Guotai Junan: The resurgence of dividends attracts coal or may usher in a turning point.

Guotai Junan released a research report stating that the performance pressure of the coal sector in the first half of 2024 has been basically released. 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 2024 Q2-Q3. In the future, as industry prices bottom out and become clearer, the cyclical weakening of the coal industry will be driven by stronger predictability and stability in the profits of leading dividend stocks, continuing the "dividend" investment strategy. Recommended investments include: 1) high-quality leading stocks with stable and predictable earnings; 2) targets in the coal and electricity integration sector; 3) targets in long-term contract coking coal; 4) targets with recovering performance bottoms. Main points from Guotai Junan are as follows: Coal leads most industries and tests supply and demand during the pressure testing period in advance. Looking back at 2024, the coal industry experienced the biggest pressure in the mid-season and peak season, with the beginning of the off-season for thermal coal demand in March, where prices were dominated by non-thermal coal. However, industries such as steel and cement have already hit bottom in terms of profitability, experiencing demand conditions that deviate from historical extremes. The coal price maintained its final bottom at 813 yuan/ton. The starting of the peak season for thermal coal in June saw a significant increase in hydropower (some regions reaching historical highs in water supply), leading to a -7.4% growth in thermal power, which accounted for nearly 70% of electricity generation in 2023. Thermal power demand also tested an extreme assumption, alongside increased production in Shanxi. However, the coal price remained relatively stable at around 840 yuan/ton, showing resilience in a context of extreme supply and demand conditions. Daily consumption maintained its highest historical level, and the sector may be approaching an inflection point surpassing expectations. From July onwards, with marginal weakening of hydropower demand, thermal power growth turned from negative to positive in August. Daily consumption data also climbed to a historical high and has remained at this level, showing no seasonal decline as in previous years. This may be due to factors such as temperatures exceeding previous years, the decline in the proportion of non-thermal coal in electricity generation due to preferential policies for electricity grids, and peak load shifting in new energy sources. This could reduce the possibility of a rapid decline in daily consumption in the short term, with expectations that the decline in daily coal consumption may be delayed until after National Day. Meanwhile, the fundamentals of non-thermal coal in steel, building materials, and cement have shown clear signs of recovery, supporting a gradual increase in non-thermal coal demand, which can compensate for the decline in thermal coal demand, as northern winter restocking is set to begin in October. In this context, the downward pressure on coal prices is expected to be significantly smaller than market expectations. Sector regains dividend attractiveness. From the perspective of coal companies' interim reports, their performance has actually met or exceeded expectations, despite the industry's significant downward pressure. Looking forward to Q3, with coal prices exceeding expectations, it is expected that the sector's performance will continue to improve year-on-year. Several coal companies have increased their interim dividends, and the trend of dividend distribution in the sector may continue to rise; moreover, long-term interest rates have shown a significant decline recently, with 10-year government bond yields falling to 2.04%. Even after adjusting for interim performance, the sector's dividend yield remains above an average of 6%, regaining dividend attractiveness. Risk factors: Lower-than-expected downstream demand, a significant drop in steel prices, and an expansion in import volumes.