Guotai Haitong: The coal industry is currently at a turning point in its fundamentals. We recommend China Shenhua Energy (601088.SH) and others.

Guotai Haitong released a research report stating that, unlike the supply-side reform in 2016, this round of "anti-inward spiraling" will significantly reduce the intensity of the one-size-fits-all approach on the supply side, and will adopt more of a "time for space" strategy. The impact on the coal industry is more practical at the bottom, and is currently at a turning point in its fundamentals. From a sector recommendation perspective, the bank recommends the release of performance risks and recommends leading companies in the sector such as China Shenhua Energy (601088.SH), Shaanxi Coal Industry (601225.SH), China Coal Energy (601898.SH), and Jinneng Holding Shanxi Coal Industry (601001.SH). Guotai Haitong's main points are as follows: "Anti-inward spiraling" has become the core term of the current new round of supply-side reform, which is different from 2016 The new round of anti-inward spiraling on the supply side has officially kicked off. The bank believes that, unlike the supply-side reform in 2016, the current "anti-inward spiraling" has a different impact on the actual industry. The current proposal of "anti-inward spiraling" focuses on the idea of "governing low-priced disorderly competition by enterprises in accordance with laws and regulations, guiding enterprises to improve product quality, and promoting the orderly exit of backward production capacity," with the core focus of the policy not on eliminating outdated production capacity, but on stopping the industry's disorderly low-price competition. The bank believes that fundamentally, this does not directly affect the industry structure, but by resolving the disorderly competition of enterprises and establishing a price bottom, the bank understands that this is more of a way to "exchange time for space" rather than the "one-size-fits-all" elimination method used in 2016. Referencing the only successful case of "anti-inward spiraling" in the entire industry: cement, synergy leading to industry profit bottoming out and recovery The bank uses the cement industry, the only successful case in the industry that achieved anti-inward spiraling without relying on administrative policy means, as an example to study the impact of anti-inward spiraling on the industry. It can be seen that in the industry's loss-making state, synergy stoppages make anti-inward spiraling the least difficult, and the actual stoppages effectively push prices up, confirming a profitability bottom. Compared to cement, the difficulty of anti-inward spiraling lies in: 1) coordinating anti-inward spiraling at the national level increases the difficulty several times; 2) differing costs of shutdown and resumption, leading to varying difficulty in pricing hikes due to industry stoppages; 3) inventory, traders may play an uncertain role in this. This round of anti-inward spiraling has more impact on the coal industry at the practical bottom, and is currently at a turning point in its fundamentals 1) Since 2025, in the context of a sharp decline in coal prices, the profitability of coal enterprises has greatly decreased, with a significant increase in data for loss-making enterprises. According to data released by the National Bureau of Statistics, the current loss-making rate in the coal industry exceeds 50%, especially for coking coal. The introduction of the "anti-inward spiraling" policy may to a certain extent encourage more loss-making coal mines to reduce production, while controlling the startup rate through safety and environmental inspection means, making the coal price bottom more practical. The bank believes that the current period is the bottom of this cycle. 2) Supply side: from April to May, the national production volume showed a significant decrease compared to Q1, indicating a spontaneous production reduction caused by the industry's economic situation as port prices fell below 650 yuan/ton; coupled with the definitive contraction in imports from January to May, total supply is expected to remain stable with a slight reduction. Demand side: The bank observed that with the warming weather in April-May, the monthly growth rate of electricity consumption by urban and rural residents quickly recovered to 7% and 9.6%, respectively, driving the overall electricity consumption's rebound, which may have already indicated that Q1 is the turning point for the year's electricity consumption growth rate. In the short term, with the recovery of overall electricity consumption, thermal power generation in May has already recovered by 1.2% and is growing positively, indicating that the peak pressure for the year may have passed. Risk warning: Policy implementation falls short of expectations; supply exceeds expected release