Sealand: Coal production is stable and reserves are high. In 2025, it is still a valuable asset worth seizing.

Sealand released a research report stating that looking ahead to the coal industry in 2025, focusing on incremental production, considering that open-pit coal mines are predominant in the Xinjiang region, capacity release is relatively easy. In addition, the Xinjiang region has already begun to accelerate the release of production in the second half of 2024, so it is worth paying attention to how much Xinjiang can contribute in terms of incremental production in 2025. Overall, it is estimated that the supply-demand gap for coal in 2025 will be over 5 million tons, significantly narrower than in 2024. The coal price is expected to fluctuate in the range of 800-900 yuan/ton. In terms of coking coal, it is expected that in 2025, domestic production will continue to drag down demand, while demand will continue to be supported by infrastructure, manufacturing, and direct steel exports. Assuming a demand growth rate of -1%, it is estimated that the supply-demand gap for coking coal in 2025 will be approximately 3 million tons, with the central price of coking coal possibly declining. Sealand's main points are as follows: Market Review: Undervalued and high-performance target stocks lead the way in gains During the third quarter of 2024, there was a style shift, with the sector's gains ranking 21st among the 31 industries in the Shanghai index (as of December 13), a decrease of 15 places from the previous year. Active fund holdings accounted for 1.18% of the sector in the third quarter of 2024, a decrease of 0.36 percentage points from the previous quarter, the second largest decline in nearly three years, second only to the significant drop in coal prices in the fourth quarter of 2022. About 25% of stocks in the sector outperformed the Shanghai and Shenzhen 300 index during the year, with stocks showing lower price-to-book ratios and better performance seeing higher gains. By December 13, 2024, Inner Mongolia Dian Tou Energy Corporation, China Shenhua Energy, Wintime Energy, China Coal Xinji Energy, and Beijing Haohua Energy Resource were among the top five gainers in the coal sector. China Coal Energy and Shaanxi Coal Industry also performed well, outpacing the Shanghai and Shenzhen 300 index. Review of Thermal Coal: Overall loose supply and demand, price center shifting lower, with minor fluctuations in coal prices during the year From January to October, domestic coal supply increased by 2.3% year-on-year (not considering changes in calorific value), while coal consumption increased by 0.5% year-on-year. With relatively loose supply and demand, the center of coal prices shifted slightly lower, with an average price of 859 yuan/ton for Qinhuangdao Port thermal coal in 2024 (as of December 13), a decline of 106 yuan/ton from the annual average in 2023, showing overall minor fluctuations and hitting a low of 800 yuan/ton in the second quarter. Regarding long-term contracts, the average price in 2024 was 701 yuan/ton, relatively stable. On the production side, coal production from January to October 2024 increased by 1.2% year-on-year, with a slower growth rate compared to the previous year, mainly due to declines in Shanxi, with growth mainly seen in Xinjiang and Inner Mongolia. On the import side, driven by production cuts and profitable import opportunities, coal imports from January to October 2024 increased by 13.5% year-on-year, with most of the increase coming from Australian coal, while imports from Russia decreased slightly, and imports from Indonesia and Mongolia remained growth. Regarding downstream demand, electricity demand increased by 5% year-on-year in the first ten months, mainly driven by the significant increase in electricity consumption in the secondary and tertiary industries and residential areas, with an improvement in power plant coal consumption rates. Building material demand declined slightly due to the weak real estate market, while chemical demand remained strong due to the significant release of downstream coal chemical capacity, maintaining robust growth throughout the year. In terms of inventory, port inventories have increased since the fourth quarter, with downstream power plants maintaining reasonably high inventory levels. Review of Coking Coal: Downward volatility, coal prices affected by fundamental and emotional factors during the year In terms of prices, the overall supply and demand of coking coal in 2024 were relatively loose, with the price center shifting lower, and an average price of 2045 yuan/ton for main coking coal at Jing Tang Port in 2024 (as of December 13), a decrease of 238 yuan/ton compared to the previous year. The coking coal price showed two significant increases during the year, the first in mid-April to mid-May, when supply and demand tightened, upstream inventories showed signs of decline, the manufacturing industry's PMI remained above the boom-bust line for two consecutive months, with improved fundamentals and improved macro sentiment driving up coal prices; the second increase occurred at the end of September to mid-October, as macro sentiment reversed, stock traders interacted positively, and supply and demand improved, with upstream inventories depleting and fundamentals providing support, leading to an increase in coal prices. On the production side, domestic coking coal production from January to October 2024 was 1.05 billion tons, a decrease of 5.3% year-on-year, with growth starting low and increasing later in the year. Imports increased significantly by 23% year-on-year, which not only supplemented the reduced domestic production but also reflected continued import profitability, with Mongolia, Australia, Russia, and the United States contributing to the majority of import growth. On the demand side, direct demand for coke and molten iron production decreased by 1% and 4% respectively year-on-year, with real estate demand dragging down and manufacturing, infrastructure, and steel exports providing support. In terms of inventory, upstream inventories continued to accumulate, while downstream inventories remained low, leading to three significant price declines during the year, with the upstream-downstream inventory ratio remaining historically high and continuing to rise. Outlook for 2025: Supply-demand gap narrowing, thermal coal prices expected to fluctuate in the range of 800-900 yuan/ton For thermal coal, the overall supply constraints are expected to remain unchanged. It is estimated that the nationwide coal mine capacity utilization rate is about 90%, with limited room for further production increases. Coal prices are expected to return to rational levels, with increasing resource costs and expectations of carbon neutrality policies jointly curbing capital expenditures. In terms of focusing on incremental production in 2025, considering that open-pit coal mines are predominant in the Xinjiang region, where production capacity can be easily released, it is worth noting how much Xinjiang can contribute in terms of incremental production in 2025. Market expectations are that the production cuts in Shanxi in 2024 may partially recover in 2025, but due to its low production-to-sales ratio and increasing regulatory scrutiny, the growth rate of production may be limited. On the demand side, under neutral assumptions, the electricity generation growth rate in 2025 is estimated to be around +3%. Chemical demand is expected to continue growing due to capital expenditure growth in coal chemical industries and the drive from the 14th Five-Year Plan policies, while the building materials sector may experience a slight decline due to the lack of recovery in the real estate market. Overall, it is estimated that the supply-demand gap for coal in 2025 will be over 5 million tons, significantly narrower than in 2024, and the coal price may fluctuate in the range of 800-900 yuan/ton. For coking coal, it is expected that in 2025, domestic production will continue to drag down demand, with infrastructure and manufacturing supporting demand.Manufacturing and steel exports will continue to support demand. Assuming demand growth is -1%, there will be a gap of around 3 million tons between supply and demand for coking coal in 2025, and the price of coking coal may decline. Globally, it is expected that in the coming years, India's cumulative new demand for coking coal will exceed the increase in exports from Australia, leading to a possible tightening of global supply and demand for coking coal.Investment advice: Coal incremental stability, stock optimization, is still a valuable asset worth grasping. In the context of low interest rates, the high dividend dividend property of coal determines that it is still one of the best assets. Before 2022, coal stocks follow coal prices with the main feature of cyclical properties. After 2023, as coal prices fall, coal stocks rise against the trend, mainly because their high dividend dividend properties are gradually recognized by the market. Of course, the dividend properties of the coal sector also need to be supported by stable profitability, high cash flow, and high dividends, which will be sustainable in the future. In terms of profitability, it is estimated that the price of thermal coal in 2025 will be in the range of 800-900 yuan, and with reference to the coal price falling to about 859 yuan/ton in 2024, the profitability of the coal sector is still at a relatively high level in the industry, compared to the third quarter report of the 31 industries of the Shenwan Index, the ROE of the coal sector is ranked third in the industry. From a vertical perspective, the net operating cash flow of the coal sector in the first three quarters of 2024 was 222.3 billion yuan, at a relatively high level in nearly ten years. Horizontally, the ratio of net operating cash flow to operating income for the coal sector in the first three quarters of 2024 was 21%, ranking fifth in the industry. In terms of dividends, the coal sector is gradually increasing its dividend ratio and scale, with the dividend ratio in 2023 higher than in 2022. Looking at the big picture, it is expected that in the coming years, the coal industry will continue to maintain a tight balance, with coal prices at medium to high levels, profitability remaining guaranteed, high-quality assets in the coal industry, ample cash flow on the books, and listed coal companies continuing to exhibit the "five highs" characteristics of "high profitability, high cash flow, high barriers to entry, high dividends, high safety margin". The coal sector has stable increment and outstanding stock, making it a valuable asset worth grasping, maintaining a "recommended" rating for the coal mining industry. Key Focus Areas (1) Stable high dividend targets: China Shenhua Energy(601088.SH), Shaanxi Coal Industry(601225.SH), China Coal Energy(601898.SH), etc.; (2) Downstream extension targets in the industry chain: Inner Mongolia Dian Tou Energy Corporation(002128.SZ), China Coal Xinji Energy(601918.SH), etc.; (3) Elastic targets for thermal coal: Yankuang Energy Group(600188.SH), Jinneng Holding Shanxi Coal Industry(601001.SH), Guanghui Energy(600256.SH), etc.; (4) Elastic targets for coking coal: Huaibei Mining Holdings(600985.SH), Pingdingshan Tianan Coal Mining(601666.SH), Shanxi Lu'an Environmental Energy Dev.Co.,Ltd(601699.SH), Shanxi Coking Coal Energy Group(000983.SZ), etc. Risk Warnings 1) Risks of economic growth below expectations; 2) Risks of policy control measures exceeding expectations; 3) Risks of continuous substitution of renewable energy; 4) Risks of coal imports affecting; 5) Risks of company performance falling below expectations; 6) Errors in calculation, subject to actual conditions.