According to research by Guotai Haitong Securities, coal prices in the first three quarters of 2025 remained lower year-over-year (YoY), leading to weaker earnings for coal companies. However, under the impact of "anti-involution" policies, Q3 coal prices rebounded significantly quarter-over-quarter (QoQ), driving notable earnings improvement for coal producers. Looking ahead, supply constraints from production oversight policies are expected to persist, coupled with strong seasonal winter demand support. With port inventories at low levels, coal prices are likely to maintain a firm and volatile upward trend. Meanwhile, cost optimization continues among coal firms, suggesting that the sector's earnings trough may have passed. Against the backdrop of recovering coal prices and low sector crowding, the undervalued, high-dividend-yielding coal sector is gradually revealing its bottom allocation value.

**Key Takeaways from Guotai Haitong's Report:**

**Q3 2025: Coal Prices Rebound, Earnings Improve QoQ** In Q3 2025, summer electricity demand boosted thermal coal consumption YoY, while domestic output contracted due to stricter safety inspections and rainfall disruptions. This supply-demand mismatch drove a clear recovery in coal prices. The average Q3 price for Qinhuangdao thermal coal (Q5500, Shanxi origin) rose 6.47% QoQ to RMB 672/ton, while Jingtang Port coking coal (Shanxi origin) surged 18.76% QoQ to RMB 1,562/ton. Higher prices, combined with cost controls by leading firms, led to substantial QoQ earnings growth for listed coal producers.

Among 28 key coal companies tracked by Guotai Haitong, Q3 2025 aggregate revenue reached RMB 302.3 billion (+11% QoQ), with net profit attributable to shareholders at RMB 31.6 billion (+21% QoQ). Excluding industry heavyweight China Shenhua Energy (601088.SH), the remaining 27 firms posted a 28.93% QoQ jump in net profit to RMB 17.2 billion.

**YoY Earnings Decline in First Three Quarters Due to Lower Coal Prices** For the first nine months of 2025, the 28 coal firms reported aggregate revenue of RMB 856.2 billion (-15.5% YoY) and net profit of RMB 88.6 billion (-28.9% YoY). Excluding China Shenhua, the remaining 27 companies saw net profit drop 36.9% YoY to RMB 49.5 billion. The average Qinhuangdao thermal coal price fell 20.71% YoY to RMB 672/ton, weighing heavily on earnings.

**Cost Optimization Partially Offsets Revenue Pressure** Absolute operating expenses for the 28 firms declined 3.1% YoY to RMB 60.8 billion in Jan-Sep 2025, but expense ratios rose due to lower revenue. The average expense ratio increased 1.24 percentage points (pct) YoY to 12.20%. Notably, reductions in special reserves (down RMB 1.38 billion YoY among 24 firms) helped offset costs and support earnings.

**Profitability and Cash Flow Metrics Weaken YoY** Median gross margin for the sector fell 7.9 pct YoY to 22.8%, while net margin dropped 6.4 pct to 4.6%. ROE declined 3.9 pct to 2.9%. Operating cash flow slumped 21% YoY to RMB 179.7 billion, and debt levels rose, with average gearing at 51.3% (-0.2 pct YoY).

**Investment Outlook: Undervalued Sector with High Dividend Appeal** With coal prices recovering, supply constraints enduring, and winter demand approaching, the sector's earnings bottom may be in place. Coal stocks now trade at historically low valuations, with active fund allocations at just 0.30%—near 2008 lows. The sector's high dividends, strong cash flows, and low crowding make it attractive for bottom-fishing.

State-backed coal giants like China Energy Investment Group and Shandong Energy Group have initiated share buybacks or asset injections, signaling confidence in the sector. Top coal firms exhibit "five highs": high profitability, cash flow, barriers, dividends, and safety margins.

**Top Picks:** 1. **Stable Plays:** China Shenhua (601088.SH), Shaanxi Coal (601225.SH), China Coal Energy (601898.SH), SDIC Energy (002128.SZ), Xinyi Energy (601918.SH). 2. **Thermal Coal Leverage:** Yankuang Energy (600188.SH), Jinneng Holding Coal (601001.SH), Guanghui Energy (600256.SH). 3. **Coking Coal Leverage:** Huaibei Mining (600985.SH), Pingmei Co (601666.SH), Lu’an Environmental Energy (601699.SH), Shanxi Coking Coal (000983.SZ).

**Risks:** Economic slowdown, policy tightening, renewable substitution, import pressures, earnings misses, and coal price volatility.