The Zhitong Finance App learned that Guojin Securities released a research report saying that the 2021-10M24 coal sector index is strongly correlated with coal prices, and that several rounds of the market essentially stem from performance growth expectations brought about by rising coal prices. Meanwhile, the 11M23 to 1M24 sector index is decoupled from the correlation between coal prices, and the sector index trend is upward when coal prices weaken. The bank believes that the current sector market has undergone internal logical changes compared to the previous one, and that the main factor behind the rise in stock prices has changed to valuation reshaping brought about by the discovery of high dividend asset values. In a context where the market is paying more attention to indicators related to investor returns, compounding state-owned enterprise reforms and market value management requirements to bring benefits, the “definitive” value recognition of coal's high-dividend assets is expected to continue to be high, and sector valuations will be reshaped or continuously interpreted.
Guojin Securities's views are as follows:
Vertical comparison: Why are coal prices weakening recently but the overall trend of sector indices is rising? The increase in this round is an increase in valuation.
The 2021-10M24 coal sector index is strongly correlated with coal prices. Several rounds of the market essentially stem from performance growth expectations brought about by rising coal prices. However, the correlation between the 11M23 to 1M24 sector index and coal price was decoupled, and the sector index trend was upward when coal prices weakened. The bank believes that the current sector market has undergone internal logical changes compared to the previous one, and that the main factor behind the rise in stock prices has changed to valuation reshaping brought about by the discovery of high dividend asset values.
Horizontal comparison: Why is the coal sector trending better since 11M23? The industry is in line with scarce supply, excellent quality, high dividends, and leading dividend rates.
The essence of a high dividend market is that in a volatile market, the market is looking for assets with “scarce supply”, “excellent quality”, and “emphasis on investor returns”, which is an increase in “certainty” value recognition; current coal production increases are limited, and bargaining power brought about by “supply constraints” help stabilize performance, and industry companies have abundant cash flow, high profit quality, and leading dividend levels, which is in line with market demand. As a result, the sector index has been able to rise against the trend when the general market trend has fluctuated and declined recently. Compared with other high-dividend sectors, the 1H23 trend in the coal sector index was relatively weak, mainly due to a negative fundamental gap of 30% in coal prices in the first half of the year; however, the high dividend strategy configuration in the 11M23 market had a large bias in the coal sector, mainly because the dividend ratio of the coal sector far exceeded other industries, the allocation cost ratio was prominent, and the 9-10M23 off-season coal price exceeded expectations, which confirmed the bottom support of coal prices. The stabilization of the sector's fundamentals was recognized by the market.
Case analysis: Taking China's Shenhua and the Shaanxi coal industry as examples, they shared the same path, and the value of “certainty” was recognized.
Although there is a big gap between the business models of China's Shenhua and Shaanxi coal industries, they are leading the industry in terms of valuation levels or valuation gains since 11M23, mainly because “the same path” fits the market's pursuit of “certainty,” that is, the certainty of investment returns guaranteed by stable profits combined with high dividend rates.
China's Shenhua's “certainty” comes from “a high ratio of long-term cooperation+coal and power joint ventures plus leading high dividend guarantee”; with the support of the company's stable fundamentals, its valuation has continued to lead among leading coal companies since 2022, and 11M23 has still achieved an increase of 3.4 pct higher than the industry on the basis of a high valuation base.
The “certainty” of the coal industry in Shaanxi comes from the profitability guarantee brought about by high-quality assets and the leading dividend commitment level; in the sector's valuation increase since 11M23, the stability of the company's valuation increase and upward trend is leading, and the “certainty” of the profitability of the main coal industry has been highly recognized by the market.
Future market outlook: Industry beta is in line with the general trend, and the restructuring of the coal sector's valuation is expected to continue to be verified.
If economic recovery exceeds expectations in the later stages, the coal sector is still expected to generate a certain amount of excess profits due to procyclical attributes. In a context where the market is paying more attention to indicators related to investor returns, compounding state-owned enterprise reforms and market value management requirements to bring benefits, the “definitive” value recognition of coal's high-dividend assets is expected to continue to be high, and sector valuations will be reshaped or continuously interpreted.
It is expected that coal prices will narrow month-on-month in 24-25, with strong support at the bottom of the price; on the one hand, the narrowing of coal price fluctuations will block the transmission of “sharp rise and fall in coal prices - large fluctuations in the sector index - leading to uncertainty in capital gains”, and the impact of future coal prices on sector index fluctuations may decrease; more importantly, supply restrictions make it difficult to start a new production capacity cycle in the industry. The cyclical nature of the industry continues to weaken, so the bottom of coal price support is strong, providing an important guarantee for the stability of future leading coal companies' performance and dividends. Although dividend ratios in the current sector have declined after increasing valuations, they are still ahead of other industries and are still highly cost-effective. Among them, leading coal companies may still have dividend rates of 6% or more in 24-25, and investors may require or lower dividend rates in the context of interest rate cuts. There is still plenty of room for future increases in the valuation center of high-dividend coal assets and a decline in dividend rates.
Investment advice:
Based on the current sector market trend starting at 11M23 and the future profit and dividend situation of various coal companies, the bank believes that it is recommended to focus on China Shenhua (601088.SH), Shaanxi Coal (601225.SH), and Shanxi Coking Coal (000983.SZ) in terms of the stability of high-dividend profit drivers and the stability of the upward valuation trend brought about by “certainty”; at the same time, it is recommended to focus on the gradual release of future performance and the gradual development of potential dividends to increase dividends, and have certain flexibility to increase their valuations 600188.SH .SH).
Risk warning: the risk that downstream demand for coal falls short of expectations, the risk of a sharp increase in imported coal depressing coal prices, the risk of accelerated replacement of renewable energy, etc.