macroeconomic stalls or recovery falls short of expectations; risk of major coal safety accidents; extreme weather disrupts demand for electricity and coal in peak seasons; and uncertain effects brought about by geopolitical conflicts.