The Zhitong Finance App learned that Cinda Securities released a research report saying that in the context 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 into 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.

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 2024 coal market, the bank expects tightening in the context of difficult production in major coal exporters, narrowing of import cuts in Europe, Japan, and South Korea, and still strong import demand from India and Southeast Asia. China's coal imports may remain flat or even fall slightly. At the same time, domestic coal stock production potential has basically reached its limit, space for approval of new production capacity is limited, coal production in the central and eastern provinces is accelerating decline. Under the high-pressure situation of safety supervision, it is not even obvious that domestic coal supply growth is limited. Facing a phased contraction.

The bank believes that 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 shortages of production capacity in the short to medium term 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 problems, 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 the demand for coking coal has been greatly weakened due to infrastructure and manufacturing hedging and a series of policies underpinning steady growth in 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 Qingang 5,500 kcal thermal coal spot price center was 969 yuan/ton, and the Qingang 5,500 kcal long-term cooperative price center 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. 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, so that the cost of developing coal production capacity in China is economical and can be developed continues to rise.

The bank predicts that in the context of long-term cooperative insurance and supply, the two-track price system is expected to exist for a long time (similar to 2003-2012). The upper limit of the long-term agreement price range for 5,500 megacars in Qingang can basically be seen as a new bottom for the long-term price of electricity and coal. Around 800+ yuan can be seen as the new bottom of the market 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. The bank believes that this round of production capacity cycle began with supply-side reforms to remove production capacity from coal, 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. They still use nuclear expansion potential as a compromise. As a result, large-scale coal mine construction approval has not yet begun, so the current round of coal production capacity cycles may be relatively long. Currently, it is still in the early to middle stages of a new round of production capacity cycle 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, the bank believes that coal will still be in a boom cycle in the next 3-5 years, and that 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, it will drive sector value restructuring, and sector investment in both offense and defense, and suggests active allocation on dips.

Investment suggestions: Based on the bank's research and judgment on the energy production cycle, the bank believes that under the situation of increasing coal production and supply throughout the country, the tightening of coal supply may continue throughout the “14th Five-Year Plan” or even the “15th Five-Year Plan”, and that 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.

The bank continues to be bullish on the coal sector and continues to suggest focusing on historic coal allocation opportunities. Focus from the bottom up on:

First, Yankuang Energy (600188.SH), Guanghui Energy (600256.SH), and Shaanxi Coal (), etc., which have large room for endogenous and epitaxial growth and excellent resource endowments; 601225.SH

Second, central coal enterprises such as China Shenhua (601088.SH), China Coal Energy (601898.SH), and Xinji Energy (), etc. have a lot of room for asset value revaluation and improvement under the central government reform policy; 601918.SH

Third, high-quality metallurgical coal companies with particularly scarce global resources such as Pingmei Co., Ltd. (601666.SH), Huaibei Mining (600985.SH), and Lu'an Huaneng (); 601699.SH

Fourth, it is recommended to focus on Lanhua Science Innovation (600123.SH), Huayang Co., Ltd. (600348.SH), etc., which can be used as targets related to anthracite that can be used as metallurgical coal injection, and related opportunities in the field of coal production and construction under the new production capacity cycle, such as Tiandi Technology () and Tianma Intelligent Control (). 600582.SH 688570.SH

Risk factors: Short-term effects of domestic and foreign energy policy changes; domestic and foreign macroeconomic stalls or recovery falls short of expectations; risk of major coal safety accidents; extreme weather disrupts peak season electricity and coal demand; uncertain impact of geopolitical conflicts.