Pay attention to dividend investment opportunities

Since the adjustment of the coal sector at the end of May 2024, there has been a recent warm-up performance, with the coking coal sector increasing by 3% week-on-week last week, while the thermal coal sector remained weak with a week-on-week decrease of 0.4%. August, as the traditional peak season for thermal coal demand, has seen high daily consumption at power plants, and the inventory of terminal power plants has been reduced, providing strong support for current coal prices, with the supply and demand pattern gradually improving.

Currently, domestic coal prices are gradually returning to a relatively high position with narrow fluctuations, and coal is gradually transforming towards sustainable high profitability, with high dividends still expected to continue. In a weak economy and low-interest-rate environment, the dividend rate of the low-volatility dividend index still has strong appeal and allocation value. It is recommended to pay attention to the investment opportunities of the Low Volatility Dividend 50 ETF (159547) and its linked funds (021482/021483).

Driven by the capacity cycle, the high prosperity of the coal industry continues:

1. Excess capacity reduction exceeds the target

The supply-side reform initiated in 2016 aimed to resolve 800 million tons of excess capacity, but actually exited 1.1 billion tons of backward capacity, leading to an unexpected decline in supply capacity.

The supply-side reform of the coal industry initiated during the 13th Five-Year Plan has exceeded the task of reducing excess capacity. From 2016 to 2018, it successively resolved 290 million, 250 million, and 270 million tons of excess capacity, achieving the annual targets of 250 million, 150 million, and 150 million tons of capacity reduction, and ahead of schedule completing the task of resolving 800 million tons of excess and backward capacity as outlined in the "Coal Industry 13th Five-Year Plan."

From 2019 to 2020, the National Development and Reform Commission's "Notice on Doing a Good Job in Resolving Excess Capacity in Key Areas in 2019/2020" required: 1) to accelerate the exit of backward and unsafe coal mines; 2) to accelerate the exit of coal mines that do not meet environmental and quality requirements; 3) to strictly control the access of new and expanded coal mines; 4) to classify and deal with coal mines with an annual production of less than 300,000 tons. According to the data disclosed by the governments of various provinces (autonomous regions, municipalities directly under the Central Government) and industry authorities, it is estimated that from 2019 to 2021, 90 million, 170 million, and 30 million tons of excess coal capacity were resolved, respectively.

It is not difficult to find that the cumulative capacity reduction has exceeded the target, reaching 1.1 billion tons.

2. The coal industry is still in a high prosperity development stage

The National Development and Reform Commission requires accelerating the development and growth of new drivers and fostering the development of high-quality advanced capacity, but this is not enough to solve the immediate problem.In 2018, the National Development and Reform Commission and the National Energy Administration significantly increased the number and scale of coal mines approved, entering a stage of accelerating the release of advanced production capacity. From 2018 to 2022, the government approved a total of 16, 42, 23, 6, and 8 coal mines with a production capacity of over a million tons, with production scales reaching 66 million, 211.5 million, 44.6 million, 19.2 million, and 33.9 million tons, respectively.

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Throughout the 13th Five-Year Plan period, the release of newly built production capacity was relatively sufficient, the historical issue of off-balance sheet capacity turning into on-balance sheet was resolved, the actual increase in production capacity was limited, and the scale of unreleased construction capacity was relatively small. Based on the 3-5 year mine construction cycle of coal enterprises, the overall scale of coal production capacity that can be truly released in the future is expected to be limited.

During the 14th Five-Year Plan period, with the growth of the national economy, the energy demand of the whole society is expected to continue to grow, the role of coal as a bottom-line guarantee in the energy system may become more prominent, the absolute consumption of coal will increase steadily, and the coal industry will still be in a high prosperity development stage.

At present, domestic coal prices are gradually returning to a relatively high position and narrow fluctuation, and coal is gradually transforming towards sustainable high profitability, and high dividends are still expected to continue.

Coal fundamentals: the supply and demand situation continues to improve

In terms of thermal coal, the supply from the production area is shrinking, and the power plant continues to destock. On the supply side, affected by safety inspections, some local mining areas have temporary production suspensions, and the supply side has declined on a weekly basis. As of August 9, 2024, the daily output of thermal coal from 462 sample mines was 5.547 million tons, a decrease of 1.35% week-on-week, and an increase of 6.90% year-on-year. The average weekly capacity utilization rate of thermal coal from 462 sample mines was 92.3%, a decrease of 1.3% compared to last week, a decrease of 1.4% week-on-week, an increase of 2.5% compared to the same period last year, and an increase of 2.8% year-on-year.

On the demand side, the daily consumption of power plants remains at a high level, exceeding the same period last year, and the inventory of power plants continues to decrease. As of August 1, 2024, the daily coal consumption of unified dispatch power plants was 9.2 million tons, an increase of 6.98% month-on-month, and an increase of 17.95% year-on-year. As of August 8, the flat warehouse price of Shanxi-produced thermal coal (Q5500) at Jingtang Port was 851 yuan/ton, a decrease of 2 yuan/ton compared to last week, a decrease of 0.2% week-on-week, an increase of 9 yuan/ton compared to the same period last year, and an increase of 1.1% year-on-year.

In terms of coking coal and coke, the scale of steel plant shutdowns has expanded, and the output of pig iron continues to decline. On the supply side, the weekly output of refined coal and raw coal increased. As of August 9, 2024, the daily output of refined coal from 523 sample coal mines and 110 sample coal washing plants was 777,400 tons and 561,800 tons, respectively, an increase of 0.79% and 3.56% week-on-week, respectively, and a decrease of 4.94% and 7.75% year-on-year, respectively.On the demand side, influenced by the continuous decline in finished product prices, the scale of steel mill shutdowns has expanded, leading to a more significant drop in pig iron production. As of August 9, 2024, the daily production of pig iron by 247 steel enterprises was 2.317 million tons, a decrease of 2.08% week-on-week and a decrease of 4.89% year-on-year. As of August 8, the warehouse pick-up price (including tax) of Shanxi-produced main coke coal at Jingtang Port was 1,860.0 yuan/ton, which is a decrease of 100.0 yuan/ton compared to last week, a week-on-week decrease of 5.1%, and a decrease of 310.0 yuan/ton compared to the same period last year, a year-on-year decrease of 14.3%.

Looking ahead, we believe that the thermal coal sector has expectations for improvement: First, the demand in the peak season continues to recover, and the supply and demand pattern is gradually improving, with the inventory of downstream power plants being reduced. August, being the traditional peak season for thermal coal demand, sees high daily consumption by power plants, and the terminal power plant inventory has been reduced, providing strong support for current coal prices, with the supply and demand pattern gradually improving. As of August 9, 2024, the terminal inventory of eight coastal provinces + seventeen inland provinces was 12,303.9 million tons, a decrease of 2.8% week-on-week and a decrease of 5.08% month-on-month.

Secondly, the latest policy adjustments and incremental policies have strengthened macroeconomic expectations. On July 30, 2024, the Political Bureau of the CPC Central Committee held a meeting, which proposed to "maintain strategic resolve and firm development confidence," while emphasizing that "macro policies should continue to exert effort and be more effective." It also stressed the need to "accelerate the full implementation of policies that have been determined and to prepare and introduce a batch of incremental policy measures in a timely manner." The fiscal and monetary policy space in the second half of the year is expected to be further opened up, with central budgeted investment, local special bonds, national bonds, and ultra-long-term special national bonds continuing to exert effort, forming effective physical work volume, thereby driving downstream demand for coal.

At present, domestic coal prices are gradually returning to a relatively high narrow fluctuation, and coal is gradually transforming towards sustainable high profitability, with high dividends still expected to continue. In a weak economy and low-interest-rate environment, the dividend rate of the low-volatility dividend index still has strong appeal and configuration value. It is recommended to pay attention to the investment opportunities of the Low-Volatility Dividend 50 ETF (159547) and its linked funds (021482/021483).

Pay attention to dividend investment opportunities

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