Guotai Junan Securities: Daily coal consumption maintains historical highs, fundamentals surpass expectations, sector turning point may not be far away.

Guotai Junan Securities released a research report stating that the performance pressure of the coal sector in the first half of 2024 has been largely relieved. The continuous decline in coal prices since the beginning of 2023 has led to a decline in industry ROE, which is expected to bottom out in Q2-Q3 of 2024. Looking back at 2024, the coal industry experienced the greatest mid-term pressure during the off-season and peak season. In an extreme supply and demand background, overall coal prices remained resilient. Starting from July, with the marginal weakening of hydropower demand, the increase in coal-fired power generation speed turned negative to positive immediately in August, and daily consumption data also climbed to historic highs and has been ongoing. Possibly due to higher temperatures than previous years, electricity grid incentives leading to a decrease in non-electric coal for self-generation, and peak-shifting of new energy sources, the likelihood of rapid declines in daily consumption in the short term is reduced, and the expected decrease in daily consumption of electricity coal may be postponed until after the National Day holiday. Coal leads most industries, testing pressure during the pre-tested period of supply and demand downturn. Guotai Junan Securities believes that looking back at 2024, the coal industry experienced the greatest mid-term pressure during the off-season and peak season, starting from March with the off-season for electricity coal demand, with prices dominated by non-electric coal. However, steel, cement, and other industries broke through the bottom of profitability in 2015, downstream customers have experienced demand conditions that diverge from historical extreme values, and coal prices finally bottomed out at 813 yuan/ton. The peak season for electricity coal started in June, with a significant increase in hydropower (some regions reached historic highs in water supply), leading to a decrease in coal-fired power generation speed by 7.4%. As the source of nearly 70% of electricity generation in 2023, coal-fired power generation demand also tested an assumption of extreme values. Despite increased production in Shanxi, coal prices remained relatively stable at around 840 yuan/ton. In an extreme supply and demand background, overall coal prices remained resilient. Daily consumption maintains historic highs, and the sector may soon see an upward turning point exceeding expectations. Guotai Junan Securities observed that starting from July, with the marginal weakening of hydropower demand, coal-fired power generation speed turned negative to positive immediately in August. The daily consumption data also climbed to historic highs and has been ongoing, and has not followed the seasonal decline in daily consumption as experienced in the past. Guotai Junan Securities believes this may be due to higher temperatures than previous years, electricity grid incentives leading to a decrease in non-electric coal for self-generation, and peak-shifting of new energy sources. This may reduce the likelihood of rapid declines in daily consumption in the short term, and the expected decrease in daily consumption of electricity coal may be postponed until after the National Day holiday. At the same time, the fundamentals of non-electric coal for steel, building materials, and cement have already shown clear signs of recovery at the bottom, and the gradual increase in demand for non-electric coal can support the absence of a decline in some electricity coal demand in the future. With the start of the northern winter stockpile in October, the downward pressure on coal prices in the future will be significantly smaller than expected. Sector dividends reappear attractive. Guotai Junan Securities believes that from the perspective of coal company reports, the performance of leading companies has actually met or exceeded expectations against the backdrop of industry downward pressure. Looking forward to Q3, with coal prices outperforming expectations at the fundamental level, it is expected that sector performance will continue to show a year-on-year improvement trend. In the mid-term reports, many coal companies have increased their mid-term dividends, and the trend of sector dividends may continue to rise. Recently, long-term interest rates have shown a significant decline again, with the 10-year government bond falling to 2.04%. Even after adjusting for mid-term performance, the sector's dividend yield still averages over 6%, reappearing the attractiveness of dividends. Investment recommendations: Recommended: 1) High-quality leading companies with profitability stability and predictability: China Shenhua Energy(601088.SH), China Coal Energy(601898.SH), Shaanxi Coal Industry(601225.SH); 2) Integrated coal and electricity China Coal Xinji Energy(601918.SH); benefiting Shaanxi Energy Investment(001286.SZ); 3) Long-term coking coal targets: Huaibei Mining Holdings(600985.SH), Anhui Hengyuan Coal Industry and Electricity Power(600955.SH), Pingdingshan Tianan Coal Mining(601666.SH), Shanxi Coking Coal Energy Group(000983.SZ); 4) Companies with recovering performance at the bottom: Shanxi Coal International Energy Group(600546.SH), Shanxi Lu'an Environmental Energy Dev.Co.,Ltd(601699.SH), Shanxi Lanhua Sci-Tech Venture(600123.SH). Risk warning: downstream demand below expectations, sharp decline in steel prices, expansion of import scale.