Tianfeng: Coal prices are rapidly declining, and profits in thermal power electricity generation may face opportunities for price increases.

According to GMTEight APP, recently, Tianfeng released a research report stating that after the Chinese New Year, the coal market is facing an "oversupply" situation, intensifying the trend of coal prices rapidly falling to a near four-year low, with the "accumulation of inventory" trend continuing, and further decreases are expected. The percentage of long-term coal contracts signed in 2025 has decreased, strengthening the marginal impact of market coal, which provides significant cost improvement opportunities for thermal power companies with a low proportion of long-term coal contracts. Compared to the decrease in long-term electricity prices in 2025, most provinces' thermal power units are expected to achieve positive growth in profitability. In conclusion, the profitability of thermal power companies may improve due to the decline in coal prices, and attention is recommended on Huaneng Power International, Inc. (600011.SH), Huadian Power International Corporation (600027.SH), and other related stocks. Tianfeng's views are as follows: The "oversupply" situation intensifies after the Chinese New Year, leading to a rapid decline in coal prices. After the Chinese New Year, coal prices have rapidly declined to near four-year lows. As of February 26, the price of 5500 kcal coal at Qinhuangdao Port fell to 696 yuan/ton, a decrease of 12 yuan/ton from the previous day, and a decrease of 231 yuan/ton compared to the same period last year. The average price of coal since the beginning of the year is 748 yuan/ton, a decrease of 168 yuan/ton compared to the same period last year. Looking at a longer time frame, since the rapid increase in the price of 5500 kcal coal at Qinhuangdao Port since the end of March 2021, the prices have remained above 700 yuan/ton for nearly four years, and the current market prices have fallen to relatively low levels. The trend of "accumulation of inventory" continues, and coal prices are expected to further decrease. After the Chinese New Year, the overall "oversupply" situation in the domestic coal market has intensified, leading to further increases in port and power plant inventories. According to Wind data, as of February 21, the coal inventories at northern ports and the Yangtze River estuary were 27.50 million tons and 6.80 million tons respectively, with year-on-year increases of 6.05 million tons and 1.59 million tons respectively. From the power plant perspective, as of February 20, the daily coal consumption of domestically coordinated power plants was 6.90 million tons, a decrease of 70,000 tons year-on-year. Considering the current relatively high port inventories and the approaching off-season for coal consumption, coal prices are expected to further decrease in the future. The decline in coal prices improves power plant profitability, and the impact of declining electricity prices is expected to ease. The percentage of long-term coal contracts signed in 2025 has decreased, strengthening the marginal impact of market coal. In November 2024, the National Development and Reform Commission issued the "Notice on the Performance of Medium and Long-Term Contract Signing for Electricity and Coal in 2025". Compared to 2024, this document: 1) lowered the requirements for the signing percentage of coal-producing provinces and coal production enterprises, from "not less than 80% of their own resources" in 2024 to "not less than 75% of their own resources", and 2) relaxed the performance requirements from "completing the performance task in full for the whole year" in 2024 to "basically completing the performance in full for the whole year, with a minimum not less than 90%". Against the backdrop of rapidly declining market coal prices, thermal power companies are expected to achieve more cost improvements. Tianfeng calculated the level of cost improvement for thermal power units after the decline in coal prices. According to Wind data, the average price of 5500 kcal coal at Qinhuangdao Port in 2024 was 857 yuan/ton, corresponding to the benchmark coal price (7000 kcal) of 1090 yuan/ton; in terms of coal consumption, based on the data from Huaneng Power International, Inc., their average coal consumption for thermal power units in the first half of 2024 was 291.09 grams/kWh. Without considering fluctuations in the prices of long-term coal contracts and imported coal, based on the calculation results, for thermal power companies with a low proportion of long-term coal contracts, their coal consumption costs have a relatively large marginal elasticity to market coal prices. At the current price level, companies with less than 50% of long-term coal contracts could see a decrease in the price of coal entering the furnace by about 100-140 yuan/ton, corresponding to an improvement in electricity generation costs of about 0.03-0.04 yuan/kWh. Most provinces' thermal power units are expected to achieve positive growth in electricity generation profitability in 2025. Compared to the decline in long-term electricity prices in 2025, most provinces' thermal power units are expected to achieve positive growth in electricity generation profitability. Looking at the results of electricity transactions in 2025, inland provinces have seen relatively small decreases in electricity prices. According to data from Phaeton Technology, the decreases in electricity prices in regions such as North China (Beijing-Tianjin-Hebei, Shandong, Shanxi), Northeast China (Heilongjiang, Liaoning, Eastern Inner Mongolia), and Northwest China (Gansu, Ningxia, Xinjiang) were generally within 1 fen, and in some areas, there were even increases (such as Tianjin). The decreases in electricity prices were relatively larger in some coastal areas. For example, the annual bilateral trading electricity price in Guangdong Province decreased by about 7 fen, while the annual average trading prices in Zhejiang and Jiangsu decreased by about 5 fen and 4 fen, respectively. Overall, with the significant downward trend in coal prices, Tianfeng believes that most provinces' thermal power units are expected to achieve positive growth in electricity generation profitability in 2025. Investment recommendations Tianfeng believes that with the widespread decline in long-term trading electricity prices nationwide in 2025, there are concerns about the profitability of thermal power companies in the market, which has put some pressure on the sector's performance initially. However, based on the trend of coal prices, the current price level may have already had a certain positive impact on the profitability of thermal power companies, and with coal prices likely to further decrease in a high inventory situation, this could help offset the pressure on profitability caused by declining electricity prices. In comparison, apart from a few coastal areas, most provinces' thermal power units are expected to achieve positive growth in electricity generation profitability in 2025. In terms of specific investments, attention is recommended on Huaneng Power International, Inc., Huadian Power International Corporation, Shenergy, An Hui Wenergy, and Jointo Energy Investment."and so on."Risk Warning Risks of significant macroeconomic decline, risks of policy progress falling short of expectations or being adjusted, risks of electricity price reductions, risks of significant fuel cost increases, subjectivity in calculations, for reference only.