CITIC SEC released a research report stating that Q3 2025 net profit increased by approximately 22% quarter-on-quarter (QoQ), while the year-to-date (YTD) figure declined by about 29% year-on-year (YoY). On a QoQ basis, thermal coal and anthracite companies showed significant earnings improvement, while coking coal firms continued to underperform.

Since Q4, winter stockpiling demand has driven coal prices higher than expected. As peak demand season progresses, the industry may face intermittent supply shortages, potentially pushing Q4 coal prices up by over 15% QoQ. Currently, policy support, coal price trends, and earnings expectations are all improving, suggesting sustained momentum for the coal sector in Q4.

Key takeaways from CITIC SEC’s report: 1. **Divergent Earnings Performance**: While Q3 net profit rose QoQ for sampled listed coal companies, performance varied significantly by segment. YTD net profit fell 29% YoY, but Q3 alone saw a 22% QoQ increase, primarily driven by higher market coal prices and improved profitability among thermal coal producers. By coal type, thermal coal/metallurgical coal/anthracite companies posted QoQ net profit changes of +29%, -52%, and +34%, respectively. Coke producers generally reported losses, highlighting stark divergence.

2. **Margin and Cash Flow Improvements**: YTD revenue and costs declined by 15.67% and 13.72% YoY, respectively, with gross margin down 1.62 percentage points (ppts). However, Q3 revenue and costs rose 11.45% and 9.97% QoQ, lifting gross margin by 0.95 ppts. Operational conditions improved, with lower receivables and inventory ratios. Average operating cash flow per share climbed from RMB 0.29 in Q2 to RMB 0.45 in Q3. Despite a 12% YoY increase in capital expenditures, a quarter of firms maintained net cash positions, indicating potential for higher dividend payouts. Special reserve balances also dropped nearly 2% YoY, reflecting cost control efforts.

3. **Short-Term Outlook**: Supply-side constraints, including safety inspections and production audits, have slowed domestic output growth. These factors persist in Q4, while demand is buoyed by early winter stockpiling amid colder northern weather. Prolonged winter conditions may trigger restocking demand, potentially causing supply shortages by December. CITIC SEC forecasts Q4 thermal coal prices at ports to rise over 15% QoQ, potentially exceeding RMB 850/ton, with coking coal prices also staying elevated (up ~RMB 200/ton QoQ). Tighter supply policies could further boost prices.

**Risks**: Macroeconomic volatility affecting coal demand/prices; weaker-than-expected supply constraints or relaxed safety checks increasing supply; systemic declines in global energy prices pressuring domestic coal.

**Investment Strategy**: With policy, pricing, and earnings expectations all improving, the coal sector’s Q4 rally is likely sustainable. Investors should focus on: - Defensive-yet-growth thermal coal dividend leaders. - Undervalued firms with high earnings elasticity.