According to Zhixin Finance & Economics APP, Changjiang Securities released a research report stating that in the first half of 2024, domestic supply will continue to be constrained by safety supervision, and imports will continue to grow but still have limited contribution. In the first half of the year, the key is that the demand side presents the characteristics of not being strong in the peak season and not being weak in the off-season. Looking ahead to the second half of the year, the fundamentals are stable and the current port inventory is not sufficient, so it is expected that coal prices will be easy to rise and difficult to fall in the second half of the year. The focus is on the resonance period of demand in the latter half of the summer peak season for power plants in August and September, as well as the non-electric peak season demand during the golden nine and silver ten periods. Taking into account the fact that the bottom of coal prices will rise in 2024, and the supply and demand of coal will be more scarce than in 2024 from 2025 onwards (the supply is still tight and the demand is improving), the subsequent downward trend of coal prices will have a bottom and the upward elasticity will open up, plus the dividend yield guarantee after the increase in dividend payout ratio, the investment value of coal sector is prominent, and the valuation upward space is further opened up.

The main opinions of Changjiang Securities are as follows:

Review: Supply and demand are in a state of double weakness, and dividends are dominant.

Coal valuation reshaped in first half of the year: coal price fluctuation converged, and the dividend style continued to drive the reshaping of coal valuation. In the first half of 2024, domestic supply will continue to be constrained by safety supervision, and imports will continue to grow but still have limited contribution. In the first half of the year, the key is that the demand side presents the characteristics of not being strong in the peak season and not being weak in the off-season. Overall, under the condition of double weakness in supply and demand, the trend of coal price is fluctuating and the center is continuing to fall, but the fluctuation is significantly converged compared with 2023. From the perspective of equity, in the first half of 2024, the newly started area of real estate further fell, the real estate cycle continued to decline, the preference of capital markets declined, and the long-term national bond interest rate fell to the bottom and opened up oscillation, indicating that the low interest rate and asset shortage characteristics in the market were obvious, thus driving the continuation of the dividend style.

Changjiang Securities believes that since the second half of 2023, the market has been transitioning from the "bearish expectation of high profitability of the coal industry" to the "optimistic expectation of medium-high profitability sustainability", and with the central trend of coal prices stabilizing after another stress test in the first half of this year, it has once again consolidated the high dividend attribute of the coal sector, thus continuing the trend of coal sector valuation reshaping.

Market outlook: The road to revaluation is not over, and the elasticity of price increases returns.

Second half of the year: Fundamentals are stable and coal prices are easy to rise and difficult to fall. At the macro level, the weakness of non-electric demand in the first half of the year is mainly affected by the weak macro expectations. With a series of "stabilizing the real estate" policies recently introduced, coupled with the acceleration of local special bond issuance, the industrial peak season coal demand in the "golden nine and silver ten" period in the second half of the year is expected to be higher than in the first half of the year. At the industry level, the supply side is constrained by safety supervision and environmental protection policies, and there is no significant increase in production capacity at the production areas before the end of June. The demand side has a certain degree of certainty in terms of the summer peak demand for electricity and winter demand, and the daily coal consumption of power plants usually peaks in August and December, with the highs in mid-August and the end of December, indicating that the demand for coal for electricity in the second half of the year is relatively continuous and stronger than in the first half of the year. In addition, the current port inventory is not sufficient, so it is expected that coal prices will be easy to rise and difficult to fall in the second half of the year. The focus is on the resonance period of demand in the latter half of the summer peak season for power plants in August and September, as well as the non-electric peak season demand during the golden nine and silver ten periods.

Medium and long term: More than just dividends, the supply-demand gap opens up space for price increases.

At the macro level, as the economy transitions from high-speed growth to medium and low-speed growth, the decline of long-term interest rates is almost an inevitable trend. Against this backdrop, the excess returns of the dividend index continue to expand, and the coal sector represented by China Shenhua has significant excess returns relative to the risk-free interest rate, and its investment advantages are still prominent. At the industry level, the normalization of safety supervision and the systemic decline of capital expenditure have led to insufficient new production capacity in China, and there is almost no increase in overseas supply. At the same time, the incremental demand in countries such as India and Southeast Asia cannot be ignored, which further limits the increase in import.

While the supply elasticity is converging, the demand is still growing steadily. In particular, from 2025 onwards, under the background of high electricity demand and inter-annual variation of hydropower, the growth rate of thermal power generation is expected to return to around 2%, and at the same time, the toughness of coking coal demand is supported by the strengthening of molten iron's substitution for scrap steel and the improvement of coke export, which comprehensively makes the supply and demand of thermal coal shift from a surplus of 59.54 million tons in 2024 to a shortage of 18.81 million tons in 2025, and the supply and demand pattern of coal is obviously improving, and the upward space of coal prices is expected to open again, forming an investment advantage of "dividends + price increases".

Investment strategy: Taking into account the rise in coal prices in 2024, the expected tighter supply and demand of coal from 2025 than in 2024 (supply is still tight and demand is improving), the subsequent downward trend of coal prices will have a bottom and the upward elasticity will open up, plus the dividend yield guarantee after the increase in dividend payout ratio, the investment value of coal sector is prominent, and the valuation upward space is further opened up.

The marginal allocation follows the following ideas for stock selection: 1) Long-term stable and profitable high-quality leaders: China Shenhua Energy (601088.SH), Shaanxi Coal Industry (601225.SH); 2) Duration pull-up: China Coal Xinji Energy (601918.SH); 3) Both offensive and defensive: Inner Mongolia Dian Tou Energy Corporation(002128.SZ); 4) Higher odds: short-term volume increase and elastic recommendations include Shanxi Coal International Energy Group (600546.SH), Shanxi Lanhua Sci-Tech Venture (600123.SH), Shan Xi Hua Yang Group New Energy (600348.SH), etc.; for mid-to-long term rising price elasticity recommendations include Yankuang Energy(600188.SH), Gansu Energy Chemical(000552.SZ), Jinneng Holding Shanxi Coal Industry (601001.SH); rare metallurgical coal with elastic recommendations include Pingdingshan Tianan Coal Mining (601666.SH), HuaiBei Mining Holdings (600985.SH), Shanxi Coking Coal Energy Group(000983.SZ), Shanxi Lu’an Environmental Energy Dev.co.,ltd (601699.SH).

Risk reminder: Under the pressure of economic situation, there is uncertainty in downstream demand. Under the influence of external factors, there is a risk of non-seasonal decline in coal prices or coal sector; there is a risk of large increase in imported coal; there is a risk of large increase in new capacity in the industry.