Many investors still have huge doubts about the following question — why is American stock god Buffett always obsessed with traditional fossil energy investments in the new energy era?

When I uncovered the “two barrels of oil” CNPC, Sinopec, and China Shenhua's financial reports for more than ten years, I immediately learned the mystery hidden in the “two barrels of oil”: “Two Barrels of Oil” listed companies had not experienced annual report losses in the past ten years, and China Shenhua also created a total profit initiative in the 18 years since listing. The stability of long-term performance has also provided the most solid backing for the implementation of these three companies' long-term dividend policies.

Therefore, the biggest appeal of energy stocks is probably that the operation of the world economy will never be separated from energy consumption. The stability and certainty of traditional fossil energy is far higher than that of the new energy industry. This is also the most fundamental reason why Buffett has continued to invest in it in recent years.

However, in China's current energy consumption structure, coal still accounts for more than half of total energy consumption. This is closely linked to China being the world's largest manufacturing country. For example, China's steel production ranks first in the world, accounting for more than half of the world's total production. This involves the use of large amounts of coal; for example, steelmaking requires coking coal, exactlyThe production and supply of our own coking coal is far from keeping up with total consumption, generating relatively rigid demand. Therefore, coking coal needs to be imported for a long time and is highly dependent on the outside world. This undoubtedly contains huge commercial space.If you follow the chart, you should be able to find some value investment targets suitable for long-term holding, with unique business models and strong certainty.

As we all know, coal stocks are highly cyclical individual stocks, and changes in the market value of individual stocks are affected by both changes in coal supply and coal prices. For example, Mongolian Coking Coal (00975.HK) and South Gobi (01878.HK), the two major Mongolian coal port stock listed companies that supply coal to China, the stock prices of the two listed companies rose 266.3% and 147.5% respectively last year after Mongolian coal was re-cleared in 2023, indicating that the market is quite optimistic about a series of businesses related to Mongolian coal imports.

In addition to this, I also discovered that I am engagedCoal supply chain businessThe listing platform, its resistance to cycles will be far superior toGeneral coal production enterprises.The most representative listed company in Hong Kong stocks is Yi Dazong (01733.HK). Since successfully restructuring its business in 2016, this company has recorded 7 consecutive profit records, which shows the stability and sustainability of its business model.

Because it doesn't need to be pressured when upstream coal prices are sluggish, its profit comes entirely from the price difference between the price of washed and refined coal sold to steel mills and the entire process or chain of obtaining raw coal from foreign coal companies. Furthermore, the cooperation is all major customers. Basically, it is a business that acts as a “water seller.”

“Water seller” in Mongolian coal import business: 2023 results returned to historic high levels, ROE reached 27.54%

According to the 2023 results announcement issued by Yi Dazong recently, its operating income achieved a year-on-year increase of 17.94% to HK$40.587 billion, returning to a historically high level; gross profit and net profit to mother recorded HK$370 billion and HK$2,123 billion respectively, with year-on-year growth rates of 15.70% and 27.43% respectively, making good use of operating leverage and releasing profitability; due to improved operational efficiency and the implementation of various cost reduction and efficiency measures, the company recorded an ROE level of 27.54% in 2023, which exceeded the 25% defined by Buffett for outstanding enterprises standards.

It is worth mentioning that the company recorded earnings per share of HK$0.793 in 2023, an increase of 33.50% year over year. The proposed final dividend of HK$320 million, plus the mid-term cash dividend of HK$211 million, will distribute a total of about HK$531 million in cash for the whole year, with a corresponding dividend rate of 12.65%. This data performance is far higher than the return ratio of cash dividends provided by Hong Kong listed coal stocks last year. If we take China Shenhua as an example, the dividend rate provided is only 9.66%. The former is almost 3 percentage points higher than the latter.

Since the restructuring in 2016, E-Dazong has distributed a total of over HK$2,681 billion in cash dividends to investors, accounting for 55.66% of the company's current market value. This means that if investors hold E-Dazong shares for a long time over 7 years, the annual dividend income alone has returned more than half of the investment amount, confirming that the nature of the company's dividend stocks is almost at its peak.

From a long-term perspective, can Yi Dazong highly meet the individual stock standards described above for long-term value investment in the energy sector? We still have to look for answers in the deterministic analysis below.

The key basis for certainty: Yi Dazong has three constant factors

1)Industry pattern

From the perspective of coking coal imports, Mongolian coal has replaced Australian coal as the largest share of imported coal in the past few years. Due to its comprehensive advantages such as transportation costs, convenient customs clearance, transportation location, and perfect infrastructure,No matter how China's coking coal imports change, the number one position of Mongolian coal may remain unchanged for a long time.

In 2023, with the normalization of customs clearance between China and Mongolia and the opening of the Mongolian Railway, China achieved a rapid increase in coal imports from Mongolia. According to Mysteel's reference, China imported 53.96 million tons of coking coal from Mongolia in 2023, an increase of 28.35 million tons over the previous year, an increase of 110.69%, accounting for 52.64% of total imports, ranking first among all importers. The dependence on coking coal imports also reached an all-time high; however, the annual coal import volume at Ganqimaodu Port alone reached 36.51 million tons, an increase of 102.4% year on year.

However, since Mongolian coal depots are still more than 20 kilometers from China's Ganqimaodu supervisory area, there are still certain restrictions on Mongolian coal exports due to the fact that current road logistics facilities still have certain restrictions on Mongolian coal exports. In the future, various parallel modes of cross-border transportation such as shipping, AGVs, and railways will be the future development direction.

In order to ensure the smooth operation of the border crossing between China and Mongolia and improve cargo handling capacity, Ganqimaodu Port has now adopted a variety of cross-border transportation modes to achieve intelligent customs clearance and continuously promote a steady increase in port trade volume. In the future, there is still huge room for growth in cargo volume at Ganqimaodu Port, which also supports and guarantees the long-term growth of coal trade between China and Mongolia.

Currently, China's coal imports mainly come from Mongolia, Russia and Australia.

Among the three, Australian hard coking coal exports recorded a year-on-year decline last year. Due to the high transportation costs of Australian coal compared to land transportation, the CIF price has been inverted with the domestic coking coal price for a long time, so it is unlikely that there will be a further increase in import volume in the future.

However, due to the re-implementation of tariffs on Russian coal, its import costs have increased. According to Mysteel, the Russian government decided to re-implement flexible coal export measures starting March 1. The tax rate range is set between 4% and 7%. Based on Russian coal export tariffs of 5.5%, the cost of imported coal from China is expected to increase by about 5.8 US dollars per ton. The CIF price is on the same level as domestic coal prices. Under reduced profit margins, Russian coal imports may face a decrease.

Under the “double drop” trend between Australian coal and Russian coal, there is room for improvement in Mongolian coal's import ratio, supported by its price advantage.

In the medium to long term, Mongolia's “mining revitalization” strategy remains unchanged. Mongolia's largest open coalfield TT mine has great potential, and there is room for coal exports to China. Furthermore, according to the development plan of Mongolia's largest state-owned coal ETT company for the next few years, ETT's annual coal output will reach 45 million tons by 2025. Furthermore, under the broad framework of the China-Mongolia-Russia Economic Corridor, the comprehensive strength of cross-border logistics, including cross-border railways, is expected to bring more transportation increases, thus bringing conditions for incremental support to the coal trade between China and Mongolia.

According to the latest data released by the General Administration of Customs, in February 2024, China imported 7.87 million tons of coking coal, an increase of 13.8% year on year, while from January to February 2024 it imported a total of 17.8.90 million tons of coking coal, an increase of 36.5% year on year.Since the beginning of 2024, although coking coal prices have been temporarily weak, the import data of Mongolian coal has recorded a good growth trend, once again proving that the upward potential of Mongolian coal still exists.

Some research reports point out that fiscal strength is increasing steady growth, which reflects the importance the country attaches to economic growth and helps stabilize economic growth expectations in the medium term. As real estate policies such as differentiated housing credit, interest rate adjustments for first home loans, and urban policies continue to be implemented and continuously improved, demand for bifocoked coal may rise steadily after the steady recovery of real estate and the formation of physical infrastructure. According to a report released in early March of this year, Fitch Bowers said that it expects coking coal prices this year to be close to or slightly lower than in 2023, with less room for decline than thermal coal. Therefore, it is expected that the weak coking coal price situation will gradually ease, coking coal stocks and total demand will bottom up, and the future may also gradually show.

Based on comprehensive considerations, the coal trade between China and Mongolia is still expected to grow continuously in the future, so it is easy to think that related listed companies that provide coal trade and supply chain services for the China-Mongolia coal trade channel are also expected to become long-term beneficiaries of such trends.

2)Leading position

As the only service provider currently covering the full chain of mining, road and rail transportation, port cross-border transportation, warehousing, washing and processing, domestic transportation, and sales in Mongolian coal business, Yi Dazong has the advantage of being an unrepeatable early entrant and leading enterprise, and has high competitive barriers. In the future, it will still be the biggest beneficiary of the Mongolian coal import business. This is also difficult to change in the future.

In terms of total volume, in 2023, Yidazong's supply chain trade business volume increased 58.30% year-on-year to 19.55 million tons. Among them, the supply chain integrated service business volume providing supporting services reached 1.06 million tons in 2023, while domestic transportation volume was 11.7 million tons. The annual coal storage volume was as high as 16.23 million tons, and the washing coal processing business volume reached 9.47 million tons in 2023. However, through construction and acquisition, its coal washing and processing capacity was expanded to 28 million tons by the end of 2023.

The company's share of coal imports at the three major ports in China and Mongolia, such as Ganqimaodu, Zeke and Erlianhot, reached 28.35%, 10.66%, and 64.38% respectively. If calculated from the total business volume of transportation, warehousing and washing, Yidazong accounts for nearly 1/3 of the service volume at the core transit port of coking coal between China and Mongolia, showing a leading edge.

Currently, in addition to the three major ports in China and Mongolia, Yi Dazong is also continuing to invest and operate at other ports, including Mandurah Port, Al Hashat Port, and Zhun Gadabqi Port, etc., and has prepared a fully forward-looking strategic layout and preparation for its coal trade supply chain.

In the Sino-Mongolian coal trade chain, so to speak, Yidazong's key links have established core advantages that are difficult to replace.

First, the company has invested in the construction of port infrastructure at the three major ports, including Ganqimaodu, Zeke, and Erlianhot. The geographical location is excellent. They are all close to major transportation routes in Outer Mongolia, and the location advantages are outstanding. Second, the company also purchased a large amount of logistics equipment, including overseas double trailer transport vehicles, AGVs, and containers. Most importantly, it also invested in railway cooperative equity, thereby securing its capacity resources and gradually establishing a unique competitive advantage.

According to statistics, since 2005, the company has continued to improve the construction and expansion of the China-Mongolia land port and other strategic locations. By the end of 2023, the original book value of the company's total long-term assets invested and shares in China and Mongolia reached about HK$6.1 billion, and the amount of additional investment ports and surrounding supporting assets throughout last year had reached HK$1.2 billion. This continuous real money investment continues to build and expand local infrastructure. “point-and-line” network resources and the construction of key links and key capabilities in the entire industry chain were difficult for latecomers to reach.

The future changes are also encouraging. As market share increases, the increase in business volume has brought about a flywheel effect, and the company is expected to develop a second growth curve. For example, in 2023, Yi Dazong's revenue from integrated supply chain services showed a faster growth rate compared to revenue from supply chain trade operations. The former's revenue share increased sharply from 10.92% in 2022 to 15.77% in 2023, an increase of 4.85 percentage points over the previous year. Judging from the absolute value of the share, there is plenty of room for future growth.

The author believes that this trend will continue. The extension and expansion of supply chain services can be diversified. Both the business structure and gross margin will be improved. For example, supply chain finance with higher gross margin, etc., the comprehensive supply chain service capacity and coverage increase is the second growth curve that relays the company's endogenous growth, and can continue to be verified in the future.

Overall, there is plenty of room for the company's business volume and revenue to continue to increase. In-depth research on the background and model can conclude that its long-term development opportunities are good, and the company's advantage as a leading industry leader will probably be consolidated in the future.

3)Market identification and value investment

Finally, Yi Dazong also enjoyed the definite advantage of being selected for market funding.

Currently, the stable profits and cash flow of leading listed coal companies and their high dividend policies will continue for a long time, and “shovel stocks” such as Yi Dazong, which provide supporting services upstream in the industrial chain, have also been recognized by the market as having high-quality assets similar to those of the former, and are worth allocating for a long time. This is also very certain. The current market trend performance has already shown this.

As can be seen from trends representing listed companies upstream and downstream of the industrial chain in the past six months and one year, respectively, Yidazong's trend is similar to China's Shenhua, and is also significantly superior to Yancoal Australia, one of its competitors, the leading coal company supplying “Australian Coal”, and Baosteel, China's largest downstream customer.

More importantly, good investment targets are compared over and over again.

Compared with China Shenhua, Yi Dazong, which is also a dividend stock, provided investors with higher dividend returns, and combined with a lower valuation, lighter asset model, and higher core profitability (i.e. ROE return). China Shenhua recorded a weighted return on net assets in 2023 of only 7.59%, which is 262.85% higher than the former.

Therefore, in terms of certainty in value investment, Yi Dazong is superior to China's Shenhua.

Yi Dazong, a scarce listed company that has long-term advantages in Sino-Mongolian coal trade and has a sustainable business. In its current valuation position, it certainly has a “cost performance” advantage over China Shenhua, the leading Chinese coal company.

A sentence expressed in popular online language is:It's not that China Shenhua can't afford it; it's that Yidazong is more cost-effective.

The current Yidazong still needs to wait for the market to be re-evaluated and explored, and the market has not given it the premium it deserves in terms of valuation. This fact is also obvious.

However, the company's performance in 2023, and whether investors can align their perceptions of the company's future development trends and form consistent expectations, may turn into an important opportunity to open up Davis's double-click channel to improve its “performance+valuation”. Let's wait and see.