Shen Wan Hongyuan: The cyclical nature of the coal industry tends to weaken, and the sector is in a position to improve the valuation center

The Zhitong Finance App learned that Shen Wan Hongyuan released a research report saying that the country's intervention in the thermal coal price formation mechanism and the implementation of the long-term agreement has increased markedly, and coal prices have gradually switched to an operating model based on market pricing, with reasonable policy ranges as the boundary, and the long-term cooperation mechanism as anchors. The volatility has declined markedly. The coal sector already has the conditions for an increase in the valuation center, which comes from a reassessment of the profit quality of coal companies and shareholder return attributes. The price stabilization mechanism under the policy will continue. Coal prices are likely to operate within a reasonable range. Coal prices and the profit bottom of coal companies are significantly stronger than during the historical downturn; coal companies gradually have remarkable characteristics such as high dividends, low capital expenses, and abundant cash flow.

Shen Wan Hongyuan's main views are as follows:

The volatility of coal prices has declined, and the cyclical nature of the coal industry is weakening

Several rounds of “supply-side” reforms in the industry over the past 20 years have led to a decline in the number of coal mines across the country, the gradual introduction of large-scale modern production capacity, and an increase in industry concentration. The coal industry has bid farewell to the past era of disorderly expansion and provided the necessary conditions for the decline in coal price volatility. In the past, the core of market pricing for the coal sector was profit flexibility brought about by rising spot coal prices, but after the extreme rise in coal prices in 2021, the country's intervention in the thermal coal price formation mechanism and the implementation of long-term agreements increased markedly. Coal prices gradually switched to an operating model based on market pricing, with reasonable policy ranges as the boundary, and the long-term cooperation mechanism as an anchor, and its volatility has declined significantly.

The evolution of the coal pricing mechanism is essentially a process where the three forces of coal companies, electricity companies, and the government disappear from one to the other

From 2002 to 2012, demand was high, supply was rigid, and transportation bottlenecks were prominent. Coal companies had strong bargaining power in the industrial chain, while electricity companies withstood profit squeeze under the coal and planned electricity market framework; from 2013-2015, falling demand and a sharp increase in production capacity led to a sharp decline in coal prices, electric companies regained advantages in procurement negotiations, and coal companies generally fell into losses; after 2016, the concentration of the coal industry increased, advanced production capacity was gradually released, and the voice of coal companies increased again; after 2021, the government took coal energy security as the core goal to form a mechanism and supply of prices Give order Institutional reshaping with profit distribution has resulted in a marked rise in the bottom profit of coal companies, and the cost center of electricity companies stabilized.

The long-term cooperation mechanism is conducive to the stability of coal prices. It is a key variable in the profit stability of coal companies and changes in sector valuations

Since 2017, the long-term agreement price mechanism of the benchmark price+floating price has been gradually established. After 2022, the reasonable medium- to long-term price range for 5,500 kcal at Qinhuangdao Port was clearly 570-770 yuan/ton, and the Changxie benchmark price was raised from 535 yuan/ton to 675 yuan. Its significance is not only to curb abnormal fluctuations, but also to reshape profit distribution methods: coal companies lock in revenue and cash flow chassis through long-term cooperation; power companies stabilize fuel cost impacts through long-term cooperation; and the government uses this to stabilize coal prices, stabilize electricity prices, and stabilize expectations.

The sector already has the conditions for an increase in the valuation center. This is not due to another disorderly surge in coal prices, but from a reassessment of the profit quality and shareholder return attributes of coal companies after the central rise in coal prices

On the one hand, the central cost of the industry has been systematically rising — with multiple factors such as increasing mining depth, stricter environmental compliance requirements, and a rigid increase in safety investment, many cost details have formed hard constraints, which means that the bottom of coal prices has been raised, making it difficult to fall back to the low level of 2015; on the other hand, the financial attributes of high barriers and high cash flow and “HALO” attributes are driving the gradual restoration of the traditional energy valuation system; in recent years, the scale of newly approved domestic production capacity is small, and it is mainly concentrated in regions such as Xinjiang and Inner Mongolia with inconvenient transportation. Increase in production capacity .

Risk warning: The macroeconomy declined beyond expectations, demand for coal fell below expectations; international coal prices fell beyond expectations.