Ping An Securities: High long-term ratio and coal-electricity integration layout strengthen the performance stickiness of coal enterprises, highlighting the scale elasticity of production capacity growth.

Ping An Securities released a research report stating that after experiencing frequent heavy rainfall in the Yangtze River Basin in July and August this year and with high contributions from hydropower, thermal coal prices have remained relatively strong. With the increase in the proportion of long-term contracts and rising production costs, the resilience of the central coal price has gradually emerged. The arrival of the northern heating season in the fourth quarter is still expected to temporarily push up coal prices. At the same time, under the high proportion of long-term contract pricing model, the optimized profit capability of coal companies and their relatively good asset-liability ratio help ensure the realization of high dividends and high stock dividends. In the current low interest rate environment in China, the expected dividend yield of coal companies is significantly higher than the yield of 10-year treasury bonds, still offering good investment value. The high proportion of long-term contracts and the integration of coal and electricity strengthen the performance stickiness of coal companies. Since the implementation of the new long-term coal contract mechanism in May 2022, the overall proportion of long-term contracts of coal companies has risen, with around 80% of domestically produced thermal coal used for power generation to ensure supply. The average proportion of medium to long-term contracts among major coal companies is around 60%, and when combined with monthly contracts, the overall long-term contract ratio is around 70%. This long-term pricing mechanism has increased the stability of coal company profits. The focus is on stable coal prices and the sustainability of coal company performance. Looking at the monthly trends in long-term contract coal prices this year, the resilience of coal prices has been evident. In addition, the integration of coal and electricity layouts helps companies smooth out the performance changes caused by coal price fluctuations. Representative listed coal companies that have traditional coal enterprises in coal and electricity integration include China Shenhua Energy, China Coal Xinji Energy, Shanxi Coking Coal Energy Group, Guizhou Panjiang Refined Coal, Shanghai Datun Energy Resources, etc. Looking at the stickiness of coal companies from the perspective of debt structure and liquidity risk: In the report "Thermal Coal Depth: Fundamental and High Dividend Dual-Driven Investment Value" by Ping An Securities, the optimization of coal company balance sheets and overall profitability is analyzed. The debt-to-asset ratio of major coal companies has been on a downward trend, with capital expenditures as a percentage of cash flow decreasing overall, while the percentage of cash dividends has been increasing. This reflects that coal companies are gradually resolving their high debt issues and improving profitability, which leads to increased shareholder returns and fulfilling their responsibilities as state-owned enterprises. Among them, China Shenhua Energy, China Coal Energy, Shaanxi Coal Industry, Shanxi Lu'an Environmental Energy Development Co., Ltd, Jinneng Holding Shanxi Coal Industry, and Shanxi Coking Coal Energy Group have sufficient cash to cover interest-bearing debts, and their debt-to-asset ratio and interest-bearing debt ratio are relatively low, making their balance sheets more optimal. From the perspective of whether existing cash can fully satisfy debt repayment, maintain capital expenditure, and a high cash dividend rate, China Shenhua Energy, Shaanxi Coal Industry, Jinneng Holding Shanxi Coal Industry, Shanxi Lu'an Environmental Energy Development Co., Ltd, Anhui Hengyuan Coal Industry and Electricity Power can maintain high dividends in 2023 and capital expenditures. situation, after paying off interest-bearing debts or short-term financial liabilities due within 2 years, they still have relatively abundant cash balances. After excluding interest-free debts due within one year, China Coal Energy can achieve a positive cash balance. Looking at the scale elasticity of coal companies from the perspective of under-construction capacity and potential group investment: China Shenhua Energy and Guanghui Energy plan to expand their production capacity the most, with total under-construction capacity of around 50 million tons per year. Yankuang Energy Group has a under-construction capacity of over 20 million tons per year, with new projects in Inner Mongolia and Gansu, while Yankuang Energy Group's large-scale projects to be put into operation in the next two years are also in Gansu; in terms of production capacity growth elasticity, Guanghui Energy, Shaanxi Energy Investment, Wintime Energy, Pingdingshan Tianan Coal Mining, China Coal Xinji Energy, Guizhou Panjiang Refined Coal, Shanxi Huayang Group New Energy, Huaibei Mining Holdings have relatively large scale expansion elasticity. Most coal companies are backed by large state-owned enterprises in various regions, and have priority acquisition rights for coal and coal chemical assets, power plants, and other assets where there is competition within the group. Among them, China Shenhua Energy (to be injected with 108 million tons/year), China Coal Energy (to be injected with 29 million tons/year), Yankuang Energy Group (excluding the group's additional capacity of 100-150 million tons/year, with 14 million tons/year under construction), Shaanxi Coal Industry (the group has an additional capacity of 49 million tons/year), Shanxi Lu'an Environmental Energy Development Co., Ltd (the group has an additional capacity of 32.9 million tons/year), Jinneng HTop coal companies such as Olding Shanxi Coal Industry Group (with an additional production capacity of 104 million tons per year), Shanxi Coking Coal Energy Group (with a pending injection of 60 million tons), and Inner Mongolia Dian Tou Energy Corporation (with a pending injection of 35 million tons) still have considerable space for the injection of assets backed by central state-owned enterprises.Investment advice: Based on the analysis of the production capacity, potential expansion ability, performance stickiness, liquidity risk, dividend yield, and current PE/PB ratio of major coal enterprises mentioned earlier, Ping An Securities believes that China Coal Energy (601898.SH) and Shanxi Luan Environmental Energy Development Co., Ltd (601699.SH) have a relatively high cost-effective ratio, while China Shenhua Energy (01088, 601088.SH) and Shaanxi Coal Industry (601225.SH) have high-quality assets and investment value. In addition, Shan Xi Hua Yang Group New Energy (600348.SH) and Shanxi Coal International Energy Group (600546.SH) and other Shanxi coal enterprises have gradually resumed production since June from the temporary shutdowns in the first half of the year, and their performance in the second half is expected to improve. Risk warning: 1) The risk of electricity demand falling below expectations. 2) The risk of mining safety accidents. 3) The risk of a significant increase in capital expenditure by coal enterprises and a reduction in the cash dividend ratio. 4) The risk of lower-than-expected demand during the peak heating season in the future, leading to sustained high coal inventories.