Growth of the coal sector

$China Shenhua(SH601088)$ $Shaanxi Coal Industry(SH601225)$ $China Coal Energy(SH601898)$

Looking at the long-term trend chart of world commodities, from oil to natural gas, from corn to coal, almost all basic consumer goods have a long-term upward trend over the span of several decades. I don’t understand why some people think that the coal sector has no growth potential. According to personal cognition, the coal sector is the sector with the most growth potential in the long run. Its potential growth comes from two aspects: one, the growth of its own performance; two, Growth in market valuations. as follows:

1. Growth of its own performance: There are three driving forces for the growth of the coal sector’s own performance: (1) The general rise in world energy prices; (2) The unit heat value of coal is moving closer to oil and natural gas; (3) The coal long-term association The price is close to the international market price.

(1) Rising world energy prices: In the long run, world energy prices are generally rising; especially in the last two years, world energy prices have entered a cycle of rapid growth. The reasons are: inflation caused by excessive currency issuance in various countries; investment in the energy industry has decreased, and the willingness to increase production is not strong; some energy-exporting regions have entered a cycle of capacity exhaustion; increased demand, energy demand brought about by urbanization in China, and rapid development in Southeast Asia, India, and Africa new energy demand.

(2) The value of coal is closer to that of oil and natural gas: Before 2020, the international energy landscape is dominated by crude oil, natural gas and coal are very cheap, and the price ratio of crude oil, natural gas and coal per unit calorific value is about 4:1:1. After entering 2021, the price of natural gas has skyrocketed, driving the price of coal to rise, and the price ratio of crude oil, natural gas, and coal unit calorific value has become about 1.8:2.7:1. Looking at the ratio of crude oil and coal alone, it has been reduced from 4:1 two years ago to 1.8:1 now. Personally, I estimate that with the advancement of technology and the energy situation is tense, there is a chance to further reduce it to 1.5:1. That is, based on the current crude oil price of 100 US dollars / barrel, the fair price of international standard thermal coal should be 280 US dollars / ton. Looking at the price of natural gas, natural gas has transformed from a cheap energy source to a noble energy source. If the price of natural gas cannot fall below US$18/MMBtu, the price of crude oil and coal will continue to rise.

(3) The long-term coal price is close to the market price: Looking at the long-term historical price chart of coal in our country, it can be found that the coal price has almost risen in tandem with the GDP. But over the past decade, coal price growth has lagged far behind GDP growth, and the reasons for this will be explained in later chapters. The current situation is that the coal price that should have risen in the past ten years has not been implemented, resulting in a damming lake of energy prices at home and abroad; in the next ten years, it is not only necessary to implement the coal price increase of the next ten years, but also to reduce the falling coal price of the previous ten years. Make up for the increase. Based on the current international oil price, for the long-term agreement price, conservative estimates also need to increase by 10% per year to 1500/ton of standard thermal coal by 2030; radical estimates need to increase by 15% per year until 2030 , rose to more than 2200/ton of standard thermal coal.

Second, the growth of market valuations: Under different market environments and different public opinion atmospheres, the valuations enjoyed by the coal sector are changing. Fortunately, the market is currently transitioning to a friendly period for the coal sector.

(1) Valuation changes caused by market risk appetite: In the past few years, the market has been flooded with funds, risk appetite has risen, and funds are willing to chase some so-called high-growth targets, pushing up a new bull market. After entering 2021, under the double squeeze of inflation and U.S. dollar interest rate hikes, capital preferences have shifted from risk to conservative, and instead pursued high returns and high certainty. In this atmosphere, stable and low-valued coal assets are more favored, and their valuations should also rise with changes in market preferences.

(2) Valuation changes caused by the re-characterization of coal energy: In the past few years, the development of the new energy industry has been booming, and the vigorous two-carbon movement around the world has given people the impression that fossil energy is about to be phased out, and the coal industry is Typical sunset energy. In the past two years, the international energy supply situation has been tense, and developed countries have shelved their carbon reduction strategies and switched to buying coal in large quantities. Recently, our country has also characterized the coal industry as a long-term main energy source. Coal resources have turned from sunset energy in the past to scarce resources. Its valuation should also increase as people’s cognition is updated.

Third, the current convertible bond model of the coal sector: For the current coal sector, the price-earnings ratio is generally in single digits, and individuals compare its valuation model to the convertible bond model. At its current valuation level, the market is valuing it as a coupon bond, and it is a low-grade bond with a thick safety pad. The growth factors listed in the article have not yet been reflected. If the long-term agreement price is slowly released in the future, it will be converted from debt to equity and release huge growth space. Low-grade bonds 7PE> High-grade bonds 10PE> Stable dividend stocks 15PE> 25PE of stable growth stocks? As for whether the long-term agreement will be gradually relaxed in the future, the following chapters will discuss it as a personal conjecture.

Summary: The long-term trend of world energy prices is always rising. At this stage, the unit energy value of coal is significantly discounted compared to natural gas and oil. With technological progress and the continuation of the energy shortage pattern, the value of coal will gradually move closer to oil and natural gas. In addition, the domestic long-term coal price is at a substantial discount to the international coal price. With the high-quality economic development, this energy price difference should be gradually smoothed out. At present, domestic coal price < international coal price < oil equivalent price, three-level energy price gradient, this energy price gradient potential difference is the source of future growth of the coal sector. Combined with the current market environment, I believe that the value of the coal sector will be gradually discovered, as the so-called:

“Song of Coal”

If you are in coal, you don’t look at coal, and oil futures follow closely.

Gas is expensive and energy is tight, so developed countries have to burn coal.

Good performance, low valuation, and high-speed growth.

The wind and rain are killing the season, and it lives up to the backbone of the market.

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