Company Quick10K Filing
Quick10K
Sinopec Shanghai Petrochemical
20-F 2018-12-31 Annual: 2018-12-31
20-F 2017-12-31 Annual: 2017-12-31
20-F 2016-12-31 Annual: 2016-12-31
20-F 2015-12-31 Annual: 2015-12-31
IFF International Flavors & Fragrances 11,604
EMN Eastman Chemical 8,949
ALB Albemarle 6,409
PAH Platform Specialty Products 3,194
WDFC WD-40 2,519
CBT Cabot 2,225
TROX Tronox 1,042
AMRS Amyris 268
VNTR Venator Materials 222
RYAM Rayonier Advanced Materials 176
SHI 2018-12-31
Part I
Item 1. Identity of Directors, Senior Management and Advisors.
Item 2. Offer Statistics and Expected Timetable.
Item 3. Key Information.
Item 4. Information on The Company.
Item 5. Operating and Financial Review and Prospects.
Item 6. Directors, Senior Management and Employees.
Item 7. Major Shareholders and Related Party Transactions.
Item 8. Financial Information.
Item 9. The Offer and Listing.
Item 10. Additional Information.
Item 11. Quantitative and Qualitative Disclosures About Market Risk.
Item 12. Description of Securities Other Than Equity Securities.
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies.
Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds.
Item 15. Controls and Procedures.
Item 16A. Audit Committee Financial Expert.
Item 16B. Code of Ethics.
Item 16C. Principal Accountant Fees and Services.
Item 16D. Exemptions From The Listing Standards for Audit Committees.
Item 16E. Purchases of Equity Securities By The Issuer and Affiliated Purchasers.
Item 16F. Change in Registrant's Certifying Accountant.
Item 16G. Corporate Governance.
Item 16H. Mine Safety Disclosure.
Part III
Item 17. Financial Statements.
Item 18. Financial Statements.
Item 19. Exhibits.
EX-8 d695706dex8.htm
EX-12.1 d695706dex121.htm
EX-12.2 d695706dex122.htm
EX-13.1 d695706dex131.htm
EX-13.2 d695706dex132.htm

Sinopec Shanghai Petrochemical Earnings 2018-12-31

SHI 20F Annual Report

Balance SheetIncome StatementCash Flow

20-F 1 d695706d20f.htm FORM 20-F Form 20-F
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

 

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

For the transition period from                  to                 

Commission file number 1-12158

 

 

 

LOGO

(Exact name of Registrant as specified in its charter)

Sinopec Shanghai Petrochemical Company Limited

(Translation of Registrant’s name into English)

The People’s Republic of China

(Jurisdiction of incorporation or organization)

No. 48 Jinyi Road, Jinshan District, Shanghai, PRC 200540

(Address of principal executive offices)

 

 

Mr. Guo Xiaojun

No. 48 Jinyi Road, Jinshan District, Shanghai, 200540

The People’s Republic of China

Tel: +86 (21) 57943143

Fax: +86 (21) 57940050

(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)

 

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class

 

Name of each exchange on which registered

American Depositary Shares, each representing 100 H

Shares, par value RMB1.00 per Share

H Shares, par value RMB1.00 per Share

 

New York Stock Exchange

 

New York Stock Exchange*

 

*

Not for trading, but only in connection with the registration of American Depositary Shares. The H Shares are also listed and traded on The Stock Exchange of Hong Kong Limited.


Table of Contents

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

3,495,000,000 H Shares, par value RMB1.00 per Share

7,328,813,500 A Shares, par value RMB1.00 per Share

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities

Act.     Yes  ☒    No  ☐

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or (15) (d) of the Securities Exchange Act of 1934.    Yes  ☐    No  ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232,405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer  ☒        Accelerated Filer  ☐        Non-Accelerated Filer  ☐        Emerging growth company  ☐

If an emerging growth company that prepares its financial statements in accordance with U.S.GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.   ☐

The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ☐     

International Financial Reporting Standards as issued

by the International Accounting Standards Board  ☒

   Other  ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ☐    Item 18  ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒


Table of Contents

Table of Contents

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

     ii  

EXCHANGE RATES

     ii  

CERTAIN TERMS AND CONVENTIONS

     iii  

PART I

     1  

ITEM 1.

  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS.      1  

ITEM 2.

  OFFER STATISTICS AND EXPECTED TIMETABLE.      1  

ITEM 3.

  KEY INFORMATION.      1  

ITEM 4.

  INFORMATION ON THE COMPANY.      11  

ITEM 4A.

  UNRESOLVED STAFF COMMENTS.      33  

ITEM 5.

  OPERATING AND FINANCIAL REVIEW AND PROSPECTS.      33  

ITEM 6.

  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.      50  

ITEM 7.

  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.      61  

ITEM 8.

  FINANCIAL INFORMATION.      65  

ITEM 9.

  THE OFFER AND LISTING.      65  

ITEM 10.

  ADDITIONAL INFORMATION.      66  

ITEM 11.

  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.      79  

ITEM 12.

  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.      81  

PART II

     82  

ITEM 13.

  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.      82  

ITEM 14.

  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.      83  

ITEM 15.

  CONTROLS AND PROCEDURES.      83  

ITEM 16A.

  AUDIT COMMITTEE FINANCIAL EXPERT.      84  

ITEM 16B.

  CODE OF ETHICS.      84  

ITEM 16C.

  PRINCIPAL ACCOUNTANT FEES AND SERVICES.      84  

ITEM 16D.

  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.      85  

ITEM 16E.

  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.      85  

ITEM 16F.

  CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT.      85  

ITEM 16G.

  CORPORATE GOVERNANCE.      85  

ITEM 16H.

  MINE SAFETY DISCLOSURE.      88  

PART III

     88  

ITEM 17.

  FINANCIAL STATEMENTS.      88  

ITEM 18.

  FINANCIAL STATEMENTS.      88  

ITEM 19.

  EXHIBITS.      89  

 

i


Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This annual report includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, included in this annual report that address activities, events or developments which we expect or anticipate will or may occur in the future are hereby identified as forward-looking statements for the purpose of the safe harbor provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words such as “believe,” “intend,” “expect,” “anticipate,” “project,” “estimate,” “predict,” “plan” and similar expressions are also intended to identify forward-looking statements. These forward-looking statements address, among others, such issues as:

 

   

amount and nature of future development;

 

   

future prices of and demand for our products;

 

   

future earnings and cash flow;

 

   

capital expansion programs;

 

   

future plans and capital expenditures;

 

   

expansion and other development trends of the petrochemical industry;

 

   

expected production or processing capacities, including expected Rated Capacities and primary distillation capacities, of units or facilities not yet in operation;

 

   

expansion and growth of our business and operations; and

 

   

our prospective operational and financial information.

These statements are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in particular circumstances. However, whether actual results and developments will meet our expectations and predictions depends on a number of risks and uncertainties which could cause actual results to differ materially from our expectations, including the risks set forth in “Item 3. Key Information — Risk Factors” and the following:

 

   

fluctuations in crude oil and natural gas prices;

 

   

fluctuations in prices of our products;

 

   

failures or delays in achieving production from development projects;

 

   

potential acquisitions and other business opportunities;

 

   

continued availability of capital and financing;

 

   

general economic, market and business conditions, including volatility in interest rates, changes in foreign exchange rates and volatility in commodity markets; and

 

   

other risks and factors beyond our control.

Consequently, all of the forward-looking statements made in this annual report are qualified by these cautionary statements and readers are cautioned not to place undue reliance on these forward-looking statements. These forward-looking statements should be considered in light of the various important factors set forth above and elsewhere in this annual report, including the risks set forth in “Item 3. Key Information – Risk Factors.” In addition, we cannot assure you that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected effect on us or our business or operations.

EXCHANGE RATES

Unless otherwise specified, references in this annual report to “U.S. Dollars” or “U.S.$” are to United States Dollars, references to “HK Dollars” or “HK$” are to Hong Kong Dollars and references to “Renminbi” or “RMB” are to Renminbi yuan, the legal currency of the PRC.

We publish our financial statements in Renminbi. Unless otherwise indicated, all translations from Renminbi to U.S. Dollars have been made at a rate of RMB6.8755 to U.S.$1.00, the noon buying rate on December 31, 2018 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. We do not represent that Renminbi or U.S. Dollar amounts could be converted into U.S. Dollars or Renminbi, as the case may be, at any particular rate.

 

ii


Table of Contents

CERTAIN TERMS AND CONVENTIONS

References to “we” or “us” or “Company” are references to Sinopec Shanghai Petrochemical Company Limited and our subsidiaries, unless the context requires otherwise. Before our formation, these references relate to the petrochemical businesses carried on by the Complex.

References to “Sinopec Corp.” are references to China Petroleum & Chemical Corporation, the controlling shareholder of the Company.

References to the “Sinopec Group” are references to China Petrochemical Corporation, the controlling company of Sinopec Corp.

References to the “Complex” are references to Shanghai Petrochemical Complex, our predecessor founded in 1972.

References to “China” or the “PRC” are references to The People’s Republic of China which, for the purpose of this annual report and for geographical reference only, excludes Hong Kong, Macau and Taiwan.

References to “ADSs” are references to our American Depositary Shares, which are listed and traded on the New York Stock Exchange (“NYSE”). Each ADS represents 100 H Shares.

References to our “A Shares” are references to 7,328,813,500 A Shares of the Company, par value RMB1.00 per share, which are ordinary shares held by Chinese investors.

References to our “H Shares” are references to our overseas-listed foreign ordinary shares, par value RMB1.00 per share, which are listed and traded on The Stock Exchange of Hong Kong Limited (“HKSE”) under the number “338.”

“Rated Capacity” is the output capacity of a given production plant or, where appropriate, the throughput capacity, calculated by estimating the number of days in a year that the production plant is expected to operate, including downtime for regular maintenance, and multiplying that number by an amount equal to the plant optimal daily output or throughput, as the case may be.

All references to “tons” are references to metric tons.

Unless otherwise noted, references to sales volume are to sales to entities other than us or our divisions and subsidiaries.

 

 

iii


Table of Contents

PART I

 

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS.

Not applicable.

 

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE.

Not applicable.

 

ITEM 3.

KEY INFORMATION.

A. Selected Financial Data.

Our selected consolidated statements of operations data (except for ADS data) and cash flows data for each of the years ended December 31, 2016, 2017 and 2018 and our selected consolidated balance sheets data as of December 31, 2017 and 2018 are derived from our consolidated financial statements included in Item 18. Financial Statements. Our selected consolidated statements of operations data and cash flows data for the years ended December 31, 2014 and 2015 and our consolidated balance sheets data as of December 31, 2014, 2015 and 2016 are derived from our consolidated financial statements not included in this annual report. Our selected consolidated financial data should be read in conjunction with our consolidated financial statements, and the notes thereto, and Item 5. Operating and Financial Review and Prospects. Our consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board.

Selected Consolidated Financial Data

(RMB in millions, except per share and per ADS data)

 

     Year Ended December 31,  
     2014
(RMB million)
    2015
(RMB million)
     2016
(RMB million)
     2017
(RMB million)
     2018
(RMB million)
 

CONSOLIDATED STATEMENTS OF OPERATIONS DATA

             

Net sales:

             

Synthetic fibers

     2,891.5       2,328.2        1,855.5        2,005.3        2,182.4  

Resins and plastics

     12,489.4       9,992.2        9,797.6        10,218.4        10,542.1  

Intermediate petrochemicals

     12,391.1       9,332.0        8,827.6        10,070.2        12,160.6  

Petroleum products

     49,259.5       30,802.0        24,002.6        32,400.6        43,403.0  

Trading of petrochemical products

     14,791.0       13,718.2        20,585.4        23,697.3        26,544.0  

Others

     902.6       864.6        867.8        826.5        781.4  

(Loss)/profit from operations

     (587.9     3,908.9        6,777.9        6,401.9        5,585.1  

(Loss)/profit before income tax

     (889.9     4,237.2        7,778.3        7,852.9        6,808.1  

Net (loss)/profit attributable to owners of the Company

     (692.2     3,274.3        5,968.5        6,143.2        5,336.3  

Net profit attributable to non-controlling interests

     16.5       36.1        13.0        11.0        (0.1

Basic (loss)/earnings per share(RMB) (a)

     (0.064     0.303        0.553        0.569        0.493  

Basic (loss)/earnings per ADS(RMB) (b)

     (6.41     30.32        55.26        56.86        49.30  

 

(a)

The Company exercised its Share Option Incentive Scheme for the first time in August 2017, and the second time in January 2018, and the total number of shares of the Company increased by 14,176, 600 shares and 9,636,900 shares, respectively, upon exercise. See ITEM 6. Directors, Senior Management and Employees – E. Share Ownership – Share Option Incentive Scheme. Basic earnings per share is calculated by dividing the profit attributable to owners of the Company by the weighted average number of ordinary shares in issue during the year.

(b)

Earnings per ADS are calculated on the basis that one ADS is equivalent to 100 H Shares.

 

1


Table of Contents
     Year Ended December 31,  
     2014
(RMB million)
    2015
(RMB million)
    2016
(RMB million)
    2017
(RMB million)
    2018
(RMB million)
 

CONSOLIDATED STATEMENTS OF CASH FLOWS DATA

          

Net cash generated from operating activities

     3,662.4       4,932.8       7,181.8       7,060.8       6,659.4  

Net cash used in investing activities

     (910.1     (439.0     (189.9     (2,400.7     (1,928.4

Net cash used in financing activities

     (2,606.5     (3,695.7     (2,637.2     (2,589.8     (3,507.2

Capital expenditure

     (1,089.3     (695.3     (901.5     (1,197.1     (1,187.0

Proceeds from borrowings

     51,385.3       31,999.8       2,589.4       2,119.1       2,536.8  

Repayments of borrowings

     (53,444.5     (35,684.7     (4,113.0     (2,059.4     (2,646.2

 

     As of December 31,  
     2014
(RMB million)
     2015
(RMB million)
     2016
(RMB million)
     2017
(RMB million)
     2018
(RMB million)
 

CONSOLIDATED BALANCE SHEETS DATA

              

Current assets

     9,510.4        8,144.0        14,875.9        19,866.1        25,298.9  

Property, plant and equipment

     15,541.6        14,383.3        13,474.3        12,866.4        11,646.4  

Total assets

     30,905.6        27,820.6        33,945.6        39,443.5        44,385.9  

Short term borrowings (a)

     4,078.2        2,070.0        546.4        606.2        497.2  

Current liabilities

     12,484.8        7,726.3        8,942.4        10,922.2        13,913.0  

Long term borrowings (excluding current portion)

     1,632.7        —          —          —          —    

Total equity attributable to owners of the Company

     16,500.3        19,797.3        24,722.0        28,230.2        30,346.1  

 

(a)

Including corporate bonds and current portion of long term borrowings.

Dividends

The following table sets forth certain information concerning the dividends of the Company since January 1, 2014:

 

Dividend Period

  

Dividend per Share

January 1, 2014-December 31, 2014

   No dividend

January 1, 2015-December 31, 2015

   RMB0.10 (U.S.$0.015)

January 1, 2016-December 31, 2016

   RMB0.25 (U.S.$0.036)

January 1, 2017-December 31, 2017

   RMB0.30 (U.S.$0.046)

January 1, 2018-December 31, 2018

   RMB0.25 (U.S.$0.036) (a)

 

(a)

Pursuant to the resolution of the Board on March 19, 2019, the Company proposed cash dividend to all the shareholders, RMB0.25 per share (including tax). The proposal remains to be approved at our 2018 Annual General Meeting.

See also Item 8. Financial Information – A. Consolidated Statements and Other Financial Information – Dividend Policy.

B. Capitalization and Indebtedness.

Not applicable.

C. Reasons for the Offer and Use of Proceeds.

Not applicable.

D. Risk Factors.

An investment in our ADSs involves significant risks. The risks and uncertainties described below are not the only ones we face. You should consider carefully all of the information in this annual report, including the risks and uncertainties described below and our consolidated financial statements and related notes, before making an investment in our ADSs. Any of the following risks could have a material adverse effect on our business, financial condition and results of operations. In any such case, the market price of our ADSs could decline, and you may lose all or part of your investment.

 

2


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Our operations may be adversely affected by the cyclical nature of the petroleum and petrochemical markets and by the volatility of prices of crude oil and petrochemical products.

Most of our revenues are attributable to the sale of refined oil and petrochemical products, which have historically been cyclical and sensitive to the availability and price of raw materials and general economic conditions. Markets for many of our products are sensitive to changes in industry capacity and output levels, changes in regional and global economic conditions, the price and availability of substitute products and changes in consumer demand, which from time to time have had a significant impact on our product prices in the regional and global markets. Due to the decrease in tariff charges, the removal of other restrictions on importation and the Chinese government’s gradual relaxation of its control of the allocation of products and pricing, many of our products have become increasingly vulnerable to the cyclical nature of regional and global petroleum and petrochemical markets, which may adversely affect our operations.

We consume large amounts of crude oil to manufacture our products of which more than 95% is typically imported. In 2018, crude oil costs accounted for RMB46.17 billion, or 51.39% of our annual cost of sales. As a result, changes in crude oil prices can affect our profitability. In recent years, due to various reasons, the price of crude oil has fluctuated significantly. We cannot rule out the possibility of the occurrence of certain global emergencies which might disrupt our crude oil supply. We expect that the volatility and uncertainty of the prices of crude oil and petrochemical products will continue, and that increasing crude oil prices and declines in prices of petrochemical products may adversely affect our business and results of operations and financial condition.

Some of our major products are subject to government price controls, and we are not able to pass on all cost increases from rising crude oil prices through higher product prices.

We consume large amounts of crude oil to manufacture our products of which more than 95% is typically imported. We attempt to mitigate the effect of increased costs due to rising crude oil prices. However, our ability to pass on these increased costs to our customers is dependent on market conditions and government regulations. Given that the increase of the sales prices of our products may lag behind the increase of crude oil costs, we may fail to completely cover the increased costs by increasing our sales prices, particularly where government regulations restrict the prices of certain of our fuel products. In particular, gasoline, diesel and jet fuel, and liquefied petroleum gas are subject to government price controls at present. In 2016, 2017 and 2018 approximately 31.19%, 36.95% and 41.62% of our net sales were from such products subject to price controls. Although the current price-setting mechanism for refined petroleum products in China allows the Chinese government to adjust price in the PRC market when the average international crude oil price fluctuates beyond certain levels within a certain time period (see Item 4. Information on the Company – B. Business Overview – Product Pricing), the Chinese government still retains discretion as to whether or when to adjust the prices of the refined oil products. The Chinese government generally exercises certain price control over refined oil products once international crude oil prices experience a sustained rise or become significantly volatile. For instance, some of our fuel products are required to be sold to designated distributors (such as the subsidiaries of Sinopec Corp.). Because we cannot freely sell our fuel products to take advantage of opportunities for higher prices, we may not be able to fully cover increases in crude oil prices by increasing the sale prices of our products, which has had and will possibly continue to have a material adverse effect on our financial condition, results of operations and cash flows.

Our development and operation plans have significant capital expenditure and financing requirements, which are subject to a number of risks and uncertainties.

The petrochemical business is a capital intensive business. Our ability to maintain and increase our revenues, net profit and cash flows depends upon continued capital spending. Our current business strategy contemplates capital expenditure for 2019 of approximately RMB1.5 billion (U.S.$ 218.2 million), which will be provided through financing activities and use of our own capital. Our actual capital expenditures may vary significantly from these planned amounts, subject to our ability to generate sufficient cash flows from operations, investments and other factors that may be beyond our control. In addition, there can be no assurance as to whether, or at what cost, our capital projects will be completed or the success of these projects if completed.

As of March 31, 2019, we had an aggregate outstanding indebtedness of approximately RMB497.2 million (U.S.$72.3 million). Most of our borrowings are with state-controlled banks in China and structured as short term debt obligations with payment due in one year or less. These banks have generally been willing to provide new short term loans while we pay off existing loans. Sinopec Corp., our controlling shareholder, did not provide any guarantee or credit support for our debt for the year ended December 31, 2018 and for the three months ended March 31, 2019.

Our ability to obtain external financing in the future and our ability to make timely repayments of our debt obligations are subject to a variety of uncertainties, including: our future results of operations, financial condition and cash flows; the condition of the economy in China and the condition of markets for our products; the cost of financing and the condition of financial markets; the issuance of relevant government approvals and other project risks associated with the development of infrastructure in China; and the continuing willingness of banks to provide new loans as we pay down existing debt.

 

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While we anticipate that we will rely less on borrowings to finance capital expenditures and operations, our business, results of operations and financial condition could be adversely affected if we fail to obtain sufficient funding for our operations or development plans.

Our business operations may be adversely affected by present or future environmental regulations.

We are subject to extensive environmental protection laws and regulations in China. These laws and regulations permit:

 

   

the imposition of pollution charge for the discharge of waste substances;

 

   

the levy of payments and fines for damages for serious environmental offenses;

 

   

the government to close down or suspend any facility which has caused or may cause environmental damages and require it to correct or stop operations causing environmental damages; and

 

   

litigations and liabilities arising from pollutions and damages to the environment and public interests.

Our production operations produce substantial amounts of waste materials (i.e., waste water, waste gas and waste residue). In addition, our production and operations require environmental related permits that are subject to renewal, modification and revocation. We were subject to various administrative penalties for violations of the relevant PRC environmental laws and regulations in the past years. See Item 4. Information of the Company – B. Business Overview – Environmental Protection. We have established a system to treat waste materials to prevent and reduce pollution. The Chinese government (including the local governments), however, has moved, and may move further, toward the adoption of more regulations and more stringent environmental standards. Chinese national or local authorities may also apply more rigorous enforcement of such regulations which would require us to incur additional expenditures on environmental matters.

If the Chinese government changes current regulations that allow us to make payments in foreign currencies, we may be unable to obtain the foreign currency necessary for our business.

The Renminbi currently is not a freely convertible currency. We receive most of our revenue in Renminbi. A portion of our Renminbi revenue must be converted into other currencies to meet our foreign currency needs, which include, among other things:

 

   

debt service costs on foreign currency-denominated debt;

 

   

purchases of imported equipment;

 

   

payment of any cash dividends declared in respect of the H Shares and the ADSs; and

 

   

import of crude oil and other materials.

Under existing foreign exchange regulations in China, we may undertake current account foreign exchange transactions, including the payment of dividends, without prior approval from the State Administration of Foreign Exchange (“SAFE”) by producing commercial documents evidencing the foreign exchange transactions, provided that they are processed through Chinese banks licensed to engage in foreign exchange transactions. Foreign exchange transactions under the capital account (international revenues and expenditures that increase or decrease debt or equity, including principal payments in respect of foreign currency-denominated obligations) continue to be subject to limitations and require the prior approval of SAFE. These limitations could affect our ability to obtain foreign exchange through debt financing, or to make capital expenditures in foreign currency. The Chinese government has stated publicly that it intends to eventually make the Renminbi freely convertible in the future. However, we cannot predict whether the PRC government will continue its existing foreign exchange policy and when the PRC government will allow free conversion of Renminbi.

If the Chinese government restricts our ability to make payments in foreign currency, we may be unable to obtain the foreign currency necessary for our business. In that case, our business may be materially adversely affected, and we may default on our obligations.

Change of currency policy and fluctuation of Renminbi might adversely affect our business and operating results.

The exchange rate between the Renminbi and the U.S. Dollar or other foreign currencies might fluctuate and be affected by the change in China’s political and economic conditions and China’s foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. Dollar, and the RMB appreciated more than 20% against the U.S. Dollar over the following three years. However, the People’s Bank of China, or the PBOC, regularly intervenes in the foreign exchange market to limit fluctuations in RMB exchange rates and achieve policy goals. During the period between July 2008 and June 2010, the exchange rate between the RMB and the U.S. Dollar had been stable and traded within a narrow range. However, the RMB fluctuated significantly during that period against other freely traded currencies, in tandem with the U.S. Dollar. Since June 2010, the RMB has started to slowly appreciate against the U.S. Dollar, though there have been periods when the U.S. Dollar has appreciated against the RMB. On August 11, 2015, the PBOC allowed the RMB to depreciate by approximately 2% against the U.S. Dollar. During 2016, the RMB depreciated by over 6.83% against the U.S. Dollar. During 2017, the RMB appreciated by over 6.16% against the U.S. Dollar. During 2018, the RMB depreciated by over 5.15% against the U.S. Dollar. It is difficult to predict how long such depreciation of RMB against the U.S. Dollar may last and when and how the relationship between the RMB and the U.S. Dollar may change again. There remains significant international pressure on the PRC government to adopt a flexible currency policy.

 

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A portion of our cash and cash equivalents is denominated in foreign currencies (mainly the U.S. Dollar). As of December 31, 2018, our bank deposits denominated in foreign currencies were equivalent to RMB351.93 million. The appreciation in the value of Renminbi against foreign currencies (including the U.S. Dollar) may cause a decrease in the Renminbi value of our cash and cash equivalents that are denominated in foreign currencies. In addition, the appreciation of Renminbi may harm the exports of our downstream manufacturers, thus adversely affecting the market demand for our products.

Although most of our revenue is denominated in Renminbi, most of our purchase of crude oil and some equipment and repayments of certain borrowings are made in foreign currencies. Any depreciation of the Renminbi would increase our cost and adversely affect our capacity of making profits. In addition, any depreciation of the Renminbi could adversely affect the value of the dividends of our H Shares and ADSs, which we declare in Renminbi and pay in foreign currencies.

We are controlled by Sinopec Corp., whose interests may not be aligned with yours.

As of March 31, 2019, Sinopec Corp. owned 50.44% of our shares. Accordingly, it has voting and management control over us, and its interests may be different from the interests of our other shareholders. Subject to our Articles of Association and applicable laws and regulations, Sinopec Corp. will be in a position to cause us to declare dividends, determine the outcome of corporate actions requiring shareholder approval or effect corporate transactions without the approval of the holders of the H Shares and ADSs. Any such increase in our dividend payout would reduce funds available for reinvestment in our business and any such actions or transactions could adversely affect us or our minority shareholders. Sinopec Corp. may also experience changes in its own business strategy and policies. Although we are not currently aware of any specific changes, they could, in turn, lead Sinopec Corp. to change its policies or practices toward us in ways that we cannot predict, with corresponding unpredictable consequences for our business. Additionally, Sinopec Corp. may leverage its controlling shareholder position to influence our decisions with regard to the manufacturing and operation, allocation of financial resources and appointment and removal of senior management members, which could adversely affect us or our minority shareholders.

We have also engaged from time to time and will continue to engage in a variety of transactions with Sinopec Corp., Sinopec Group, the controlling company of Sinopec Corp., and their various subsidiaries or affiliates which provide a number of services to us, including the supply of raw materials, product distribution and sales agency, project design and installment service, petrochemical industry related insurance and financial services. We also sell oil and petrochemical products to Sinopec Corp. and its affiliates. Our transactions with these companies are governed by a Mutual Product Supply and Sales Services Framework Agreement with Sinopec Corp. and a Comprehensive Services Framework Agreement with Sinopec Group, the terms of which were negotiated on an arm’s length basis. See Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transactions. Our business and results of operations could be adversely affected if Sinopec Corp. or Sinopec Group refuses to engage in such transactions or if it seeks to amend the contracts between the parties in a way adverse to us. In addition, Sinopec Corp. has interests in businesses which compete or are likely to compete, either directly or indirectly, with our businesses. Because Sinopec Corp. is our controlling shareholder and its interests may conflict with our own interests, Sinopec Corp. may take actions that favor itself over our interests.

Our operations are exposed to risks relating to operating hazards and production safety and we have limited insurance coverage for resulting losses.

Our operations involve the handling and storage of explosives and other hazardous articles. In addition, our operations involve the use of heavy machinery, which involves inherent risks that cannot be entirely eliminated through our preventive efforts. As a result, we may encounter fires, explosions and other unexpected incidents during our operations, which may cause personal injuries or death, property damage, environmental damage, interruption of operations and reputational damages to us. Each of such incidents could have a material adverse impact on our financial condition and results of operations.

We maintain a package of insurance coverage plan through Sinopec Group on our property, facilities and inventory. In addition, we maintain insurance policies for such assets as the engineering construction projects and products in transit with third-party commercial insurance companies. We carry a third party liability insurance with a coverage capped at RMB50 million in 2019 to cover claims, subject to deductibles, in respect of personal injury, property or environmental damage arising from accidents on our property or relating to our operations other than on our transportation vehicles. Our insurance coverage may not be sufficient to cover all the financial losses caused by operating hazards. Resulting losses required to be compensated or otherwise paid for by us due to such operating hazards that are not fully insured against may have a material adverse effect on our financial condition and results of operations.

 

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Our business may be limited or adversely affected by government regulations.

The Chinese central and local governments continue to exercise a certain degree of control over the petrochemical industry in China by, among other things:

 

   

mandating distribution channels for our fuel products;

 

   

setting the allocations and pricing of certain resources, products and services;

 

   

assessing taxes and fees payable;

 

   

setting import and export quotas and procedures; and

 

   

setting safety, environmental and quality standards.

As a result, we may face significant constraints on our flexibility and ability to expand our business operations or to maximize our profitability. In the past, we have benefited from favorable regulatory policies that have, for example, reduced the competition we face from illegal imports of petroleum products. Existing policies that favor our industry may change in the future and our business could be adversely affected by any such changes.

Our development plans may require regulatory approval.

We are currently engaged in a number of construction and expansion projects. Most of our projects are subject to governmental review and approval. The timing and cost of completion of these projects will depend on numerous factors, including approvals from relevant government authorities and general economic conditions in China.

While in general we attempt to obtain governmental approval as far in advance as practicable, we are unable to predict the timing and outcome of these governmental reviews and approvals. If any of our important projects required for our future growth are not approved, or not approved on a timely basis, our results of operations and financial condition could be adversely affected.

We could face increasing competition in China.

Our principal market, Eastern China, which is comprised of Shanghai, Shandong, Jiangsu, Anhui, Zhejiang, Jiangxi and Fujian, has enjoyed stronger economic growth and a higher demand for petrochemical products than other regions of China. As a result, we believe that our competitors will try to expand their sales and build up their distribution networks in our principal market. We believe this will have an adverse impact on the production and sale of our major products. Moreover, Chinese private enterprises have gradually overcome technological and funding barriers to extend their business from the downstream processing sector to the upstream petrochemical field. These enterprises have advantages in many areas such as flexibility in operation costs, preferential policy treatments and regional presence, and may use these advantages to compete with us in our target market.

We face increasing foreign competition in our lines of business.

China joined the WTO on December 11, 2001 and committed to eliminate some tariff and non-tariff barriers to foreign competition in the domestic petrochemical industry that benefited us in the past. In particular, China:

 

   

has reduced tariffs on imported petrochemicals products that compete with ours;

 

   

increased levels of permitted foreign investment in the domestic petrochemicals industry, allowing foreign investors to own 100% of a domestic petrochemicals company from December 11, 2004;

 

   

has gradually relaxed restrictions on the import of crude oil by non-state-owned companies;

 

   

has granted foreign-owned companies the right to import petrochemical products; and

 

   

has permitted foreign-owned companies to distribute and market fuel products in both retail and wholesale markets in China.

As a result of these measures, we face increasing competition from foreign companies and imports. In addition, competition for our products has increased, as many overseas companies have switched their focus to sales in China. Furthermore, tariff reductions could reduce our profit margins or otherwise negatively impact our revenue from certain products, including a small number of significant products. The Chinese government may also reduce the tariffs imposed on production equipment that we may import in the future.

 

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Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and results of operations.

Substantially all of our operations are conducted in China. Accordingly, our business, prospects, financial condition and results of operations may be influenced to a significant degree by political, economic and social conditions in China generally and by continued economic growth in China as a whole.

The Chinese economy differs from the economies of most developed countries in many respects, including the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over China’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.

While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. Our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. In addition, the Chinese government has implemented in the past certain measures, including interest rate increases, to control the pace of economic growth. These measures may cause decreased economic activity in China, and since 2012, China’s economic growth has slowed down. Any prolonged slowdown in the Chinese economy may reduce the demand for our products and services and materially and adversely affect our business and results of operations.

Interpretation and enforcement of Chinese laws and regulations is uncertain.

The Chinese legal system is based on statutory law. Under this system, prior court decisions may be cited as persuasive authority, but do not have the binding effect of precedents. Since 1979, the Chinese government has been developing a comprehensive system of commercial laws and considerable progress has been made in the promulgation of laws and regulations dealing with economic matters, such as corporate organization and governance, foreign investment, commerce, taxation and trade. Because these laws, regulations and legal requirements are relatively new or otherwise undeveloped and not all accessible to the public and because prior court decisions have little precedential value, the interpretation and enforcement of these laws, regulations and legal requirements involve greater uncertainty than in other jurisdictions.

Cyber attacks and security breaches may threaten the integrity of our intellectual property and other sensitive information and disrupt our business operations, which could adversely affect our reputation, business and financial position.

We face global cybersecurity threats, which may range from uncoordinated individual attempts to sophisticated and targeted measures directed at us. Cyber attacks and security breaches may include, but are not limited to, attempts to disrupt our operations, gain access to confidential information, insertion of computer viruses, denial of service and other electronic security breaches. In recent years, a number of major oil and petrochemical companies have been the subject of cyber attacks.

Although we have not experienced any material cybersecurity incidents in the past, we cannot assure you that we will not experience them in the future. Due to the evolving nature of cybersecurity threats, the scope and impact of any future incident cannot be predicted. While we continually work to safeguard our systems and mitigate potential risks, there is no assurance that such actions will be sufficient to prevent cyber attacks or security breaches that manipulate or improperly use our systems or networks, compromise confidential or otherwise protected information, destroy or corrupt data, or otherwise disrupt our operations. The occurrence of such events could disrupt our operations, cause physical harm to people or the environment, damage or destroy assets, compromise business systems, result in proprietary information being altered, lost, stolen or compromised or otherwise disrupt our business operations. We could incur significant costs to remedy the effects of such a cybersecurity disruption as well as in connection with any resulting regulatory actions and litigation. In addition, a material cybersecurity incident could negatively impact our reputation and our competitive position, which could have an adverse effect on our financial condition and results of operations.

You may not enjoy shareholders’ protections that you would be entitled to in other jurisdictions.

As most of our business is conducted in China, our operations are governed principally by the laws of China. Despite the continuing improvement of the PRC Company Law and Securities Law, Chinese legal provisions for the protection of shareholders’ rights and access to information are different from those applicable to companies formed in the United States, Hong Kong, the United Kingdom and other developed countries or regions. You may not enjoy shareholders’ protections under Chinese law that you would be entitled to in other jurisdictions. Moreover, there are significant differences between our corporate governance practices and those of U.S. issuers listed on the NYSE, as further described under Item 16 G. Corporate Governance.

 

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Our Articles of Association require you to submit your disputes with us and other persons defined by our Articles of Association regarding the Company’s affairs to arbitration. You will have no legal right to a court proceeding with respect to such disputes.

Our Articles of Association require holders of our H Shares or ADSs having a claim against, or a dispute with, us, our directors, supervisors, executive officers or a holder of our A Shares relating to any rights or obligations conferred or imposed by our Articles of Association, the PRC Company Law or other relevant Chinese laws or regulations relating to our affairs, to submit such claim or dispute to arbitration with the China International Economic and Trade Arbitration Commission or to the Hong Kong International Arbitration Center. Our Articles of Association further provide that any arbitration decisions with respect to such disputes or claims shall be final and binding on all parties. As a result, you will have no legal right to a court proceeding with respect to such disputes.

Proceedings instituted by the SEC against certain PRC-based accounting firms, including our independent registered public accounting firm, could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act.

In December 2012, the SEC instituted administrative proceedings against the Big Four PRC-based accounting firms, including our independent registered public accounting firm, alleging that these firms had violated U.S. securities laws and the SEC’s rules and regulations thereunder by failing to provide to the SEC the firms’ audit work papers with respect to certain PRC-based companies that are publicly traded in the United States.

On January 22, 2014, the administrative law judge, or the ALJ, presiding over the matter rendered an initial decision that each of the firms had violated the SEC’s rules of practice by failing to produce audit papers and other documents to the SEC. The initial decision censured each of the firms and barred them from practicing before the SEC for a period of six months.

On February 6, 2015, the four China-based accounting firms each agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC and audit U.S.-listed companies. The settlement required the firms to follow detailed procedures and to seek to provide the SEC with access to Chinese firms’ audit documents via the China Securities Regulatory Commission (the “CSRC”). Under the terms of the settlement, the underlying proceeding against the four China-based accounting firms was deemed dismissed with prejudice four years after entry of the settlement. The four-year mark occurred on February 6, 2019. While we cannot predict if the SEC will further challenge the four China-based accounting firms’ compliance with U.S. law in connection with U.S. regulatory requests for audit work papers or if the results of such a challenge would result in the SEC imposing penalties such as suspensions, if the accounting firms are subject to additional remedial measures, our ability to file our financial statements in compliance with SEC requirements could be impacted. A determination that we have not timely filed financial statements in compliance with SEC requirements could ultimately lead to the delisting of our ADSs from the NYSE or the termination of the registration of our H Shares under the Securities Exchange Act of 1934, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.

Our auditor, like other independent registered public accounting firms operating in China, is not permitted to be subject to inspection by Public Company Accounting Oversight Board, and consequently investors may be deprived of the benefits of such inspection.

Our auditor, the independent registered public accounting firm that issued the audit reports included elsewhere in this annual report, as an auditor of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance applicable professional standards. Our auditor is located in, and organized under the laws of, the PRC, which is a jurisdiction where the PCAOB has been unable to conduct inspections without the approval of the Chinese authorities. In May 2013, PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the CSRC and the PRC Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations undertaken by PCAOB, the CSRC or the PRC Ministry of Finance in the United States and the PRC, respectively. PCAOB continues to be in discussions with the China Securities Regulatory Commission, or CSRC, and the PRC Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with PCAOB and audit Chinese companies that trade on U.S. exchanges.

On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. However, it remains unclear what further actions, if any, the SEC and PCAOB will take to address the problem.

 

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This lack of PCAOB inspections in China prevents the PCAOB from fully evaluating audits and quality control procedures of our independent registered public accounting firm. As a result, we and investors in our ordinary shares are deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections, which could cause investors and potential investors in our stock to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.

We may be or become a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. investors.

Generally, if, for any taxable year, at least 75% of our gross income is passive income, or at least 50% of the value of our assets is attributable to assets that produce passive income or are held for the production of passive income, we would be characterized as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes. We do not expect to be a PFIC for our current taxable year. However, since PFIC status depends on the composition of our income and the composition and value of our assets from time to time, there can be no assurance that we will not be considered a PFIC for any taxable year. If we are characterized as a PFIC, U.S. investors may suffer adverse tax consequences, including increased U.S. tax liabilities and reporting requirements. For further discussion of the adverse U.S. federal income tax consequences of our possible classification as a PFIC, see Item 10. Additional Information – E. Taxation – U.S. Taxation.

We have in the past sourced a small portion of crude oil from Iran that may be targeted by economic sanctions under relevant U.S. laws, and if such activities are determined by the U.S. governmental authorities as sanctionable activities, we could be sanctioned or otherwise penalized.

The United States has adopted a number of measures since 1996 that provide for the possible imposition of sanctions against non-U.S. companies engaged in certain activities in and with Iran in the energy and other sectors, including, the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRSHRA”) enacted August 10, 2012 and the Iran Freedom and Counter-Proliferation Act (“IFCA”) enacted January 2, 2013, Section 1245 of the National Defense Authorization Act of 2012 (“NDAA”) enacted December 31, 2011, and Executive Order 13846 of August 6, 2018, that was issued in connection with the termination of the participation by the United States in the Joint Comprehensive Plan of Action, or JCPOA, that became effective January 16, 2016, and resulted in the waiver of certain U.S. sanctions that against non-U.S. persons engaging in certain transactions with Iran. The withdrawal was effected in two stages that resulted on November 5, 2018, in the complete re-imposition of the U.S. sanctions that were waived under the JCPOA. On November 5, 2018, the United States also granted a 180-day waiver (that is potentially renewable) under NDAA Section 1245 to China (and seven other countries) allowing for the purchase of petroleum from Iran under specified conditions. The NDAA waiver does not authorize transaction that remain prohibited under other U.S. sanctions laws.

The sanctionable activities include certain investments, the provision of goods, services, technology, or support that could contribute to the development of petroleum and petrochemical resources or the production of refined petroleum products in Iran, the exportation of refined petroleum products to Iran, the transportation of crude oil from Iran, or the engagement in a significant transaction for the purchase or acquisition of petroleum or petroleum products from Iran, and the engagement in transactions with certain Iranian specially designated nationals and blocked persons (“SDNs”) as identified and published by U.S. Department of the Treasury’s Office of Foreign Assets Control, or OFAC, the agency primarily responsible for administering U.S. sanctions and embargoes

We have sourced a small portion of our crude oil from Iran in the past through Sinopec Corp., our current controlling shareholder, and independent third parties, and we may continue to purchase crude oil from Iran. In addition, Sinopec Corp. and Sinopec Group, the controlling shareholder of Sinopec Corp., have engaged in operations in or purchasing crude oil sourced from Iran and may continue to do so in the future. We have no control over the activities of Sinopec Group or Sinopec Corp. in connection with any activities that they may conduct in Iran.

If our purchases of crude oil from Iran and transactions related thereto are determined to be sanctionable activities by the U.S. President and/or the relevant U.S. governmental authorities, we may be subject to five or more of the twelve sanctions options available under the Iran Sanctions Act of 1996 (as amended) (“ISA”) and the ITRSHRA, which include restrictions on bank financing, outright blocking of the Company’s property within U.S. jurisdiction, under the control of U.S. persons anywhere in the world, and prohibition of U.S. persons from investing or purchasing a significant amount of equity or debt instruments of the Company. Similar sanctions may also be imposed under Executive Order 13846, the IFCA, and other U.S. laws. In addition, many states in the United States have adopted legislation requiring state pension funds to divest themselves of securities in any company with active business operations in Iran. We cannot assure that we or any of our affiliates will not be sanctioned by the U.S. President and/or the relevant U.S. governmental authorities in light of the activities by us or our affiliates in Iran. The imposition of any such sanctions on us or our affiliates will have a negative impact on our business, reputation or stock price. In addition, purchase of crude oil by Sinopec Corp. subsidiaries that supply us with raw materials may from time to time be sourced from National Iranian Oil Company. This entity has been identified by the U.S. government as an SDN and sanctioned under various laws, including for assisting the government of Iran to avoid sanction and for engaging in activities related to nuclear proliferation. Under Executive Order 13846, the U.S. President can sanction non-U.S. companies that engage in transactions with SDNs such as the National Iranian Oil Company. To the extent we indirectly (or directly) purchase raw materials from this entity, we risk potential U.S. government sanctions. Even absent any U.S. government sanctions, we risk adverse publicity in the world markets, which may impair our reputation and business.

 

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Sinopec Group, the controlling shareholder of Sinopec Corp. which is our current controlling shareholder, or its affiliates’ current or future activities in certain countries are the subject of economic sanctions under relevant U.S. laws and could result in negative media and investor attention to us and possible imposition of sanctions on Sinopec Group, which could materially and adversely affect our shareholders.

Sinopec Group undertakes, from time to time and without our involvement, overseas investments and operations in the oil and gas industry, including the exploration and production of oil and gas, refining and Liquefied Natural Gas, or LNG, projects. Sinopec Group’s overseas asset portfolio includes oil and gas development projects in Iran, Sudan and Syria, countries subject to U.S. sanctions and embargoes. We cannot predict the interpretation or implementation of government policy at the U.S. federal, state or local levels with respect to any current or future activities by Sinopec Group or its affiliates in countries or with individuals or entities that are the subject of U.S. sanctions. Similarly, we cannot predict whether U.S. sanctions will be further tightened, or the impact that such actions may have on Sinopec Group. It is possible that the United States could subject Sinopec Group to sanctions due to these activities. Certain U.S. state and local governments and colleges have restrictions on the investment of public funds or endowment funds, respectively, in companies that are members of corporate groups with activities in certain countries that are the subject of U.S. sanctions. These investors may not wish to invest, and may divest their investment, in us because of our relationship with Sinopec Group and its investments and activities in those U.S. government sanctioned countries. It is possible that, as a result of activities by Sinopec Group or its affiliates in countries that are the subject of U.S. sanctions, we may be subject to negative media or investor attention, which may distract management, consume internal resources and affect investors’ perception of our company.

Further, the ISA authorizes the imposition of sanctions on companies that engage in certain activities in and with Iran, especially in Iran’s energy sector. It is possible that Sinopec Group or its affiliates engage in activities that are targeted for sanction purposes by the ISA or other U.S. laws. If the U.S. President determines that Sinopec Group or one of its affiliates in fact engaged in the targeted activities, he would be required under the ISA to impose on Sinopec Group or its affiliates at least five sanctions from among twelve sanctions options available under the ISA, which range from restrictions on U.S. exports or bank financing to outright blocking of Sinopec Group or its affiliate’s property within the U.S. or in the possession or control of U.S. persons anywhere in the world. In addition, the IFCA requires the U.S. President to block the property of persons and entities within U.S. jurisdiction or control of U.S. persons if he determines that, among other things, such persons or entities are engaged in certain transactions involving the energy, shipping or shipbuilding sectors of Iran or with certain SDNs. It also requires the U.S. President to impose five or more sanctions under the ISA on a person that he determines has knowingly, on or after July 1, 2013, sold, supplied or transferred to or from Iran precious metals or certain other materials (including graphite, aluminum, steel, coal and certain software) if used for specified purposes. If the U.S. President determines that Sinopec Group, or an entity it owns or controls engages in any such activities and if the most extreme sanction under the ISA or other U.S. sanctions laws, blocking, were applied to Sinopec Group’s property, including controlled subsidiaries, Sinopec Group could be prohibited from engaging in business activities in the United States or with U.S. individuals or entities, and U.S. transactions in our securities and distributions to U.S. individuals and entities with respect to our securities could also be prohibited.

In addition, pursuant to the IFCA, Executive Order 13846 and other U.S. laws, the U.S. government can sanction financial institutions anywhere in the world that engage in certain Iran related transactions. Such sanctions include prohibiting the financial institution from opening, or imposing strict conditions on maintaining, a correspondent or payable through account in the United States. The potential for financial institutions to be sanctioned for Iran related activities may impact our ability to engage in financial transactions related to Iran transactions.

The trading prices of our ADSs and H Shares have been volatile and may continue to be volatile regardless of our operating performance.

The trading prices of our ADSs and H Shares have been and may continue to be subject to wide fluctuations. The market price for our ADSs may continue to be volatile and subject to wide fluctuations in response to factors including the following:

 

   

actual or anticipated fluctuations in our quarterly results of operations;

 

   

changes in financial estimates by securities research analysts;

 

   

conditions in petroleum and petrochemical markets;

 

   

changes in the operating performance or market valuations of other petroleum and petrochemical companies;

 

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announcements by us or our competitors of new products, acquisitions, strategic partnerships, joint ventures or capital commitments;

 

   

fluctuations of exchange rates between RMB and the U.S. Dollar; and

 

   

general economic or political conditions in China or elsewhere in the world.

In addition, the stock market in general, and the market prices for companies with operations in China in particular, have experienced volatility that often has been unrelated to the operating performance of such companies. The securities of some China-based companies that have listed their securities in the United States have experienced significant volatility since their initial public offerings in recent years, including, in some cases, substantial declines in the trading prices of their securities. The trading performances of these companies’ securities after their offerings may affect the attitudes of investors towards Chinese companies listed in the United States in general, which consequently may impact the trading performance of our ADSs, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or other matters of other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of whether we have engaged in any inappropriate activities. In particular, the global financial crisis and the ensuing economic recessions in many countries have contributed and may continue to contribute to extreme volatility in the global stock markets. These broad market and industry fluctuations may adversely affect the market price of our ADSs.

 

ITEM 4.

INFORMATION ON THE COMPANY.

A. History and Development of the Company

General Information

We were established in the People’s Republic of China as a joint stock limited company under the PRC Company Law on June 29, 1993 as Shanghai Petrochemical Company Limited. On October 12, 2000, we changed our name to Sinopec Shanghai Petrochemical Company Limited. Our registered office is at No. 48 Jinyi Road, Jinshan District, Shanghai, China 200540. Our telephone number there is (86-21) 5794-1941. Our company website is www.spc.com.cn. The SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and our other information that file electronically with the SEC.

Our Predecessor

Our predecessor, Complex, was founded in 1972 as one of the first large scale Chinese petrochemical enterprises using advanced imported technology and equipment. Prior to June 29, 1993, the Complex was wholly-owned by Sinopec Group, at the time a ministerial level enterprise (before its restructuring in 1998, “Sinopec”). The Complex’s location was chosen because of accessibility by water and land transportation to Shanghai, a major industrial city of China, and the availability of reclaimable land. The Complex was initially under the administration of the Ministry of Textile Industry and in 1983 was placed under the administration of Sinopec.

Construction Projects

The Complex and we, as its successor, have completed six major stages of construction. The first stage of construction (1972-1976) included reclamation of land and the installation of 18 production units. The second stage of construction (1980-1986) increased the Complex’s capacity for processing crude oil and doubled its capacity for synthetic fiber production. The third stage of construction (1987-1992) primarily consisted of the installation of a 300,000 ton Rated Capacity ethylene unit, an additional crude oil refining unit and other units for the production of petrochemical products. The third stage of construction completed our transition from a synthetic fiber producer to a highly integrated producer of a wide variety of petrochemical products. The fourth stage of construction (2000-2002) mainly included the 700,000 ton Ethylene Expansion Project and Coal-Fired Power Plant Expansion Project. The fifth stage of construction (2003-2009) was mainly designed to optimize our structure and realize sustainable development, and mainly included 3,300,000t/a diesel hydrogenation unit, 1,200,000t/a delayed coking unit and other projects implemented for removing “bottlenecks” in refinery, the building of new 600,000t/a paraxylene hydrocarbon complex unit, 150,000t/a C5 segregation unit, 380,000t/a ethane unit, etc..

The Company commenced the sixth stage of construction in 2010 (the “Phase 6 Project”) and completed the project in December 2012. The key component of the Phase 6 Project was the refinery revamping and expansion project. The Phase 6 Project also included the technology development and fine chemicals projects. The purpose of the Phase 6 Project was to improve the Company’s overall industrial structure, core competitiveness and the capability of maintaining sustainable developments. The Phase 6 Project was focused on the objective to achieve intensive utilization of natural resources and the build-up of a complete set of facilities, in accordance with the fundamental industrial model of integrating oil refining and petrochemical production. Through this project, the Company further enhanced its oil refining process and strengthened and expanded the Company’s core businesses while continuing to explore the development of fine chemicals and products with high value added.

 

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Over the past four decades, the Company has built up an infrastructure system to support its production needs. The Company has its own facilities to supply water, electricity, steam and other utilities and to treat waste water, as well as ocean and inland waterway wharfs and railroad and road transportation facilities.

Our Initial Public Offering and Listing

We were established as a subsidiary of Sinopec on June 29, 1993. In preparation for our initial public offering of ordinary shares, all assets and liabilities of the Complex were transferred either to us or to Sinopec Shanghai Jinshan Industrial Company (“JI”), a separate subsidiary of Sinopec. The Complex’s non-core businesses and assets, such as housing, stores, schools, transportation and medical services, were transferred to JI. The Complex’s core business and assets were transferred to us. The Complex then ceased to exist as a legal entity. In 1998, Sinopec was restructured into a limited liability company under the name of China Petrochemical Corporation (“Sinopec Group”). On February 25, 2000, Sinopec Group transferred its interest in us to its subsidiary, Sinopec Corp. In 1997, JI was restructured and its subsidiaries were either transferred to Sinopec or Shanghai Jinshan District. Sinopec Group now provides community services to us that were formerly provided by JI.

Our H Shares commenced listing on the HKSE on July 26, 1993. Our ADSs, each representing 100 H Shares, are listed on the NYSE. Our A Shares are listed on the Shanghai Stock Exchange. We were the first Chinese joint stock limited company to have securities concurrently traded in Hong Kong, the United States and China. On November 8, 1993, our A Shares were included in the Shanghai Stock Exchange Stock Index.

A Share Reform

Pursuant to regulations issued by the CSRC, we were required to obtain shareholder approval for and implement certain share reform. As a result of such share reform, all non-publicly tradable A Shares of the Company would be converted into publicly tradable A Shares and may be sold publicly on the Shanghai Stock Exchange subject to any applicable lock-up period.

In connection with the share reform, the Distribution Proposal regarding 2013 Interim Distribution of Cash Dividend and the Conversion of Capital Fund and Surplus Reserve into Shares of the Company (“Proposal”) was approved at the Company’s 2013 First Extraordinary General Meeting, 2013 First A Shareholders Class Meeting and 2013 First H Shareholders Class Meeting held on October 22, 2013. According to the Proposal, based on the Company’s total share capital of 7,200,000,000 shares as of June 30, 2013, RMB2,421 million of the capital surplus of the Company from its share premium account was used to fund the issue of 3.36 new bonus shares with respect to every 10 issued and outstanding shares, the surplus reserve was used to fund the issue of 1.64 new bonus shares with respect to every 10 issued and outstanding shares, and an interim cash dividend of RMB0.50 (tax included) for every 10 issued and outstanding shares was distributed to all shareholders.

In addition, Sinopec Corp. undertakes under the Proposal that it shall not, within 12 months from the date on which Sinopec Corp. becomes entitled to trade, deal in or transfer its non-publicly tradable shares of the Company in the market (meaning the first trading day after the implementation of the Proposal), trade such shares in the market. Also, after the expiration of the aforesaid 12-month term, the amount of existing non-publicly tradable shares to be disposed of by Sinopec Corp. through trading on the stock exchange shall not represent more than 5% of the total number of our shares held by Sinopec Corp. within the next 12 months, and not more than 10% within the next 24 months.

Immediately upon completion of the conversion of capital surplus and surplus reserve into new shares of the Company, the total number of A Shares of the Company reached, as of December 4, 2013, 7,305,000,000, and the total amount of H Shares of the Company reached 3,495,000,000. Therefore, the Company’s total share capital consists of 10,800,000,000 shares. Sinopec Corp., being the controlling shareholder of the Company, holds 5,460,000,000 A Shares, representing 50.56% of the total share capital of the Company.

The share certificates of new H Shares issued in connection with the share reform were dispatched and the cash dividend was paid to the holders of H Shares on December 4, 2013. The dealings in the new H Shares commenced on December 5, 2013.

Description of Principal Capital Expenditures and Divestitures

For a description of capital expansion projects related to our facilities, see Item 4. Information on the Company – D. Property, Plant and Equipment – Capital Expansion Program.

 

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B. Business Overview

We are one of the largest petrochemical companies in China based on 2018 net sales and ethylene production. Our highly integrated petrochemical complex processes crude oil into a broad range of products in four major product areas:

 

   

synthetic fibers,

 

   

resins and plastics,

 

   

intermediate petrochemicals, and

 

   

petroleum products.

Based on 2018 sales volumes, we are a leading Chinese producer of synthetic fibers and resins and plastic products. We believe that we are also a leading competitor in sales of petroleum products and intermediate petrochemicals in our regional markets.

Our net sales by business lines as a percentage of total net sales in each of 2016, 2017 and 2018 are summarized as follows:

Net Sales of RMB65,936.5 million in 2016

 

Synthetic fibers

     2.81

Resins and plastics

     14.86

Intermediate petrochemicals

     13.39

Petroleum products

     36.40

Trading of petrochemical products

     31.22

Others

     1.32
  

 

 

 

Total

     100.00
  

 

 

 

Net Sales of RMB79,218.3 million in 2017

 

Synthetic fibers

     2.53

Resins and plastics

     12.90

Intermediate petrochemicals

     12.71

Petroleum products

     40.90

Trading of petrochemical products

     29.91

Others

     1.05
  

 

 

 

Total

     100.00
  

 

 

 

Net Sales of RMB95,613.5 million in 2018

 

Synthetic fibers

     2.29

Resins and plastics

     11.03

Intermediate petrochemicals

     12.72

Petroleum products

     45.39

Trading of petrochemical products

     27.76

Others

     0.81
  

 

 

 

Total

     100.00
  

 

 

 

We derive a substantial portion of our revenues from customers in Eastern China (principally Shanghai and its six neighboring provinces), an area that has experienced economic growth above the national average in recent years. Shown by geographic region and exports, our net sales by business lines as a percentage of total net sales for each of 2016, 2017 and 2018 are as follows:

 

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2016 Net Sales by Region (%)

 

     Eastern China      Other parts of China      Exports  

Synthetic fibers

     86.58        12.40        1.02  

Resins and plastics

     91.49        8.50        0.01  

Intermediate petrochemicals

     97.77        1.07        1.16  

Petroleum products

     90.98        9.02        0.00  

Trading of petrochemical products

     36.53        9.52        53.95  

Total net sales

     76.69        8.03        15.28  
2017 Net Sales by Region (%)  
     Eastern China      Other parts of China      Exports  

Synthetic fibers

     88.07        11.93        0.00  

Resins and plastics

     92.75        7.25        0.00  

Intermediate petrochemicals

     96.52        2.25        1.23  

Petroleum products

     91.99        3.81        4.20  

Trading of petrochemical products

     40.86        47.49        11.65  

Total net sales

     92.68        7.13        0.19  
2018 Net Sales by Region (%)  
     Eastern China      Other parts of China      Exports  

Synthetic fibers

     87.61        12.39        0.00  

Resins and plastics

     94.13        5.87        0.00  

Intermediate petrochemicals

     90.25        8.67        1.08  

Petroleum products

     86.60        0.90        12.50  

Trading of petrochemical products

     50.66        5.42        43.91  

Total net sales

     78.63        3.60        17.77  

Business Strategies

In 2019, we continue to adopt a market-oriented approach to ensure the quality and efficiency of our production. We endeavor to maintain the safety and environmental standards and place emphasis on cost control measures in order to sustain a stable production level in 2019. We seek to further strengthen our production optimization, encourage innovation, enhance our staff efficiency and strive to create a higher production and operation level.

To achieve our business objectives in 2019, we intend to pursue the following strategies:

 

   

Strengthen our efforts in safety and environmental protection

We plan to increase our efforts on the promotion and training of Health, Safety, Security and Environment (“HSSE”) by raising our employees’ awareness of HSSE and the implementation of safety production responsibilities at all organizational levels to establish a long-term HSSE management system. We will continue to promote the establishment of “green enterprises” by emphasizing on our environmental responsibilities, encouraging emission reduction from the beginning, and processing control and end-of-pipe treatment to continuously improve our cleaner production goals. We will tighten the management of our contractors and hidden danger troubleshooting, and continue to promote the Leak Detection and Repair coverage while following the principle of delicacy management.

 

   

Enhance the production and operation management efficiencies

We will formulate detailed quantitative goals of “Safety Operation, Stable Operation, Long-term Operation, Full-capacity Operation and High-quality Operation” and comprehensively implement a standardized management of our production operations. We will promote the equipment integrity management system on some of our key machineries, further promote the application of new technologies such as reciprocating engine condition monitoring system and strengthen technical skills and basic equipment management to improve the operational reliability and utilization of our equipment. We aim to eliminate defects of RDS-A series, examine, repair or reform butadiene old area, ethylene glycol and other equipment to ensure that the oil cleaning units work smoothly.

 

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Improve production optimization and explore potential cost control measures to increase production efficiency

We will continue to strengthen our efforts in crude oil procurement and increase the procurement of oil products with high performance/cost ratio. We will continue to strengthen our efforts in market analysis and judgment by continuously improving the accuracy of the three-month rolling forecast and the management ability of guiding production and operation plans based on price forecast. We will optimize cracking feedstock and the operation of ethylene plant to increase olefin yield and reduce ethylene production cost. We will also further optimize our hydrogen system, sewage refining and sewage treatment processes to improve our operational efficiency. We will deepen regional cooperation and continue to promote mutual material supply, resource optimization, tank capacity complementation, maintenance balance and coordination on overhaul material and reserves sharing with Shanghai SECCO Petrochemical Company Limited (“SECCO”). In the meantime, we will deepen the overall budget management and continue to monitor our repair costs, financial costs, management costs, and sales costs closely. We will continue to focus on maximizing our financial performance in areas including production optimization, product structure adjustment, production-supply-sales coordination, inventory control and cost control.

 

   

Promote industrial restructuring and increase innovation and development efforts

We will refine and improve our development plan and focus on promoting product structure and industrial structure adjustments. We will actively implement the second phase of carbon fiber project and work towards the launch of some key projects including the 1# ethylene relocation redevelopment project and the large-tow carbon fiber project. We will actively pursue regional coordinated development and seek joint venture opportunities with Dushangang Petrochemical Industrial Park and Jinshan Second Industrial Zone.

Efforts will be made to advance carbon fiber and other technological breakthrough to complete the transformation of high-performance carbon fiber equipment and continue to develop carbon rod structure optimization, broadening the mode of application, development and application of carbon fiber composite materials. We will commence marketing activities for polyesters for optical films, polyesters for engineering plastics and flame retardant polyesters. Advance the development of hexene copolymerization and large-diameter polyethylene pipe materials, foamed polypropylene serialized products and medical polypropylene syringe products. With the integration and optimization of production process, integrated management and control of refinery production and industrial cloud platform as our current focus, we will continue to build an intelligent plant.

 

   

Further strengthen corporate governance

We aim to further strengthen our corporate governance by researching and streamlining our organizational structure, and improve the management responsibilities of functional departments and secondary units. We will promote the pilot work of our Carbon Fiber Business Unit and improve the integration of new products production, sales and research. We will drive the optimal delicacy management of our industrial system while exploring the incubation mechanism for the transformation of our scientific research results. We will continuously improve our staff performance appraisal system with reference to our core business processes and optimize the appraisal indicator system. We will explore the selection, appointment, supervision and evaluation of managers, revitalizing our internal human resource pool, increase the introduction of mature industry talents, manage total labor costs, and in turn to improve our overall productivity.

Principal Products

We produce four principal types of products with different specifications, including synthetic fibers, resins and plastics, intermediate petrochemicals and petroleum products. We use many of the important petroleum products and intermediate petrochemicals we produce in producing our own downstream products.

The following table shows a comparison of the production volume and sales volume in 2017 and 2018 by our major products.

 

     Production     Sales  

Products

   2018
(10,000  tons)
     2017
(10,000 tons)
     Year-on-year
change
    2018
(10,000  tons)
     2017
(10,000 tons)
     Year-on-year
change
 

Diesel Note1

     373.08        386.38        -3.44     372.70        338.87        9.98

Gasoline

     322.92        316.61        1.99     325.67        317.15        2.69

Jet Fuel Note1

     146.82        157.41        -6.73     100.37        75.13        33.60

Paraxylene

     67.30        63.29        6.34     49.82        41.32        20.57

Benzene Note2

     34.86        34.06        2.35     31.02        31.97        -3.06

Ethylene Glycol

     41.52        41.11        1.00     30.65        29.34        4.46

Ethylene Oxide

     19.43        14.64        32.72     18.48        14.25        29.68

Ethylene Note2

     77.78        76.69        1.42     2.90        0.55        427.27

Polyethylene

     41.79        47.13        -11.33     41.62        46.26        -10.03

Polypropylene

     49.36        48.18        2.45     49.37        47.87        3.13

Polyester Pellet Note2

     40.65        41.41        -1.48     27.18        29.32        -7.30

Acrylic

     11.32        13.19        -14.18     11.33        13.16        -13.91

Polyester Staple

     4.77        4.58        4.15     4.16        3.93        5.85

 

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Notes: 1. Excludes sales volume on a sub-contract basis.

           2. The difference between production and sales are internal sales.

The above-mentioned sales volume and sales revenue do not include the trading of our petrochemical products.

The following table shows our 2018 net sales by major products as a percentage of total net sales together with the typical uses of these products.

 

Product

   % of net sales      Typical Use

SYNTHETIC FIBERS

     

Polyester staple fiber

     0.23      Textiles and apparel

Acrylic staple fiber

     1.85      Cotton type fabrics, wool type fabrics

Others

     0.20     

Sub-total

     2.28     

RESINS AND PLASTICS

     

Polyester chips

     2.27      Polyester fibers, films and containers

Polypropylene pellets

     3.19      Films, ground sheeting, wire and cable compound and other injection molding products such as housewares and toys

Polypropylene pellets

     4.12      Films or sheets, injection molding products such as housewares, toys and household electrical appliances and automobile parts

Polyvinyl alcohol (“PVA”)

     0.10      PVA fibers, building coating materials and textile starch

Others

     1.34     

Sub-total

     11.02     

INTERMEDIATE PETROCHEMICALS

     

Ethylene

     0.10      Feedstock for polyethylene, ethylene glycol, polyvinyl chloride and other intermediate petrochemicals which can be further processed into resins, plastics and synthetic fiber.

Ethylene oxide

     1.65      Intermediate products for the chemical and pharmaceutical industry, including dyes, detergents and adjuvant

Benzene

     1.76      Intermediate petrochemical products, styrene, plastics, explosives, dyes, detergents, epoxies and polyamide fiber

Paraxylene

     3.58      Intermediate petrochemicals and polyester

Butadiene

     0.92      Synthetic rubber and plastics

Ethylene glycol

     2.01      Fine chemicals

Others

     2.71     

Sub-total

     12.73     

PETROLEUM PRODUCTS

     

Gasoline

     17.78      Transportation fuels

Diesel    

     17.06      Transportation fuels and agricultural machinery fuels

Jet Fuel

     4.69      Transportation fuels

Others

     5.86     

Sub-total

     45.39     

Trading of petrochemical products

     27.76      Import and export trade of petrochemical products (purchased from domestic and overseas suppliers)

Others

     0.82     
  

 

 

    

Total

     100.00     
  

 

 

    

 

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The following table provides a detailed description of our major products by industry segment, primary upstream raw materials, transport and storage method, primary downstream application fields and key price-influencing factors:

 

Product

 

Industry segment

 

Primary upstream raw

material

  

Transport/storage

method

  

Primary downstream

application fields

  

Key price-influencing

factors

Diesel

  Petroleum products   Petroleum   

Pipeline transportation

and shipping/ storage tank

  

Transportation fuel, agricultural

machinery fuel

  

International crude oil price, government

control

Gasoline

  Petroleum products   Petroleum    Pipeline transportation and shipping/storage tank    Transportation fuel   

International crude oil price, government

control

Jet Fuel

  Petroleum products   Petroleum    Pipeline transportation and shipping/storage tank    Transportation fuel   

International crude

oil price, supply-demand balance

Paraxylene

 

Intermediate

petrochemicals

  Naphtha   

Road transportation/

storage tank

  

Intermediate

petrochemical

products and

polyester

  

Raw material price,

supply-demand balance

Benzene

 

Intermediate

petrochemicals

  Naphtha   

Road transportation,

shipping, rail

transportation/

storage tank

  

Intermediate

petrochemical

products, styrene,

plastic, explosive,

dye, detergent,

epoxy resin,

chinlon

  

International crude

oil price, market

supply-demand

condition

Ethylene Glycol

 

Intermediate

petrochemicals

  Naphtha   

Road transportation/

storage tank

  

Fine Chemicals

engineering

  

International crude

oil price, market

supply-demand

condition

Ethylene Oxide

 

Intermediate

petrochemicals

  Naphtha   

Road transportation,

pipeline

transportation/ storage tank

  

Chemical and

medical industry

intermediate

products, including

dyes, detergents

and auxiliary

  

International crude

oil price, market

supply-demand

condition

Ethylene

 

Intermediate

petrochemicals

  Naphtha   

Road transportation,

pipeline

transportation,

shipping/storage

tank

   Polypropylene, ethylene glycol, polyvinyl chloride and other raw material for further processing of intermediate petrochemical products such as resins, plastics and synthetic fibers   

International crude

oil price, supply-demand balance

 

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Product

 

Industry segment

 

Primary upstream raw

material

  

Transport/storage

method

  

Primary downstream

application fields

  

Key price-influencing

factors

Polyethylene

  Resins and plastics   Ethylene   

Road transportation,

shipping and rail

transportation/

warehousing

  

Film, mulching film, cable insulation

material and

housewares, toys

injection moulding

products

  

Raw material price

and market supply-

demand condition

Polypropylene

  Resins and plastics   Propylene   

Road transportation,

shipping and rail

transportation/

warehousing

  

Film, mulching film,

housewares,

toys, household

appliances and

auto parts injection

moulding products

  

Raw material price

and market supply-

demand condition

Polyester chips

  Resins and plastics   Purified terephthalic acid (“PTA”), ethylene glycol   

Road transportation,

shipping and rail

transportation/

warehousing

  

Polyester fiber or

film, container

  

Raw material price

and market supply-

demand condition

Acrylics

  Synthetic fibers   Acrylonitrile   

Road transportation,

shipping and rail

transportation/

warehousing

  

Simple spinning or

blend with other

material for texture

or acrylic top

  

Raw material price

and market supply-

demand condition

Polyester

  Synthetic fibers   Polyester   

Road transportation,

shipping and rail

transportation/

warehousing

   Texture, apparel   

Raw material price

and market supply-

demand condition

Production Processes

The key component of the vertically integrated production facility of the Company is the ethylene facility producing ethylene and propylene and aromatics facility mainly producing paraxylene and benzene. Ethylene is the main raw material for the production of polyethylene and ethylene glycol, while ethylene glycol and PTA polymerization produces polyester. Propylene is the main raw material for the production of acrylics and polypropylene. The above-mentioned products all use crude oil as raw material and are processed through a series of petrochemical facilities. The chart below illustrates in brief the production processes of the Company.

 

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LOGO

 

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Intermediate Petrochemicals

Ethylene – Ethylene is either directly processed into polypropylene resins or processed into other intermediate petrochemicals. The most important of these is MEG. MEG is a key ingredient in polyester. It is produced by oxidizing ethylene in the ethylene oxide /ethylene glycol unit. Ethylene is also used to produce vinyl acetate which is processed into PVA.

Propylene – Propylene is either processed directly into polypropylene resins or is further processed into other intermediate petrochemicals such as acrylonitrile, acetonitrile, hydroxyl acetonitrile and sodium cyanide. Acrylonitrile is used in producing acrylics.

Vacuum gas oil – VGO is passed through the hydrocracker, and the resulting heavy naphtha is fed into the aromatics plants to produce paraxylene and benzene. Paraxylene is processed into PTA, one of the principal raw materials in producing polyester.

Resins and Plastics and Synthetic Fibers

We process our intermediate petrochemical products into five kinds of synthetic fiber raw materials: (1) polyester, (2) acrylonitrile, (3) polypropylene, (4) polyethylene, and (5) PVA. Each of these five products has its own production line or lines. We further process polyester and acrylonitrile into various types of synthetic fibers.

Polyester – MEG and PTA are fed into a polymerization unit which produces polyester chips and polyester melt. Both chips and melt are used as raw materials in the production of polyester staple and filaments. Some chips are also sold to third parties.

Polyester staple fiber is a multi-strand fiber cut into short lengths which can be spun into fabric on its own or blended with cotton, wool or flax to produce textiles. Polyester filaments are a class of more highly processed polyester materials which have been drawn and oriented to produce a long thread-like fiber.

Acrylonitrile – We produce polyacrylonitrile by feeding acrylonitrile into a polymerization unit. By passing the polyacrylonitrile through the fiber unit, acrylic fiber and acrylic staple fiber are produced, including cotton and wool type staple fibers. Wool acrylic staple fiber can be processed into acrylic wool strips.

Polypropylene – We produce polypropylene resins by feeding propylene into a polymerization unit. Our fiber grade polypropylene resin is the main ingredient for polypropylene fiber production.

Polyethylene – We have three sets of units producing polypropylene, two of which produce low-density polyethylene (“LDPE”) using the kettle type process, and the other unit produces all density polypropylene products using the Borstar bimodal process.

PVA – PVA granules are produced from vinyl acetate, derived from ethylene.

Raw Materials

In 2018, we continued to strengthen our advantages in refining and chemical integration and leverage the strong adaptability of our refining plants to process more high-sulfur crude oil; we used a Process Industry Modeling System to determine the cost performance of crude oil to further improve the cost control of crude oil purchases; and the total volume of the top ten main types of oil purchased in the whole year of 2018 accounted for 100% of the total purchase of crude oil.

To enhance the overall profitability, we optimized our ethylene cracking stocks, adjusted and improved our natural gas and fuel gas structure, optimized our hydrogen system, reduced the emission and increased the efficiency of flare gas, increased the outputs of gasoline and aviation kerosene, and optimized naphtha, residual oil and wax oil processing lines. By reducing the output of paraxylene, we increased our supply of high-octane gasoline blending components to produce more gasoline. By substituting aviation kerosene hydrogenation equipment for diesel hydrogenation equipment and upgrading the 3.3 million tons of diesel hydrogenation equipment, we further optimized the structure of our finished oil products, achieving a diesel to gasoline ratio of 1.16:1 for 2018. We strengthened our tracking of the margin contribution of our units, and continuously carried out daily profitability measurement for each product so as to promptly detect changes in profitability, quickly adjust the load and running schedule of our production units and afford priority to the production of products with high profitability and market demand.

Crude Oil

Crude oil is our primary raw material and the most significant raw material we purchase from outside sources. In 2018, crude oil accounted for approximately 51.39% of our total cost of sales. Accordingly, the supply and price of crude oil are key factors in determining our profitability.

 

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Supply and Transportation – All crude oil required by us, whether from domestic or foreign sources, is purchased through the channels of Sinopec Corp. as an agent. During 2018, we did not experience any significant problems in obtaining sufficient crude oil to meet our production needs.

Sinopec Group is responsible for preparing an annual plan on demand and supply for crude oil and petroleum products that forms the basis of the Chinese government’s annual “balancing plan” which effectively dictates our planned volume of crude oil processing in each year. Likewise, under the “balancing plan,” some of our petroleum products are designated for sale to the subsidiaries of Sinopec Group or other designated customers at market prices and we must consult Sinopec Group to sell elsewhere.

We have received confirmation from Sinopec Corp. that it will purchase on our behalf 15.05 million tons of imported crude oil in 2019. Sinopec Corp. has further confirmed that, subject to China’s national crude oil policy and our actual production needs, it will continue to purchase on our behalf sufficient quantities and appropriate types of crude oil, including domestic offshore and imported crude oil, to satisfy our anticipated annual needs. We anticipate that we will fully utilize our supply of crude oil in 2019. We believe that the mix of crude oil feedstock currently available is satisfactory for our 2019 production capacity and targets. Additionally, as part of China’s commitment at its accession into WTO, certain non-state-owned enterprises have been granted an increasing amount of quota to import crude oil. Although we do not expect to obtain crude oil through this channel in the foreseeable future due to the current crude oil supply system, this may provide us with an alternative source of crude oil supply.

Crude Oil Mix – Our refining equipment is designed to process certain grades of crude oil. Therefore, the origin and quality of the crude oil available can be important to our business. We believe that as we have been significantly increasing usage of imported crude oil, we will continue to be able to obtain from the market such imported crude oil that is compatible with our refining equipment. The overall mix of foreign versus domestic crude oil we process in 2019 will depend on a variety of factors, including the amount of future supply of domestic offshore crude oil and the availability, price, quality, processing profitability and compatibility with our refining capabilities of imported crude oil. Provided there are no significant modifications to the existing channels of crude oil supply, we believe that sufficient supplies of crude oil will be available on the domestic or international markets for our 2019 production capacity and goals.

In 2018, our crude oil was sourced as follows:

 

Domestic offshore crude oil

     0.59

Imported crude oil

     99.41
  

 

 

 

Total:

     100.00
  

 

 

 

We expect that we will continue to rely principally on foreign sources for our crude oil supply. However, we believe that we will be able to maintain our processing efficiency through technological adjustments of our equipment and quality control and that increased use of imported oil will not materially adversely impact our business and results of operations.

Foreign and domestic offshore crude oil is supplied by tanker and pipeline to our oil terminal wharf and oil storage tank. See Item 4.D. Property, Plants and Equipment -Wharfs.

In the past, we have not experienced disruption in our crude oil supply. We have on-site crude oil storage tanks at Chenshan wharf capable of storing approximately 300,000 cubic meters of crude oil, primarily to provide crude oil to our No. 2 atmosphere vacuum distillation facility. This crude oil storage can provide us with approximately a 2-week supply of crude oil. The crude oil for our No. 3 atmosphere vacuum distillation facility is mainly supplied from the Ningbo-Shanghai-Nanjing oil pipeline. Due to our ability to obtain crude oil from multiple sources, we are able to meet our normal requirements for crude oil.

Pricing – The price of domestic crude oil shall apply the market –adjusted rate and the imported crude oil is generally sold to us at prevailing international market prices. The average cost of imported crude oil and domestic offshore crude oil in 2018 was RMB3,806.39 (U.S.$468) per ton and RMB3,350.98 (U.S.$505) per ton, respectively. In 2018, we processed 14,302,900 tons of imported crude oil and 76,000 tons of domestic offshore crude oil (including 729,200 tons of crude oil processed on a sub-contract basis).

Until March 2001 the Chinese government implemented a unified pricing system for crude oil. Each month, the National Development and Reform Commission (“NDRC”) established an indicative price for each grade of domestic onshore crude oil based on comparable international market prices, inclusive of any duties that would have been imposed had the oil been imported. The actual price for domestic onshore oil would be such indicative price plus a surcharge. This surcharge was determined by China National Petroleum Corporation and Sinopec Group to reflect any transportation and other miscellaneous costs that would have been incurred in having the oil delivered to various refineries. Beginning March 2001, NDRC ceased publishing an indicative price. Instead, the indicative price for domestic onshore oil has been calculated and determined directly by China National Petroleum Corporation and Sinopec Group based on the principles and methods formerly applied by NDRC.

 

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On January 13, 2016, NDRC issued the Circular on Several Issues on Further Improving the Pricing Mechanism of Refined Oil (Fa Gai Jia Ge [2016] No. 64) to adjust the existing refined oil pricing mechanism, which include, among other things, (i) setting a price floor of U.S.$40 for the downward adjustment of the crude refined oil. When the international crude oil price drops to U.S.$40 per barrel or below, i.e., the adjustment price floor, the refined oil price in China shall no longer be adjusted downwards; and (ii) creating a reserve for risks associated with the adjustment and control of oil prices. When the international crude oil price drops to U.S.$40 per barrel or below, all unadjusted amount shall be allocated to the reserve above mentioned for use for the purpose of energy saving or reduction of emission, improving the oil quality and securing a safe supply of oil.

We purchase crude oil through Sinopec Corp. and its affiliates from the sources selected and in the quantities confirmed by the Company at market prices. On this basis, we believe that changes in crude oil prices should not have a material effect on our competitiveness with other domestic producers. Nevertheless, any increase in the price of crude oil could have an adverse impact on our profitability to the extent that we are unable to pass cost increases on to our customers.

In 2018, international crude oil prices presented an inverted V-shaped trend. In the first three quarters, the Brent crude oil price fluctuated and climbed to a recent high of US$86/barrel, driven by the effect of production reduction in major oil producing countries and a series of geopolitical risks. In the fourth quarter, the market began to worry that because of the global economic slowdown, the supply of crude oil would be excessive, the production of crude oil in the United States and Russia reached an all-time high, and the political pressure exerted by the United States on Saudi Arabia would curb the price of crude oil, etc, the oil prices declined sharply, hitting the lowest level in the year. By the end of 2018, Brent crude oil prices fell about 20% from the end of 2017, and American West Texas Intermediate (WTI) crude oil prices dropped by around 25% over the end of 2017. However, the average price of crude oil in 2018 was still higher than previous year’s level. In 2018, the average West Texas Intermediate crude oil price on the U.S. mercantile exchanges was U.S.$ 64.22/barrel, representing an increase of 26.12% from U.S.$ 50.92/barrel in 2017. In 2018, the average price of Brent crude oil on the London Intercontinental Exchange was U.S.$ 71.59/barrel, representing an increase of 30.66% from U.S.$ 54.79/barrel in 2017; and in 2018, the average price of crude oil in Dubai was U.S.$ 69.87/barrel, representing an increase of 30.72% from U.S.$ 53.45/barrel in 2017.

For the year ended December 31, 2018, we processed a total of 14.4 million tons of crude oil (including 0.7 million tons of crude oil processed on a sub-contract basis), representing a slight increase of 26,200 tons, or 0.18%, over the previous year. The average unit cost of crude oil processed (by us) in 2018 was RMB3,382.38/ton (RMB2,581.35/ton in 2017), representing an increase of 31.03% over the previous year. Our total cost of crude oil processed reached RMB46.17 billion in 2018, representing an increase of 40.31% as compared to RMB32.90 billion in 2017, which represented 51.39% of the total cost of sales.

Coal

Most of the coal used for electricity generation is purchased through a unified system of procurement by Sinopec Corp., and the rest is purchased directly by us from mines. Coal is transported by rail from the mines to Qinhuangdao port and shipped by barge to Jinshanwei where it is delivered to the plant via a wharf and conveyer system. Our cost is primarily dependent on coal price and transportation charges. Although coal may be purchased from alternative sources, railroad transportation must be obtained by allocation from the Chinese government on a monthly basis.

We expect that our total requirement for coal to generate electricity in 2019 will be approximately 2.00 million tons. In 2018, we consumed approximately 2.00 million tons of coal, an increase of 0.02 million tons from 2017 of 1.98 million tons.

Other Raw Materials

We produce most of the raw materials used as feedstock for our operations. If any of these raw materials, other than ethylene, becomes unavailable from internal production, we believe that there are sufficient alternative sources at reasonable prices and the unavailability of raw materials from internal sources will not have a significant effect on our operations and profitability.

We purchase some ancillary raw materials from outside sources. These raw materials include natural gas, methanol, ammonia, sodium hydroxide, sulfur, acetone, acrylonitrile, PTA, propylene and a variety of catalytic agents. In 2018, the total cost of these materials accounted for approximately 11.97% of our total cost of sales. We do not expect any difficulties in obtaining a supply of any of these ancillary raw materials in amounts sufficient to meet our needs in the foreseeable future.

 

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Sales and Marketing

Distribution

The distribution of our fuel products is subject to government regulations. We are required to sell certain refined products to the subsidiaries of Sinopec Group or customers designated by Sinopec Group. Since the second half of 2005, Sinopec Group has executed reforms to its system of selling petrochemical products and implemented what it refers to as a “Five Consolidations” strategy featuring “consolidated marketing strategy, consolidated promotion, consolidated logistics optimization, consolidated sales and consolidated branding.” As a result, the sales of our major petrochemical products are now conducted in a consolidated manner by sales agents designated by Sinopec Group. However, we have the autonomy to decide on the distribution method of our other products in accordance with market conditions. The products we sold in 2018 that were subject to planned distribution by Sinopec Group, sales by agents and sales based on our own discretion accounted for 60.71%, 35.22% and 4.07%, respectively, of the total products we sold.

We generally sell our products to larger trading companies and industrial users with whom we have long-standing relationships, including Sinopec Group or customers designated by Sinopec Group. We believe that the transition to sales of major petrochemical products by agents designated by Sinopec Group will increase our distribution efficiency, reduce horizontal competition and enhance our overall bargaining power, by allowing us to benefit from Sinopec Group’s extensive and highly specialized sales network. It will also allow us to focus more of our resources on reducing production costs and enhancing our technical support.

We use long term contracts to sell most of our products. We did not experience significant write-offs or defaults on our accounts receivable or other trading accounts in 2018. In general we managed to maintain a stable correlation between production and sales in 2018.

Product breakdown

Synthetic Fibers – In 2018, 24.5% of our synthetic fiber products were purchased by provincial and municipal government trading companies that act as intermediaries between us and end-users. No single customer accounted for more than 15% of our sales of synthetic fibers in 2018.

Resins and Plastics – In 2018, approximately 51.5% of our resins and plastics sales were to provincial and municipal government trading companies and approximately 48.5% were sold to industrial users. No single customer accounted for more than 5% of our sales of resins and plastics in 2018.

Intermediate Petrochemicals – We sell a variety of intermediate petrochemical products, among which the sale volume of petroleum benzene and paraxylene was relatively high in 2018. SECCO is the principal outside consumer of our petroleum benzene. In 2018, we sold 0.14 million tons of petroleum benzene to SECCO, representing 45.51% of our total 2018 production of such product.

Jiaxing Petrochemical Company Limited and Oriental Petrochemical (Shanghai) Corporation are the outside consumers of our paraxylene. In 2018, we sold 0.44 million tons and 0.06 million tons of paraxylene, representing 88.02% and 11.98% of our total 2018 production of such product, to Jiaxing Petrochemical Company Limited and Oriental Petrochemical (Shanghai) Corporation respectively, at prices mutually agreed upon by the relevant parties.

Petroleum Products – In 2018, our primary gasoline and diesel customer was Sinopec Huadong Sales Company Limited.

Trading of Petrochemical Products – In 2018, our largest trading customer for petrochemical products was Sinopec Chemical Commercial Holding Company Limited.

Major Suppliers and Customers

Our top five suppliers in 2018 were China International United Petroleum & Chemical Co., Ltd., Shengyuan Ji (Jiangsu) Industrial Co., Ltd., Shanghai International Holding Co., headquarter of Sinopec Petroleum Reserve Company Limited and Marubeni Corporation. Total procurement costs involving these five suppliers, which amounted to RMB52,709.9 million, accounted for 60.89% of our total procurement costs for the year. The procurement from the largest supplier amounted to RMB40,849.8 million, representing 47.19% of the total costs of purchases by our Group for the year.

Our top five customers in 2018 were East China Branch of Sinopec Sales Company Limited, China International United Petroleum & Chemical Co. Ltd., Hengli Petrochemical (Dalian) Co., Ltd., SECCO and Jiaxing Petrochemical Co., Ltd.. Total sales to these five customers amounted to RMB60,526.6 million, representing 56.17% of our total turnover for the year. Sales to our largest customer amounted to RMB42,492.8 million, representing 39.43% of our total revenue for the year.

 

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To the knowledge of the Board, among the suppliers and customers listed above, none of the Directors or shareholders of the Company (and their respective close associates) had any interests in Shengyuan Ji (Jiangsu) Industrial Co., Ltd., Shanghai International Holding Co., Marubeni Corporation and Hengli Petrochemical (Dalian) Co., Ltd. and Jiaxing Petrochemical Co., Ltd.. China International United Petroleum & Chemical Co. Ltd. and East China Branch of Sinopec Sales Company Limited are subsidiaries of Sinopec Corp., the controlling shareholder of the Company. SECCO is a subsidiary of Sinopec Corp., and an associated company of us.

Product Pricing

Most of our products are permitted to be sold at market prices. However, four types of petroleum products (gasoline, diesel and jet fuel, and liquefied petroleum gas) that we sell are subject to varying degrees of government pricing control and are, accordingly, sold at prices set by the Chinese government, which may sometimes be below our costs. In 2016, 2017 and 2018, approximately 31.19%, 36.95% and 41.62% of our net sales, respectively, were from products subject to price controls. Price controls may apply to these products in various ways. Such price controls are sometimes applied exclusively to our products, exclusively to our competitors’ products or sometimes applied to neither our products nor our competitors’ products. The Chinese government has adopted changes to the pricing mechanism for domestic refined oil to be indirectly aligned with international crude oil prices in a controlled manner through use of certain formula(s).

For products that are not subject to price controls, we set our prices with reference to prices in the major Chinese chemical commodities markets in Shanghai and other parts of China. We also monitor pricing developments in major international commodities markets, particularly in Southeast Asia. In most cases, we revise product prices each month, or more frequently during periods of price volatility. Due to our economies of scale, brand recognition and high quality of products, we believe that we can continue to price our products competitively.

Competition

We compete principally in the Chinese domestic market where 82.2% of our products in volume were sold in 2018. In addition, we believe the limitation in transportation infrastructure in China and the difficulties involved in transporting petrochemical products force petrochemical companies in China, including us, to compete primarily on a regional basis. In 2018, 78.6% of our net sales were made to customers in Eastern China.

Our Competitive Advantages

We believe our primary competitive advantages are quality of product, pricing, brand recognition, geographic location and vertical integration. We have received many prizes and awards from both central and local government authorities for high product quality. Furthermore, our location on the outskirts of the densely populated and highly industrialized Shanghai area places us in close proximity to many of our customers. This location also gives us convenient access to ocean transport and inland waterways, which results in a competitive advantage in terms of transportation cost and reliability and punctuality of product delivery.

We believe that our vertical integration in business model represents a significant competitive advantage over non-integrated competitors in China, both in terms of reliability in delivery and price. For most downstream products, our vertical integration results in significant savings on transportation and storage costs which would be incurred by less vertically integrated facilities.

The Domestic Competitive Environment

Prior to 1993, because distribution and pricing of our products were determined in accordance with the state plan, we did not operate in a competitive environment. With the liberalization of control over pricing and product allocation by the Chinese government, competition in the domestic market has been gradually increasing. At the same time, Chinese private enterprises have gradually overcome technological and funding barriers to extend their business from the downstream processing sector to the upstream petrochemical field. These enterprises have advantages in many areas such as flexibility in operation costs, preferential policy treatment and regional presence, and may use these advantages to compete with us in markets for our products.

Foreign Competition and the World Trade Organization

China joined the WTO on December 11, 2001. As part of its membership commitments, China agreed to eliminate certain tariff and non-tariff barriers to foreign competition in the domestic petrochemical industry that benefited us in the past. In accordance with its WTO commitments, China:

 

   

has reduced tariffs on imported petrochemicals products that compete with ours;

 

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increased levels of permitted foreign investment in the domestic petrochemicals industry, allowing foreign investors to own 100% of a domestic petrochemicals company from December 11, 2004;

 

   

has gradually relaxed restrictions on the import of crude oil by non-state owned companies;

 

   

has granted foreign-owned companies the right to import petrochemical products; and

 

   

has permitted foreign-owned companies to distribute and market fuel products in both retail and wholesale markets in China.

As a result of these measures, we are facing increasing competition from foreign companies and imports. On the other hand, we think that China’s WTO entry and increasing foreign investments in China have contributed and will continue to contribute to the growth of investment and business in China, resulting in an increase in sales opportunities for us.

Our Competitive Position

In the following discussion, internal consumption of resins and intermediate petrochemicals produced by integrated manufacturers in the production of downstream products are treated as sales.

Synthetic Fibers

In 2018, we had an approximate 0.44% share of total domestic polyester and acrylic consumption while imports had an approximate 1.31% share.

 

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The following table summarizes the competitive position of our principal synthetic fibers according to domestic sales in 2018.

 

Product

   Our share of
domestic
consumption
     Our
competitive
ranking
     Location of
principal
domestic
competitor
   Principal
domestic
competitor’s
share of
consumption
     Imports’
share of
consumption
 
     (%)                  (%)      (%)  

Acrylic

     15.33        2      Jilin Province      33.70        20.23  

Sources: Zhuochuang Information (www.chem99.com).

Resins and Plastics

In 2018, we had an approximate 2.93% share of total domestic resins and plastics consumption while imports had an approximate 25.13% share. The following table summarizes the competitive position of our principal resins and plastics products according to domestic sales in 2018.

 

Product

   Our share of
domestic
consumption
     Our
competitive
ranking
     Location of
principal
domestic
competitor
   Principal
Domestic
competitor’s
Share of
consumption
     Imports’
share of
consumption
 
     (%)                  (%)      (%)  

Polyester chips

     4.98        3      Zhejiang Province      6.15        5.47  

Polyethylene

     1.11        20      Guangdong Province      3.03        47.00  

Polypropylene

     1.98        15      Zhejiang Province      2.17        13.73  

Sources: Zhuochuang Information (www.chem99.com).

Intermediate Petrochemicals

In 2018, we were one of the largest sellers of intermediate petrochemicals in China, holding an approximate 2.16% share of total domestic consumption, while imports had an approximate 26.67% share of domestic consumption. Ethylene glycol, paraxylene, benzene and butadiene are our major intermediate petrochemical products. In 2018, we were a major producer of ethylene glycol, paraxylene and benzene in China. The following table summarizes the competitive position of our principal intermediate petrochemicals according to domestic sales in 2018.

 

Product

   Our share of
domestic
consumption
     Our
competitive
ranking
     Location of
principal
domestic
competitor
   Principal
Domestic
competitor’s
Share of
consumption
     Imports’
share of
consumption
 
     (%)                  (%)      (%)  

Ethylene glycol

     1.84        7      Zhejiang Province      2.79        59.08  

Paraxylene

     1.86        8      Zhejiang Province      5.77        57.38  

Benzene

     2.64        8      Jiangsu Province      3.24        17.00  

Butadiene

     3.23        16      Zhejiang Province      4.19        9.90  

Sources: Zhuochuang Information (www.chem99.com).

Petroleum Products

In 2018, we had an approximate 2.45% share of total domestic petroleum products market while imports had an approximate 6.40% share. Although we have one of the largest refining capabilities in China, we use most of our refining capacity to produce feedstock for our own downstream processing of petrochemical products.

 

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The domestic markets for each of our major petroleum products are geographically concentrated because these markets tend to be highly localized with individual producers controlling a large share of the markets in their locality. In 2018, we sold approximately 86.60% of our petroleum products in Eastern China.

Investments

We established SECCO, a Sino-foreign equity joint venture, in late 2001 with BP Chemicals East China Investments Limited (“BP”) and Sinopec Corp., primarily to build and operate a 900,000 ton Rated Capacity ethylene petrochemical manufacturing facility. SECCO completed construction and commenced its manufacturing operations in 2005. In 2009, SECCO had expanded the capacity of certain facilities to 1,090,000 tons of ethylene per annum. We own 20% of the equity interest of SECCO, while BP and Sinopec Corp. own 50% and 30% interests in SECCO, respectively. In October 2017, BP transferred its 50% equity interests in SECCO to a subsidiary of Sinopec Corp., Sinopec Shanghai Gaoqiao Petrochemical Co., Ltd.. As a result of equity transfer, we, Sinopec Corp. and Sinopec Shanghai Gaoqiao Petrochemical Co., Ltd. own 20%, 30% and 50% interests in SECCO, respectively, and SECCO was converted into a PRC domestic company. The registered capital of SECCO is RMB7,800,811,272.00, all of which had been fully contributed by the shareholders in accordance with their equity percentages in SECCO as of October 18, 2017.

In 2018, SECCO achieved a sales revenue of RMB26.32 billion (U.S.$3.83 billion), representing a decrease of 9.80% from its sales revenue of RMB29.18 billion (U.S.$4.24 billion) in 2017. SECCO produced 951,000 tons of ethylene in 2018, representing a decrease of 294,000 tons over the previous year. SECCO had a net profit of RMB3.23 billion (U.S.$469.8 million) in 2018, representing a decrease of RMB1.97 billion (U.S.$286.5 million) over the previous year.

Environmental Protection

We are subject to national and local environmental protection regulations, which currently impose a graduated schedule of fees for the discharge of waste substances, require the payment of fines for pollution and provide for the forced closure of any facility that fails to comply with orders requiring it to cease or cure certain environmentally damaging practices. We have established environmental protection systems which consist of pollution control facilities to treat certain of our waste materials and to safeguard against accidents. Because of the nature of our business, however, we store a significant amount of waste substances in the plants and discharge them into the environment after making such waste substances meet the discharge standards.

We were subject to various administrative penalties for its violations of the relevant PRC environmental laws and regulations in the past three years. In 2018, we were subject to three administrative penalties for violations of the relevant PRC environmental laws and regulations, with fines in a total of RMB0.6 million.

We believe our environmental protection facilities and systems are adequate for the existing national and local environmental protection regulations. In 2018, we continued to carry out various energy-saving and emissions reduction measures in accordance with the relevant domestic energy conservation and emissions reduction requirements, and achieved all energy-saving and emissions reduction goals set by the Chinese government during the year.

During 2018, the Company’s overall level of energy consumption per RMB10,000 of product value was 0.760 ton of standard coal, decreased by 1.17% from the previous year. As compared with 2017, the total volume of chemical oxygen demand discharged was decreased 24.58%, while that of ammonia nitrogen, sulfur dioxide, nitrogen oxides and volatile organic compounds declined by 39.20%, 64.01%, 39.96% and 16.63%, respectively. At the same time, the compliance rate of waste water and waste gas emissions reached 100%, and all hazardous waste was disposed of properly at 100%. The average heat efficiency of heaters increased 0.13% to 92.67% due to the load reduction.

Insurance

We currently participate in a package of insurance coverage plan through Sinopec Group as its controlled subsidiary, which, as of December 31, 2018, was approximately RMB43.3 billion (U.S.$6.30 billion) on our property and facilities and approximately RMB3.0 billion (U.S.$0.44 billion) on our inventory. In addition, we maintain insurance policies for such assets as engineering construction projects and products in transit with third-party’s commercial insurance company. The Sinopec Group insurance coverage is compulsory and applies to all enterprises controlled by Sinopec Group, pursuant to guidelines of Sinopec Group which may not be legally enforceable against Sinopec Group. Thus, there are uncertainties under Chinese law as to what percentage insurance claims we may demand against Sinopec Group.

We carry a third party liability insurance with a coverage capped at RMB50 million to cover claims, subject to deductibles, in respect of personal injury, property or environmental damage arising from accidents on our property or relating to our operations other than on our transportation vehicles. We have not had a third party liability claim filed against us during the last five years. Since business interruption insurance is not customary in China, we do not carry such insurance.

 

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Cyber Security

We have implemented policies and procedures intended to prevent cyber incidents and to identify and respond to unauthorized intrusions. With respect to our internal internet policies on cybersecurity, we have established an information safety management system and issued internal regulations on cybersecurity, internal hardware and data safety systems and we are gradually implementing measures relating to the office environment information safety management, information system access control, protection from any malicious software, and internal review and audit of information safety risks, in order to prevent loss of information due to cybersecurity incidents, network outages or hardware incidents. In 2018, we did not experience any material cybersecurity incidents or related losses.

Government Regulations

Following the development of several major oil fields and a growth in demand for petroleum and petrochemical products in China in the early 1970s, the Chinese government organized petroleum refining and petrochemical production and processing plants into large complexes that would permit integrated production of petroleum products, intermediate petrochemicals, resins and plastics, and synthetic fibers.

Although the Chinese government is liberalizing its control over the petroleum and petrochemical industries in China, significant government regulations that limit the business strategies available to us remain. Central government agencies and their local or provincial level counterparts do not own or directly control our production plants. However, they exercise significant control over the petrochemical industry in areas such as pricing, production quotas, quality standards, allocation of raw materials and finished products, allocation of foreign exchange and Renminbi loans for capital construction projects. The Chinese government’s intentions with respect to the development objectives and policies for the petrochemical industry are stated as part of the Five Year Plans for National Economic and Social Development formulated every five years. These plans at both the national and Shanghai municipality level have identified the petrochemical industry as a “development industry.”

Historically, we were supervised by Sinopec, a ministry-level enterprise under the direct supervision of the State Council, China’s highest administrative body. As a result of a governmental restructuring in 1998, we became subject to the administration of the State Bureau of Petroleum and Chemical Industry. After its functions were terminated in March 2001, we became subject to the administration of the State Economic and Trade Commission. The State Economic and Trade Commission was dissolved in March 2003 and its function in directing the reform and management of state-owned enterprises was assumed by the State-owned Assets Supervision and Administration Commission, its function in industry planning and policy making was assumed by NDRC, and its functions in administering domestic trade, coordinating and implementing import and export plans of critical industrial products and raw materials were assumed by the Ministry of Commerce. Since then, we have been subject to the industrial oversight of these three governmental agencies at the national level.

As part of this restructuring, Sinopec was also restructured in July 1998. The succeeding entity, Sinopec Group, was authorized to conduct petrochemical business and to control the exploration of crude oil and natural gas and crude oil refining, mainly in the southern and eastern regions of China. China Petroleum and Natural Gas Corporation, another major state-owned petrochemical company, was also restructured, renamed China National Petroleum Corporation and authorized to conduct the same type of business, mainly in the northern and western regions of China. On December 31, 1999, Sinopec Group completed a reorganization pursuant to which certain of its core oil and gas and chemical operations and businesses and related assets and liabilities were transferred to its subsidiary, Sinopec Corp., currently our controlling shareholder.

Business Operations Relating to Iran and other U.S. Sanctioned Countries

In 2018, we sourced a small amount of crude oil from Iran through a wholly-owned subsidiary of Sinopec Corp., our controlling shareholder, and such amount represented 1.39% of our total purchase volume of crude oil. Details of the purchase volume and purchase expenses are provided below:

 

     Volume
(thousand  tons)
     % of total      Amount
(RMB  billion)
     % of total  

Iran

     189.28        1.39        0.67        1.46  

Others

     13,429.22        98.61        44.97        98.54  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     13,618.50        100.00        45.64        100.00  
  

 

 

    

 

 

    

 

 

    

 

 

 

In addition, based on feedback to our inquiries to Sinopec Corp., in 2018, it sourced approximately 8.0% of its total refinery throughputs of crude oil from Iran. In additional, it engaged in a small amount of trading activities with Iranian companies, generating revenue and net profit of U.S.$526.6 million and U.S.$4.2 million, respectively. These amounts represented 0.121% and 0.035% of Sinopec Corp.’s annual operating revenue and net profit, respectively.

 

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Based on feedback to our inquiries to Sinopec Group, the controlling shareholder of Sinopec Corp., Sinopec Group engaged in limited business activities in Iran such as providing engineering services and designs. Sales revenue from these business activities accounted for 0.041% of Sinopec Group’s total unaudited sales revenue in 2018.

We have no performance obligations under any contract to continue to purchase crude oil sourced from Iran in 2019.

C. Organizational Structure.

Our Subsidiaries

As of December 31, 2018, our significant subsidiaries are listed below. All of the subsidiaries named below are incorporated in China.

 

Subsidiary Name

   Our ownership interest     Our voting power  
     (%)       (%)  

Shanghai Petrochemical Investment Development Company Limited

     100.00       100.00  

China Jinshan Associated Trading Corporation

     67.33       67.33  

Shanghai Jinchang Engineering Plastics Company Limited

     74.25       71.43  

Shanghai Golden Phillips Petrochemical Company Limited

     100.00       100.00  

Zhejiang Jin Yong Acrylic Fiber Company Limited

     75.00       75.00  

Shanghai Jinshan Trading Corporation

     67.33       67.33  

Sinopec Corp.

We are a member of a group (defined as a parent and all its subsidiaries) for purposes of the disclosure rules of the Securities and Exchange Commission. The parent company of this group is Sinopec Corp., our controlling shareholder. Sinopec Corp. is operated by separate management and from time to time uses its interest as a shareholder to direct our policies and management.

Sinopec Corp. is the largest integrated petroleum and petrochemical company in China and one of the largest in Asia in terms of operating revenues. Sinopec Corp. is one of the largest refiners, distributors and marketers of gasoline, diesel, jet fuel and most other major refined products in China and Asia with principal markets in the eastern and southern regions of China. Sinopec Corp. is also a producer and distributor of petrochemicals in China and additionally explores, develops and produces crude oil and natural gas principally to supply its refining and chemical operations.

Subsidiaries

Details of Sinopec Corp.’s principal subsidiaries are given in the table below. Except for Sinopec Kantons Holdings Limited and Sinopec Overseas Investment Holding Limited, which are incorporated in Bermuda and Hong Kong respectively, all of the below principal subsidiaries are incorporated in China.

 

                 Percentage of       

Name of Company

   Particulars
of issued
capital
     Type of
legal
entity
   equity held by
Sinopec Corp.
and its
subsidiary
    

Principal activities

     (millions)           (%)       

Sinopec International Petroleum Exploration and Production Company Limited

     RMB8,000      Limited
company
     100.00      Investment in exploration, development, production, sales of petroleum and natural gas and other areas

Sinopec Great Wall Energy and Chemical Company Limited

     RMB22,761      Limited
company
     100.00      Coal chemical industry investment management, production and sale of coal chemical products

Sinopec Yangzi Petrochemical Company Limited

     RMB15,651      Limited
company
     100.00      Manufacturing of intermediate petrochemical products and petroleum products

Sinopec Pipeline Storage & Transportation Company Limited

     RMB12,000      Limited
company
     100.00      Pipeline storage and transportation of crude oil

Sinopec Yizheng Chemical Fiber Limited Liability Company

     RMB4,000      Limited
company
     100.00      Production and sale of polyester chips and polyester fibers

 

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Table of Contents
                Percentage of       

Name of Company

  

Particulars

of issued

capital

   Type of
legal
entity
   equity held by
Sinopec Corp.
and its
subsidiary
    

Principal activities

     (millions)         (%)       

Sinopec Lubricant Company Limited

   RMB3,374    Limited
company
     100.00      Production and sale of lubricant products, lubricant base oil, and petrochemical materials

Sinopec Qingdao Petrochemical Company Limited

   RMB1,595    Limited
company
     100.00      Manufacturing of intermediate petrochemical products and petroleum products

Sinopec Chemical Sales Company Limited

   RMB1,000    Limited
company
     100.00      Trading of petrochemical products

China International United Petroleum & Chemical Company Limited

   RMB3,000    Limited
company
     100.00      Trading of crude oil and petrochemical products

Sinopec Overseas Investment Holding Limited

   U.S.$1,662    Limited
company
     100.00      Overseas investment and management of equities

Sinopec Catalyst Company Limited

   RMB1,500    Limited
company
     100.00      Production and sale of catalyst products

China Petrochemical International Company Limited

   RMB1,400    Limited
company
     100.00      Trading of petrochemical products

Sinopec Beihai Refining and Chemical Limited Liability Company

   RMB5,294    Limited
company
     98.98      Import and processing of crude oil, production, storage and sales of petroleum and petrochemical products

Sinopec Qingdao Refining and Chemical Company Limited

   RMB5,000    Limited
company
     85.00      Manufacturing of intermediate petrochemical products and petroleum products

Sinopec Hainan Refining & Chemical Company Limited

   RMB3,986    Limited
company
     75.00      Manufacturing of intermediate petrochemical products and petroleum products

Sinopec Marketing Co.

   RMB28,403    Limited
company
     70.42      Marketing and distribution of refined petroleum products

Shanghai SECCO Petrochemical Company Limited

   RMB7,801    Limited
company
     67.60      Manufacturing and sales of petrochemical products

Sinopec-SK (Wuhan) Petrochemical Company Ltd.

   RMB6,270    Limited
company
     65.00      Production, sales, research and development of ethylene and downstream derivatives

Sinopec Kantons Holdings Limited

   HK$248    Limited
company
     60.33      Crude oil wharf services and natural gas pipeline transportation services

Sinopec Shanghai Gaoqiao Petrochemical Company Limited

   RMB10,000    Limited
company
     55.00      Manufacturing of intermediate petrochemical products and petroleum products

Sinopec Shanghai Petrochemical Company Limited

   RMB10,824    Limited
company
     50.44      Manufacturing of synthetic fibers, Resin and plastics, intermediate petrochemical products and petroleum products

Fujian Petrochemical Company Limited

   RMB8,140    Limited
company
     50.00      Manufacturing of plastics, intermediate petrochemical products and petroleum products

D. Property, Plant and Equipment.

Real Property

Our corporate headquarters and production facilities, occupying an area of approximately 7.03 square kilometers, are located in Jinshanwei, approximately 75 kilometers from downtown Shanghai. The total gross floor area of all our production and other facilities is approximately 2 million square meters. We own all of the buildings and facilities located at the site. We have the right to use the land upon which our buildings and facilities are located for a term of 50 years beginning in 1993 without the payment of any rent or usage fees other than land use taxes. We also have the right to transfer our land use rights to third parties without any payment to the Chinese government, so long as the use of the land remains the same as when the land use right was granted to us and the terms of the land use right we received will be applicable to any transferees.

 

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Plants and Facilities

The following tables set forth the Rated Capacities of our principal production units. The actual production capacity of a production unit can exceed the Rated Capacity and may be further increased without increasing the Rated Capacity through technical improvements or expansion of such unit. The utilization rate of a production unit is based upon the Rated Capacity rather than actual production capacity and may vary with technical enhancements, changes in production management and scheduling of maintenance.

The following table sets forth the Rated Capacities and weighted average utilization rates of our principal production units for petroleum products and intermediate petrochemicals in 2018:

 

Production Unit (number of units)

   Rated Capacity (tons)      Utilization Rate (%)  

Crude oil distillation units (2)

     14,000,000        93.80  

Hydrocracker (2)

     3,000,000        90.55  

Ethylene unit

     700,000        107.03  

*Aromatics units (2)

     835,000        97.29  

PTA unit

     400,000        83.64  

Ethylene oxide / ethylene glycol units (2)

     525,000        93.52  

Cracking and catalyzing

     3,500,000        99.56  

Delayed coking (2)

     2,200,000        91.87  

Diesel oil hydrogenation units (2)

     3,850,000        92.79  

Acrylonitrile unit

     650,000        85.56  

C5 segregation units (2)

     205,000        114.00  

 

*

The No. 1 paraxylene unit (235,000 tons/year) ceased operating during 2018, and the average utilization rate was based on production of the No.2. paraxylene unit.

Our two crude oil distillation units were designed and built in China. In 2018, the actual quantity of crude oil we processed was approximately 14.4 million tons. Our hydrocracker uses technology from United Oil Products Corporation of the United States. Our second ethylene unit uses technology from ABB Lummus Global Inc. of the United States. The aromatics unit uses technology from Universal Oil Products Corporation of the United States. The PTA unit uses technology from Mitsui Petrochemical Corporation of Japan. The ethylene oxide / ethylene glycol unit was constructed using technology from Scientific Design Corporation of the United States.

The following table sets forth the Rated Capacities and weighted average utilization rates of our principal production units for resins and plastics and synthetic fibers in 2018:

 

Production Unit (number of units)

   Rated Capacity (tons)      Utilization Rate (%)  

*Polyester units (3)

     550,000        90.39  

**Polyester staple units (2)

     158,000        94.12  

Polyester filament unit

     21,000        85.66  

Acrylic staple fiber units (3)

     141,000        111.28  

Polypropylene units (3)

     408,000        98.13  

Polypropylene units (3)

     400,000        99.63  

Vinyl acetate unit

     86,100        89.92  

 

*

The No.3 polyester unit (100,000 tons/year) ceased operating on September 1, 2013, and the average utilization rate was based on the production of No.1 and the No.2 polyester units.

**

The No.1 polyester staple unit (4,000 tone/year) ceased operating during 2018, and the average utilization rate was based on the production of the No.2 polyester staple unit.

Our polyester units use technology from Kanebo Corporation of Japan and E.I. Dupont DeNemours & Co. Inc. of the United States. The polyester staple units use technology from Teijin of Japan and Jima of Germany as well as Chinese technology. The polyester filament units use technology from Murata Manufacturing Company Limited and Teijin Corporation of Japan, Barmag AG of Germany and E.I. Dupont DeNemours & Co. Inc.. We produce polyethylene in three units; two LDPE units which use technology from Mitsubishi Petrochemical Corporation of Japan and BASF LDPE of Germany; and one high-density polypropylene unit uses the Borstar bimodal polyethylene technology from Northern European Chemical Engineering Company.

The acrylic fiber units were built domestically, based on a design of equipment which had been imported into China in the 1960s and that we substantially improved. In 1996, we acquired two additional acrylic fiber units which use technology from the Kawasaki Corporation of Japan. We produce polypropylene in three identical units using technology from Himont Corporation of Italy. The PVA unit uses technology acquired from Kuraray Corporation of Japan.

 

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Power Facilities

Our electricity requirements are currently supplied by our own 425 megawatt coal-fired power plant and petroleum coke power plant. These power plants are designed to provide sufficient power supply needed by our facilities. We are connected to the Eastern China electricity grid, which provides a back-up source of power in case of a shortfall in our self-generated power supply.

Other Facilities

We also have facilities to produce industrial water, steam, hydrogen, oxygen and nitrogen which we use in our production facilities.

Maintenance

We engage in production stoppages for facility maintenance and repairs and implement our routine monthly maintenance and repair plans according to the needs of our production facilities, our requirements for product quality, and our commitment to security and environmental protection. The technicians in our facility management department have responsibility for the daily management of maintenance and repair work. We also outsource facility maintenance and repair projects to qualified contractors.

In 2018, we continued to place emphasis on quality, health, safety & environment (“QHSE”) by implementing a QHSE responsibility system at each level to strengthen the safety supervision at our operations and construction sites and to improve the QHSE-related performance appraisal. We believe these efforts have resulted in continued improvement in our safety and environmental protection practices. We did not encounter serious accidents involving production safety, environmental pollution or occupational poisoning in 2018. Among the 71 major indicators that measure technical and economic capacity, 38 exceeded those of the previous year while 29 reached advanced levels in our industry.

Transportation-Related Fixtures

Crude oil, our principal raw material, is transported by pipeline and oil tanker to a crude oil terminal wharf and storage tanks. Our products leave the factory by water, rail, road and pipeline. In 2018, approximately 88.86% of our products by sales volume were collected by customers from our premises, and we delivered the balance. Our major ethylene customer is supplied via a pipeline. Some of the products collected by customers were also transported using our facilities.

Wharfs

We own one chemical wharf at Jinshan with five berths of 3,000, 5,000, 10,000, 10,000 and 30,000 tons. We also own a connecting pipeline capable of loading up to approximately 4.6 million tons of chemical products annually onto ocean-going barges and ships. In 2018, products representing 26.90% of total sales volume were shipped from the wharf. We also have a facility to load ships and barges which use the region’s inland waterways. In 2018, products representing 1.5% of total sales volume were shipped from these facilities. We believe that we have a competitive advantage because a greater proportion of our products are shipped by water as opposed to rail and truck, which is subject to capacity constraints on China’s rail and highway networks. Additionally, we own facilities for receiving crude oil and coal at docks that we own and transporting such materials by pipeline or conveyor to our production facilities.

Rail

We own a railroad loading depot with an annual capacity of 500,000 tons. The depot provides access via a spur line to the national Chinese railway system. In 2018, products representing 0.34% of total sales volume were transported from the factory by rail.

 

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Capital Expansion Program

We have planned or started a number of other principal capital expansion projects. In 2016, 2017 and 2018, we invested RMB0.8 billion, RMB1.4 billion and RMB1.0 billion, respectively, in capital expansion projects. We expect that total investment in the projects described below will be approximately RMB1.5 billion in 2019.

Refining Capacity Expansion

In 2016, we launched No. 2 Diesel Hydrogenation Unit Reconstruction and Diesel Quality Upgrading Project so as to further improve the quality of oil product and perfect oil product structure. In 2017, we launched gasoline upgrade project involving an alkylation plant with a capacity of 400,000 tons/year, which is anticipated to complete in 2019.

Expansion of New and Existing Downstream Petrochemical Products

As a large-scale integrated petrochemical enterprise, we produce a wide range of intermediate and downstream petrochemical products. In order to adapt to the changes in the world’s energy market and the development trends in the oil and chemical products market in China, we will seek to further integrate the existing refining, olefin and aromatic processing chains, and further develop our chemical business.

To take advantage of our specialty in producing acrylics fiber and to improve our industrial structure and upgrade certain products, we plan to construct a carbon fiber project with a capacity of 1,500 tons/year. Sinopec Corp. approved the basic design for this project in December 2010; pile foundation construction was commenced in December 2010; civil engineering was commenced in February 2011 and one series of facilities under phase I were launched for trial operation in 2012. Subject to the market conditions, we plan to commence the construction of Phase II of the Project in August 2019.

Upgrading Environmental Protection Facilities Projects

To enhance our capacity for sustainable development and response to the government requirements of environmental protection, we intend to increase our capital expenditures on a series of environmental projects, mainly including oil cleaning project with 400,000 tons/year clean gasoline component unit, transformation project for “ultra clean discharge” work in cogeneration unit, transformation of No. 2 olefin cracking burner, and Thermoelectric Department’s renovation project involving furnaces Nos. 3 and 4 meeting emission standards. There projects are anticipated to finish in 2019.

 

TEM 4A.

UNRESOLVED STAFF COMMENTS.

None.

 

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS.

General

You should read the following discussion and analysis in conjunction with our audited financial statements and our selected financial data, in each case, together with the accompanying notes included elsewhere in this annual report. Our audited financial statements have been prepared in accordance with IFRS, as issued by the International Accounting Standards Board.

Critical Accounting Policies

The following discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements. The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during 2018. Our financial condition and results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of our financial statements. We based our assumptions and estimates on historical experience and on various other assumptions that we believe to be reasonable and which form the basis for making judgments about matters that are not readily apparent from other sources. On an on-going basis, our management evaluates its estimates. Actual results may differ from those estimates as facts, circumstances and conditions change.

Our principal accounting policies are set forth in Note 2 to our consolidated financial statements and the changes in accounting policies are set forth in Note 3. The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing our financial statements. We believe the following critical accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.

 

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Table of Contents

Impairments for long-lived assets

Assets that have an indefinite useful life must be tested annually for impairment. Long term assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. In determining the value in use, expected cash flows generated by the asset or the cash-generating unit are discounted to their present value. We use all readily available information in determining an amount that is a reasonable approximation of recoverable amount, including estimates based on reasonable and supportable assumptions and projections of sale volume, selling price and amount of operating costs. During the years ended December 31, 2016, 2017 and 2018, we recognized impairment charges on property, plant and equipment and other long-term assets of RMB254.2 million, RMB118.2 million and RMB82.7 million, respectively.

Depreciation

Property, plant and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets, after taking into account the estimated residual value. We review the estimated useful lives of the assets annually in order to determine the amount of depreciation expense to be recorded during any reporting period. The useful lives are based on our historical experience with similar assets, taking into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates. There were no significant changes in these estimates during the years ended December 31, 2016, 2017 and 2018.

Inventory management

At the beginning of every year, the management team determines the appropriate levels of inventories to maintain on the basis of annual production and operating plans, financial budgets and market conditions. Every six months, the management team conducts an inventory status analysis in conjunction with its supply, production, marketing, financial and other departments and develops a plan for keeping inventories at an appropriate level.

Management assesses the realizability of our inventories based on the estimates of the net realizable value of the inventories at the end of each reporting period. Net realizable value represents the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. We base the estimates on all available information, including the current market prices of the finished goods and raw materials and historical operating costs. Any excess of the cost over the net realizable value of each item of inventories is recognized as a provision for diminution in the value of inventories. If the actual selling prices were to be lower or the costs of completion were to be higher than the estimates, the actual allowance for diminution in value of inventories could be higher than estimated. In addition, management periodically reviews inventory aging information to assess if any obsolete inventories are required to be written down at the period end. Based on our assessments, we recorded write-down of inventories of RMB76 million, RMB60 million and RMB48 million, respectively, for the years ended December 31, 2016, 2017 and 2018. Barring unforeseeable changes that may occur to the current economic environment in either China or worldwide, our management does not anticipate encountering major difficulties with our attempt to realize by the end of 2019 the bulk of our inventories as of December 31, 2018 after deducting for diminution in values.

Recognition of deferred tax assets

There are many transactions and events for which the ultimate tax determination is uncertain during the ordinary course of business. Significant judgment is required from us in determining the provision for income taxes in each of these jurisdictions. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

Deferred tax assets are recognized in respect of temporary deductible differences and the carry forward of unused tax losses. We recognize deferred tax assets only to the extent that it is probable that future taxable profit will be available against the assets which can be realized or utilized. At the end of each reporting period, we assess whether previously unrecognized deferred tax assets should be recognized. The Company recognizes a previously unrecognized deferred tax asset to the extent that it is probable that future taxable profit will allow the deferred tax asset to be utilized. In addition, we assess the carrying amount of deferred tax assets that are recognized at the end of each reporting period. The Company reduces the carrying amount of a deferred tax asset to the extent that it is no longer probable that sufficient taxable profit will be available for the deferred tax asset to be utilized.

In making the assessment of whether it is probable the Company will realize or utilize the deferred tax assets, we primarily rely on the generation of future taxable income to support the recognition of deferred tax assets. In order to fully utilize the deferred tax assets recognized at December 31, 2018, the Company would need to generate future taxable income of at least RMB476 million.

 

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We believe that it is probable that the Company will generate sufficient taxable income before the unused tax losses expire. Favorable factors include the enlargement of crude oil refinery capacity of the Company and the new pricing mechanism in the PRC for setting gasoline and diesel prices to more closely track crude oil costs. Uncertainties which could affect the estimated taxable income include various factors such as the volatility of international crude oil prices and the cyclical nature of the petroleum and petrochemical industry. Upon changes in facts and circumstances, management may conclude that deferred tax assets may not be realizable in future periods, resulting in a future reduction in the carrying amount of a deferred tax asset.

Measurement of expected credit losses

The impairment provisions for trade receivables and other receivables are based on assumptions about the expected loss rates. We use judgment in making these assumptions and selecting the inputs to the impairment calculation, based on our historical information, existing market conditions as well as forward looking estimates at the end of each reporting period. Changes in these assumptions and estimates could materially affect the result of the assessment and may be necessary to make additional impairment charge to net impairment losses on financial assets.

A. Results of Operations

Government Policies

The impact of government economic, fiscal, and monetary policies can materially affect our financial condition, results of operations, and cash flows (see Item 3. Key Information - D. Risk Factors).

In particular, we consume large amounts of crude oil to manufacture our products of which more than 95% is typically imported. We attempt to mitigate the effect of increased costs due to rising crude oil prices. However, our ability to pass on these increased costs to our customers is dependent on government regulations, among other factors. Given that the increase of the sales prices of our products can lag behind the increase of crude oil costs, we sometimes fail to completely cover the increased costs by increasing our sales prices, particularly where government regulations restrict the prices of certain of our fuel products such as gasoline, diesel and jet fuel, and liquefied petroleum gas. In 2016, 2017 and 2018, approximately 31.19%, 36.95% and 41.62% of our net sales were from such products subject to price controls. Although the current price-setting mechanism for refined petroleum products in China allows the Chinese government to adjust price in the PRC market when the average international crude oil price fluctuates beyond certain levels within a certain time period (see Item 4. Information on the Company – B. Business Overview – Product Pricing), the Chinese government still retains discretion as to whether or when to adjust the prices of the refined oil products. The Chinese government generally exercises certain price control over refined oil products once international crude oil prices experience a sustained rise or become significantly volatile. Moreover, the Chinese government controls the distribution of many fuel products in China. For instance, some of our fuel products are required to be sold to designated distributors (such as the subsidiaries of Sinopec Corp.). Because we cannot freely sell our fuel products to take advantage of opportunities for higher prices, we may not be able to fully cover increases in crude oil prices by increases in the sale prices of our products, which has had and will continue to have a material adverse effect on our financial condition, results of operations and cash flows.

In addition, the exchange rates between the Renminbi and the U.S. Dollar or other foreign currencies are affected by Chinese government policies. In particular, the value of the Renminbi is only permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. The Chinese government continues to receive significant international pressure to liberalize its currency policy. Most of our revenue is denominated in Renminbi, and most of our purchase of crude oil and some equipment and repayment of certain borrowings are made in foreign currencies. Historically, the trend for appreciation of the Renminbi was helpful to us since our imported crude oil purchases constitute such a large portion of our total costs. However, the recent depreciation of the Renminbi increased our costs and affected our capacity of making profits. In addition, any depreciation of the Renminbi could adversely affect the value of the dividends of our H Shares and ADSs, which we pay in foreign currencies. Further appreciation in the value of Renminbi against foreign currencies (including the U.S. Dollar) may cause a decrease in the value of our cash and cash equivalents that are denominated in foreign currencies.

Inflation

Inflation or deflation did not have a significant impact on our results of operations for the year ended December 31, 2018.

 

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Summary

In 2018, China’s economy generally remained stable. The gross domestic product (GDP) grew by 6.6%, decreased by 0.3% from the previous year. China’s petrochemical industry was operated in stable trend with good momentum with basically steady production, overall stable market demands, risen product price and improved industrial efficiency. In 2018, we focused on enhancing our overall efficiency and stepped up efforts to improve a variety of its work, including work safety and environmental protection, operation optimization, cost reduction, market development, research and development, and human resources development. We have achieved major progress in production and operation and continuously maintained a relatively high level of economic benefits.

The following table sets forth our sales volumes and net sales for the years indicated:

 

     Year ended December 31,  
     2016      2017      2018  
     Sales
Volume
(‘000 tons)
     Net Sales
(RMB
million)
     % of
Total
Net Sales
     Sales
Volume
(‘000 tons)
     Net Sales
(RMB
million)
     % of
Total
Net Sales
     Sales
Volume
(‘000 tons)
     Net Sales
(RMB
million)
     % of
Total
Net Sales
 

Synthetic fibers

     202.1        1,855.5        2.8        172.6        2,005.3        2.5        156.0        2,182.4        2.3  

Resins and plastics

     1,341.7        9,797.6        14.9        1,262.4        10,218.4        12.9        1,208.6        10,542.1        11.0  

Intermediate petrochemicals

     2,055.7        8,827.6        13.4        1,938.5        10,070.2        12.7        2,134.4        12,160.6        12.7  

Petroleum products

     8,097.9        24,002.6        36.4        9,233.5        32,400.6        40.9        9,917.3        43,403.0        45.4  

Trading of petrochemical products

     —          20,585.4        31.2        —          23,697.3        29.9        —          26,544.0        27.8  

Others

     —          867.8        1.3        —          826.5        1.1        —          781.4        0.8  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     11,697.4        65,936.5        100.0        12,607.0        79,218.3        100.0        13,416.3        95,613.5        100.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table sets forth a summary statement of our consolidated statements of operations for the years indicated:

 

     Year ended December 31,  
     2016     2017     2018  
     RMB
million
    % of
Net sales
    RMB
million
    % of
Net sales
    RMB
million
    % of
Net sales
 

Synthetic fibers

            

Net sales

     1,855.5       2.8       2,005.3       2.5       2,182.4       2.3  

Operating expenses

     (2,466.4     (3.7     (2,480.6     (3.1     (2,755.9     (2.9

Segment loss

     (608.9     (0.9     (475.3     (0.6     (573.5     (0.6

Resins and plastics

            

Net sales

     9,797.6       14.9       10,218.4       12.9       10,542.1       11.0  

Operating expenses

     (8,160.0     (12.4     (8,862.5     (11.2     (9,641.7     (10.1

Segment profit

     1,637.6       2.5       1,355.9       1.7       900.4       0.9  

Intermediate petrochemicals

            

Net sales

     8,827.6       13.4       10,070.2       12.7       12,160.6       12.7  

Operating expenses

     (7,017.6     (10.6     (7,864.1     (9.9     (10,225.7     (10.7

Segment profit

     1,810.0       2.7       2,206.1       2.8       1,934.9       2.0  

Petroleum products

            

Net sales

     24,002.6       36.4       32,400.6       40.9       43,403.0       45.4  

Operating expenses

     (20,189.6     (30.6     (29,280.6     (37.0     (40,493.0     (42.4

Segment profit

     3,813.0       5.8       3,120.0       3.9       2,910.0       3.0  

Trading of petrochemical products

            

Net sales

     20,585.4       31.2       23,697.3       29.9       26,544.0       27.8  

Operating expenses

     (20,534.2     (31.1     (23,636.7     (29.8     (26,439.1     (27.7

Segment profit

     51.2       0.1       60.6       0.1       104.9       0.1  

Others

            

Net sales

     867.8       1.3       826.5       1.1       781.4       0.8  

Operating expenses

     (792.8     (1.2     (691.9     (0.9     (473.0     (0.5

 

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     Year ended December 31,  
     2016     2017     2018  
     RMB
million
    % of
Net sales
    RMB
million
    % of
Net sales
    RMB
million
    % of
Net sales
 

Segment profit

     75.0       0.1       134.6       0.2       308.4       0.3  

Total

            

Net sales

     65,936.5       100.0       79,218.3       100.0       95,613.5       100.0  

Operating expenses

     (59,158.6     (89.7     (72,816.4     (91.9     (90,028.4     (94.2

Profit from operations

     6,777.9       10.3       6,401.9       8.1       5,585.1       5.8  

Net finance income

     83.7       0.1       207.3       0.3       337.4       0.4  

Investment income

     —         —         —         —         —         —    

Share of profit of associates and jointly controlled entities

     916.8       1.4       1,243.7       1.6       885.6       0.9  

Profit before income tax

     7,778.3       11.8       7,852.9       10.0       6,808.1       7.1  

Income tax

     (1,796.8     (2.7     (1,698.7     (2.2     (1,471.9     (1.5

Net profit

     5,981.5       9.1       6,154.2       7.8       5,336.2       5.6  

Attributable to:

            

Equity shareholders of the Company

     5,968.5       9.1       6,143.2       7.8       5,336.3       5.6  

Non-controlling interests

     13.0       0.0       11.0       0.0       (0.1     0.0  

Net profit

     5,981.5       9.1       6,154.2       7.8       5,336.2       5.6  

 

Net sales represent sales revenue of the respective segments after sales taxes and surcharges. Operating expenses here represent cost of sales, selling and administrative expenses and other operating expenses /income, as allocated to respective segments. This definition is only applicable for the financial review.

Year ended December 31, 2018 compared with year ended December 31, 2017

Net sales

In 2018, our net sales amounted to RMB95,613.5 million, representing an increase of 20.70% as compared to RMB79,218.3 million in 2017. The increase was primarily due to the increase in weighted average sales price of our petroleum and petrochemical products, among which, the weighted average prices (exclude tax) of our synthetic fibers, resins and plastics, intermediate petrochemical products and petroleum products increased by 20.35%, 7.77%, 9.68% and 24.72%, respectively, over the previous year. The total volume of our products was 13.4 million tons in 2018, representing an increase of 6.42% over the previous year. Our production/sales ratio was 100.21%, and the trade receivables recovery rate was 100%. Our total amount of sales from export was RMB19.15 billion, an increase of 38.30% compared with 2017.

(i) Synthetic fibers

In 2018, our net sales for synthetic fibers amounted to RMB2,182.4 million, representing an increase of 8.83% compared to RMB2,005.3 million in 2017. The increase was primarily due to the increase in price of synthetic fibers, driven by the increase in cost of raw materials. The continued sluggish downstream demand and under-performing initiatives in raw material procurement yet led to a drop in sales volume. Sales volume for synthetic fibers decreased by 9.57% compared with the previous year, while the weighted average sales price increased by 20.35%. In particular, the weighted average sales price of acrylic fiber, the main product of our synthetic fibers, increased by 23.35%, and the weighted average sales price of polyester fiber increased by 13.63% over the previous year. Sales of acrylic fiber and polyester fiber accounted for 81.20% and 9.88% of the total sales of synthetic fibers, respectively.

Net sales of synthetic fiber products accounted for 2.3% of total net sales in 2018, representing a decrease of 0.2% as compared to the previous year.

(ii) Resins and plastics

Net sales of resins and plastics amounted to RMB10,542.1 million in 2018, representing an increase of 3.17% as compared to RMB10,218.4 million in 2017. The increase in net sales was mainly attributable to the increase in unit price of resin and plastics, driven by the increase in the costs of raw materials. Due to the lower demand in the downstream market, the sales volume of resins and plastics decreased 4.27% as compared to the previous year, while the weighted average sales price increased by 7.77%. In particular, the weighted average sales price of polyethylene, polypropylene and polyester pellet increased by 2.74%, 9.95% and 14.71%, respectively. Sales of polyethylene, polypropylene and polyester pellet accounted for 29.01%, 37.39% and 20.66% of the total sales of resins and plastics, respectively.

 

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Net sales of resins and plastics accounted for 11.0% of total net sales in 2018, representing a decrease of 1.9% as compared to the previous year.

(iii) Intermediate petrochemicals

Net sales of intermediate petrochemical products amounted to RMB12,160.6 million in 2018, representing an increase of 20.76% as compared to RMB10,070.2 million in 2017. This was mainly due to (i) an increase in weighted average sales price of intermediate petrochemical products of 9.68% as compared to the previous year, which, in turn, was due to the increase in costs of raw materials; and (ii) an increase in sales volume of 10.10% as compared to the previous year, which, in turn, was due to the higher demand in the downstream market. In particular, the weighted average sales price of paraxylene, ethylene oxide and glycol increased by 22.36%, 5.79% and 2.85%, respectively, and the sales volume of each of them increased by 20.55%, 29.70% and 4.44%, respectively. Sales of paraxylene, ethylene oxide and glycol accounted for 28.14%, 12.96% and 15.79% of the total sales of intermediate petrochemical products, respectively.

Net sales of intermediate petrochemicals accounted for 12.7% of total net sales in 2018, which remained the same as the previous year.

(iv) Petroleum products

Net sales of petroleum products amounted to RMB43,403.0 million in 2018, representing an increase of 33.96% as compared to RMB32,400.6 million in 2017, which was mainly attributable to the increase in prices of refined oil in China driven by the increase in world crude oil unit price. The weighted average sales price of major products increased by 24.72%, while sales volume increased by 7.41% as compared to the previous year.

Net sales of petroleum products accounted for 45.4% of total net sales in 2018, representing an increase of 4.5% as compared to the previous year.

(v) Trading of petrochemical products

Net sales from trading of petroleum products amounted to RMB26,544.0 million in 2018, representing an increase of 12.01% as compared to RMB23,697.3 million in 2017. The increase is mainly due to an increase of RMB3,025.0 million in sales of China Jinshan Associated Trading Corporation, a subsidiary of the Company, during 2018.

Net sales from trading of petrochemical products accounted for 27.8% of total net sales in 2018, representing a decrease of 2.1% as compared to the previous year.

(vi) Others

Net sales of other products amounted to RMB781.4 million in 2018, representing a decrease of 5.46% as compared to RMB826.5 million in the previous year.

Net sales of other products accounted for 0.8% of our total net sales in 2018, representing a decrease of 0.3% as compared to the previous year.

Cost of sales and operating expenses

Our cost of sales and operating expenses are comprised of cost of sales, selling and administrative expenses, other operating income and other operating expenses.

Our cost of sales and operating expenses amounted to RMB90,028.4 million in 2018, representing an increase of 23.64% as compared to RMB72,816.4 million in 2017. Our cost of sales and operating expenses of synthetic fibers, resins and plastics, intermediate petrochemicals, petroleum products, trading of petrochemical products and others were RMB2,755.9 million, RMB9,641.7 million, RMB10,225.7 million, RMB40.493.0 million, RMB26,439.1 million and RMB473.0 million, representing an increase of 11.10%, 8.79%, 30.03%, 38.29%, 11.86%, and a decrease of 31.64% compared to the previous year, respectively. Such increases were primarily due to the increase in cost of raw materials driven by the rise in world crude oil unit prices, which substantially increased the cost of sales.

 

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Cost of sales

Our cost of sales amounted to RMB89,839.0 million in 2018, representing an increase of 24.09% as compared to RMB72,398.3 million in 2017. Cost of sales accounted for 93.96% of net sales for 2018. The increase in cost of sales was primarily due to the increase in crude oil price in 2018.

 

 

Selling and administrative expenses

Our selling and administrative expenses amounted to RMB536.1 million in 2018, representing a slight increase of 0.15% as compared to RMB535.3 million in the previous year.

 

 

Other operating income

Our other operating income amounted to RMB202.6 million in 2018, representing an increase of 70.25% as compared to RMB119.0 million in the previous year. The increase in other operating income was due to an increase of RMB28.1 million in refunds of local education surcharges in Jinshan District, resulting in an increase in government subsidy that was included in other business income.

 

 

Other operating expenses

Our other operating expenses were RMB32.5 million in 2018, representing an increase of 51.87% as compared to RMB21.4 million in the previous year. This was mainly due to an increase in the severances for termination of employees.

 

 

Other gains/(losses)-net

Our other gains amounted to RMB176.7 million in 2018, representing an increase of RMB157.2 million as compared to other gains of RMB19.5 million in the previous year. The significant increase in other gain was primarily due to the increase of net gains on disposal of property, plant and equipment of RMB185.5 million in 2018.

Profits/(losses) from operations

Our profit from operations amounted to RMB5,585.1 million in 2018, representing a decrease of RMB816.8 million as compared to RMB6,401.9 million in the previous year. In 2018, there was an increase in costs for all segments generally as compared with those in last year as a result of a 30.66% increase in the average price of Brent crude oil on the London Intercontinental Exchange as compared to the previous year. Despite the subsequent increase in unit price of finished products, the unit purchase price of raw materials increased to a larger extent than the unit price of finished products due to the impact brought by the production cycle and demand of downstream market, leading to a slight fall in profit from operations as compared to last year.

(i) Synthetic fibers

Loss from operations related to synthetic fibers amounted to RMB573.5 million in 2018, representing an increase of RMB98.2 million in the amount of loss as compared to a loss of RMB475.3 million in the previous year. The increase in loss was primarily due to the increase in the cost of raw materials as compared to the previous year.

(ii) Resins and plastics

Profit from operations related to resins and plastics amounted to RMB900.4 million in 2018, representing a decrease of RMB455.5 million as compared to RMB1,355.9 million in the previous year. The decrease in operating profit was mainly attributable to the significant increase in costs of raw materials driven by the increase in world crude oil price. For the period, cost of sales and expenses increased by 8.79%, unit cost of sales increased by 14.37%, and net sales increased by 3.17%.

 

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(iii) Intermediate petrochemicals

Profit from operations related to intermediate petrochemical products amounted to RMB1,934.9 million in 2018, representing a decrease of RMB271.2 million as compared to RMB2,206.1 million in the previous year. The decrease was mainly attributable to an increase of RMB2,090.4 million in net sales of intermediate petrochemicals, while the cost of sales and expenses for the same period rose by RMB2,361.6 million.

(iv) Petroleum products

Profit from operations related to petroleum products amounted to RMB2,910.0 million in 2018, representing a decrease of RMB210.0 million as compared to RMB3,120.0 million in the previous year. The decrease was mainly attributable to the increase of RMB11,212.4 million in cost of sales and expenses, while the net sales of petroleum products increased RMB11,002.4 million, which resulted in a profit decrease as compared to the previous year.

(v) Trading of petrochemical products

Profit from trading of petrochemical products amounted to RMB104.9 million in 2018, representing an increase of RMB44.3 million as compared to RMB60.6 million in the previous year. The increase was mainly attributable to an increase of RMB2,846.7 million in net sales of the trading business, while the cost of sales and expenses for the same period was up by RMB2,802.4 million, leading to a higher profit as compared to the previous year.

(vi) Others

Profit from other operations amounted to RMB308.4 million in 2018, representing an increase of RMB173.8 million as compared to RMB134.6 million in the previous year. The increase in profit was mainly attributable to an increase in income from disposal of assets.

Net finance income

Our net finance income was RMB337.4 million in 2018, representing an increase of RMB130.1million as compared to RMB207.3 million in the previous year. The increase was mainly due to an increase in our bank deposit average balance of RMB3.7 billion during 2018, which in turn drove an increase of RMB195.1 million in interest income, the effect of which was partially offset by an increase in interest expenses from RMB61.0 million in 2017 to RMB106.2 million in 2018.

Profit before income tax

Our profit before taxation was RMB6,808.1 million in 2018, representing a decrease of RMB1,044.8 million as compared to the profit before taxation of RMB7,852.9 million in the previous year.

Income tax

Our income tax expenses amounted to RMB1,471.9 million in 2018, representing a decrease of RMB226.8 million as compared to RMB1,698.7 million in the previous year. The decrease was primarily due to the decrease in our profit before income tax.

In accordance with the PRC Enterprise Income Tax Law (amended) which took effect from January 1, 2008, the income tax rate of the Company in 2018 was 25% (2017:25%). However, the effective rate for income tax was 21.62% in 2018, as compared to 21.63% in 2017.

Net profit

Our net profit was RMB5,336.2 million in 2018, representing a decrease of RMB818.0 million as compared to RMB6,154.2 million in 2017.

Year ended December 31, 2017 compared with year ended December 31, 2016

Net sales

In 2017, our net sales amounted to RMB79,218.3 million, increased by 20.14 % compared with 2016. The increase was primarily due to the increase in weighted average sales price of our petroleum and petrochemical products, among which, the weighted average prices (exclude tax) of our synthetic fibers, resins and plastics, intermediate petrochemical products and petroleum products increased by 26.60%, 10.85%, 20.97% and 18.39% over the previous year, respectively. The total volume of our products was 12.6 million tons in 2017, representing an increase of 7.7% over the previous year. Our production/sale ratio was 99.80 %, and the trade receivables recovery rate was 100 %. Our total amount of sales from export was RMB13.85 billion, increased by 16.33 % compared with 2016.

 

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(i) Synthetic fibers

In 2017, our net sales for synthetic fibers amounted to RMB2,005.3 million, representing an increase of 8.07% compared to RMB1,855.5 million in 2016. The increase was primarily due to the increase in price of synthetic fibers, driven by the increase in cost of raw materials. The continued sluggish downstream demand and under-performing initiatives in raw material procurement yet led to a drop in sales volume. Sales volume for synthetic fibers fell by 14.60% compared with the previous year, while weighted average sales price rose 26.60%. In particular, the weighted average sales price of acrylic fiber, the main product of our synthetic fibers, increased by 17.13%, and the weighted average sales price of polyester fiber increased by 21.75% over the previous year. Sales of acrylic fiber and polyester fiber accounted for 83.52% and 8.57% of the total sales of synthetic fibers, respectively.

Net sales of synthetic fiber products accounted for 2.5% of total net sales in 2017, representing a decrease of 0.3% as compared to the previous year.

(ii) Resins and plastics

Net sales of resins and plastics amounted to RMB10,218.4 million in 2017, representing an increase of 4.30% as compared to RMB9,797.6 million in 2016. The increase in net sales was mainly attributable to the increase in unit price of resin and plastics, driven by the increase in the costs of raw materials. Due to the lower demand in the downstream market, the sales volume of resins and plastics decreased 5.91% as compared to the previous year, while the weighted average sales price rose by 10.84%. In particular, the weighted average sales price of polyethylene, polypropylene and polyester pellet increased by 11.58%, 7.61% and 15.52%, respectively. Sales of polyethylene, polypropylene and polyester pellet accounted for 32.58%, 33.97% and 19.90% of the total sales of resins and plastics, respectively.

Net sales of resins and plastics accounted for 12.9% of total net sales in 2017, representing a decrease of 2.0% as compared to the previous year.

(iii) Intermediate petrochemicals

Net sales of intermediate petrochemical products amounted to RMB10,070.2 million in 2017, representing an increase of 14.08% as compared to RMB8,827.6 million in 2016. This was mainly due to the increase in unit price of intermediate petrochemical products resulted from the increase in costs of raw materials. The weighted average sales price increased 20.97% as compared to the previous year. The sales volume decreased 5.7% as compared to the previous year due to the decreased downstream demand. The two factors together drove an increase in net sales. Sales of paraxylene, butadiene, ethylene oxide, benzene and glycol accounted for 23.04%, 9.48%, 11.41%, 17.51% and 17.75% of the total sales of intermediate petrochemical products, respectively.

Net sales of intermediate petrochemicals accounted for 12.7% of total net sales in 2017, representing a decrease of 0.7% as compared to the previous year.

(iv) Petroleum products

Net sales of petroleum products amounted to RMB32,400.6 million in 2017, representing an increase of 34.99% as compared to RMB24,002.6 million in 2016, which was mainly attributable to the increase in prices of refined oil in China driven by the increase in world crude oil unit price. The weighted average sales price of major products increased by 18.39%, while sales volume increased by 14.02% as compared to the previous year.

Net sales of petroleum products accounted for 40.9% of total net sales in 2017, representing an increase of 4.5% as compared to the previous year.

(v) Trading of petrochemical products

Net sales from the trading of petroleum products amounted to RMB23,697.3 million in 2017, representing an increase of 15.12% as compared to RMB20,585.4 million in 2016. The increase is mainly due to the significant growth in sales of Shanghai Jinmao International Trading Company Limited, a subsidiary of the Company, during 2017.

Net sales of trading of petrochemical products accounted for 29.9% of total net sales in 2017, representing a decrease of 1.3% as compared to the previous year.

 

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(vi) Others

Net sales of other products amounted to RMB826.5 million in 2017, representing a decrease of 4.76% as compared to RMB867.8 million in the previous year. This decrease in net sales was mainly due to the decrease in sales of processing business during 2017.

Net sales of other products accounted for 1.1% of our total net sales in 2017, representing a decrease of 0.2% as compared to the previous year.

Cost of sales and operating expenses

Our cost of sales and operating expenses are comprised of cost of sales, selling and administrative expenses, other operating income, other operating expenses and other gains/(losses)-net.

Our cost of sales and operating expenses increased from RMB59,158.6 million in 2016 to RMB72,816.4 million in 2017. Our cost of sales and operating expenses of synthetic fibers, resins and plastics, intermediate petrochemicals, petroleum products, trading of petrochemical products and others were RMB2,480.6 million, RMB8,862.5 million, RMB7,864.1 million, RMB29,280.6 million, RMB23,636.7 million and RMB691.9 million, representing increases of 0.66%, 8.61%, 12.06%, 45.03%, 15.11%, and a decrease of 12.73% as compared to the previous year, respectively as compared to the previous year, respectively. Such increases were primarily due to the increase in cost of raw materials driven by the growth in world crude oil unit price, which substantially increased the cost of sales.

 

 

Cost of sales

Our cost of sales amounted to RMB72,398.3 million in 2017, increased by 23.27% from RMB58,731.7 million in 2016. Cost of sales accounted for 91.39% of net sales for 2017. The increase in cost of sales was primarily due to the increase in crude oil price in 2017.

 

 

Selling and administrative expenses

Our selling and administrative expenses amounted to RMB535.3 million in 2017, representing a decrease of 1.98% as compared to RMB546.1 million in the previous year, mainly due to termination of overhead charge of the riverway from April 2017, resulting in a decrease in administrative expenses.

 

 

Other operating income

Our other operating income amounted to RMB119.0 million in 2017, representing a decrease of 39.69% as compared to RMB197.3 million in the previous year. The significant decrease in other operating income was because the headquarter of the Company did not receive additional refunds of local education fees in Jinshan District, resulting in a decrease of RMB80 million compared with 2016 in government subsidy that was included in other business income.

 

 

Other operating expenses

Our other operating expenses were RMB21.4 million in 2017, representing a decrease of RMB2.9 million as compared to RMB24.3 million in the previous year.

 

 

Other gains/(losses)-net

Our other gains – net amounted to RMB19.5 million in 2017, representing an increase of RMB73.4 million as compared to other losses – net of RMB53.9 million in the previous year. The significant increase in other gains/(losses)-net was primarily due to the net gain on foreign exchange of RMB35.6 million and the decrease of net loss on disposal of property, plant and equipment of RMB29.0 million in 2017.

Profits/(losses) from operations

Our profit from operations amounted to RMB6,401.9 million in 2017, representing a decrease of RMB376.0 million as compared to RMB6,777.9 million in the previous year. In 2017, there was an increase in costs for all segments generally as compared with those in last year as a result of the increase in average annual price of international crude oil. Despite the subsequent increase in unit price of finished products, the unit purchase price of raw materials increased to a larger extent than the unit price of finished products due to the impact brought by the production cycle and demand of downstream market, leading to a slight fall in profit from operations as compared to last year.

 

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(i) Synthetic fibers

Loss from operations related to synthetic fibers amounted to RMB475.3 million in 2017, representing a decrease of RMB133.6 million in loss as compared to loss of RMB608.9 million in the previous year. The decrease in loss was primarily due to a 14.63% decrease in the sales volume of synthetic fibers this year compared to the previous year, resulting in a reduction in losses of synthetic fibers this year.

(ii) Resins and plastics

Profit from operations related to resins and plastics amounted to RMB1,355.9 million in 2017, representing a decrease of RMB281.7 million as compared to RMB1,637.6 million in the previous year. The decrease in operating profit was mainly attributable to the significant increase in costs of raw materials driven by the increase in world crude oil price. The significant price increase in polyethylene and polypropylene and a 4.30% increase in net sales of resins and plastics led to an 8.61% increase in cost of sales and expenses for the period.

(iii) Intermediate petrochemicals

Profit from operations related to intermediate petrochemical products amounted to RMB2,206.1 million in 2017, representing an increase of RMB396.1 million as compared to RMB1,810.0 million in the previous year. The increase was mainly attributable to an increase of RMB1,242.6 million in net sales of intermediate petrochemicals, while the cost of sales and expenses for the same period rose by RMB846.5 million, leading to a profit growth as compared to the previous year.

(iv) Petroleum products

Profit from operations related to petroleum products amounted to RMB3,120.0 million in 2017, representing a decrease of RMB693.0 million as compared to RMB3,813.0 million in the previous year. The decrease was mainly attributable to the increase of RMB9,091.0 million in cost of sales and expenses, while the net sales of petroleum products increased RMB8,398.0 million, which resulted in a lower profit during the year..

(v) Trading of petrochemical products

Profit from trading of petrochemical products amounted to RMB60.6 million in 2017, representing an increase of RMB9.4 million as compared to RMB51.2 million in the previous year. The increase was mainly attributable to an increase of RMB3,111.9 million in net sales of the trading business, while the cost of sales and expenses for the same period was up by RMB3,102.5 million, leading to a higher profit as compared to the previous year.

(vi) Others

Profit from other operations amounted to RMB134.6 million in 2017, representing an increase of 79.47% as compared to RMB75.0 million in the previous year. The increase in profit was mainly attributable to a decrease of RMB41.3 million in net sales of other products, while cost of sales and expenses for the same period decreased by RMB100.9 million, which led to a growth in profit as compared to the previous year.

Net finance income

Our net finance income was RMB207.3 million in 2017, representing an increase of RMB123.6 million as compared to RMB83.7 million in the previous year. The increase was mainly due to a significant increase in our bank deposits during 2017, which in turn drove an increase of RMB131.1 million in interest income. In addition, interest expenses increased from RMB53.6 million in 2016 to RMB61.0 million in 2017.

Profit before income tax

Our profit before taxation was RMB7,852.9 million in 2017, representing an increase of RMB74.6 million, or 1.0% as compared to the profit before taxation of RMB7,778.3 million in the previous year. The increase was mainly due to an increase in our share of profit of associates and jointly controlled entities as a result of the good performance achieved by our associates and jointly controlled entities in 2017.

 

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Income tax

Our income tax expenses amounted to RMB1,698.7 million in 2017, representing a decrease of RMB98.1 million as compared to RMB1,796.8 million in the previous year. The decrease was primarily attributable to the tax impact of tax-free investment income generated by us amounted to RMB307.5 million, which increased by RMB81.7million from RMB225.8 million in the previous year. As a result, the income tax payable by the Company for the current period decreased accordingly.

In accordance with the PRC Enterprise Income Tax Law (amended) which took effect from January 1, 2008, the income tax rate of the Company in 2017 was 25% (2016:25%). However, the effective rate for income tax was 21.63% in 2017, compared to 23.10% in 2016. The relatively low effective income tax rate in 2017 was mainly because that share profit of investments accounted for using the equity method amounted to RMB1,243.7 million in 2017, representing an increase of RMB329.6 million as compared to RMB916.8 million in 2016.

Net profit

Our net profit was RMB6,154.2 million in 2017, representing an increase of RMB172.7 million, or 80.7%, as compared to RMB5,981.5 million in 2016.

B. Liquidity and Capital Resources.

We strive to always have sufficient liquidity to meet our liabilities when due, preparing for both normal and stressed conditions, without incurring unacceptable losses or risking damage to our reputation.

Our primary sources of funding have been cash provided by our operating activities and short term and long term borrowings. Our primary uses of cash have been for cost of sales, other operating expenses and capital expenditures. We prepare monthly cash flow budgets to ensure that we will always have sufficient liquidity to meet our financial obligations as they become due. We arrange and negotiate financing with financial institutions and maintain a certain level of standby credit facilities to reduce liquidity risk. We believe that our current cash on hand, expected cash flows from operations and available standby credit facilities from financial institutions will be sufficient to meet our working capital requirements and repay our short term borrowings and obligations when they become due. In addition, we will continue to optimize our fund raising strategy from short and long term perspectives to take advantage of low interest rates by issuing corporate bonds or debts with low financing costs.

The following table sets forth a condensed summary of our consolidated statement of cash flows for the years ended December 31, 2016, 2017 and 2018.

 

     Year Ended December 31,  
Cash flow data    2016      2017      2018  
     (RMB million)  

Net cash generated from operating activities

     7,181.8        7,060.8        6,659.4  

Net cash used in investing activities

     189.9        2,400.7        1,928.4  

Net cash used in financing activities

     2,637.2        2,589.8        3,507.2  

Net increase in cash and cash equivalents

     4,354.7        2,070.3        1,223.9  

Net cash generated from operating activities

The net cash generated from operating activities amounted to RMB6,659.4 million in 2018, representing a decrease in cash inflows of RMB401.4 million as compared to the net cash inflows of RMB7,060.8 million in 2017, due to (i) a decrease of RMB283.0 million in cash inflows from operating activities, which, in turn, was due to the increase in the cost of sales; and (ii) an increase of RMB100.4 million in income tax payment.

The net cash generated from operating activities amounted to RMB7,060.8 million in 2017, representing a decrease in cash inflows of RMB121.0 million as compared to the net cash inflows of RMB7,181.8 million in 2016. We recorded profit from operation in 2017, cash inflows from operation amounted to RMB8,784.5 million, representing an increase of RMB305.4 million as compared with cash inflows of RMB8,479.1 million in 2016. We paid RMB1,706.0 million of income tax in 2017, representing an increase of RMB437.9 million in cash outflow as compared with the income tax of RMB1,268.1 million in 2016.

 

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Net cash used in investing activities

Our net cash used in investing activities decreased from RMB2,400.7 million in 2017 to RMB1,928.4 million in 2018. The decrease was primarily due to (i) an increase of RMB332.0 million in dividend received from joint ventures and associated companies; and (ii) an increase of RMB207.0 million in income generated from the disposal of fixed assets.

Our net cash used in investing activities increased from RMB189.9 million in 2016 to RMB2,400.7 million in 2017. This was primarily due to the increase in fixed term deposits over 6 months.

Net cash used in financing activities

Our net cash used in financing activities increased from RMB2,589.8 million in 2017 to RMB3,507.2 million in 2018. The increase was primarily due to (i) an increase in repayment of borrowings to third parties of RMB536.8 million; and (ii) an increase of RMB578.5 million in payment of dividends to shareholders of RMB million.

Our net cash used in financing activities decreased from was RMB2,637.2 million in 2016 to RMB2,589.8 million in 2017. The decrease was primarily due to the decrease in repayments of borrowings to third parties of RMB1,683.6 million, the effect of which was partially offset by the increase in payment of dividends to shareholders of RMB1,612.4 million.

Borrowings and banking facilities

Due to the Company’s net profit position and the reduced capital expenditure, the Company managed to maintain the balance of cash and cash equivalents at a prudent level with a decrease in the amount of borrowings in 2018. Our total borrowings at the end of 2018 amounted to RMB497.2 million, representing a decrease of RMB109.0 million as compared to RMB606.2 million at the end of the previous year. See Item 11 Quantitative and Qualitative Disclosures about Market Risk – Interest Rate Risk for more information on the maturity and the interest rate of the borrowings. We have generally been able to arrange short term loans with several PRC financial institutions as and when needed. The debt obligations as of December 31, 2017 and 2018 were as follows.

 

     Year Ended December 31,  
Debt instruments    2017      2018  
     (RMB million)  

Short term bank loans (1)

     606.2        497.2  

Long term bank loans

     —          —    
  

 

 

    

 

 

 
     606.2        497.2  
  

 

 

    

 

 

 

 

(1)

As of December 31, 2018, no borrowings were secured by the way of property, plant and equipment. We obtained a credit rating of AAA for financing loans, assessed by Shanghai Huajie Credit Rating & Investors Service Co., Ltd., a credit rating agency authorized by the Shanghai Branch of the People’s Bank of China. As of December 31, 2018, the current assets exceeded current liabilities by RMB11.39 billion. The liquidity of the Company is primarily dependent on the ability to maintain adequate cash inflow from operations, the renewal of its short-term bank loans and on its ability to obtain adequate external financing to support its working capital and meet its debt obligation when they become due. As of December 31, 2018, we had standby credit facilities of RMB16.96 billion, within which the maturity dates of unused facility amounting to RMB3.71 billion will be after December 31, 2019. We assessed that all the facilities could be renewed upon their expiration dates. We have carried out a detailed review of the cash flow forecast for the 12 months ending December 31, 2019. Based on such forecast, we believe that we will be able to renew these facilities when they expire based on our well-established relationships with various lenders and adequate sources of liquidity exist to fund our working capital and capital expenditure requirements.

 

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Our ability to renew our short term borrowings and obtain additional external financing in the future and the cost of such financing are subject to a variety of uncertainties, including:

 

   

the cost of financing and the condition of financial markets;

 

   

our future operating performance, financial condition and cash flows; and

 

   

potential changes in monetary policy of the Chinese government with respect to bank interest rates and lending practices.

If we fail to rollover, extend or refinance our short term borrowings as necessary in a timely manner, we may be unable to meet our obligations in connection with debt servicing, trade and bills payable and/or other liabilities when they become due. See also Item 3. Key Information – D. Risk Factors – Our development and operation plans have significant capital expenditure and financing requirements, which are subject to a number of risks and uncertainties.

In light of our good credit standing and various financing channels, we believe that we will not experience any difficulty in obtaining sufficient financing for our operations.

We managed to maintain our gearing ratio at a safe level by enhancing controls over both liabilities (including borrowings) and financing risks. We generally do not experience any seasonality in borrowings. However, due to the nature of the capital expenditures plan, long term bank loans can be arranged in advance of expenditures while short term borrowings are used to meet operational needs. The terms of our existing borrowings do not restrict our ability to pay dividends on our shares.

Gearing ratio

As of December 31, 2018, our gearing ratio was 31.37%, while as of December 31, 2017, our gearing ratio was 27.71%. The ratio is calculated using this formula: total liabilities divided by total assets.

Capital expenditure

In 2018, our capital expenditure amounted to RMB1,011.0 million, representing a decrease of 28.65% as compared to RMB1,417.0 million in capital expenditure in 2017. Major projects include the following:

 

Major Project

   Total amount of  project
investment
RMB million
     Amount of  project
Investment in 2018
RMB million
     Project progress as  of
December 31, 2018
 

Project with an annual production of 1,500 tons of PAN-based carbon fibers

     848        46        Purchase of equipment  

Oil cleaning project with 400,000 tons/year clean gasoline component unit

     795        50        Purchase of equipment  

Reconstruction project of cogeneration unit for up-to-standard discharge

     289        18        Under construction  

Renovation project involving low nitrogen combustion in olefin cracking furnace No. 2

     121        17        Under construction  

Thermoelectric Department’s renovation project involving furnaces Nos. 3 and 4 meeting emission standards

     99        55        Under construction  

Environmental protection control project 2# of closed decoking for delayed coking

     70        65        Under construction  

Oil and gas recovery project of light oil tanks and trestles of Storage and Transportation Department

     66        32        Under construction  

High-sulphur torch system optimization and reconstruction project of Storage and Transportation Department

     44        39        Under construction  

 

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Our capital expenditure for 2019 is estimated at approximately RMB1.5 billion.

Proposed Dividend Distribution

A dividend for the year ended December 31, 2018 of RMB0.25 per share (including tax), based on 10,823,813,500 shares outstanding, amounted to a total dividend of RMB2,705,953,000, was proposed by the Board of Directors on March 19, 2019. The proposal remains to be approved at our 2018 Annual General Meeting.

 

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C. Research and Development, Patents and Licenses, etc.

We have a number of technology development units, including the Petrochemical Research Institute, the Plastics Research Institute, the Polyester Fiber Research Institute, the Acrylic Fiber Research Institute and the Environmental Protection Research Institute. These units are charged with various research and development tasks with respect to new technology, new products, new production processes and equipment and environmental protection. Our research and development expenditures in 2016, 2017 and 2018 were RMB102.1 million, RMB36.7 million and RMB37.3 million, respectively. The research and development expenditures in 2018 remained consistent with 2017. The research and development expenditures in 2016 were relatively high due to a research and development project on carbon fiber, which was completed in the first half of 2017.

We are not, in any material aspect, dependent on any patents, licenses, industrial, commercial or financial contracts, or new production processes.

D. Trend Information

The International Monetary Fund advised in its April 2019 edition of World Economic Outlook that global growth is projected to slow from 3.6 percent in 2018 to 3.3 percent in 2019, before returning to 3.6 percent in 2020. Global economic performance is increasingly vulnerable to trade and investment protectionism, tightening monetary policies of major countries and increased tensions in international policy coordination.

China is facing a more complex development environment, with greater difficulties and challenges as well as increased external uncertainty. The domestic economy is relatively stable, but may be negatively impacted by Sino-US trade frictions, operational difficulties for some enterprises, and financial volatility. However, the Chinese government is implementing measures seeking to support economic growth through a deepening of reform measures and fiscal and monetary policies designed to stimulate growth. It is currently expected that China’s economy will generally be stable in 2019, although the growth rate will decline slightly.

In 2019, there are many uncertainties in the world oil market, among which the Sino-US trade disputes, Brexit and conflicts in the Middle East will continue to be important factors affecting the trend of oil prices. U.S. crude oil production is expected to continue to grow strongly, the slowdown in global economic growth will drag down the growth of crude oil demand. It is expected that the world oil market will be difficult to achieve equilibrium in 2019, and the average price of crude oil is expected to fall.

The global economy slowdown in 2019 will affect the growth of demand for petrochemical products. It is expected that the global chemical market will continue to grow in 2019, but the growth rate of global chemical production will slow down. Due to the strong growth of key terminal markets and abundant supply of superior energy and raw materials in the United States, U.S. chemical production will maintain a strong upward trend. China’s economy is expected to continue to decelerate, leading to a slowdown in the growth of demand for major chemicals in China. Also, the future expansion of production capacity in the Chinese market will make domestic market competition more intense.

E. Off-balance Sheet Arrangements

As of December 31, 2018, we had no contingent liabilities in respect of guarantees issued to banks in favor of our associated companies and other unlisted investments (December 31, 2017: nil). Other than our capital commitments disclosed in Note 32 in our consolidated financial statements included in Item 18. Financial Statements, we do not have any other off-balance sheet arrangements.

 

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F. Contractual Obligations and Commercial Commitments

The following table sets forth our obligations to make future payments under contracts effective as of December 31, 2018.

 

            As of December 31, 2018/Payment Due by Period  
     Total      Within 1
year or on
demand
     More than
1 year but
within 2

years
     More than
2 years but
within 5

years
     More than
5 years
 
     (RMB’000)      (RMB’000)      (RMB’000)      (RMB’000)      (RMB’000)  

Contractual obligations

              

Short term borrowings

     497,249        497,249        —          —          —    

Long term borrowings

     —          —          —          —          —    

Operating lease

     84,746        81,188        738        746        2,074  

Total contractual obligations

     563,995        560,437        738        746        2,074  

Estimated future interest payments

              

Fixed rate

     —          —          —          —          —    

Variable rate

     22,186        —          —          —          —    

Total estimated future interest payments

     22,186        —          —          —          —    

Investment commitments

              

Capital contribution to SECCO (Note 28(i))

     111,263        —          —          —          —    

Other commercial commitments

              

Capital commitments (Note 31)

     69,210        —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Note: Capital commitments refer to commitments for purchase of property, plant and equipment.

G. Other Information

Purchase, Sale and Investment

Except as disclosed in this report, during the year ended December 31, 2018, we engaged in no material purchase or sale of our subsidiaries or associated companies or any other material investments.

Pledge of Assets

As of December 31, 2018, we did not pledge any of our property or equipment.

 

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ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.

A. Directors and Senior Management.

The following table sets forth certain information concerning our directors, executive officers and members of our supervisory committee (“Supervisory Committee”). The current term for our directors, executive officers and members of our Supervisory Committee is three years, which term will end in June 2020.

 

Name

   Age     

Position

Directors

     

Wu Haijun(1)

     56      Chairman of the Board of Directors, Chairman of Strategy Committee and Member of Nomination Committee

Shi Wei (2)

     59      Executive Director, President and Member of Strategy Committee

Jin Qiang

     53      Executive Director and Vice President

Guo Xiaojun

     49      Executive Director, Member of Strategy Committee, Vice President and Secretary to Board of Directors

Zhou Meiyun

     49      Executive Director, Member of Strategy Committee and Remuneration and Appraisal Committee, Vice President and Chief Financial Officer

Jin Wenmin(3)

     53      Executive Director and Vice President

Lei Dianwu

     56      Non-executive Director and Member of Strategy Committee

Mo Zhenglin

     54      Non-executive Director and Member of Strategy Committee

Zhang Yimin

     64      Independent Director and Chairman of the Remuneration and Appraisal Committee and Nomination Committee

Liu Yunhong

     42      Independent Director and Member of Audit Committee

Du Weifeng

     42      Independent Director and Member of Audit Committee, Remuneration and Appraisal Committee and Nomination Committee

Li Yuanqin

     45      Independent Director, Chairman of Audit Committee and Member of Strategy Committee

Supervisory Committee

     

Ma Yanhui

     48      Chairman of the Supervisory Committee

Zuo Qiang

     56      Employee Supervisor

Li Xiaoxia

     49      Employee Supervisor

Zhai Yalin

     54      Supervisor

Fan Qingyong

     54      Supervisor

Zheng Yunrui

     53      Independent Supervisor

Choi Tingki

     64      Independent Supervisor

 

 

(1) Mr. Wu Haijun resigned from position of President of the Board on September 5, 2018.

(2) Mr. Shi Wei was appointed as the President of the Company on the eleventh meeting of the Ninth Session of the Board of Directors on September 19, 2018, was appointed as a Director of the Company on the First Extraordinary General Meeting of 2018 of the Company on November 8, 2018, and was appointed as an Executive Director of the Company and the Member of Strategy Committee on the thirteenth meeting of the Ninth Session of the Board of Directors on November 8, 2018.

(3) Mr. Jin Wenmin was appointed as a Director of the Company on the 2017 Annual General Meeting on June 13, 2018, and was appointed as an Executive Director of the Company on the ninth meeting of the Ninth Session of the Board of Directors on the same date.

 

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Directors

Wu Haijun, aged 56, is an Executive Director, Chairman, Secretary of the Communist Party Committee, Chairman of the Strategy Committee, member of the Nomination Committee of the Company, Chairman of SECCO and Chairman of Shanghai Chemical Industry Park Development Co., Ltd.. Mr. Wu joined Complex in 1984 and has held various positions, including Deputy Director and Director of the Company’s No.2 Chemical Plant, as well as the Manager of the Chemical Division. He was a Vice President of the Company from May 1999 to March 2006 and a Director of the Company from June 2004 to June 2006. Mr. Wu was the Manager and Secretary of the Communist Party Committee of the Chemical Sales Branch of Sinopec Corp. from December 2005 to March 2008. From December 2005 to April 2010, he was a Director of the Chemical Business Department of Sinopec Corp. In April 2010, he was appointed as a Director of SECCO. From April 2010 to February 2011, Mr. Wu was the President of SECCO. From April 2010 to August 2018, he was the Secretary of the Communist Party Committee of SECCO. In June 2010 he was appointed as a Director of the Company. From June 2010 to December 2017, he served as a Vice Chairman of the Company. From February 2011 to March 2015, he acted as a Vice President of SECCO, and was the President of SECCO from March 2015 to December 2017. From October 2017 to January 2019, Mr. Wu was the Chairman of SECCO. From December 2017 to September 2018, he served as the President and Deputy Secretary of the Communist Party Committee of the Company. He has been serving as the Chairman of the Company since December 2017, the Chairman of Shanghai Chemical Industry Park Development Co., Ltd. since January 2018, and the Secretary of the Communist Party Committee of the Company since August 2018. Mr. Wu graduated from East China Institute of Chemical Technology in 1984, majoring in chemical engineering, and obtained a bachelor’s degree in engineering. In 1997, he obtained a master’s degree in business administration from China Europe International Business School. He is a professor-grade senior engineer by professional title.

Shi Wei, aged 59, is an Executive Director, President, Deputy Secretary of the Party Committee and member of the Strategic Committee of the Company. Mr. Shi joined Shanghai Petrochemical Company Ltd. in 1982. He has been serving as the Assistant Manager and Deputy Manager of the Company’s Refinery and Chemical Department, Manager of the Company’s Environmental Protection Department, Secretary of the Party Committee and Manager of the Company’s Refinery and Chemical Department. From October 2003 to March 2014, he acted as Deputy General Manager of the Company. From June 2005 to April 2013, he served as the director of the Company. From May 2012 to March 2014, he was the head of the preparatory Group of Sinopec’s Guizhou Zhijin Coal Chemical Project. From March 2013 to August 2018, he acted as Vice Chairman of Bijie Zhongcheng Energy Co., Ltd. From March 2014 to August 2018, he served as General Manager and Secretary of the Party Committee of Sinopec Great Wall Energy and Chemical Industry (Guizhou) Co., Ltd. In August 2018, he was appointed Deputy Secretary of the Party Committee of the Company. In September 2018, he served as General Manager of the Company. In November 2018, he was appointed Executive Director and member of the Strategic Committee of the Company. Mr. Shi graduated from East China Institute of Chemical Engineering in 1982 with a bachelor’s degree in petroleum refining engineering. In 1998, he completed the postgraduate course of enterprise management in East China University of Science and Technology. He is a senior engineer by professional title.

Jin Qiang, aged 53, is an Executive Director and a Vice President of the Company. Mr. Jin joined Zhenhai General Petrochemical Works in 1986 and has held various positions, including the Deputy Chief of the Utilities Department, Deputy Director and Director of the Machinery and Power Division of SINOPEC Zhenhai Refining & Chemical Co., Ltd., and a Director of the Machinery and Power Division of SINOPEC Zhenhai Refining & Chemical Company. Mr. Jin was the Deputy Chief Engineer of SINOPEC Zhenhai Refining & Chemical Company from March 2007 to October 2011, and was appointed as aVice President of the Company in October 2011. In June 2014, Mr. Jin was appointed as an Executive Director of the Company. Mr. Jin graduated from East China Institute of Chemical Technology in 1986 majoring in chemical machinery, and graduated from the Graduate School of Central Party School in 2007 majoring in economic management. He is a professor-grade senior engineer by professional title.

Guo Xiaojun, aged 49, is an Executive Director, a Vice President, the Secretary to Board of Directors, a joint company secretary, a member of the Strategy Committee of the Company, and a director of Shanghai Chemical Industry Park Development Co., Ltd.. Mr. Guo joined the Complex in 1991. He has held various positions, including a Director of the Polyolefin Integrated Plant in the Plastics Division, the Deputy Chief Engineer in the Plastics Division, Deputy to the Manager, Deputy Manager and Manager cum Deputy Secretary of the Communist Party Committee of the Company. He was the Deputy Chief Engineer and Director of the Production Department of the Company from March 2011 to April 2013 and has been serving as a Vice President of the Company since April 2013. In June 2014, Mr. Guo was appointed as an Executive Director of the Company and was appointed as the Secretary to the Board and joint company secretary of the Company in June 2017. Mr. Guo has been serving as a director of Shanghai Chemical Industry Park Development Co., Ltd. since September 2018. He graduated from East China University of Science and Technology in 1991 with a bachelor’s degree in engineering, majoring in basic organic chemical engineering and obtained a master’s degree majoring in chemical engineering from East China University of Science and Technology in April 2008. He is a professor-grade senior engineer by professional title.

Zhou Meiyun, aged 49, is an Executive Director, a Vice President, the Chief Financial Officer, a member of the Remuneration and Appraisal Committee and the Strategy Committee of the Company. Mr. Zhou joined Complex in 1991 and has held various positions, including an Officer, Assistant to Manager, Deputy Manager and Manager of the Finance Department of the Company. He served as Manager of the Finance Department of SECCO from May 2011 to March 2017, and was appointed as a Vice President and the Chief Financial Officer of the Company in February 2017. He has been serving as an Executive Director of the Company since June 2017 and the Chairman of China Jinshan Associated Trading Corporation (“Jinshan Associated Trading”) since July 2017. Mr. Zhou graduated from Shanghai University of Finance and Economics in 1991 majoring in accounting, and obtained a master’s degree in economics from Huazhong University of Science and Technology majoring in western economics in 1997. He is a senior accountant by professional title.

 

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Jin Wenmin, aged 53, is and Executive Director and a Vice President of the Company. Mr. Jin Wenmin has been nominated as an candidate for Executive Director by the Board of Directors on March 20, 2018, whose appointment is subject to the approval of the shareholders of the Company at the 2017 Annual General Meeting. Mr. Jin joined Complex in 1985 and served as the Secretary of the Communist Party Committee of the Company’s No.1 Oil Refining Device of Refining Unit, Head of Butadiene Device, Manager of the storage and transportation, branch company, manager and Deputy Secretary of the Communist Party Committee of Storage and Transportation Department, manager and Deputy Secretary of the Communist Party Committee of Oil Refining Department etc.. From April 2013 to February 2017, Mr. Jin was appointed as the Head of Production Department of the Company. From May 2013 to August 2016, Mr. Jin was appointed as the Assistant to the President of the Company, and was appointed as a Vice President of the Company in September 2016 and an Executive Director of the Company in June 2018. Mr. Jin graduated from Shanghai Second Polytechnic University in July 2003, majoring in business administration. He is a senior engineer by professional title.

External Directors

Lei Dianwu, aged 56, is a Non-executive Director and a member of the Strategy Committee of the Company, Senior Vice President of Sinopec Corp., the controlling shareholder of the Company. Since June 2005, Mr. Lei has been serving as a Non-executive Director of the Company. Mr. Lei has held various positions, including the Deputy Director of Planning Division and Director of the Preparation Office of the Joint Venture of Yangzi Petrochemical Company, and a Vice President and manager of the Production Division of Yangzi BASF Stylene Company Limited. He acted as the Deputy Manager of Yangzi Petrochemical Company and Deputy Director of its Joint Venture Office, Director of the Development and Planning Division of China Dong Lian Petrochemical Limited Liabilities Company, Deputy General Manager of Yangzi Petrochemical Limited Liabilities Company and Deputy Director of the Development and Planning Division of Sinopec Corp. From March 2001 to August 2013, he was the Director of Development and Planning Division of Sinopec Corp. From March 2009 to October 2018, Mr. Lei was the Assistant to the President of Sinopec Group. From May 2009 to October 2018, he was a Vice President of Sinopec Corp. From August 2013 to October 2018, he was the Chief Economist of Sinopec Group. From October 2015 to October 2018, Mr. Lei was the Secretary to the board of directors of Sinopec Group. From June 2018 to December 2018, Mr. Lei was the head of International Cooperation Department, director of the Foreign Affairs Bureau and head of the Hong Kong, Macau and Taiwan Office of Sinopec Group, and the head of the International Cooperation Department of Sinopec Corp.. Mr. Lei has been serving as a Senior Vice President of Sinopec Corp. since October 2018. Mr. Lei has rich experience in enterprise planning and investment development management. In 1984, Mr. Lei graduated from East China Petroleum Institute majoring in basic organic chemicals and obtained a bachelor’s degree in engineering. He is a professor-grade senior engineer by professional title.

Mo Zhenglin, aged 54, is a Non-executive Director and a member of the Strategy Committee of the Company, Deputy Director of the Finance Division of Sinopec Corp., controlling shareholder of the Company. In June 2014, Mr. Mo was appointed as Non-executive Director of the Company. Mr. Mo began his career in August 1986 and has held various positions, including Deputy Director of the Finance Department and Head of the Accounting Department of Beijing Yanshan Petrochemical Corporation and Chief Accountant and Director of the Finance Department of its Refinery Division, Deputy Chief Accountant of Sinopec Beijing Yanshan Company, Chief Accountant of its Refinery Division, Director of Beijing Yanshan Petrochemical Company Limited and Chief Accountant of Sinopec Beijing Yanshan Company. Mr. Mo has been Chief Accountant of the Chemical Division of Sinopec Corp. from August 2008 to August 2017, and Director of SECCO from November 2008 to October 2017. From March 2015 to August 2017, he was Deputy Director of the Chemical Division of Sinopec Corp. In August 2017, Mr. Mo was appointed as Deputy Director of the Finance Division of Sinopec Corp. Mr. Mo obtained a bachelor’s degree in management from Zhongnan University of Economics in 1986, majoring in finance and accounting. He is a senior accountant by professional title.

Independent Directors

Zhang Yimin, aged 64, is an Independent Non-executive Director, the Chairman of the Remuneration and Appraisal Committee and the Nomination Committee of the Company and a Professor of Economics and Finance at China Europe International Business School. He has been an Independent Non-executive Director of the Company since October 2013. Mr. Zhang has been an independent director of Shanghai Huayi Group Corporation Ltd. (listed on the Shanghai Stock Exchange, stock code: 600623) since April 2015. Mr. Zhang obtained a doctorate’s degree majoring in finance and political studies at the Business School of University of British Columbia, Canada, and has held various positions, including a Post-doctoral Fellow at the Business School of University of British Columbia, Canada, an Assistant Professor at the Business School of University of New Brunswick, Canada, and Associate Professor of the Economics and Finance Department at City University of Hong Kong. He was appointed as a Professor of the China Europe International Business School in September 2004. His major area of research is in operations, financing and industrial economic studies. He possesses a wealth of professional expertise and experience.

 

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Liu Yunhong, aged 42, is an Independent Non-executive Director and a member of Audit Committee of the Company, the Assistant to General Manager of Hwabao Securities Co. Ltd. of Hwabao Securities Co. Ltd. He is also the Deputy Head of the Institute of International M&A and Investment, Renmin University of China. He has been an Independent Non-executive Director of the Company since June 2015. Mr. Liu was an Independent Director of Guangdong HEC Technology Holding Co., Ltd. (listed on the Shanghai Stock Exchange, stock code: 600673) from May 13, 2014 to March 24, 2018. Mr Liu is an Independent Director of Shanghai Aerospace Automobile Electromechanical Co., Ltd. (listed on the Shanghai Stock Exchange, stock code: 600151), Shenergy Company Limited (listed on the Shanghai Stock Exchange, stock code: 600642) and Bank of Guiyang Co., Ltd. (listed on the Shanghai Stock Exchange, stock code: 601997). From June 2008 to August 2010, Mr. Liu has been the Head of Legal and Compliance Division of Guotai Asset Management Co., Ltd. From October 2008 to August 2010, Mr. Liu conducted post-doctoral research in economics at Guanghua School of Management, Peking University and was conferred as an assistant professor and master postgraduate instructor. From October 2010 to July 2012, he worked for fund product development and supervision of listed companies at the Shanghai Stock Exchange. From August 2012 to September 2013, Mr. Liu was the General Manager of Investment Banking Department of Aerospace Securities Co., Ltd. From October 2013 to November 2017, Mr. Liu was the General Manager of the Institutional Business Department (renamed as the Investment Banking Department in May 2015) of Hwabao Securities Co. Ltd.. Since September 2015, Mr. Liu has been the Assistant to General Manager of Hwabao Securities Co. Ltd.. Since May 2014, Mr. Liu has been the Deputy Head of the Institute of International M&A and Investment, Renmin University of China. Mr. Liu obtained a doctorate’s degree in law from Renmin University of China, majoring in civil and commercial Law in 2008. Mr. Liu is a research fellow by professional title.

Du Weifeng, aged 42, is an Independent Non-executive Director, a member of the Audit Committee, the Remuneration and Appraisal Committee and the Nomination Committee of the Company, and a Partner of Beijing JunZeJun (Shanghai) Law Offices. He has been serving as an Independent Non-executive Director of the Company since June 2015. Mr. Du began his career in July 1998. He has held various positions, including Clerk and Assistant Judge of Shanghai Pudong New Area People’s Court and worked as a lawyer at Watson & Band Law Offices in Shanghai and at Wintell & Co Law Firm in Shanghai. He has been a Partner of the Shanghai branch of Beijing JunZeJun Law Offices since February 2009. With extensive experience as a lawyer, Mr. Du is a designated lawyer of some banks’ headquarters, Shanghai branches, Shanghai branch of the state-owned asset management companies and private asset management companies. Mr. Du obtained a bachelor’s degree in Commercial Law from Shanghai University in July 1998, and a master’s degree in commercial law from Bristol University in September 2005. He also obtained a master’s degree in business administration from China Europe International Business School in 2013.

Li Yuanqin, aged 45, is an Independent Non-executive Director, the Chairman of the Audit Committee and a member of the Strategy Committee of the Company, an associate professor of the School of Management and the associate head of the Department of Accountancy at Shanghai University. She is currently an independent director of Shanghai New World Co., Ltd. (listed on Shanghai Stock Exchange, stock code: 600628). From April 2000 to March 2003, she served at the Settlement Department at the headquarters of ICBC. From June 2006 to September 2009, she was the lecturer at the School of Management at Shanghai University. She has been an associate professor of the School of Management at Shanghai University since September 2009 and the associate head of the Department of Accountancy of Shanghai University since May 2011. During that period, she was also a visiting scholar at Foster School of Business, University of Washington in the United States between February 2012 and February 2013. She also serves as a member of the eighth session of the Shanghai Baoshan Committee of the Chinese People’s Political Consultative Conference and a non-executive member of the Chinese Institute of Certified Public Accountants. She received a PhD in Management from Antai College of Economics and Management (ACEM) at Shanghai Jiao Tong University.

Supervisory Committee

The Company has a Supervisory Committee whose primary duty is to supervise senior management of the Company that includes the Board of Directors, managers and senior officers. The function of the Supervisory Committee is to ensure that senior management of the Company act in the interests of the Company, its shareholders and employees and in compliance with PRC law. The Supervisory Committee reports to the shareholders in the general meeting. The Articles of Association provide the Supervisory Committee with the right to investigate the business and the financial affairs of the Company and to convene shareholder’s meetings from time to time. The Supervisory Committee currently comprises of seven members, three of whom are employee representatives and four of whom are external supervisors, including one independent supervisor.

Ma Yanhui, aged 48, is a Supervisor, Chairman of Supervisory Committee, the Deputy Secretary of the Communist Party Committee, Secretary of the Communist Party Discipline Supervisory Committee and Chairman of the Labor Union of the Company. Mr. Ma started his career in 1996. He served as the Secretary of Office of Yanhua Refinery, Secretary and Deputy Director of Yanhua Office of Great Wall Lubricant Oil, Supervisor and Acting Director of Integrated Corporate Reform Department of Sinopec Group, Deputy Director of Integrated Corporate Reform Department of Sinopec Group, Deputy Director and Director of Structure Reform Sector, Corporate Reform Department of Sinopec Assets Management Co., Ltd.. From June 2008 to August 2017, Mr. Ma was the Director of Integrated Corporate Reform Department of Sinopec Group. In August 2017, Mr. Ma was appointed as the Deputy Secretary of the Communist Party Committee and Secretary of the Communist Party Discipline Supervisory Committee of the Company. He was appointed as a Supervisor, the Chairman of Supervisory Committee and Chairman of the Labour Union of the Company in October 2017. Mr. Ma graduated from East China University of Science and Technology in July 1996, majoring in petroleum processing, and obtained a bachelor’s degree in engineering. In June 2006, he obtained a master’s degree in corporate management from Renmin University of China. Mr. Ma is a senior economist by professional title.

 

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Zuo Qiang, aged 56, is a Supervisor, Chief Legal Counsel and Deputy Chief of Political Work of the Company. Mr. Zuo joined Complex in 1981 and has held various positions, including an archivist of the Command Division for the construction of Phase II of No. 1 Chemical Plant of the Complex, the Head of Archives at the ethylene plant, Secretary of the Youth League Committee of the ethylene plant, Secretary of the Youth League Committee of the Refining and Chemical Division of the Complex, Secretary of the Youth League Committee of the Refining and Chemical Division of the Company, Secretary of the General Branch of the Communist Party Committee of Ethylene Plant No. 1 of the Refining and Chemical Division of the Company, and the Deputy Director of the Supervisory Office of the Company and the Secretary of the Corporate Discipline Supervisory Committee of the Company. From April 2011 to April 2018, he was a Director of the Supervisory Office of the Company. He has been serving as a Supervisor of the Company since June 2011. From June 2011 to December 2018, he was a Director of Supervisory Committee Office of the Company. From October 2011 to December 2018, he was the Deputy Secretary of the Discipline Inspection Commission of the Company. He has been servicing as the Deputy Chief of Political Work of the Company since February 2016 and the Chief Legal Counsel of the Company since February 2017. From April 2018 to December 2018, he was a Director of the Supervisory Department of the Company. Mr. Zuo graduated from the Correspondence College of Communist Party Committee School of the Central Committee in 1993 majoring in party & administrative management. He has senior professional technical qualification.

Li Xiaoxia, aged 49, is a Supervisor and Secretary of the Communist Party Committee and the Deputy Director of the Plastics Division of the Company. Ms. Li joined Complex in 1991 and has held various positions, including the Controller of the operation zone of the marine terminal of the Company, Assistant to the Workshop Director, Deputy Workshop Director and Deputy Section Chief of Storage and Transportation Area No. 2 of the Refining and Chemical Division, Deputy Secretary of the Youth League Committee of the Company, Secretary of Party General Branch for Staff Exchange and Relocation Centre, Secretary of the Communist Party Committee and Deputy Manager of the Refining Division of the Company. She was appointed as a Supervisor of the Company in June 2011 and served as the Vice Chairman of the Labor Union of the Company from December 2011 to August 2017. She was appointed as the Secretary of the Communist Party Committee and Deputy Director of the Plastics Division of the Company in July 2017. Ms. Li graduated from Liaoning University of Petroleum and Chemical Technology in 1991 majoring in petroleum and natural gas transportation, and obtained a bachelor’s degree in Engineering. She has senior professional technical qualification.

Zhai Yalin, aged 54, is an External Supervisor of the Company, the Deputy Director of the Auditing Bureau of Sinopec Group, the Deputy Director of Auditing Department of Sinopec Corp. and the ninth group leader of leading party inspection group of Sinopec Group. Mr. Zhai has been an External Supervisor of the Company since June 2008. Mr. Zhai started his career in 1986 and successively served as the Deputy Head of the Head Office and Director of the Auditing Department of Qianguo Refinery, Deputy Director of the General Office of Sinopec Huaxia Auditing Company, the Deputy Director of the General Administrative Office of the Auditing Bureau of Sinopec Group, a Director of the General Administrative Office of the Auditing Bureau of Sinopec Group, and Director of the General Administrative Office of the Auditing Bureau of Sinopec Group (Auditing Department of Sinopec Corp.). Since December 2001, Mr. Zhai concurrently holds the posts of the Deputy Director of the Auditing Bureau of Sinopec Group and the Deputy Director of Auditing Department of Sinopec Corp. He was appointed as the ninth group leader of leading party inspection group of Sinopec Group in April 2018. Mr. Zhai graduated from Jilin Siping Normal College in 1986 and is a senior economist by professional title.

Fan Qingyong, aged 54, is an External Supervisor of the Company, the Deputy Chief of the Supervisory Bureau and a member of the Discipline Inspection Group of Sinopec Group, a Deputy Director of the Supervisory Department of Sinopec Corp., the controlling shareholder of the Company, and a Supervisor of Sinopec Refinery & Marketing Limited. Mr. Fan has been an External Supervisor of the Company since June 2017. Mr. Fan started his career in 1987, and has held various positions, including the Deputy Director of the Communist Party Office of No. 2 Oil Plant and a Director of the Corporate Management Department of Fushun Petrochemical Company, the Discipline Inspector (Deputy level) and Deputy Director of the Second Discipline Inspection and Supervision Group of the Supervisory Bureau of Sinopec Group (Supervisory Department of Sinopec Corp.), and a Director of the First Discipline Inspection and Supervision Group of the Supervisory Bureau of Sinopec Group (Supervisory Department of Sinopec Corp.). He has been the Deputy Director of the Supervisory Bureau of Sinopec Group and Deputy Director of the Supervisory Department of Sinopec Corp. since April 2010. He served as a Supervisor of Sinopec Star Petroleum Co., Ltd. from July 2010 to April 2015. He has been serving as a member of the Discipline Inspection Group of the Communist Party Committee of Sinopec Group and a Supervisor of Sinopec Refinery & Marketing Limited since May 2012. Mr. Fan graduated from Fushun Normal College (now known as Fushun Teachers College) majoring in Chinese in 1987, from Liaoning Normal University majoring in Chinese in July 1991, and from Renmin University of China, majoring in law in January 2003 and obtained a master’s degree in law. He is a professor-grade senior professional by professional title and is qualified to practice law.

 

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Independent Supervisor

Zheng Yunrui, aged 53, is an Independent Supervisor of the Company and a professor in civil and commercial law at the Faculty of Law of the East China University of Political Science and Law in the PRC and a Member of Expert Consultation Committee of Shanghai Yangpu District People’s Procuratorate and Mediator of Shanghai Second Intermediate People’s Court. He has been serving as an Independent Supervisor of the Company since December 2014. Mr. Zheng is an independent director of Hangzhou Innover Technology Co., Ltd. (listed on the Shenzhen Stock Exchange, stock code: 002767), Jiangxi Xinyu Guoke Technology Co., Ltd. (listed on the Shenzhen Stock Exchange, stock code: 300722) and Fuxin Dare Automotive Parts Co., Ltd. (listed on the Shenzhen Stock Exchange, stock code: 300473). Mr. Zheng graduated from Shangrao Normal University in Jiangxi Province, majoring in English Language. Mr. Zheng obtained a master’s degree in law and a doctorate’s degree in law from the Faculty of Law of Peking University in July 1993 and July 1998, respectively. Mr. Zheng previously worked at the Education Bureau of Shangrao County, Jiangxi Province, Hainan Airport Limited, China Township Enterprise Investment and Development Company Limited and the Legal Affairs Office of the Shanghai Municipal People’s Government. He has been teaching at East China University of Political Science and Law since August 2001. He was a visiting scholar at the Faculty of Law of National University of Singapore between July 2002 and December 2002. Mr. Zheng has been engaged in trials, teaching and research relating to civil law, property law, contract law, company law, insurance law, social insurance law and government procurement law. He is experienced in the legal affairs on corporate governance and has great academic achievements. He is also an arbitrator at the Arbitration Commission of Shenzhen, Shenyang, Xuzhou and Wuxi. Mr. Zheng was appointed as a member of Expert Advisory Committee of the People’s Procuratorate of Shanghai Yangpu District and mediator of Shanghai No. 2 intermediate People’s Court in March 2017 and June 2017, respectively.

Choi Tingki, aged 64, is an Independent Supervisor of the Company and a Fellow of the Hong Kong Institute of Certified Public Accountants. He joined the Company in June 2011. Mr. Choi served as an Independent Non-executive Director of the Company from June 2011 to June 2017, and has been an Independent Supervisor since June 2017. Mr. Choi has been an independent non-executive director of Yangtzekiang Garment Limited (listed on the Main Board of the HKSE, stock code: 00294) and YGM Trading Limited (listed on the Main Board of the HKSE, stock code: 00375) since December 2012. Mr. Choi graduated from the Department of Accounting, Hong Kong Polytechnic in 1978. He joined KPMG in the same year and has held various positions, including a Partner of the audit department of KPMG Hong Kong Office, an Executive Partner of KPMG Shanghai Office, a Senior Partner of KPMG Huazhen Shanghai Office as well as a Senior Partner of KPMG Huazhen in Eastern and Western China. Mr. Choi retired from KPMG Huazhen in April 2010.

B. Compensation.

The aggregate amount of cash compensation we paid to our directors, supervisors and executive officers during the year ended December 31, 2018 was approximately RMB7.72 million. In addition, directors and supervisors who are also officers or employees receive certain other benefits-in-kind, such as subsidized or free health care services, housing and transportation, which large Chinese enterprises customarily provide to their employees. No benefits are payable to members of the board or the Supervisory Committee or the executive officers upon termination of their relationship with us.

 

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The following tables set forth the compensation on an individual basis for our directors, supervisors and executive officers who received compensation from us in 2018.

 

Name

  

Position with the Company

  

Salaries and

other

benefits

    

Retirement

scheme

contributions(1)

    

Discretionary

bonus

    

Share

Option

expenses

    

Total
Remuneration in
2018

(excluding share
options)

 
         

(RMB’000)

(before tax)

    

(RMB’000)

(before tax)

    

(RMB’000)

(before tax)

    

(RMB’000)

(before tax)

     (RMB’000)
(before tax)
 

Wu Haijun(1)

   Chairman & Executive Director      393        19        910        —          1,322  

Shi Wei(2)

  

Executive

Director & President

     84        6        58        —          148  

Jin Qiang

   Executive Director & Vice President      226        19        523        —          768  

Guo Xiaojun

   Executive Director, Vice President & Secretary to the Board      216        19        518        —          753  

Zhou Meiyun

   Executive Director, Vice President & Chief Financial Officer      185        19        498        —          702  

Jin Wenmin(3)

   Executive Director & Vice President      187        19        528        —          734  

Lei Dianwu

   External Director      —          —          —          —          —    

Mo Zhenglin

   External Director      —          —          —          —          —    

Zhang Yimin

   Independent Director      150        —          —          —          150  

Liu Yunhong

   Independent Director      150        —          —          —          150  

Du Weifeng

   Independent Director      150        —          —          —          150  

Li Yuanqin

   Independent Director      150        —          —          —          150  

Ma Yanhui

   Chairman of Supervisory Committee      274        14        288        —          576  

Zuo Qiang

   Supervisor      135        17        411        —          563  

Li Xiaoxia

   Supervisor      143        16        418        —          577  

Zhai Yalin

   Supervisor      —          —          —          —          —    

Fan Qingyong

   Supervisor      —          —          —          —          —    

Zheng Yunrui

   Independent Supervisor      100        —          —          —          100  

Choi Tingki

   Independent Supervisor      100        —          —          —          100  

Gao Jinping (4)

   Former Executive Director, Vice Chairman & Vice President      215        12        549        —          776  

 

(1) Retirement scheme contributions refer to the relevant payments we made in relation to the defined contribution government pension scheme in compliance with Shanghai regulations as well as the enterprise annuity plan set up by the Company. All of our employees are required to participate in the defined contribution government pension scheme whereas our employees who have been with the Company for one year or more may opt to participate in the enterprise annuity plan. See Item 6. Directors, Senior Management and Employees—D Employees for more information on the defined contribution government pension scheme and the Company’s annuity plan.

 

(1)

Mr. Wu Haijun resigned from position of President of the Board on September 5, 2018.

(2)

Mr. Shi Wei was appointed as the President of the Company on the eleventh meeting of the Ninth Session of the Board of Directors on September 19, 2018, was appointed as a Director of the Company on the First Extraordinary General Meeting of 2018 of the Company on November 8, 2018, and was appointed as an Executive Director of the Company and the Member of Strategy Committee on the thirteenth meeting of the Ninth Session of the Board of Directors on November 8, 2018.

(3)

Mr. Jin Wenmin was appointed as a Director of the Company on the 2017 Annual General Meeting on June 13, 2018, and was appointed as an Executive Director of the Company on the ninth meeting of the Ninth Session of the Board of Directors on the same date.

(4)

Mr. Gao Jinping resigned from his positions of Vice Chairman of the Board, Executive Director and Vice President of the Company on September 5, 2018.

 

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C. Board Practices.

Board of Directors

Our Board of Directors consists of eleven members. Our Directors are elected at meetings of our shareholders, and, unless they resign at an earlier date, are deceased or removed, will serve three-year terms. The Directors shall be eligible for reelection upon expiry of their terms of office; however, the combined tenure of an Independent Non-executive Director may not exceed a total of six years. The term of our current Board of Directors will expire in June 2020. None of our Directors have entered into any service contracts with us or any of our subsidiaries providing for benefits upon termination of appointment or employment (with the exception of compensation required by Chinese labor law).

Independent Board Committee

We formed an Independent Board Committee on October 24, 2013, which consists of four Independent Non-executive Directors. The current members are Ms. Li Yuanqin, Mr. Zhang Yimin, Mr. Liu Yunhong and Mr. Du Weifeng. The Independent Board Committee advised our shareholders other than Sinopec Corp. and its associates in respect of the terms of the continuing connected transactions under the renewed Mutual Product Supply and Sale Services Framework Agreement with Sinopec Group and Sinopec Corp. and the renewed Comprehensive Services Framework Agreement with Sinopec Group and the proposed caps on annual transaction values thereof for the three years ending December 31, 2019.

Supervisory Committee

The Supervisory Committee is responsible for ensuring that our Directors and senior officers act in the interests of our company or those of our shareholders or employees and that they do not abuse their positions and powers. The Supervisory Committee has no power to overturn the decisions or actions of our Directors or officers and may only recommend that they correct any acts that are harmful to our interests or the interests of our shareholders or employees. The Supervisory Committee is currently composed of seven members appointed for a three year term. The term of the current members will expire in June 2020. Supervisory Committee members have the right to attend meetings of our Board of Directors, inspect our financial affairs and perform other supervisory functions.

Remuneration and Appraisal Committee

We formed a remuneration and appraisal committee on December 25, 2001 which consists of three Directors. As of December 31, 2018, the members of the remuneration committee are Mr. Zhang Yimin (Chairman of the Committee), Mr. Zhou Meiyun and Mr. Du Weifeng. The key responsibility of the Remuneration Committee is to formulate and review the remuneration policy and plan for the Directors and executive officers, formulate the standards for evaluation of the Directors and executive officers and conduct such evaluations. The members of the remuneration and appraisal committee will hold office for the same term as their directorships which will expire in June 2020.

Audit Committee

We formed an audit committee on June 15, 1999 which consists of three Directors. As of December 31, 2018, the members are Ms. Li Yuanqin (Chairman of the Committee), Mr. Liu Yunhong and Mr. Du Weifeng. The key responsibility of the Audit Committee is to advise the Board on the appointment, dismissal, remuneration and terms of engagement of external auditors, review and supervise our financial reporting process, internal controls and risk management systems, and review our connected transactions. The members of the audit committee will hold office for the same term as their directorships which will expire in June 2020.

Nomination Committee

We formed a nomination committee on June 27, 2012 which consists of three Directors. As of December 31, 2018, the members are Mr. Zhang Yimin (Chairman of the Committee), Mr. Du Weifeng and Mr. Wu Haijun. The key responsibility of the Nomination Committee is to review the Board composition, make recommendations to the Board on the procedures and criteria for the selection and appointment of Directors and senior management and assess the independence of Independent Non-executive Directors. The members of the audit committee will hold office for the same term as their directorships which will expire in June 2020.

Strategy Committee

We formed a strategy committee on June 15, 2017 which consists of four Executive Directors, two Non-executive Directors and one Independent Non-executive Director. As of December 31, 2018, the members are Mr. Wu Haijun (Chairman of the Committee), Mr. Shi Wei, Mr. Guo Xiaojun, Mr. Zhou Meiyun, Mr. Lei Dianwu, Mr. Mo Zhenglin and Ms. Li Yuanqin. The key responsibility of the Strategy Committee is to conduct researches and give recommendations to the Board on major investment decisions, projects and major issues that affect our development, and monitor our long-term development strategic plan. The members of the audit committee will hold office for the same term as their directorships which will expire in June 2020.

 

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Summary Corporate Governance Differences

There are significant differences between our corporate governance practices and those of U.S. issuers listed on the NYSE. Pursuant to Section 303A.11 of the NYSE listing Manual, we have disclosed certain of these differences on our website at http://www.spc-ir.com.hk/eng/company.asp.

D. Employees.

As of December 31, 2018, we had 9,597 employees.

The following table shows the approximate number of employees we had at the end of the last three years by the principal business function they performed:

 

     December 31,  
     2016      2017      2018  

Management

     1,134        1,148        1,057  

Engineers, technicians and factory personnel

     6,607        6,197        5,753  

Accounting, marketing and others

     3,347        3,016        2,787  
  

 

 

    

 

 

    

 

 

 

Total

     11,088        10,361        9,597  
  

 

 

    

 

 

    

 

 

 

Approximately 50.76% of our work force are graduates with a tertiary degree or higher. In addition, we offer our employees opportunities for education and training based upon our development plans and requirements and the individual performance of each employee.

 

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A system of labor contracts has been adopted in our Company. The contract system imposes discipline, provides incentives to adopt better work habits and gives us greater management control over our work force. We believe that by linking remuneration to productivity, the contract system has also improved employee morale. As of December 31, 2018, almost all of the work force was employed pursuant to labor contracts which specify the employee’s position, responsibilities, remuneration and grounds for termination. The contracts generally have short terms of one to five years and may be renewed with the agreement of both parties. The remaining personnel are employed for an indefinite term.

We have a labor union that protects employees’ rights, aims to assist in the fulfillment of our economic objectives, encourages employee participation in management decisions and assists in mediating disputes between us and union members. We have not been subject to any strikes or other labor disturbances which have interfered with our operations, and we believe that our relations with our employees are good.

Total remuneration of our employees includes salary and bonuses. Employees also receive certain benefits in terms of housing, education and health services that we subsidize, and other miscellaneous subsidies. In 2018, we incurred RMB288.9 million in employment costs.

In compliance with Shanghai regulations, we and our employees participate in a defined contribution government pension scheme under which all employees upon retirement are entitled to receive pensions. In order to safeguard and properly enhance the living level of retired employees and improve the medium and long term incentive system, the Company established an enterprise annuity plan. According to the plan, to the extent that the employees volunteer for the related payments and have been with the Company for one year or more, such employees are entitled to participate in the enterprise annuity plan. We will make payments to match the payments made by the employees after giving considerations to our profitability, the employee’s work responsibilities, contributions, and treatments post retirement based on the principle of universal benefits. We have 18,344 retired employees under the above retirement insurance plans. During 2018, we terminated employment with 764 persons (including the retired and voluntary leave), accounting for 7.37% of 10,361 employees we had as of January 1, 2018.

In addition to the pension benefits, pursuant to the relevant laws and regulations of the PRC, we and our employees participate in defined social security contributions for employees, such as a housing fund, basic medical insurance, supplementary medical insurance, unemployment insurance, injury insurance and maternity insurance.

 

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E. Share Ownership.

The table below sets forth information regarding the beneficial ownership of our shares held by our directors, supervisors and executive officers as of March 31, 2019:

 

Name    Position held    Number of Shares held
(shares)
   Percentage of total issued
shares of the Company (%)
     Percentage of total
issued A shares (%)
 

Jin Qiang

   Executive Director and Vice President    301,000 A shares (L)      0.0028        0.0041  

Guo Xiaojun

   Executive Director, Vice President, Secretary to the Board and Joint Company Secretary    301,000 A shares (L)      0.0028        0.0041  

Jin Wenmin

   Executive Director and Vice President    175,000 A shares (L)      0.0016        0.0024  

(L): Long position

Share Option Incentive Scheme

We adopted a share option incentive scheme on December 23, 2014, pursuant to which our directors, senior management members and key business personnel may be granted options to purchase our A shares. Under the share option incentive scheme, the total number of underlying shares to be granted shall neither exceed 10% of the total share capital of the Company nor exceed 10% of the total A-share capital of the Company. Unless approved by the shareholders as a special resolution at a general meeting of the Company, the aggregate number of A shares to be acquired by each grantee through the share option scheme and other effective share option schemes of the Company (if any) at any time shall not exceed 1% of the total A-share capital of the Company. The exercisable period for the share options shall be three years, commencing from the expiry of the two-year period after the grant date, and the vesting period for each grant under the scheme shall be no less than two years. The exercise price of a share under initial grant will be determined by our Board of Directors at its discretion, which shall not be lower than the highest of: (1) the closing price of the A shares of the Company on the trading day immediately before the date of announcement on the summary of the draft scheme, which was RMB3.29 per share; (2) the average closing price of the A shares of the Company for the 30 trading days immediately before the date of announcement on the summary of the draft scheme, which was RMB3.27 per share; and (3) RMB4.20 per share. The exercise price for further grant shall be the higher of: (1) the closing price of the A shares of the Company on the trading day immediately before the date of announcement on the summary of the draft proposal for each grant; and (2) the average closing price of the A shares of the Company for the 30 trading days immediately before the date of announcement on the summary of the draft proposal for each grant. The expiration date of this scheme is December 22, 2024.

On January 6, 2015, our Board of Directors approved the proposal of the initial grant of the share option incentive scheme. A total of 38,760,000 share options were granted to 214 participants, among which 2,540,000 were granted to six of our directors and senior management. The total number of underlying stock accounted for 0.359% of the Company’s total share capital when granted. The exercisable period for the share options shall be three years, commencing from the expiry of the two-year period after the grant date. There shall be three exercisable periods (one year for each exercisable period, same for the following) under the scheme. Upon the fulfilment of the exercise conditions, 40%, 30% and 30% of the total share options granted shall become exercisable within the first, second and third exercisable periods, respectively. According to the principle on the determination of exercise price, the exercise price of the initial grant was RMB4.20 per share (in the event of dividends payment, capitalization of capital reserves, bonus issue, subdivision or reduction of shares or allotment of shares during the validity period, the exercise price shall be adjusted according to the Share Option Incentive Scheme). On June 15, 2016, the 2015 annual profit distribution plan was considered and passed at the 2015 annual general meeting, whereby cash dividend of RMB1.00 was paid for each 10 shares, and the exercise price was adjusted to RMB4.10 per share accordingly. On June 15, 2017, the 2016 annual profit distribution plan was considered and passed at the 2016 annual general meeting, whereby cash dividend of RMB2.50 was paid for each 10 shares, and the exercise price was adjusted to RMB3.85 per share accordingly. On June 13, 2018, the 2017 annual profit distribution plan was considered and passed at the 2017 annual general meeting, whereby cash dividend of RMB3.00 was paid for each 10 shares, and the exercise price was adjusted to RMB3.55 per share accordingly.

On August 22 and 23, 2017, our Board of Directors confirmed the fulfillment of the exercise conditions in the first exercisable period. The number of participants in the first exercisable period was 199. The number of exercisable A shares share options in the first exercisable period was 14,212,500. The first tranche of the share option incentive scheme was exercised on August 29, 2017, and the Company received cash payment of RMB54.6 million from 199 grantees. As a result, A shares of 14,176,600 were registered on September 27, 2017.

 

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On January 8, 2018, our Board of Directors confirmed the fulfillment of the exercise conditions in the second exercisable period. The total number of A shares share options granted but not exercised was adjusted to 18,583,800. The number of participants in the second exercisable period was 185. The number of exercisable A shares share options in the second exercisable period was 9,636,900. The second tranche of the share option incentive scheme was exercised on January 12, 2018, and the Company received cash payment of RMB37.1 million from 185 grantees. We completed the registration of the newly issued A shares of 9,636,900 on February 14, 2018, after which the number of the Company’s issued shares increased to 10,823,813,500 shares. After the second exercise of the A shares share options, the total number of A shares share options granted but not exercised is 8,946,900.

In 2018, the 8,946,900 of A shares share options expired due to the unfulfillment of exercise conditions. As of March 31, 2019, none of our directors, supervisors, executive officers or major shareholders held any outstanding A shares share options.

 

ITEM 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.

A. Major Shareholders.

Sinopec Corp. owns 50.44% of our share capital and is able to exercise all the rights of a controlling shareholder, including the election of directors and voting on amendments to our Articles of Association.

The diagram below sets forth the information on the ownership and controlling relationship between our Company, Sinopec Corp., and Sinopec Group.

 

LOGO

The table below sets forth information regarding ownership of our shares as of March 31, 2019 by all persons who we know own more than five percent of our A shares and our H Shares. Our major shareholders listed below do not have voting rights different from those of our other shareholders.

 

Name of shareholders

  

Interests held (shares)

  

Percentage of total

issued shares of the

Company (%)

  

Percentage of total

issued shares for

this category(%)

  

Capacity

Sinopec Corp.

   5,460,000,000 A Shares (L)    50.44 (L)    74.50 (L)    Beneficial owner

The Bank of New York Mellon Corporation

  

496,076,471 H Shares (L)

402,870,300 H Shares (S)

81,142,371 H Shares (P)

  

4.58 (L)

3.72 (S)

0.75 (P)

  

14.19 (L)

11.53 (S)

2.32 (P)

   Interests of controlled corporation

BlackRock, Inc.

  

323,087,985 H Shares (L)

5,416,500 H Shares (S)

  

2.98 (L)

0.05 (S)

  

9.24 (L)

0.15 (S)

   Interests of controlled corporation

Citigroup Inc.

  

224,724,270 H Shares (L)

1,425,000 H Shares (S)

189,282,335 H Shares (P)

  

2.07 (L)

0.01 (S)

1.75 (P)

  

6.42 (L)

0.04 (S)

5.41 (P)

   Secured equity holders, Interests of controlled corporation and approved lending agents

Hung Hin Fai (1)

  

211,008,000 H Shares (L)

200,020,000 H Shares (S)

  

1.95 (L)

1.85 (S)

  

6.04 (L)

5.72 (S)

   Interests of controlled corporation

Chan Kin Sun (2)

   200,020,000 H Shares (L)    1.85 (L)    5.72 (L)    Interests of controlled corporation

JPMorgan Chase & Co.

  

198,059,077 H Shares (L)

31,687,660 H Shares (S)

140,507,533 H Shares (P)

  

1.83 (L)

0.29 (S)

1.30 (P)

  

5.66 (L)

0.90 (S)

4.02 (P)

   Interests of controlled corporation, investment manager, equity holders and approved lending agents

(L): Long position; (S): Short position; (P): Lending Pool

 

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Notes:

 

(1)

These shares were held by Corn Capital Company Limited. Hung Hin Fai held 100% interests in Corn Capital Company Limited, and was deemed to be interested in the shares held by Corn Capital Company Limited.

(2)

These shares were held by Yardley Finance Limited. Chan Kin Sun held 100% interests in Yardley Finance Limited, and was deemed to be interested in the shares held by Yardley Finance Limited.

As of March 31, 2019, a total of 3,495,000,000 H Shares were outstanding, and a total of 7,328,813,500 A Shares were outstanding.

The Bank of New York Mellon has advised us that, as of March 31, 2019, 3,956,948 ADSs, representing the equivalent of 395,694,800 H Shares, were held of record by 82 other registered shareholders domiciles in and outside of the United States. We have no further information as to our shares held, or beneficially owned, by U.S. persons.

To the best of our knowledge, except as disclosed above, we are not directly or indirectly controlled by another corporation, any foreign government, or any other natural or legal person, severally or jointly.

We are not aware of any arrangement that may at a subsequent date result in a change of control of our company.

B. Related Party Transactions.

Intercompany service agreements and business-related dealings

During 2016, pursuant to the Mutual Product Supply and Sales Service Framework Agreement entered into by the Company and Sinopec Corp., we purchased raw materials from, and sold petroleum products and petrochemicals as well as leased properties to, Sinopec Corp. and its associates, and Sinopec Corp. and its associates acted as sales agents for our petrochemical products. Under the Comprehensive Services Framework Agreement entered into by the Company and Sinopec Group, we accepted construction and installation, engineering design, insurance agency and financial services relating to the petrochemical industry provided by Sinopec Group and its associates. The relevant connected transactions were conducted in accordance with the terms of the Mutual Product Supply and Sales Services Framework Agreement and the Comprehensive Services Framework Agreement. The current Mutual Product Supply and Sales Service Framework Agreement and Comprehensive Services Framework Agreement were renewed with Sinopec Corp. and Sinopec Group respectively upon approval and authorization at our 2016 Extraordinary General Meeting held on October 18, 2016. At the 2016 Extraordinary General Meeting, our shareholders also approved certain caps on the annual transaction values of certain ongoing continuing connected transactions for the years ending December 31, 2017, 2018 and 2019. The transaction amounts of the relevant connected transactions in 2018 did not exceed such caps.

The purchases by us of crude oil and related materials from, and sales of petroleum products by us to, Sinopec Corp. and its associates were conducted in accordance with the State’s relevant policy and applicable State tariffs or State guidance prices. As long as the State does not lift its control over purchases of crude oil, sales of petroleum products and pricing thereof, such connected transactions will continue to occur. We sell petrochemicals to Sinopec Corp. and its associates and Sinopec Corp. and its associates act as agents for the sales of petrochemicals in order to reduce our inventories, expand their trading, distribution and sales networks and improve our bargaining power with our customers. We lease part of the properties to Sinopec Corp. and its associates in consideration of their good financial background and credit standing. We accept construction and installation, engineering design, insurance agency and financial services relating to the petrochemical industry from Sinopec Group and its associates in order to secure steady and reliable services at reasonable prices.

The prices of the continuing connected (i.e., related-party) transactions conducted between the Company and Sinopec Group, Sinopec Corp. and its associates are determined by the parties involved after consultation pursuant to (1) the fixed price of the state; or (2) the guiding price of the state; or (3) market prices, and the conclusion of agreements for the connected transactions are in compliance with the needs of the Company’s production and operation. Therefore the above continuing connected transactions do not cause a material impact on the Company’s independence.

 

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The table below sets forth certain relevant information regarding our continuing connected transactions with Sinopec Corp. and Sinopec Group under the Mutual Product Supply and Sales Services Framework Agreement and the Comprehensive Services Framework Agreement in 2018.