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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, 2020 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
中国石化上海石油化工股份有限公司
(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. Wu Haijun
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 |
Trading Symbol(s) |
Name of each exchange on which registered | ||
| American Depositary Shares, each representing | SHI | New York Stock Exchange | ||
| 100 H Shares, par value RMB1.00 per Share | ||||
| H Shares, par value RMB1.00 per Share | 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. |
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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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
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 ☒
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. * Yes ☐ No ☐
| * | This requirement does not apply to the registrant in respect of this filing. |
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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.
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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 RMB6.5250 to U.S. $1.00, the noon buying rate on December 31, 2020 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.
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.
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ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS.
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.
Not applicable.
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, 2018, 2019 and 2020 and our selected consolidated balance sheets data as of December 31, 2019 and 2020 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, 2016 and 2017 and our consolidated balance sheets data as of December 31, 2016, 2017 and 2018 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, | ||||||||||||||||||||
| 2016 (RMB million) |
2017 (RMB million) |
2018 (RMB million) |
2019 (RMB million) |
2020 (RMB million) |
||||||||||||||||
| CONSOLIDATED STATEMENTS OF OPERATIONS DATA |
|
|||||||||||||||||||
| Net sales: |
||||||||||||||||||||
| Synthetic fibers |
1,855.5 | 2,005.3 | 2,182.4 | 2,158.9 | 1,472.4 | |||||||||||||||
| Resins and plastics |
9,797.6 | 10,218.4 | 10,542.1 | 9,979.9 | 9,419.7 | |||||||||||||||
| Intermediate petrochemicals |
8,827.6 | 10,070.2 | 12,160.6 | 10,313.6 | 8,205.8 | |||||||||||||||
| Petroleum products |
24,002.6 | 32,400.6 | 43,403.0 | 43,125.9 | 30,139.6 | |||||||||||||||
| Trading of petrochemical products |
20,585.4 | 23,697.3 | 26,544.0 | 21,690.7 | 11,577.3 | |||||||||||||||
| Others |
867.8 | 826.5 | 781.4 | 786.7 | 746.1 | |||||||||||||||
| Profit/(loss) from operations |
6,777.9 | 6,401.9 | 5,585.1 | 1,320.5 | (466.2 | ) | ||||||||||||||
| Profit before income tax |
7,778.3 | 7,852.9 | 6,808.1 | 2,656.1 | 590.8 | |||||||||||||||
| Net profit attributable to owners of the Company |
5,968.5 | 6,143.2 | 5,336.3 | 2,215.7 | 645.1 | |||||||||||||||
| Net profit/(loss) attributable to non-controlling interests |
13.0 | 11.0 | (0.1 | ) | 11.4 | 11.3 | ||||||||||||||
| Basic earnings per share(RMB) (a) |
0.553 | 0.569 | 0.493 | 0.205 | 0.060 | |||||||||||||||
| Basic earnings per ADS(RMB) (b) |
55.26 | 56.86 | 49.30 | 20.45 | 5.96 | |||||||||||||||
| (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. |
| Year Ended December 31, | ||||||||||||||||||||
| 2016 (RMB million) |
2017 (RMB million) |
2018 (RMB million) |
2019 (RMB million) |
2020 (RMB million) |
||||||||||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS DATA |
||||||||||||||||||||
| Net cash generated from operating activities |
7,181.8 | 7,060.8 | 6,659.4 | 5,057.8 | 1,679.9 | |||||||||||||||
| Net cash used in investing activities |
(189.9 | ) | (2,400.7 | ) | (1,928.4 | ) | (4,623.2 | ) | (3,887.5 | ) | ||||||||||
| Net cash (used in)/generated from financing activities |
(2,637.2 | ) | (2,589.8 | ) | (3,507.2 | ) | (1,737.4 | ) | 1,681.8 | |||||||||||
| Capital expenditure |
(901.5 | ) | (1,197.1 | ) | (1,187.0 | ) | (1,430.4 | ) | (1,841.0 | ) | ||||||||||
| Proceeds from borrowings |
2,589.4 | 2,119.1 | 2,536.8 | 4,755.1 | 3,458.1 | |||||||||||||||
| Repayments of borrowings |
(4,113.0 | ) | (2,059.4 | ) | (2,646.2 | ) | (3,695.2 | ) | (3,460.6 | ) | ||||||||||
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| As of December 31, | ||||||||||||||||||||
| 2016 (RMB million) |
2017 (RMB million) |
2018 (RMB million) |
2019 (RMB million) |
2020 (RMB million) |
||||||||||||||||
| CONSOLIDATED BALANCE SHEETS DATA |
||||||||||||||||||||
| Current assets |
14,875.9 | 19,866.1 | 25,298.9 | 22,309.2 | 17,304.8 | |||||||||||||||
| Property, plant and equipment |
13,474.3 | 12,866.4 | 11,646.4 | 11,300.8 | 11,713.0 | |||||||||||||||
| Total assets |
33,945.6 | 39,443.5 | 44,385.9 | 45,494.1 | 44,619.1 | |||||||||||||||
| Short term borrowings |
546.4 | 606.2 | 497.2 | 1,547.6 | 1,548.0 | |||||||||||||||
| Short-term bonds |
— | — | — | — | 3,017,811 | |||||||||||||||
| Current liabilities |
8,942.4 | 10,922.2 | 13,913.0 | 15,479.6 | 15,232.2 | |||||||||||||||
| Long term borrowings (excluding current portion) |
— | — | — | — | — | |||||||||||||||
| Total equity attributable to owners of the Company |
24,722.0 | 28,230.2 | 30,346.1 | 29,863.3 | 29,198.0 | |||||||||||||||
Dividends
The following table sets forth certain information concerning the dividends of the Company since January 1, 2016:
| Dividend Period |
Dividend per Share | |
| 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) | |
| January 1, 2019-December 31, 2019 |
RMB0.12 (U.S.$0.017) | |
| January 1, 2020-December 31, 2020 |
RMB0.10 (U.S.$0.015) (a) |
| (a) | Pursuant to the resolution of the Board on 24 March, 2021, the Company proposed cash dividend to all the shareholders, RMB0.10 per share (including tax). The proposal remains to be approved at our 2020 Annual General Meeting. |
See also Item 8. Financial Information – A. Consolidated Statements and Other Financial Information – Dividend Policy.
| A. | Capitalization and Indebtedness. |
Not applicable.
| B. | Reasons for the Offer and Use of Proceeds. |
Not applicable.
| C. | 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.
Business and Operational Risk Factors
The recent coronavirus outbreak could materially and adversely affect our business.
In the beginning of 2020, a novel strain of coronavirus (COVID-19) was reported to have surfaced and then caused a pandemic outbreak. The global outbreak of COVID-19 and related adverse public health developments have had and may continue to have a material adverse impact upon our normal operating activities, the demand for our end products and our financial performance. Our normal operating activities were disrupted by the temporary closure of our offices, suspension of business travel, disruptions to our normal working schedules, various restrictions on our employees’ activities and similar disruptive effects to our normal operations. In addition, the global spread of COVID-19, and the implementation by governments around the world of measures intended to slow down the spread, have caused a material reduction in worldwide business activity, resulting in a drop in demand for our products.
We have taken measures in response to the outbreak, including the adoption of more stringent workplace sanitation measures. We will continue to monitor the situation and consider additional measures to protect the health and safety of our employees and to respond to future developments. At present, domestic COVID-19 is generally under control within China, and vaccines are being administered within China and abroad. However, the extent to which this outbreak impacts our results will depend on global trends and future developments of COVID-19, including information which may emerge concerning new variants and other factors which could affect the scope and severity of the outbreak and the actions needed to contain the outbreak. The long-term impact of the COVID-19 pandemic on our performance also depends in large part on factors that are not within our control, such as measures implemented by governmental authorities to address the pandemic, the effect of the pandemic on global and regional economies and the response of world financial markets. An extended outbreak could depress global economic activity, disrupting our operations, reducing demand for our products and adversely impacting our financial performance.
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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 recent extreme volatility in crude oil prices, 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 2020, crude oil costs accounted for RMB 13.117 billion, or 54.86% 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 2018, 2019 and 2020 approximately 41.62%, 44.81% and 43.64% 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 2021 of approximately RMB3.25 billion (U.S. $498.08 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, 2021, we had an aggregate outstanding indebtedness of approximately RMB 38 million (U.S.$5.82 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, 2020 and for the three months ended March 31, 2021.
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.
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.
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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 2021 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.
We are controlled by Sinopec Corp., whose interests may not be aligned with yours.
As of March 31, 2021, 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 either Sinopec Corp. or Sinopec Group refuses to engage in such transactions or if one of them seeks to amend the its contracts with us in a way adverse to us. In addition, Sinopec Corp. has interests in businesses that 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.
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. |
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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.
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 numerous and evolving 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 including our information technology systems and data, gain access to confidential information, insertion of computer viruses, denial of service and other electronic security breaches, whether internal or external through third parties with whom we conduct business. 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, including information of our employees, customers, partners and other third parties, 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.
Legal, Regulatory or Political Risk Factors
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 environmental protection tax 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 |
| • | lawsuits 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.
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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.
Changes in the monetary policy and fluctuations in the value of Renminbi may have an adverse impact on Sinopec Group’s business and operating results
The exchange rate of the Renminbi against the US Dollar and other foreign currencies may fluctuate and is subject to alterations due to changes on the Chinese political and economic situations. In July 2005, the PRC government overhauled its policy of pegging the value of the Renminbi to the US dollar by permitting the Renminbi to fluctuate within a certain band against a basket of foreign currencies. Since the adoption of this new policy, the value of the Renminbi against the US dollar fluctuates daily. In addition, the PRC government has been under international pressure to further ease its exchange rate policy, and may as a result further change its currency policy. Early in 2020, the Renminbi had weakened against the US dollar to levels not seen since 2008, but steadily rebounded at the end of the year.
A small portion of our cash and cash equivalents is denominated in foreign currencies (mainly the U.S. Dollar). As of December 31, 2020, our bank deposits denominated in foreign currencies were equivalent to RMB 208 million. Any increase in the value of Renminbi against other currencies, including the U.S. dollar, may decrease the Renminbi value of our cash and cash equivalents that are denominated in foreign currencies.
Although most of our revenue is denominated in Renminbi, most of our procurement of crude oil, certain equipment and certain debt repayments are denominated in foreign currencies. Any depreciation of the Renminbi in the future would increase our costs and adversely affect profitability. 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.
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.
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.
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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, the rate of 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.
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. We are a foreign private issuer, and therefore exempt from certain rules under the Exchange Act that are applicable to U.S. domestic public companies, such as rules relating to the having a majority of independent directors; independent audit committee members, compensation committee members and nominating committee members; obtaining shareholder approval for certain issuances of securities; or certain reporting requirements and certifications. Significant differences between our corporate governance practices and those of U.S. issuers listed on the NYSE are further described under Item 16G. Corporate Governance. Because of these exemptions, shareholders may be afforded fewer protections than they otherwise would under the NYSE corporate governance requirements applicable to U.S. domestic issuers, or shareholders may not be afforded the same information generally available to shareholders holding shares in public companies organized in the United States or traded on the NYSE that are not foreign private issuers.
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.
Our ADSs may be delisted under the Holding Foreign Companies Accountable Act if the PCAOB is unable to inspect auditors who are located in China. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment. Additionally, the inability of the PCAOB to conduct inspections deprives our investors with the benefits of such inspections.
The Holding Foreign Companies Accountable Act, or the HFCA Act, was enacted on December 18, 2020. The HFCA Act states if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares or ADSs from being traded on a national securities exchange or in the over the counter trading market in the U.S.
Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this 20-F, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Since our auditor is located in China, a jurisdiction where the PCAOB has been unable to conduct inspections without the approval of the Chinese authorities, our auditor is currently not inspected by the PCAOB. Our Audit Committee is aware of these limitations, but believes that it is important for us to use an auditor based in China as that is the principal location of our assets and operations.
The PCAOB’s inability to conduct inspections in China prevents it from fully evaluating the 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 the 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 reliability and quality of our audited financial statements. In addition, under changes to the PRC Securities Law that became effective in March 2020, the SEC and other foreign securities regulators are not permitted to conduct investigations in China and we are not permitted to provide evidence to the SEC in connection with a securities investigation without the permission of the Chinese government. These restrictions may further erode confidence in our financial reporting.
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On March 24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and documentation requirements of the HFCA Act. If the SEC determines that, for any year commencing with our 2021 fiscal year our auditors were not subject to inspection by the PCAOB, then we will be required to comply with the disclosure requirements set forth in these rules. The SEC is in the process of establishing procedures to govern the identification of companies whose auditors were not inspected, and is also assessing how to implement other requirements of the HFCA Act, including the listing and trading prohibition requirements described above.
The SEC may propose additional rules or guidance that could impact us if our auditor is not subject to PCAOB inspection. For example, on August 6, 2020, the President’s Working Group on Financial Markets, or the PWG, issued the Report on Protecting United States Investors from Significant Risks from Chinese Companies to the then President of the United States. This report recommended the SEC implement five recommendations to address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfil its statutory mandate. Some of the concepts of these recommendations were implemented with the enactment of the HFCA Act. However, some of the recommendations were more stringent than the HFCA Act. For example, if a company’s auditors were not subject to PCAOB inspection, the report recommended that the transition period before a company would be delisted would end on January 1, 2022.
The SEC has announced that the SEC staff is preparing a consolidated proposal for the rules regarding the implementation of the HFCA Act and to address the recommendations in the PWG report. It is unclear when the SEC will complete its rulemaking and when such rules will become effective and what, if any, of the PWG recommendations will be adopted. The implications of this possible regulation in addition the requirements of the HFCA Act are uncertain. Such uncertainty could cause the market price of our ADSs to be materially and adversely affected, and our securities could be delisted or prohibited from being traded “over-the-counter” earlier than would be required by the HFCA Act. If our securities are unable to be listed on another securities exchange by then, such a delisting would substantially impair your ability to sell or purchase our ADSs when you wish to do so, and the risk and uncertainty associated with a potential delisting would have a negative impact on the price of our ADSs.
In May 2013, the 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 the PCAOB in the PRC or by the CSRC or the PRC Ministry of Finance in the United States. The PCAOB continues to be in discussions with the CSRC and the PRC Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with the PCAOB and audit Chinese companies that trade on U.S. exchanges. We are unable to predict if such discussions will resolve any or all of the risks posed by the HFCA Act or the PWG recommendations.
If remedial measures are imposed on the “big four” PRC-based accounting firms, including our independent registered public accounting firm, we might not be able to timely file future financial statements in compliance with the requirements of the Exchange Act. This could result in a suspension of trading or a delisting or deregistration of our ADSs.
Starting in 2011, the Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, were affected by a conflict between the United States and Chinese law. Specifically, for certain United States listed companies operating and audited in China, the SEC and the PCAOB sought to obtain from the Chinese accounting firms access to their audit work papers and related documents. The firms were, however, advised and directed that under Chinese law they could not respond directly to the United States regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the CSRC.
In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the PRC-based accounting firms, including our independent registered public accounting firm. In January 2014, an administrative law judge reached an initial decision to impose penalties on the firms including a temporary suspension of their right to practice before the SEC. The accounting firms filed a petition for review of the initial decision. On February 6, 2015, before a review by the Commissioners of the SEC had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms will receive matching requests, and are required to abide by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit work, commencement of a new proceeding against a firm, or in extreme cases the resumption of the current proceeding against all four firms. Under the terms of the settlement, the underlying proceeding against the four PRC-based accounting firms was deemed dismissed with prejudice four years after entry of the settlement. The four-year mark occurred on February 6, 2019.
In the event that the SEC brings new administrative proceedings, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act. Moreover, any negative news about any such future proceedings against these audit firms may cause investor uncertainty regarding PRC-based, United States listed companies and the market price of the ADSs may be adversely affected.
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If our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our consolidated financial statements, our consolidated financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of the ADSs from the NYSE or deregistration with the SEC, which would substantially reduce or effectively terminate the trading of the ADSs in the United States.
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. 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 are not currently a PFIC or that we will not be considered a PFIC for the current year until its close, or for any future 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 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 Section 1245 of the NDAA to China (and seven other countries) allowing for the purchase of petroleum from Iran under specified conditions. The NDAA waiver does not authorize transactions that remain prohibited under other U.S. sanctions laws. On April 22, 2019, the U.S. Secretary of State announced that the United States would not grant any further waivers under the NDAA. In February 2021, U.S. President announced that the U.S. would not lift economic sanctions on Iran until Iran complies with the terms of the JCPOA.
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 Iran may continue to be the ultimate source of a small portion of our crude oil. 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 any 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.
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.
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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 United States 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.
General Risk Factors
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; |
| • | 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 PRC-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.
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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.
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.
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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.
B. Business Overview
We are one of the largest petrochemical companies in China based on 2020 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 2020 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 2018, 2019 and 2020 are summarized as follows:
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 | % | ||
|
|
|
Net Sales of RMB88,055.7 million in 2019
| Synthetic fibers |
2.45 | % | ||
| Resins and plastics |
11.33 | % | ||
| Intermediate petrochemicals |
11.71 | % | ||
| Petroleum products |
48.98 | % | ||
| Trading of petrochemical products |
24.63 | % | ||
| Others |
0.90 | % | ||
|
|
|
|||
| Total |
100.00 | % | ||
|
|
|
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Net Sales of RMB61,560.9 million in 2020
| Synthetic fibers |
2.39 | % | ||
| Resins and plastics |
15.30 | % | ||
| Intermediate petrochemicals |
13.33 | % | ||
| Petroleum products |
48.96 | % | ||
| Trading of petrochemical products |
18.81 | % | ||
| Others |
1.21 | % | ||
|
|
|
|||
| 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 2018, 2019 and 2020 are as follows:
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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 |
50.67 | 5.42 | 43.91 | |||||||||
| Total net sales |
78.63 | 3.60 | 17.77 | |||||||||
2019 Net Sales by Region (%)
| Eastern China |
Other parts of China | Exports | ||||||||||
| Synthetic fibers |
89.32 | 10.68 | 0.00 | |||||||||
| Resins and plastics |
83.40 | 16.60 | 0.00 | |||||||||
| Intermediate petrochemicals |
93.88 | 5.42 | 0.70 | |||||||||
| Petroleum products |
85.40 | 0.55 | 14.05 | |||||||||
| Trading of petrochemical products |
48.48 | 48.26 | 3.26 | |||||||||
| Total net sales |
78.36 | 3.36 | 18.28 | |||||||||
2020 Net Sales by Region (%)
| Eastern China | Other parts of China | Exports | ||||||||||
| Synthetic fibers |
||||||||||||
| Resins and plastics |
||||||||||||
| Intermediate petrochemicals |
||||||||||||
| Petroleum products |
||||||||||||
| Trading of petrochemical products |
||||||||||||
| Total net sales |
||||||||||||
Business Strategies
Our development objective is to evolve into a “leading domestic and first-class global” energy, chemical and new materials enterprise. The key components of Sinopec Group’s development strategy are to take into account both low cost and differentiation and to focus on both scale and refinement. The Company focuses on: value and market orientation, creativity, talent, emphasizing the environment, low carbon emissions and integrated development, realizing lower costs and large scale of the upstream, and high value-added and refinement of the downstream. The Company will fully engage its advantages of a wide product chain, diversified products and close monitoring of the market to enhance competitiveness. Under the guidance of our development strategy, the Company further integrates the existing three industrial chains of oil refining, olefin and aromatics with the ideas of “One Leader, One Core and One Base”, enterprise resource optimization and our development plan in the Shanghai region. The Company also takes advantage of the new development model of integrated refinery and petrochemical capacity with the concept of molecular refining and petrochemicals, and further advances the integration of industry and city as well as regional integration, while selectively developing the downstream petrochemical product chain with cost and logistics advantages as well as market support. On this basis, the Company intends to build an industrial base that features green energy, fine petrochemical, and high-end materials that come with world-scale and first-class competitiveness on the northern shore of Hangzhou Bay, forming an unparalleled industrial complex with a stable profit model.
In 2021, Sinopec Group will continue to adhere to the market-oriented, efficiency-centered strategy, consolidate the foundation of environmental protection, optimize production and operation, improve corporate governance efficiency with a focus on building talent teams, achieve high-quality development of the Company and strive to create better economic benefits.
In 2021, the Company is looking to process a total of 14.20 million tons of crude oil and produce a total of 8.69 million tons of refined oil, 0.75 million tons of ethylene, 0.49 million tons of paraxylene, 0.42 million tons of polyethylene, 0.43 million tons of polypropylene, 0.30 million tons of purified terephthalic acid, 0.25 million tons of ethylene glycol, 0.03 million tons of polyester fiber and 0.10 million tons of acrylic fiber.
To achieve our business objectives in 2021, we intend to pursue the following strategies:
| • | Focus on green and clean energy for consolidating environmental protection |
The Company vows to comprehensively promote the establishment of the HSSE management system and establish and improve the PDCA closed-loop management mechanism. Under the key theme of “identifying major risks, eliminating major hidden dangers, and preventing major accidents”, the Company seeks to strengthen risk management and control in key areas and key links, and continue to tighten contractor safety management and control. Furthermore, the Company will continue to improving employees’ safety awareness and skills and promote the creation of a culture that values safety. The Company will also emphasize implementing a green and clean strategy and strengthen carbon emission management to realize stable and standard- meeting emission of waste gas and wastewater to ensure that VOCs’ average concentration at the boundary was less than 100 micrograms/m3 and strengthen carbon emission management. The Company also seeks to make a good effort in the supply of anti-epidemic materials, in dealing with emergencies and the workforce’s stability to ensure the safety and physical and mental health of employees, and to strengthen employee safety education and comprehensively improve employee health management standards.
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| • | Focus on improving quality and efficiency through the continuous optimization of production and operation |
The Company vows to optimize its overall planning for operations shutdown and start-up and strengthen the plant’s management and control during the shutdown and start-up phase. The Company shall also improve its technical and economic indicators by improving safety management and its key control and maintenance plans. The Company shall also optimize its systems to further improve the accuracy and reliability of crude oil comparison and selection, production and operation, and product structure optimization. The Company shall also further expand varieties in crude oil procurement and enhance deployment flexibility and reduce crude oil procurement costs. Furthermore, the Company strives to accurately grasp market conditions and adjust marketing strategies and product structures to maximize benefits. The Company shall also emphasize flexibly adjusting the yield of refined oil products and diesel-gasoline ratio, raise the total volume of high-grade gasoline, and develop new channels for exporting gasoline and jet fuel. The Company shall also take advantage of market opportunities and devote efforts in developing new products and specialized materials. The Company shall optimize its public projects and promote the optimization of its storage and transportation logistics system, and optimization its oil refining business. As a significant step forward, the Company is to implement full process safety management while strengthening its process stability and equipment integrity management, and continuously upgrade the automation and intelligence of its equipment. The Company will exert strict control of “Three Smalls” and eliminate “Three Nons”. Special competitions on the reliability of production equipment will continue to take place, while the “The Day of Excellence” activities are continuing to mobilize employees to eliminate safety risks in time, avoid accidents, and strengthen the smooth separation of the equipment.
| • | Advance reformations further and raise efficiencies in corporate governance |
With a good focus on its strategic planning, the Company seeks to explore its path in organizational reorganization along the business or industrial chain to establish an organizational system which is in line with the management scope. The Company shall also reorganize its organizations and streamline work processes as well as integrate positions, and focus on key tasks in the reform, such as the reformation of “three systems”, the reformation of its scientific research regime, and a sound market-oriented operating system. The Company shall continue to promote its process management to improve the efficiency of business collaboration between different departments. The Company shall also strengthen the management of investment enterprises, and incorporate wholly-owned and holding subsidiaries into the Company’s integrated management system. The Company shall also fully carry out benchmarking and upgrading, and strengthen cost target management across the whole staff body, while further tapping potentials and raise efficiency, with strict control on various expenses and expenditures. The Company also works to integrate business and finance, and transformation from accounting finance to management finance. The Company also implements transparent management, optimizes business processes, improves management efficiency and quality, and makes good use of information technology to quickly and effectively convey the Company’s decisions and plans to, and deployment at, the bottom level. The Company is also establishing a back-check mechanism to ensure the all employees are clear about the goals and responsibilities and provided the motivation.
| • | Focus on creativity-driven development so as to realize high-quality corporate development |
In accordance with the “3060” national carbon emission requirement (“3060” refers to having carbon dioxide emissions peak by 2030 and achieving carbon neutrality by 2060), the Company’s ultimate goal is to ensure “zero carbon emissions” and guarantee coordination of carbon reduction and transformation and development. The Company promoted the construction of large ton carbon fiber, hundred-ton high performance carbon fiber pilot plant project, 3rd circuit 220 kV power supply line project. We will speed up the construction of hydrogen energy demonstration projects and launch the thermoplastic elastomer project. The Company shall emphasize tackling key core technologies such as carbon fiber, increase investment in research and development, and improve the collaborative innovation mechanism. The Company shall also explore opportunities in differentiated high value-added products, and strive to build a new material industry cluster with the carbon fiber industry as its core and utilize polyester, polyolefin, elastomer, C5 downstream fine chemical new materials as the keys to seek breakthroughs and developments. The Company also vigorously promotes the construction of a data governance system and the application of advanced control and optimization technologies, and deepens the application of intelligent security by promoting the construction of an integrated platform for intelligent marketing and accelerating the advancement of digital transformation.
| • | Focus on team building and cementing solid foundation for development |
The Company shall further empower the Company through recruiting talents and improve the recruitment of new graduates. The Company is devising a five-year training program for new college graduates and building a talent team with engineering thinking. The Company shall also clarify its employment orientation and evaluate the officer and talent selection and appointment mechanism. The Company continues to explore channels to select and appoint officers by introducing experienced talent through the selection and appointment of professional managers to nurture more young officers. The Company is also looking to uphold the pioneering spirit of the base-level and the public and improve staff medical services and improve medical protection standards to raise its staff’s happiness index while further enhancing the cohesion of the staff team.
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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 2019 and 2020 by our major products.
| Production | Sales | |||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||
| (10,000 | (10,000 | Year-on-year | (10,000 | (10,000 | Year-on-year | |||||||||||||||||||
| Products | tons) | tons) | change | tons) | tons) | change | ||||||||||||||||||
| DieselNote1 |
398.21 | 384.50 | 3.57 | % | 398.61 | 384.14 | 3.77 | % | ||||||||||||||||
| Gasoline |
327.30 | 346.84 | -5.63 | % | 328.18 | 345.31 | -4.96 | % | ||||||||||||||||
| Jet FuelNote1 |
112.45 | 187.86 | -40.14 | % | 99.43 | 135.39 | -26.56 | % | ||||||||||||||||
| Paraxylene |
66.24 | 66.68 | -0.66 | % | 45.64 | 45.55 | 0.20 | % | ||||||||||||||||
| BenzeneNote2 |
37.21 | 37.33 | -0.32 | % | 33.14 | 32.98 | 0.49 | % | ||||||||||||||||
| Ethylene Glycol |
23.67 | 28.67 | -17.44 | % | 12.73 | 18.23 | -30.17 | % | ||||||||||||||||
| Ethylene Oxide |
31.30 | 27.55 | 13.61 | % | 30.53 | 26.69 | 14.39 | % | ||||||||||||||||
| EthyleneNote2 |
82.52 | 84.13 | -1.91 | % | — | 0.19 | — | |||||||||||||||||
| Polyethylene |
58.12 | 53.73 | 8.17 | % | 57.85 | 53.58 | 7.97 | % | ||||||||||||||||
| Polypropylene |
49.29 | 46.96 | 4.96 | % | 45.16 | 43.36 | 4.15 | % | ||||||||||||||||
| Polyester PelletNote2 |
33.99 | 35.90 | -5.32 | % | 29.33 | 28.09 | 4.41 | % | ||||||||||||||||
| Acrylic |
11.55 | 13.69 | -15.63 | % | 11.69 | 13.70 | -14.67 | % | ||||||||||||||||
| Polyester Staple |
3.37 | 3.94 | -14.47 | % | 3.40 | 3.94 | -13.71 | % | ||||||||||||||||
| 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 2020 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 |
0.22 | Textiles and apparel | ||
| Acrylic staple fiber |
2.03 | Cotton type fabrics, wool type fabrics | ||
| Others |
0.14 | |||
| Sub-total |
2.39 | |||
| RESINS AND PLASTICS |
||||
| Polyester chips |
2.06 | Polyester fibers, films and containers | ||
| Polypropylene pellets |
5.66 | Films, ground sheeting, wire and cable compound and other injection molding products such as housewares and toys | ||
| Polypropylene pellets |
5.26 | Films or sheets, injection molding products such as housewares, toys and household electrical appliances and automobile parts | ||
| Polyvinyl alcohol (“PVA”) |
0.09 | PVA fibers, building coating materials and textile starch | ||
| Others |
2.23 | |||
| Sub-total |
15.30 | |||
| INTERMEDIATE PETROCHEMICALS |
||||
| Ethylene |
0.00 | Feedstock for polyethylene, ethylene glycol, polyvinyl chloride and other intermediate petrochemicals which can be further processed into resins, plastics and synthetic fiber. | ||
| Ethylene oxide |
3.02 | Intermediate products for the chemical and pharmaceutical industry, including dyes, detergents and adjuvant | ||
| Product | % of net sales |
Typical Use | ||
| Benzene |
1.81 | Intermediate petrochemical products, styrene, plastics, explosives, dyes, detergents, epoxies and polyamide fiber | ||
| Paraxylene |
2.95 | Intermediate petrochemicals and polyester | ||
| Butadiene |
0.89 | Synthetic rubber and plastics | ||
| Ethylene glycol |
0.73 | Fine chemicals | ||
| Others |
3.93 | |||
| Sub-total |
13.33 | |||
| PETROLEUM PRODUCTS |
||||
| Gasoline |
19.07 | Transportation fuels | ||
| Diesel |
18.41 | Transportation fuels and agricultural machinery fuels | ||
| Jet Fuel |
4.42 | Transportation fuels | ||
| Others |
7.06 | |||
| Sub-total |
48.96 | |||
| Trading of petrochemical products |
18.81 | Import and export trade of petrochemical products (purchased from domestic and overseas suppliers) | ||
| Others |
1.21 | |||
| 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:
| Primary upstream | Transport/storage | Primary downstream | Key price-influencing | |||||||
| Product |
Industry segment |
raw material |
method |
application fields |
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 |
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| Primary upstream | Transport/storage | Primary downstream | Key price-influencing | |||||||
| Product |
Industry segment |
raw material |
method |
application fields |
factors | |||||
| 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 | PE, EG, PVC and other raw material for further processing of intermediate petrochemical products such as resins, plastics and synthetic fibres | International crude oil price, supply- demand balance | |||||
| 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 | PTA, EG | Road transportation, shipping and rail transportation/ warehousing | Polyester fibre or film, container | Raw material price and market supply- demand condition | |||||
| Acrylics | Synthetic fibres | 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 fibres | Polyester | Road transportation, shipping and rail transportation/warehousing | Texture, apparel | Raw material price and market supply- demand condition |
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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.
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.
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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 2020, 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 2020 accounted for 97.74% 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 1.22:1 for 2020. 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 2020, crude oil accounted for approximately 54.86% of our total cost of sales. Accordingly, the supply and price of crude oil are key factors in determining our profitability.
Supply and Transportation – The crude oil required by us is purchased through Sinopec Corp., as an agent, from foreign sources and Shanghai Nanguang Petrochemical Co., Ltd., as an agent, from domestic sources. During 2020, 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 14.2 million tons of imported crude oil in 2021. 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 2021. We believe that the mix of crude oil feedstock currently available is satisfactory for our 2021 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 2020 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 2020 production capacity and goals.
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In 2020, our crude oil was sourced as follows:
| Domestic offshore crude oil |
1.08 | % | ||
| Imported crude oil |
98.92 | % | ||
|
|
|
|||
| 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 2020 was RMB 2,374.65 (U.S.$ 335.15) per ton and RMB 2,573.82 (U.S.$308.67) per ton, respectively. In 2020, we processed 14,483,400 tons of imported crude oil and 188100 tons of domestic offshore crude oil (including 402,400 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.
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 2020, the international crude oil market fluctuated violently, with a huge overall decline. Prices fell sharply in the first quarter, bottomed out and rebounded in the second quarter. After entering the third quarter, the average price was relatively stable and rose significantly at the end of the year. The annual average price of West Texas Intermediate (WTI) crude oil was $39.51/barrel, a decrease 30.7% over the previous year; the average price of Brent crude oil was $41.74/barrel, a decrease of 35.1%; and the average price of Dubai crude oil was $42.18/barrel, a decrease of 33.6%.
As of December 31, 2020, Sinopec Group had processed a total of 14.6715 million tons of crude oil (of which 402,400 tons were processed on order), indicating a year-on-year decrease of 3.47%. The cost of crude oil processing for the whole year of 2020 was RMB2,380.02/ton, representing a decrease of RMB950.61/ton or 28.54% from the same period last year. The annual crude oil processing total cost decreased by RMB13.117 billion from the same period last year or 27.86%, accounting for 54.86% 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 2021 will be approximately 1.9 million tons. In 2020, we consumed approximately 1.8908 million tons of coal, an increase of 11,300 tons from 2019 of 1.8795 million tons.
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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 2020, the total cost of these materials accounted for approximately 13.74% 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.
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 2020 that were subject to planned distribution by Sinopec Group, sales by agents and sales based on our own discretion accounted for 60.36%, 34.13% and 5.51%, 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 2020. In general we managed to maintain a stable correlation between production and sales in 2020.
Product breakdown
Synthetic Fibers – In 2020, 36.99% 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 25% of our sales of synthetic fibers in 2020. List of customers each accounting for more than 10% of the sales in this segment: SDIC International Trade (Beijing) Co., Ltd.: 11.03%; Shaoxing Xiangyu Green Packing Co., Ltd.: 24.89%.
Resins and Plastics – In 2020, approximately 45% of our resins and plastics sales were to provincial and municipal government trading companies and approximately 55% were sold to industrial users. No single customer accounted for more than 5% of our sales of resins and plastics in 2020.
Intermediate Petrochemicals – We sell a variety of intermediate petrochemical products, among which the sale volume of p-xylene, ethylene oxide was relatively high in 2020. SECCO is the principal outside consumer of our petroleum benzene. In 2020, we sold 0.1363 million tons of petroleum benzene to SECCO, representing 41.12% of our total 2020 production of such product. List of customers each accounting for more than 10% of sales in this segment: SECCO: 41.12%; Sinopec Shanghai Gaoqiao Petrochemical Co., Ltd.: 18.15%; Zhejiang Baling Hengyi Caprolactam Co., Ltd.:17.58.
Jiaxing Petrochemical Company Limited, Oriental Petrochemical (Shanghai) Corporation and Zhejiang Dushan Energy Co., Ltd. are the outside consumers of our paraxylene. In 2020, we sold 0.2139 million tons, 0.1139 million and 0.1286 million tons of paraxylene, representing 46.86%, 24.96% and 28.18% of our total 2020 production of such product, to Jiaxing Petrochemical Company Limited, Oriental Petrochemical (Shanghai) Corporation respectively and Zhejiang Dushan Energy Co., Ltd., at prices mutually agreed upon by the relevant parties.
Petroleum Products – In 2020, our primary gasoline and diesel customer was SINOPEC East China Company.
Trading of Petrochemical Products – In 2020, our largest trading customer for petrochemical products was Sinopec Chemical Commercial Holding Company Limited.
Major Suppliers and Customers
Sinopec Group’s top five suppliers in 2020 were China International United Petroleum & Chemical Co., Ltd., Sinochem Oil Co. Ltd., SINOPEC East China Company, Sinopec Chemical Commercial Holding (Hong Kong). Company Limited and Shanghai Gas Co., Ltd.. Total procurement costs involving these five suppliers, which amounted to RMB34,973.0 million, accounted for 59.53% of the total procurement costs of Sinopec Group for the year. The procurement from the largest supplier amounted to RMB26,820.7 million, representing 45.65% of the total costs of purchases by Sinopec Group for the year.
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Sinopec Group’s top five customers in 2020 were SINOPEC East China Company, China International United Petroleum & Chemical Co., Ltd., Sino Refinery Products Sales Co., Ltd., Shanghai Secco and Jiaxing Petrochemical Co., Ltd.. Total sales to these five customers amounted to RMB46,506.8 million, representing 62.96% of Sinopec Group’s total turnover for the year. Sales to Sinopec Group’s largest customer amounted to RMB38,651.4 million, representing 52.32% of Sinopec Group’s total turnover for the year.
To the knowledge of the Board, among the suppliers and customers listed above, Shareholders and Directors of the Company and their close associates have no interest in Sinochem Oil Company Limited, Jiaxing Petrochemical Company Limited and Shanghai Gas Company Limited, which is an associate of the Company; Shanghai Secco is an associate company of the Company; Sinopec Chemicals Sales (Hong Kong) Co., Ltd., Sinopec Refinery Sales Co., Ltd. and SINOPEC East China Company are subsidiaries of Sinopec Corp., a controlling shareholder of the Company.
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 2018, 2019 and 2020, approximately 41.62%, 44.81% and 43.64% 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 89.72% of our products in volume were sold in 2020. 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 2020, 87.11% 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; |
| • | 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; |
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| • | 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 2020, we had an approximate 0.39% share of total domestic polyester and acrylic consumption while imports had an approximate 0.89% share.
The following table summarizes the competitive position of our principal synthetic fibers according to domestic sales in 2020.
| 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 |
20.67 | 2 | Jilin Province | 43.85 | 12.15 | |||||||||||||
Sources: Zhuochuang Information (www.chem99.com).
Resins and Plastics
In 2020, we had an approximate 1.67% share of total domestic resins and plastics consumption while imports had an approximate 28.18% share. The following table summarizes the competitive position of our principal resins and plastics products according to domestic sales in 2020.
| 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 |
2.11 | 4 | Jiangsu Province | 6.38 | 2.63 | |||||||||||
| Polyethylene |
1.51 | 22 | Guangdong Province | 2.24 | 48.01 | |||||||||||
| Polypropylene |
1.66 | 29 | Zhejiang Province | 2.46 | 15.25 | |||||||||||
Sources: Zhuochuang Information (www.chem99.com).
Intermediate Petrochemicals
In 2020, we were one of the largest sellers of intermediate petrochemicals in China, holding an approximate 1.91% share of total domestic consumption, while imports had an approximate 19.94% share of domestic consumption. Ethylene glycol, paraxylene, benzene and butadiene are our major intermediate petrochemical products. In 2020, 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 2020.
| 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 |
1.23 | 8 | Zhejiang Province | 3.31 | 54.67 | |||||||||||||
| Paraxylene |
1.98 | 12 | Zhejiang Province | 4.33 | 41.39 | |||||||||||||
| Benzene |
2.51 | 4 | Zhejiang Province | 8.78 | 14.16 | |||||||||||||
| Butadiene |
2.79 | 24 | Jiangsu Province | 2.79 | 12.12 | |||||||||||||
Sources: Zhuochuang Information (www.chem99.com).
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Petroleum Products
In 2020, we had an approximate 2.76% share of total domestic petroleum products market while imports had an approximate 7.27% 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.
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 2020, we sold approximately 91.35% of our petroleum products in Eastern China.
Research and Development, Patents and Licenses, etc.
We have a number of technology development units, including Advanced Materials Innovation Research Institute, the Petrochemical Research Institute, the Plastics 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 2018, 2019 and 2020 were RMB37.3 million, RMB93.0 million and RMB110.6 million, respectively. The increase was mainly due to the increase in research and development investment in projects related to carbon fiber.
We are not, in any material aspect, dependent on any patents, licenses, industrial, commercial or financial contracts, or new production processes.
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 2020, SECCO achieved a sales revenue of RMB21.63 billion (U.S.$3.31 billion), representing a decrease of 31.02% from its sales revenue of RMB28.34 billion (U.S.$4.07 billion) in 2019. SECCO produced 289,596 tons of ethylene in 2020, representing a decrease of 1,123 tons over the previous year. SECCO had a net profit of RMB2.41 billion (U.S.$369.35 million) in 2020, representing a decrease of RMB0.97 billion (U.S.$ 148.66 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. In 2020, the Company paid a total of RMB 15.20 million in environmental taxes, a decrease of 15.75% compared with 2019.
We were subject to various administrative penalties for its violations of the relevant PRC environmental laws and regulations in the past three years. In 2020, we were subject to one administrative penalty for violations of the relevant PRC environmental laws and regulations, with fines of RMB0.4 million.
We believe our environmental protection facilities and systems are adequate for the existing national and local environmental protection regulations. In 2020, 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 2020, the Company’s overall level of energy consumption per RMB10,000 of product value was 0.743 ton of standard coal, decreased by 0.27% from the previous year. As compared with 2019, the total volume of chemical oxygen demand, sulfur dioxide, nitrogen oxides 14.97%, 4.74%, 3.37% and 26.92%, respectively. The volume of annual average cumulative average VOCs concentration at the plant boundary is 99.1 micrograms/m3, a decrease of 26.92% compared with last year. 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 was 92.46%, which was basically the same as last year.
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Insurance
We currently participate in a package of insurance coverage plan through Sinopec Group as its controlled subsidiary, which, as of December 31, 2020, was approximately RMB44.93 billion (U.S.$6.89 billion) on our property and facilities and approximately RMB892.88 million (U.S.$136.84 million) 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.
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 2020, 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 2020, we sourced no crude oil from Iran.
In addition, based on feedback to our inquiries to Sinopec Corp., in 2020, it did not source any of its refinery throughputs of crude oil from Iran. Based on Sinopec Corp.’s internal reports and statistics, Sinopec Corp. recorded no revenue or net profit from its trading activities with Iranian companies.
In addition, based on feedback to our inquiries to Sinopec Group, the controlling shareholder of Sinopec Corp., Sinopec Group engaged in a small amount of business activities in Iran such as providing engineering services and designs. Sales revenue from these business activities accounted for 0.014% of its total unaudited sales revenue, with a minor net loss incurred from these business.
We have no performance obligations under any contract to continue to purchase crude oil sourced from Iran in 2021.
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C. Organizational Structure.
Our Subsidiaries
As of December 31, 2020, 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 | ||||||
| Shanghai Jinshan Trading Corporation |
67.33 | 67.33 | ||||||
| Zhejiang Jinlian Petrochemical Storage and Transportation Company Limited |
100.00 | 100.00 | ||||||
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 SEC. 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.
| Name of Company |
Particulars of issued capital |
Type of legal entity |
Percentage of and its |
Principal activities | ||||
| (millions) | (%) | |||||||
| Sinopec International Petroleum Exploration and Production Company Limited |
RMB8,250 | 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 Yizheng Chemical Fiber Limited Liability Company |
RMB4,000 | Limited company | 100.00 | Production and sale of polyester chips and polyester fibers | ||||
| 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 | Marketing and distribution of petrochemical products | ||||
| China International United Petroleum & Chemical Company Limited |
RMB5,000 | Limited company | 100.00 | Trading of crude oil and petrochemical products | ||||
| Sinopec Overseas Investment Holding Limited |
U.S.$1,662 | Limited company | 100.00 | Investment of overseas business and equity interests management | ||||
| 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 |
RMB9,606 | Limited company | 75.00 | Manufacturing of intermediate petrochemical products and petroleum products |
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| 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. |
RMB7,193 | Limited company | 59.00 | Production, sale, research and development of petroleum products, petrochemical products, ethylene and downstream derivatives | ||||
| Sinopec Kantons Holdings Limited |
HK$248 | Limited company | 60.33 | Provision of crude oil jetty services and natural gas pipeline transmission 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 |
RMB10,492 | Limited company | 50.00 | Manufacturing of plastics, intermediate petrochemical products and petroleum products | ||||
| Zhongke (Guangdong) Refining & Chemical Co., Ltd. |
RMB6,397 | Limited company | 90.3 | Crude oil processing and petroleum products manufacturing | ||||
| Sinopec Baling Petrochemical Co., Ltd. |
RMB3,000 | Limited company | 55 | Crude oil processing and petroleum products manufacturing |
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.
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 2020:
| Production Unit (number of units) |
Rated Capacity (tons) | Utilization Rate (%) | ||||||
| Crude oil distillation units (2) |
14,000,000 | 95.44 | ||||||
| Hydrocracker (2) |
3,000,000 | 86.81 | ||||||
| Ethylene unit |
700,000 | 107.54 | ||||||
| *Aromatics units (2) |
835,000 | 102.06 | ||||||
| PTA unit |
400,000 | 79.93 | ||||||
| Ethylene oxide / ethylene glycol units (2) |
525,000 | 86.51 | ||||||
| Cracking and catalyzing |
3,500,000 | 95.85 | ||||||
| Delayed coking (2) |
2,200,000 | 87.5 | ||||||
| Diesel oil hydrogenation units (2) |
3,850,000 | 97.55 | ||||||
| **Acrylonitrile unit |
650,000 | 94.19 | ||||||
| C5 segregation units (2) |
205,000 | 134.8 | ||||||
| * | The No. 1 paraxylene unit (235,000 tons/year) ceased operating during the whole year. |
| ** | No. 2 Diesel hydrogenation facility (1,200,000 tons/year) was revamped into acrylonitrile facility by the end of 2016. Annual production is 650,000 tons/year. |
Our two crude oil distillation units were designed and built in China. In 2020, the actual quantity of crude oil we processed was approximately 14.6715 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.
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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 2020:
| Production Unit (number of units) |
Rated Capacity (tons) | Utilization Rate (%) | ||||||
| *Polyester units (3) |
550,000 | 88.37 | ||||||
| **Polyester staple units (2) |
158,000 | 88.38 | ||||||
| Polyester filament unit |
21,000 | 82.48 | ||||||
| Acrylic staple fiber units (3) |
141,000 | 111.38 | ||||||
| Polypropylene units (3) |
408,000 | 96.34 | ||||||
| Polypropylene units (3) |
400,000 | 97.78 | ||||||
| Vinyl acetate unit |
86,000 | 98.27 | ||||||
| * | No. 3 polyester fibre facility (100,000 tons/year) was discontinued on 1 September 2013. |
| ** | No. 1 Polyester staple fibre facility (4,000 tons/year) was suspended for the whole year. |
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.
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 2020, Sinopec Group focused on building up and implementing stable production as its top priority in production management, and implemented and consolidated its foundation in production operation while cementing safety management. The Company seeks to implement the HSSE management system and put into practice process safety management, and further enhance its ensure equipment integrity assurance regime. We did not encounter serious accidents involving production safety, environmental pollution or occupational poisoning in 2020. Among the 58 major indicators that measure technical and economic capacity, 44 exceeded those of the previous year with a year-over-year growth rate of 75.86%.
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 2020, approximately 89.98% 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 2020, products representing 26.87% 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 2020, products representing 2.26% 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.
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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 2020, products representing 0.17% of total sales volume were transported from the factory by rail.
Capital Expansion Program
We have planned or started a number of other principal capital expansion projects. In 2018, 2019 and 2020, we invested RMB1.0 billion, RMB1.8 billion and RMB2.1 billion, respectively, in capital expansion projects. We expect that total investment in the projects described below will be approximately RMB3.3 billion in 2021.
Increasing Quality of Oil Products
In 2016, we launched No. 2 Diesel Hydrogenation Unit Reconstruction and Diesel Quality Upgrading Project so as to further improve the quality of oil products and perfect oil product structure. In 2017, we launched an oil cleaning project with 400,000 tons/year clean gasoline components units, which was completed and put into operation in 2020.
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 commenced the construction of Phase II of the Project in April 2019, and completed the mid-term delivery of it in March 2021. We commenced raw silks (24,000 ton/year) and 48K large-tow carbon fiber (12,000 ton/year) project in November 2020, and planned to complete Phase I mid-term delivery of them in June 2022.
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 400,000 tons/year clean gasoline components units, 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. All the projects were completed in 2020.
| ITEM 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 2020. 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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Net realizable value (“NRV”) of inventories
The NRV is determined based on the estimated selling prices less the estimated costs to completion, if relevant, other costs necessary to make the sale, and the related taxes. Determination of estimated selling prices requires significant management judgement, taking into consideration of historical selling prices and future market trend. If the actual selling prices were to be lower or the costs of completion were to be higher than estimated, the actual allowance for diminution in value of inventories could be higher than the estimate.
Impairments for non-financial assets
In determining the value in use, expected cash flows generated by the non-financial assets 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.
Useful life and residual value of property, plant and equipment
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, 2018, 2019 and 2020.
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 2018, 2019 and 2020, approximately 41.62%, 44.81% and 43.64% 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.
Summary
In 2020, the global economy was severely impacted while facing the most severe economic crisis since the Great Depression in the 1930s under the global COVID-19 pandemic situation. Major developed economies experienced negative growth without exception, while emerging markets and developing economies have also in general experienced negative Gross Domestic Product (GDP) growth. Facing a complicated domestic and global situation, especially under the difficulties caused by the COVID-19 pandemic, China adhered closely to the principle of seeking progress while maintaining stability and coordinated epidemic prevention and control together with economic and social development to guarantee the restoration of economic stability. Throughout 2020, GDP saw a growth of 2.3%, a decrease of 3.8% year-on-year, yet China was the only global major economy that managed to achieve positive economic growth in the year. China’s petrochemical industry faced enormous challenges especially in the first quarter. Price of major chemical products saw a severe drop as both production and sales were in historic decline. Under the constraints of both resources and environment, the petrochemical industry was in a short downward spiral. However, with the gradual resumption of work and production in the second quarter, the petrochemical industry saw a gradual rebound.
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In 2020, the Company actively responded to the complex and severe domestic and international economic and industry situations. At the same time with pandemic prevention, Sinopec Group focused its attention on main contradictions, system optimization, and pandemic prevention to transform potential crises into opportunities and to achieve a level of operation results with the joint efforts of all staff.
The following table sets forth our sales volumes and net sales for the years indicated:
| Year ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2018 | 2019 | 2020 | ||||||||||||||||||||||||||||||||||
| 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 |
156.0 | 2,182.4 | 2.3 | 177.9 | 2,158.9 | 2.5 | 151.4 | 1,472.4 | 2.4 | |||||||||||||||||||||||||||
| Resins and plastics |
1,208.6 | 10,542.1 | 11.0 | 1,292.4 | 9,979.9 | 11.3 | 1,365.4 | 9,419.7 | 15.3 | |||||||||||||||||||||||||||
| Intermediate petrochemicals |
2,134.4 | 12,160.6 | 12.7 | 2,193.7 | 10,313.6 | 11.7 | 2,168.0 | 8,205.8 | 13.3 | |||||||||||||||||||||||||||
| Petroleum products |
9,917.3 | 43,403.0 | 45.4 | 10,294.6 | 43,125.9 | 49.0 | 10,347.7 | 30,139.6 | 49.0 | |||||||||||||||||||||||||||
| Trading of petrochemical products |
— | 26,544.0 | 27.8 | — | 21,690.7 | 24.6 | — | 11,577.3 | 18.8 | |||||||||||||||||||||||||||
| Others |
— | 781.4 | 0.8 | — | 786.7 | 0.9 | — | 746.1 | 1.2 | |||||||||||||||||||||||||||
| Total |
13,416.3 | 95,613.5 | 100.0 | 13,958.6 | 88,055.7 | 100.0 | 14,032.5 | 61,560.9 | 100.0 | |||||||||||||||||||||||||||
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The following table sets forth a summary statement of our consolidated statements of operations for the years indicated:
| Year ended December 31, | ||||||||||||||||||||||||
| 2018 | 2019 | 2020 | ||||||||||||||||||||||
| RMB million |
% of Net sales |
RMB million |
% of Net sales |
RMB million |
% of Net sales |
|||||||||||||||||||
| Synthetic fibers |
||||||||||||||||||||||||
| Net sales |
2,182.4 | 2.3 | 2,158.9 | 2.5 | 1,472.4 | 2.4 | ||||||||||||||||||
| Operating expenses |
(2,755.9 | ) | (2.9 | ) | (2,699.2 | ) | (3.1 | ) | (1,836.6 | ) | (3.0 | ) | ||||||||||||
| Segment loss |
(573.5 | ) | (0.6 | ) | (540.3 | ) | (0.6 | ) | (364.2 | ) | (0.6 | ) | ||||||||||||
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| Year ended December 31, | ||||||||||||||||||||||||
| 2018 | 2019 | 2020 | ||||||||||||||||||||||
| RMB million | % of Net sales |
RMB million | % of Net sales |
RMB million | % of Net sales |
|||||||||||||||||||
| Resins and plastics |
||||||||||||||||||||||||
| Net sales |
10,542.1 | 11.0 | 9,979.9 | 11.3 | 9,419.7 | 15.3 | ||||||||||||||||||
| Operating expenses |
(9,641.7 | ) | (10.1 | ) | (9,578.5 | ) | (10.9 | ) | (8,157.6 | ) | (13.3 | ) | ||||||||||||
| Segment profit |
900.4 | 0.9 | 401.4 | 0.4 | 1,262.1 | 2.0 | ||||||||||||||||||
| Intermediate petrochemicals |
||||||||||||||||||||||||
| Net sales |
12,160.6 | 12.7 | 10,313.6 | 11.7 | 8,205.8 | 13.3 | ||||||||||||||||||
| Operating expenses |
(10,225.7 | ) | (10.7 | ) | (9,899.6 | ) | (11.2 | ) | (7,624.2 | ) | (12.4 | ) | ||||||||||||
| Segment profit |
1,934.9 | 2.0 | 414.0 | 0.5 | 581.6 | 0.9 | ||||||||||||||||||
| Petroleum products |
||||||||||||||||||||||||
| Net sales |
43,403.0 | 45.4 | 43,125.9 | 49.0 | 30,139.6 | 49.0 | ||||||||||||||||||
| Operating expenses |
(40,493.0 | ) | (42.4 | ) | (42,420.4 | ) | (48.2 | ) | (32,338.3 | ) | (52.5 | ) | ||||||||||||
| Segment profit/(loss) |
2,910.0 | 3.0 | 705.5 | 0.8 | (2,198.7 | ) | (3.5 | ) | ||||||||||||||||
| Trading of petrochemical products |
||||||||||||||||||||||||
| Net sales |
26,544.0 | 27.8 | 21,690.7 | 24.6 | 11,577.3 | 18.8 | ||||||||||||||||||
| Operating expenses |
(26,439.1 | ) | (27.7 | ) | (21,637.5 | ) | (24.5 | ) | (11,535.3 | ) | (18.7 | ) | ||||||||||||
| Segment profit |
104.9 | 0.1 | 53.2 | 0.1 | 42.0 | 0.1 | ||||||||||||||||||
| Others |
||||||||||||||||||||||||
| Net sales |
781.4 | 0.8 | 786.7 | 0.9 | 746.1 | 1.2 | ||||||||||||||||||
| Operating expenses |
(473.0 | ) | (0.5 | ) | (500.0 | ) | (0.6 | ) | (535.1 | ) | (0.9 | ) | ||||||||||||
| Segment profit |
308.4 | 0.3 | 286.7 | 0.3 | 211.0 | 0.3 | ||||||||||||||||||
| Total |
||||||||||||||||||||||||
| Net sales |
95,613.5 | 100.0 | 88,055.7 | 100.0 | 61,560.9 | 100.0 | ||||||||||||||||||
| Operating expenses |
(90,028.4 | ) | (94.2 | ) | (86,735.2 | ) | (98.5 | ) | (62,027.1 | ) | (100.8 | ) | ||||||||||||
| Profit/(loss) from operations |
5,585.1 | 5.8 | 1,320.5 | 1.5 | (466.2 | ) | (0.8 | ) | ||||||||||||||||
| Net finance income |
337.4 | 0.4 | 363.0 | 0.4 | 332.3 | 0.5 | ||||||||||||||||||
| Investment income |
— | — | — | — | — | — | ||||||||||||||||||
| Share of profit of associates and jointly controlled entities |
885.6 | 0.9 | 972.6 | 1.1 | 724.7 | 1.2 | ||||||||||||||||||
| Profit before income tax |
6,808.1 | 7.1 | 2,656.1 | 3.0 | 590.8 | 0.9 | ||||||||||||||||||
| Income tax |
(1,471.9 | ) | (1.5 | ) | (429.0 | ) | (0.5 | ) | 65.6 | 0.1 | ||||||||||||||
| Net profit |
5,336.2 | 5.6 | 2,227.1 | 2.5 | 656.4 | 1.0 | ||||||||||||||||||
| Attributable to: |
||||||||||||||||||||||||
| Equity shareholders of the Company |
5,336.3 | 5.6 | 2,215.7 | 2.5 | 645.1 | 1.0 | ||||||||||||||||||
| Non-controlling interests |
(0.1 | ) | 0.0 | 11.4 | 0.0 | 11.3 | 0.0 | |||||||||||||||||
| Net profit |
5,336.2 | 5.6 | 2,227.1 | 2.5 | 656.4 | 1.0 | ||||||||||||||||||
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, 2020 compared with year ended December 31, 2019
Net sales
In 2020, our net sales amounted to RMB 61,560.9 million, representing a decrease of 30.09% as compared to RMB88,055.7 million in 2019. The decrease was primarily due to the decrease 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 decreased by 19.84%, 10.65%, 19.49% and 30.48%, respectively, over the previous year. The total volume of our products was 14,032.5 million tons in 2020, representing an increase of 0.53% over the previous year. Our production/sales ratio was 100.11%, and the trade receivables recovery rate was 100%. Our total amount of sales from export was RMB7.7 billion, a decrease of 58.16% compared with 2019.
(i) Synthetic fibers
In 2020, our net sales for synthetic fibers amounted to RMB1,472.4 million, representing a decrease of 31.80% compared to RMB2,158.9 million in 2019. The decrease was mainly due to the downturn in the downstream market this year. The general decline in the sales price of synthetic fiber products led to the sales decline during the reporting period. Sales volume of synthetic fibers increased by 14.91% compared with the previous year, while the weighted average sales price decreased by 19.84%. Meanwhile, the weighted average sales price of acrylic fiber, the main product of our synthetic fibers, decreased by 19.33%, and the weighted average sales price of polyester fiber decreased by 24.72% over the previous year. Net sales of acrylic fiber, polyester fiber and other products accounted for 84.84%, 9.15% and 6.01% of the total sales of synthetic fibers, respectively.
Net sales of synthetic fiber products accounted for 2.4% of total net sales in 2020, representing a decrease of 0.1% as compared to the previous year.
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(ii) Resins and plastics
Net sales of resins and plastics amounted to RMB 9,419.7 million in 2020, representing a decrease of 5.61% as compared to
RMB9,979.9 million in 2019. The decrease in net sales was mainly due to the decline in the sales price of resins products this year. The general decline in the sales price of resins and plastics products led to the sales decline during the reporting period. The weighted average sales price of resins and plastics decreased by 10.65%, while the sales volume of resins and plastics products increased by 5.65% as compared to the previous year. Meanwhile, the weighted average sales price of polyethylene and polypropylene decreased by 3.55% and 7.37%, and the weighted polyester chips decreased by 30.77%, respectively. Sales of polyethylene, polypropylene, polyester chips and other products accounted for 34.38%, 36.95%, 13.43% and 15.24% of the total sales of resins and plastics, respectively.
Net sales of resins and plastics accounted for 15.3% of total net sales in 2020, representing an increase of 4.0% as compared to the previous year.
(iii) Intermediate petrochemicals
Net sales of intermediate petrochemical products amounted to RMB8,205.8 million in 2020, representing a decrease of 20.44% as compared to RMB10,313.6 million in 2019. The decline in raw material costs this year has driven down the unit price of intermediate petrochemical products. The weighted average sales price of intermediate petrochemical products decreased by 19.49% compared to the previous year, and its sales volume decreased by 1.17% compared to the previous year. The sales of p-xylene, ethylene oxide, pure benzene, ethylene glycol and other products accounted for 22.12%, 22.65%, 13.59%, 5.51% and 36.13% of the total sales of intermediate petrochemical products respectively.
Net sales of intermediate petrochemicals accounted for 13.3% of total net sales in 2020, representing an increase of 1.6% as compared to the previous year.
(iv) Petroleum products
Net sales of petroleum products amounted to RMB30,139.6 million in 2020, representing a decrease of 30.11% as compared to RMB43,125.9 million in 2019, which was mainly due to the impact of international crude oil price shocks. The weighted average sales price of major products decreased by 30.48%, and sales volume increased by 0.52% as compared to the previous year.
Net sales of petroleum products accounted for 49.0% of total net sales in 2020, with no change compared with the previous year.
(v) Trading of petrochemical products
Net sales from trading of petroleum products amounted to RMB11,577.3 million in 2020, representing a decrease of 46.63% as compared to RMB21,690.7 million in 2019. Mainly due to the decrease in customer purchase demand of the subsidiary China Jinshan Associated Trading Corporation and Shanghai Jinshan Trading Corporation, the sales of this year decreased by RMB3,804 million and RMB6,247 million respectively.
Net sales from trading of petrochemical products accounted for 18.8% of total net sales in 2020, representing a decrease of 5.8% as compared to the previous year.
(vi) Others
Net sales of other products amounted to RMB746.1 million in 2020, representing a decrease of 5.16% as compared to RMB 786.7 million in the previous year.
Net sales of other products accounted for 1.2% of our total net sales in 2020, representing an increase 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 RMB 62,027.1 million in 2020, representing a decrease of 28.49% as compared to RMB 86,735.2 million in 2019. Our cost of sales and operating expenses of synthetic fibers, resins and plastics, intermediate petrochemicals, petroleum products, trading of petrochemical products and others were RMB 1,836.6 million, RMB 8,157.6 million, RMB 7,624.2 million, RMB 32,338.3 million, RMB 11,535.3 million and RMB 535.1 million, respectively, a decrease of 31.96%, a decrease of 14.83%, a decrease of 22.98%, a decrease of 23.77%, a decrease of 46.69% and an increase of 7.02% respectively.
Compared to the previous year, the cost of sales and operating expenses of the petrochemical products decreased this year, which was mainly due to the sharp decrease in crude oil prices and thus the decrease in corresponding costs.
| • | Cost of sales |
Our cost of sales amounted to RMB 61,664.8 million in 2020, representing a decrease of 28.56 % as compared to RMB 86,314.1 million in 2019.
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Cost of sales accounted for 100.17 % of net sales for 2020.
| • | Selling and administrative expenses |
Our selling and administrative expenses amounted to RMB 486.3 million in 2020, representing a decrease of 11.57 % as compared to RMB 549.9 million in the previous year, which was mainly due to the decrease in revenue and the increase in sales ratio in East China, resulting in a decrease in handling and miscellaneous handling fees of RMB19.8 million and a decrease in agency fees of RMB21.0 million.
| • | Other operating income |
Our other operating income amounted to RMB 148.7 million in 2020, representing a decrease of 1.33 % as compared to RMB 150.7 million in the previous year. This was mainly due to the decrease of RMB2.6 million in subsidies of R&D projects, leading to a reduction in other operating income.
| • | Other operating expenses |
Our other operating expenses were RMB 24.7 million in 2020, representing an increase of 12.79% as compared to RMB 21.9 million in the previous year. This was primarily due to an increase in other operating expenses as a result of the payment of RMB6.1 million for the purchases of rights of carbon emission during the year.
| • | Other gains/(losses)-net |
Our other gains amounted to RMB115.4 million in 2020, representing a decrease of RMB38.5 million as compared to other gains of RMB153.9 million in the previous year. The decrease in other gains was primarily due to the decrease of net gains on disposal of property, plant and equipment.
Profits from operations
Our profit from operations amounted to RMB466.2 million in 2020, representing a decrease of RMB4,264.5 million as compared to RMB1,786.7 million in the previous year. The sharp decrease was mainly due to the decrease in the price of crude oil, which led to a drop in sales prices.
(i) Synthetic fibers
Loss from operations related to synthetic fibers amounted to RMB364.2 million in 2020, representing a decrease of RMB176.1 million in the amount of loss as compared to a loss of RMB540.3 million in the previous year. The overall poor performance of the textile industry, the downstream market of synthetic fibers segment, together with the impact of the external trade situation resulted in weak market demand and an increase in losses in the synthetic fibers sector during 2020.
(ii) Resins and plastics
Profit from operations related to resins and plastics amounted to RMB1,262.1 million in 2020, representing an increase of RMB860.7 million from the operating profit of RMB401.4 million in the previous year. The rise in gross profit in the year was mainly due to a rise in plastics product downstream demand which in turn contributed to a rise in sales volume.
(iii) Intermediate petrochemicals
Profit from operations related to intermediate petrochemical products amounted to RMB581.6 million in 2020, representing an increase of RMB167.6 million as compared to RMB414.0 million in the previous year. The rise in gross profit of petrochemical products as compared with the previous period was mainly due to a fall in international crude oil price, which contribute to a significant cost fall.
(iv) Petroleum products
Loss from operations related to petroleum products amounted to RMB 2,198.7 million in 2020, representing a decrease of RMB 2,904.2 million as compared to the operating profit of RMB705.5 million in the previous year. The fall in operating profit in the year was mainly due to a fall in international crude oil price, which contributed to a significant fall in sales price. This in turn further led to the losses in the petroleum products sector.
(v) Trading of petrochemical products
Profit from trading of petrochemical products amounted to RMB 42.0 million in 2020, representing a decrease of RMB 11.2 million as compared to RMB 53.2 million in the previous year. The decrease was mainly due to the decrease of RMB10,113.4 million in net sales of the trading of petrochemical products and the decrease of RMB10,102.2 million in the cost and expenses of trading, which resulted in a year-on-year decrease in profits.
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(vi) Others
Profit from other operations amounted to RMB 211.0 million in 2020, representing a decrease of RMB 75.7 million as compared to RMB 286.7 million in the previous year, which was mainly due to a decrease of RMB84.3 million in processing trade.
Net finance income
Our net finance income was RMB 332.3 million in 2020, representing an decrease of RMB 30.7 million as compared to RMB 363.0 million in the previous year, mainly due to an increase in the average balance of loans and the issuance of RMB3.0 billion of short-term bonds during 2020, as a result our interest expenses had increased by RMB42.3 million from RMB59.4 million in 2019 to RMB101.7 million in 2020. The increase in our deposits during the Reporting Period resulted in an increase in interest income of RMB33.0 million from RMB398.2 million in 2019 to RMB431.2 million in 2020.
Profit before income tax
Our profit before taxation was RMB 590.8 million in 2020, representing a decrease of RMB 2,065.3 million as compared to the profit before taxation of RMB 2,656.1 million in the previous year.
Income tax
Our income tax credit amounted to RMB 65.6 million in 2020, representing a decrease of RMB 494.6 million as compared to the income tax expense RMB 429.0 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 2020 was 25% (2019:25%).
However, the effective rate for income tax was -11.10% in 2020, as compared to 16.15% in 2019.
Net profit
Our net profit was RMB656.4 million in 2020, representing a decrease of RMB1,570.7 million as compared to RMB2,227.1 million in 2019.
Year ended December 31, 2019 compared with year ended December 31, 2018
Net sales
In 2019, our net sales amounted to RMB 88,055.7 million, representing a decrease of 7.90% as compared to RMB95,613.5 million in 2018. The decrease was primarily due to the decrease 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 decreased by 13.24%, 11.48%, 17.48% and 4.28%, respectively, over the previous year. The total volume of our products was 13,958.6 million tons in 2019, representing an increase of 4.40% over the previous year. Our production/sales ratio was 100.02%, and the trade receivables recovery rate was 100%.
Our total amount of sales from export was RMB18.3 billion, a decrease of 4.19% compared with 2018.
(i) Synthetic fibers
In 2019, our net sales for synthetic fibers amounted to RMB 2,158.9 million, representing a decrease of 1.08% compared to RMB2,182.4 million in 2018. The decrease was mainly due to the downturn in the downstream market this year. The general decline in the sales price of synthetic fiber products led to the sales decline during the reporting period. Sales volume of synthetic fibers increased by 14.02% compared with the previous year, while the weighted average sales price decreased by 13.24%. Meanwhile, the weighted average sales price of acrylic fiber, the main product of our synthetic fibers, decreased by 14.44%, and the weighted average sales price of polyester fiber decreased by 14.13% over the previous year. Net sales of acrylic fiber, polyester fiber and other products accounted for 84.83%, 9.03% and 6.14% of the total sales of synthetic fibers, respectively.
Net sales of synthetic fiber products accounted for 2.5% of total net sales in 2019, representing a decrease of 0.2% as compared to the previous year.
(ii) Resins and plastics
Net sales of resins and plastics amounted to RMB 9,979.9 million in 2019, representing a decrease of 5.33% as compared to RMB10,542.1 million in 2018. The decrease in net sales was mainly attributable to the downturn in the downstream market this year. The general decline in the sales price of resins and plastics products led to the sales decline during the reporting period. The weighted average sales price of resins and plastics decreased by 11.48%, while the sales volume of resins and plastics products increased by 6.94% as compared to the previous year. Meanwhile, the weighted average sales price of polyethylene and polypropylene decreased by 17.94% and 4.08%, and the weighted polyester chips decreased by 15.91%, respectively. Sales of polyethylene, polypropylene, polyester chips and other products accounted for 31.92%, 36.21%, 17.55% and 14.32% of the total sales of resins and plastics, respectively.
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Net sales of resins and plastics accounted for 11.3% of total net sales in 2019, representing a decrease of 0.3% as compared to the previous year.
(iii) Intermediate petrochemicals
Net sales of intermediate petrochemical products amounted to RMB10,313.6 million in 2019, representing a decrease of 15.19% as compared to RMB12,160.6 million in 2018. The decline in raw material costs this year has driven down the unit price of intermediate petrochemical products. The weighted average sales price of intermediate petrochemical products decreased by 17.48% compared to the previous year, and its sales volume increased by 2.78% compared to the previous year. The sales of p-xylene, ethylene oxide, pure benzene, ethylene glycol and other products accounted for 27.26%, 16.97%, 13.72%, 7.40% and 34.67% of the total sales of intermediate petrochemical products respectively.
Net sales of intermediate petrochemicals accounted for 11.7% of total net sales in 2019, representing a decrease of 1.01% as compared to the previous year.
(iv) Petroleum products
Net sales of petroleum products amounted to RMB43,125.9 million in 2019, representing a decrease of 0.64% as compared to RMB43,403.0 million in 2018, representing a slight change. The weighted average sales price of major products decreased by 4.28%, and sales volume increased by 3.80% as compared to the previous year.
Net sales of petroleum products accounted for 49.0% of total net sales in 2019, representing an increase of 3.6% as compared to the previous year.
(v) Trading of petrochemical products
Net sales from trading of petroleum products amounted to RMB21,690.7 million in 2019, representing a decrease of 18.28% as compared to RMB26,544.0 million in 2018. Mainly due to the decrease in customer purchase demand of the subsidiary China Jinshan Associated Trading Corporation, the sales of this year decreased by RMB4,513 million.
Net sales from trading of petrochemical products accounted for 24.6% of total net sales in 2019, representing a decrease of 3.2% as compared to the previous year.
(vi) Others
Net sales of other products amounted to RMB786.7 million in 2019, representing an increase of 0.68% as compared to RMB781.4 million in the previous year.
Net sales of other products accounted for 0.9% of our total net sales in 2019, representing an increase of 0.1% 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 RMB86,735.2 million in 2019, representing a decrease of 3.66% as compared to
RMB90,028.4 million in 2018. Our cost of sales and operating expenses of synthetic fibers, resins and plastics, intermediate petrochemicals, petroleum products, trading of petrochemical products and others were RMB2,699.2 million, RMB9,578.5 million, RMB9,899.6 million, RMB42,420.4 million, RMB21,637.5 million and RMB500 million, respectively. Meanwhile, cost of sales and operating expenses of synthetic fibers and petroleum products increased by 4.48% and 4.76% compared to the previous year, respectively. while cost of sales and operating expenses of resins and plastics, intermediate petrochemical products, petrochemical products and other products decreased by 0.66%, 3.19%, 18.16% and 22.54% compared to the previous year.
Compared to the previous year, the cost of sales and operating expenses of the petrochemical products decreased this year, which was mainly due to the decrease in sales of the subsidiary China Jinshan Associated Trading Corporation and thus the decrease in corresponding costs.
| • | Cost of sales |
Our cost of sales amounted to RMB86,468.0 million in 2019, representing a decrease of 3.75% as compared to RMB89,839.0 million in 2018. Cost of sales accounted for 98.02% of net sales for 2019.
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| • | Selling and administrative expenses |
Our selling and administrative expenses amounted to RMB549.9 million in 2019, representing a slight increase of 2.57% as compared to RMB536.1 million in the previous year, which was mainly due to the increase in transportation fee by RMB13.5 million.
| • | Other operating income |
Our other operating income amounted to RMB150.7 million in 2019, representing a decrease of 25.62% as compared to RMB202.6 million in the previous year. This was mainly due to the decrease of RMB22.1 million in tax refunds and RMB12.9 million in subsidies of R&D projects, leading to a reduction in the revenue of other businesses.
| • | Other operating expenses |
Our other operating expenses were RMB21.9 million in 2019, representing a decrease of 32.62% as compared to RMB32.5 million in the previous year. This was mainly due to the decrease of RMB10.9 million in compromise and costs this year, leading to a reduction in expenses of other businesses.
| • | Other gains/(losses)-net |
Our other gains amounted to RMB153.9 million in 2019, representing a decrease of RMB22.8 million as compared to other gains of RMB176.7 million in the previous year. The decrease in other gains was primarily due to the decrease of net gains on disposal of property, plant and equipment of RMB14.0 million in 2019.
Profits from operations
Our profit from operations amounted to RMB1,320.6 million in 2019, representing a decrease of RMB4,264.5 million as compared to RMB5,585.1 million in the previous year. The sharp decrease was mainly due to impacts of the increase in crude oil prices and the production cycle in 2019. Affected by the overall economic environment and the demands of downstream manufacturers, the price of the our products fell sharply, while our raw material purchase prices and processing costs fell less, resulting in a significant reduction in profits.
(i) Synthetic fibers
Loss from operations related to synthetic fibers amounted to RMB540.3 million in 2019, representing a decrease of RMB33.2 million in the amount of loss as compared to a loss of RMB573.5 million in the previous year. The overall poor performance of the textile industry, the downstream market of synthetic fibers segment, together with the impact of the external trade situation resulted in weak market demand and an increase in losses in the synthetic fibers sector during 2019.
(ii) Resins and plastics
Profit from operations related to resins and plastics amounted to RMB401.4 million in 2019, representing a decrease of RMB499.0 million as compared to RMB900.4 million in the previous year. The decrease was mainly due to the increase in the cost of raw materials and the market downturn, which led to a significant decline in sales prices. For the period, cost of sales and expenses decreased by 0.66%, unit cost of sales increased by 6.94%, and net sales decreased by 5.33%.
(iii) Intermediate petrochemicals
Profit from operations related to intermediate petrochemical products amounted to RMB413.9 million in 2019, representing a decrease of RMB1,521.0 million as compared to RMB1,934.9 million in the previous year. The decrease in gross profit of chemical products was due to the increase in the cost of crude oil, which made the average unit cost of intermediate petrochemical products rise more, and the sales affected by the needs of downstream manufacturers and the overall economic environment, hence the gross profit dropped significantly.
(iv) Petroleum products
Profit from operations related to petroleum products amounted to RMB705.5 million in 2019, representing a decrease of RMB2,204.5 million as compared to RMB2,910.0 million in the previous year. The decrease was mainly attributable to the weighted average sales price of major products decreasing by 4.28%, and sales volume increasing by 3.80% as compared to the previous year.
(v) Trading of petrochemical products
Profit from trading of petrochemical products amounted to RMB53.2 million in 2019, representing a decrease of RMB51.7 million as compared to RMB104.9 million in the previous year. The increase was mainly attributable to the decrease of RMB4,853.3 million in net sales of the trading business, and the cost of sales and expenses for the same period was decreased by RMB4,801.6 million, leading to a lower profit as compared to the previous year.
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(vi) Others
Profit from other operations amounted to RMB286.8 million in 2019, representing a decrease of RMB21.6 million as compared to RMB308.4 million in the previous year, which was mainly due to the decrease in the amount of government subsidies issued this year and the increase in the amount of asset disposal income.
Net finance income
Our net finance income was RMB363.0 million in 2019, representing an increase of RMB25.6 million as compared to RMB337.4 million in the previous year. The increase was mainly due to reduction in interest expenses incurred on short-term borrowings during the reporting period, which led to a decrease of RMB52.4 million in interest expenses from RMB106.2 million in 2018 to RMB53.8 million in 2019.
Profit before income tax
Our profit before taxation was RMB2,656.1 million in 2019, representing a decrease of RMB4,152.0 million as compared to the profit before taxation of RMB6,808.1 million in the previous year.
Income tax
Our income tax expenses amounted to RMB429.0 million in 2019, representing a decrease of RMB1,042.9 million as compared to RMB1,471.9 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 2019 was 25% (2018:25%). However, the effective rate for income tax was 16.15% in 2019, as compared to 21.62% in 2018.
Net profit
Our net profit was RMB2,227.1 million in 2019, representing a decrease of RMB3,109.1 million as compared to RMB5,336.2 million in 2018.
| 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, 2018, 2019 and 2020.
| Year Ended December 31, | ||||||||||||
| 2018 | 2019 | 2020 | ||||||||||
| (RMB million) | ||||||||||||
| Net cash generated from operating activities |
6,659.4 | 5,057.8 | 1,679.9 | |||||||||
| Net cash used in investing activities |
(1,928.4 | ) | (4,623.2 | ) | (3,997.5 | ) | ||||||
| Net cash (used in)/generated from financing activities |
(3,507.2 | ) | (1,737.4 | ) | 1,681.8 | |||||||
| Net increase/(decrease) in cash and cash equivalents |
1,223.9 | (1,302.8 | ) | (525.9 | ) | |||||||
Net cash generated from operating activities
The net cash generated from operating activities amounted to RMB1,679.9 million in 2020, representing a decrease in cash inflows of RMB3,377.9 million as compared to the net cash inflows of RMB5,057.8 million in 2019. During the reporting period, with profitability in operating, the Company’s cash inflows generated from operating activities in 2020 amounted to RMB1,995.1 million, a decrease of RMB3,660.6 million from the cash inflows generated from operating activities of RMB5,655.7 million. The income tax payable in 2020 amounted to RMB243.9 million, a decrease of RMB290.6 million from the income tax payable of RMB534.5 million in the previous year.
The net cash generated from operating activities amounted to RMB5,057.8 million in 2019, representing a decrease in cash inflows of RMB1,601.6 million as compared to the net cash inflows of RMB6,659.4 million in 2018.During the reporting period, with profitability in operating, the Company’s cash inflows generated from operating activities in 2019 amounted to RMB5,655.7 million, a decrease of RMB2,845.8 million from the cash inflows generated from operating activities of RMB8,501.5 million. The income tax payable in 2019 amounted to RMB534.5 million, a decrease of RMB1,271.9 million from the income tax payable of RMB1,806.4 million in the previous year.
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Net cash used in investing activities
Our net cash used in investing activities decreased from RMB4,623.2 million in 2019 to RMB3,997.5 million in 2020. This was primarily due to the increase in the amount of structured deposits and time deposits.
Our net cash used in investing activities increased from RMB1,928.4 million in 2018 to RMB4,623.2 million in 2019. This was primarily due to the increase in the amount of structured deposits and fixed deposits.
Net cash used in financing activities
Our net cash used in financing activities was RMB1,737.4 million in 2019, net cash inflow generated from financing activities RMB1,681.8 million in 2020. The increase was primarily because we issued 169-day short-term bonds of face value RMB3.0 billion.
Our net cash used in financing activities decreased from was RMB3,507.2 million in 2018 to RMB1,737.4 million in 2019. The decrease was primarily due to (i) an increase in borrowings to third parties of RMB1,050.0 million, and (ii) a decrease in payment of dividends to shareholders of RMB541.0 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 in 2020. Our total borrowings at the end of 2020 amounted to RMB1,548.0 million, representing an increase of RMB0.4 million as compared to RMB1,547.6 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, 2019 and 2020 were as follows.
| Year Ended December 31, | ||||||||
| Debt instruments |
2019 | 2020 | ||||||
| (RMB million) | ||||||||
| Short term bank loans (1) |
1,547.6 | 1,548.0 | ||||||
| Long term bank loans |
— | — | ||||||
|
|
|
|
|
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| 1,547.6 | 1,548.0 | |||||||
|
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| (1) | As of December 31, 2020, 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, 2020, the current assets exceeded current liabilities by RMB2.07 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, 2020, we had standby credit facilities of RMB32.5 billion, within which the maturity dates of unused facility amounting to RMB14.2 billion will be after December 31, 2021. 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, 2021. 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. |
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, 2020, our gearing ratio was 34.25%, while as of December 31, 2019, our gearing ratio was 34.07%. The ratio is calculated using this formula: total liabilities divided by total assets.
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Capital expenditure
In 2020, our capital expenditure amounted to RMB2,107.0 million, representing an increase of 15.77% as compared to RMB1,820.0 million in capital expenditure in 2019. Major projects include the following:
| Major Project | Total amount of project investment RMB million |
Amount of project Investment in 2020 RMB million |
Project progress as of | |||||||
| Equity acquisition of Zhejiang Jinlian Petrochemical Storage and Transportation Co., Ltd. |
3.40 | 3.40 | Capital contribution fully completed | |||||||
| Sinopec Shanghai raw silks (24,000 ton/year) and 48K large-tow carbon fiber (12,000 ton/year) project |
34.90 | 2.80 | Under construction | |||||||
| Oil cleaning project 400,000 tons/year clean gasoline components units |
7.82 | 2.60 | Put into operation | |||||||
| Second stage of PAN (Polyacrylonitrile) based carbon fiber project with annual production of 1,500 tons |
8.48 | 0.57 | Under construction | |||||||
| Security risk rectification project of the central control room of the olefin section |
1.00 | 0.50 | Under construction | |||||||
| Jinyang spinning process optimization project |
0.54 | 0.39 | Under construction | |||||||
| Equity Investment in Pinghu China Aviation Oil Port Co., Ltd. |
0.28 | 0.28 | Capital contribution fully completed | |||||||
Our capital expenditure for 2021 is estimated at approximately RMB3.3 billion.
Proposed Dividend Distribution
A dividend for the year ended December 31, 2020 of RMB0.1 per share (including tax), based on 10,823,813,500 shares outstanding, amounted to a total dividend of RMB1,082,38,350, was proposed by the Board of Directors on 24 March, 2021. The proposal remains to be approved at our 2020 Annual General Meeting.
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 2018, 2019 and 2020 were RMB37.3 million, RMB93.0 million and RMB110.6 million, respectively. The increase was mainly due to the increase in research and development investment in projects related to the carbon fiber.
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 2021 edition of World Economic Outlook that the global economy is projected to have a recovery of about 6 percent in 2021 and 4.4 percent in 2022. However, the recovery will likely have divergent paths where advanced economies are more likely to return to pre-COVID GDP levels or higher by 2022 but emerging markets and developing economies (other than China, which has already returned to pre-COVID GDP levels) may not do so until 2023.
Currently, while the world is deep in the crisis of the COVID-19 pandemic, the global economy is expected to undergo a rapid recovery in the wake of swift vaccine research and roll-out, and is on track for the full restoration of a pre-pandemic state by the end of the year. Even so, the ongoing global economic recovery is still clouded by the following challenges: the long-term effectiveness of vaccines is still undetermined ; the roll-out of vaccines on a global basis is uncertain, countries may withdraw their stimulus measures sooner; trade protectionism may increase; geo-political tensions may intensify and the global economy still faces intricacy.
While China is still moving into a new development phase, the foundation for recovery is yet to be consolidated. Issues in unbalanced and inadequate development remain to be tackled. However, China still enjoys positive economic development factors: 2021 is the initial year of the “14th Five-Year Plan” which represents the three major objectives to be completed on schedule, and a new development pattern with the domestic big circle as the main body and the domestic and international double circle promoting each other is being accelerated. China will continue to implement a proactive fiscal policy and a prudent monetary policy so as to keep providing necessary support for economic recovery. It is expected that China’s economic growth is going to operate within a reasonable range.
In 2021, the COVID-19 pandemic, OPEC+ production cuts and geo-political incidents pose continuing challenges for oil prices. The recovery of the global economy in the second half of the year may increase demand for oil . Rising supply is expected from OPEC nations exempted from oil production cut and non-OPEC producers like Canada, which will exert pressure on the supply side. However, global oil supply would run low should OPEC+ maintain effective enforcement on production cuts, so much so that the supply would stay lower than demand. On the political stage, the new US President’s governance strategy, the degree of support for energy development in the US and the positioning of Sino-US relations are still uncertain. Whether Sino-US trade frictions will increase and the trend of US crude oil production and export are factors that may affect the oil price trends in 2021.
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The domestic petrochemical industry is currently facing the challenge of a downward economic cycle. During the “14th Five-Year Plan” period, China’s refining and chemical industry is set to enter a full phase of new release in capacity and fierce competition. Industry integration, transformation and upgrading are also phasing in. Oversupply is further seen in the refined oil market. The transformation of chemical products towards the higher end and the more environmentally friendly will become a new trend. Driven by new energy, new materials, and the new economy, clean, digital, and diversified developments are now the key trends in developments upon the phasing in of a new energy regime in social development. These new developments will impact the energy supply from petrochemical companies, which will put severe pressure on petrochemical companies’ profitability.
| E. | Critical Accounting Estimates |
Net realizable value (“NRV”) of inventories
The NRV is determined based on the estimated selling prices less the estimated costs to completion, if relevant, other costs necessary to make the sale, and the related taxes. Determination of estimated selling prices requires significant management judgement, taking into consideration of historical selling prices and future market trend. If the actual selling prices were to be lower or the costs of completion were to be higher than estimated, the actual allowance for diminution in value of inventories could be higher than the estimate.
Impairments for non-financial assets
In determining the value in use, expected cash flows generated by the non-financial assets 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.
Useful life and residual value of property, plant and equipment
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.
| F. | Contractual Obligations and Commercial Commitments |
The following table sets forth our obligations to make future payments under contracts effective as of December 31, 2020.
| As of December 31, 2020,/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 |
1,548,000 | 1,548,000 | — | — | — | |||||||||||||||
| Long term borrowings |
— | — | — | — | — | |||||||||||||||
| Short-term bonds |
3,000,000 | 3,000,000 | — | — | — | |||||||||||||||
| Lease liabilities |
12,702 | 9,373 | 2,136 | 1,090 | 103 | |||||||||||||||
| Total contractual obligations |
4,560,702 | 4,557,373 | 2,136 | 1,090 | 103 | |||||||||||||||
| Estimated future interest payments |
||||||||||||||||||||
| Fixed rate |
32,198 | — | — | — | — | |||||||||||||||
| Variable rate |
872 | — | — | — | — | |||||||||||||||
| Total estimated future interest payments |
33,070 | — | — | — | — | |||||||||||||||
| Investment commitments |
||||||||||||||||||||
| Capital contribution to SECCO (Note 29(h)) |
111,263 | — | — | — | — | |||||||||||||||
| Capital contribution to Shidian Energy (Note 29(h)) |
80,000 | — | — | — | — | |||||||||||||||
| Total investment commitments |
191,263 | — | — | — | — | |||||||||||||||
| Other commercial commitments |
||||||||||||||||||||
| Capital commitments (Note 32) |
585,870 | — | — | — | — | |||||||||||||||
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, 2020, we engaged in no material purchase or sale of our subsidiaries or associated companies or any other material investments.
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Pledge of Assets
As of December 31, 2020, we did not pledge any of our property or equipment.
| 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 2023.
| Name | Age | Position | ||
| Directors | ||||
| Wu Haijun | 59 | Executive Director, Chairman of the Board of Directors, Chairman of Strategy Committee, and Member of Nomination Committee | ||
| Guan Zemin | 57 | Executive Director, Vice-Chairman of the Board of Directors, Vice-Chairman of Strategy Committee, and President | ||
| Jin Qiang | 56 | Executive Director and Vice President | ||
| Jin Wenmin | 56 | Executive Director and Vice President | ||
| Huang Xiangyu | 53 | Executive Director and Vice President | ||
| Huang Fei | 44 | Executive, Member of Strategy Committee, Vice President and Board Secretary and Joint Company Secretary | ||
| Xie Zhenglin | 56 | Non-executive Director and Member of Strategy Committee | ||
| Peng Kun | 55 | Non-executive Director | ||
| Li Yuanqin | 48 | Independent Director, and Chairman of Audit Committee | ||
| Tang Song | 41 | Independent Director, and Member of Audit Committee | ||
| Chen Haifeng | 47 | Independent Director, Member of Audit Committee and Member of Nomination Committee | ||
| Yang Jun | 64 | Independent Director, Chairman of Remuneration and Appraisal Committee and Chairman of Nomination Committee | ||
| Gao Song | 51 | Independent Director, Member of Remuneration and Appraisal Committee and Member of Strategy Committee | ||
| Supervisory Committee | ||||
| Ma Yanhui | 50 | Chairman of the Supervisory Committee | ||
| Zhang Feng | 52 | Employee Supervisor | ||
| Chen Hongjun | 50 | Employee Supervisor | ||
| Zhai Xiaofeng | 51 | Supervisor | ||
| Zheng Yunrui | 56 | Independent Supervisor | ||
| Cai Tingki | 67 | Independent Supervisor | ||
| Senior Management | ||||
| Du Jun | 51 | Vice President and Chief Finance Officer |
Directors
Wu Haijun, born in August 1962 is the Executive Director, Chairman, Chairman of the Strategy Committee and member of the Nomination Committee, Director of Shanghai SECCO and Chairman of Shanghai Chemical Industry Park Development Co., Ltd.. Mr. Wu joined the Shanghai Petrochemical Complex (the “Complex”) in 1984 and has held various positions, including Deputy Director and Director of the Company’s No.2 Chemical Plant, as well as manager of the Chemical Division. He was Vice President of the Company from May 1999 to March 2006 and Director of the Company from June 2004 to June 2006. Mr. Wu was 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 Director of the Chemical Business Department of Sinopec Corp. From April 2010, he was appointed as a Director of Shanghai SECCO. From April 2010 to February 2011, Mr. Wu was President of Shanghai SECCO. From April 2010 to August 2018, he was appointed Secretary of the Communist Party Committee of Shanghai SECCO and in June 2010 he was appointed Director of the Company. From June 2010 to December 2017, he served as Vice President of the Company. From February 2011 to March 2015, he acted as Vice President of Shanghai SECCO, and was President of Shanghai SECCO from March 2015 to December 2017. From December 2017 to January 2019, Mr. Wu was appointed Chairman of Shanghai SECCO. From December 2017 to August 2018, he was the Company’s Deputy Party Secretary. He has served as President of the Company from December 2017 to September 2018. In December 2017, he was appointed as Chairman of the Company. In January 2018, he was appointed as Chairman of Shanghai Chemical Industry Park Development Co, Ltd. and was appointed as Secretary to the Communist Party Committee of the Company in August 2018. Mr. Wu graduated from the 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 the China Europe International Business School. He is a Professorate senior engineer by title.
Guan Zemin, born in December 1964, is serving as Deputy Chairman, Executive Director, Deputy Chairman of the Strategy Committee and President of the Company. Mr. Guan started to work in 1990, and he has successively served as Section Manager of Technology Development Section, Technology Development Department, and Deputy Chief Engineer of Wuhan Petrochemical Works, and Director of Catalyzing Workshop, Deputy Director and Director of Production Scheduling Department, and Deputy Chief Engineer of the Wuhan branch of Sinopec Corp. (“Wuhan Branch”). From December 2012 to December 2018, he served as Deputy General Manager of Wuhan Branch. From May 2016 to December 2019, he served as General Manager and Director of Sinopec-SK (Wuhan) Petrochemical Company Limited. From December 2018 to December 2019, he served as the Director and Deputy Party Secretary and General Manager of Wuhan Branch. He was appointed Deputy Secretary of the Company in December 2019. From February 2020, he served as the President of the Company. From June 2020, he served as the executive director, vice chairman and vice chairman of the strategy committee of the company. Mr. Guan graduated from the Fine Chemical Major of School of Chemical Engineering, East China University of Science and Technology with a Master’s degree in Engineering in July 1990. He is a senior engineer by professional title.
Jin Qiang, born in May 1965, is an Executive Director and Vice President of the Company. Mr. Jin joined Zhenhai General Petrochemical Works in 1986 and has held various positions, including Deputy Chief of the Utilities Department, Deputy Director and Director of the Machinery and Power Division of SINOPEC Zhenhai Refining & Chemical Co., Ltd., and Director of the Machinery and Power Division of SINOPEC Zhenhai Refining & Chemical Company. Mr. Jin was Deputy Chief Engineer of SINOPEC Zhenhai Refining & Chemical Company from March 2007 to October 2011, and was appointed Vice President of the Company in October 2011. In June 2014, Mr. Jin was appointed Executive Director of the Company. Mr. Jin graduated from the 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 Professorate senior engineer by title.
Jin Wenmin, born in February 1965, is an Executive Director and Vice President of the Company. Mr. Jin joined the 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 Head of Production Department of the Company. From May 2013 to August 2016, Mr. Jin was appointed as Assistant to the General Manager of the Company and was appointed Vice President of the Company in September 2016. He was appointed Executive Director of the Company in June 2018. Mr. Jin graduated from the Shanghai Second Polytechnic University in July 2003. He is a senior engineer by professional title.
Huang Xiangyu, born in March 1968, is serving as the Executive Director and Deputy President of the Company. Mr. Huang started his career in 1990 and joined the Complex in 1992. He served as the Deputy Director of the chemical workshop of Shanghai Jinyang Acrylic Plant, Deputy Director of Jinyang Equipment, Director and Deputy Director of Jinyang Acrylic Equipment of Acrylic Business Unit and Chief Engineer of Acrylic Business Unit. From July 2011 to January 2020, he served as the Director of the Acrylic Fiber Research Institute. From November 2011 to January 2020, he served as the Chief Engineer of the Acrylic Fiber Department. From February 2019 to January 2020, he served as Deputy Chief Engineer of the Company. From February 2020, he served as the Vice President of the Company. From June 2020, he was an Executive Director of the Company. Mr. Huang graduated from the Organic Chemical Major of School of Chemical Engineering, East China University of Science and Technology with a Bachelor’s degree in Engineering in July 1990. He obtained a Master’s degree in Engineering from Donghua University in May 2004. He graduated from Polymeric Chemistry and Physics Major of Fudan University with a doctor’s degree in Science in June 2013. He is a Professorate senior engineer by title.
Huang Fei, born in January 1977, is serving as Executive Director, Deputy President of the Company, Secretary to the Board, Joint Company Secretary and member of the Strategy Committee. Mr. Huang joined Sinopec Shanghai Petrochemical Company Limited in 2000, and he has successively served as Polyolefin Plant Deputy Director of Plastic Business Unit and Manager Assistant and Polyolefin Plant Director of Plastic Department. From August 2012 to June 2014, he served as Deputy Manager of the Plastic Department. From June 2014 to February 2017, he served as Director of Statistical Center and Vice Party Secretary. From February 2017 to December 2018, he served as Manager of Olefin Department and Deputy Party Secretary. From December 2018 to January 2019, he served as President’s Assistant and the Director of Production Department. From January 2019 to December 2019, Mr. Huang served as President’s Assistant and Manager of Production Department of Shanghai SECCO. From February 2020, he served as the Deputy President of the Company. From June 2020, he served as the Executive Director, Secretary to the Board, Joint Company Secretary and member of the Strategy Committee of the company. Mr. Huang graduated from the Polymer Materials and Engineering Major of East China University of Science and Technology with a Bachelor’s degree of Engineering in July 2000. He graduated from Chemical Engineering Major of East China University of Science and Technology with a Master’s degree in April 2008. He is a senior engineer by professional title.
External Directors
Xie Zhenglin, born in February 1965, is currently serving as an Non-Executive Director, member of the Strategy Committee, Deputy President of Chemical Service Department of the Sinopec Corp., and General Manager of Sinopec Group Assets Management Co., Ltd.. Mr. Xie started his work in 1989, served as Principal Staff Member of State Price Control Bureau and State Development Planning Commission, and started to work in Sinopec Group in September 1995, successively served as Deputy Director and Director of the Comprehensive Division of the Finance Department, Deputy Director of Capital Management Department, Deputy Director of General Accounting Department of Sinopec Assets Management (presided over the work), Deputy Director of Assets Management Department of Sinopec Corp., Deputy General Manager of Sinopec Assets Management, Acting Director of Assets Management Department of Sinopec Corp., and Deputy Executive Director and Deputy General Manager of Sinopec Assets Management. From April 2014 to October 2020, he served as the Deputy Chairman and director of the China Merchants Energy Shipping Co., Ltd. (listed on the Shanghai Stock Exchange, Stock Code: 601872). Mr. Xie served as Director of Assets Management Department of Sinopec Corp., and Executive Director and General Manager of Sinopec Assets Management from April 2014 to December 2019. He has been the Deputy President of Chemical Service Department of Sinopec Corp. and General Manager of Sinopec Assets Management since December 2019. From June 2020, he served as the executive director and member of the strategy committee of the company. Mr. Xie obtained a Master’s degree in Economics from Graduate School of Chinese Academy of Social Science in August 1989. He obtained a Master’s degree in Business Administration from University of Houston in May 2007. He is a Senior Accountant by professional title.
Peng Kun, born in December 1966, is currently serving as a Non-Executive Director, the General Manager of Human Resource Department, Minister of Party Committee Organization Department, and Director of Office of Veteran Cadres of the Company. Mr. Peng joined the Complex in 1986 and served as Deputy Director of General Affairs Office, Department of Chemical Engineering, General Research Institute, assistant manager of the life logistics subsidiary of Easy-Art Design, section manager of Coordination Section of Chemical Engineering Institute, section manager of Administration Department, Secretary of Party General Branch and Deputy Director of Quality Center, Deputy party Secretary and Secretary of Commission for Discipline Inspection of Quality Management Center, Director of Labor Union, and Chairman, Secretary of the Communist Party Committee and Deputy Manager of Labor Union. He served as Director of Human Resources Department of the Company from February 2016 to April 2018, the Head of Human Resources Division of the Company from April 2018 to May 2019, and the Head of Organization and Personnel Division of the Company from May 2019 to March 2020. He was appointed as Director of CPC United Front Work Department and Director of Retired Cadres Office in May 2019, and General Manager of Human Resources Department and Director of CPC Organization Department of the Company from March 2020. From June 2020, he served as the Non-Executive Director of the Company. Mr. Peng graduated from East China University of Science and Technology with a degree in Engineering Management in July 2004 and obtained senior professional and technical title.
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Independent Directors
Li Yuanqin, born in July 1973, is an Independent Non-Executive Director, Chairman of the Audit Committee and member of the Strategy Committee of the Company, Professor of the School of Management and the associate head of the Department of Accountancy at Shanghai University. Ms. Li has been appointed as an Independent Non-Executive Director of the Company since August 2017. She is currently the independent Director of Shanghai New World Co., Ltd. (listed on Shanghai Stock Exchange, stock code: 600628), Yunsai Zhilian Co., Ltd. (listed on Shanghai Stock Exchange, stock code: 600602, 900901) and Hengtian Kaima Co., Ltd. (listed on Shanghai Stock Exchange, stock code: 900953). From April 2000 to March 2003, Li 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. From September 2009 to March 2019, she was the associate professor at the School of Management at Shanghai University. She has been the professor at the School of Management and the associate head of the Department of Accountancy of Shanghai University since March 2019 and 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-practicing 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.
Tang Song, born in December 1980, is serving as the Independent Non-executive Director and a member of the Audit Committee of the Company, Dean Assistant of School of Accountancy, Shanghai University of Finance and Economics, Professor and PH. D graduate student supervisor. Mr. Tang finished his undergraduate study in June 2003 at the School of Accountancy of the Shanghai University of Finance and Economics and obtained a doctor’s degree from a successive postgraduate and doctoral program in Management (Accountancy) in June 2008. Mr. Tang worked in the School of Accounting and Finance, Hong Kong Polytechnic University for collaborative research from August 2008 to August 2009. He worked in China Europe International Business School for collaborative research from August 2009 to June 2010. Mr. Tang served as Lecturer in School of Accountancy, Shanghai University of Finance and Economics from June 2010 to July 2012. He served as associate professor at the School of Accountancy, Shanghai University of Finance and Economics from August 2012 to June 2019. Mr. Tang served as Dean Assistant of Shanghai University of Finance and Economics from January 2019, and as a Professor of the School of Accountancy of the University since August 2019. Mr. Tang served as an Independent Director of the Shanghai Qifan Cable Co. Ltd. (listed on the Shanghai Stock Exchange, stock code: 605222) since July 2019, and as an Independent Director for the Shanghai Universal Biotech Co., Ltd since May 2020. He served as the independent non-executive director, member of the audit committee and member of the strategy committee of the company since June 2020. Mr. Tang served as an Independent Director for the Wuxi Commercial Mansion Grand Orient Co., Ltd. (listed on Shanghai Stock Exchange, stock code: 600327) since November 2020.
Chen Haifeng, born in January 1974, is serving as an Independent Non-Executive Director of the Company, member of the Audit Committee and the Nomination committee, and a Senior Director of the Shanghai MindMotion Microelectronics Co., Ltd.. Mr. Chen graduated from Fudan University with a Bachelor’s degree in applied physics in 1997. He served as clerk, project supervisor, and project manager of Investment Banking Department of CITIC Securities from July 1997 to August 2001. Mr. Chen served as Senior Manager of Strategic Investment Department of SVT Group from September 2002 to February 2006. He served as Senior Manager of Investment Banking Department of Orient Securities from August 2006 to March 2008. Mr. Chen served as senior vice president and sponsor Deputy of Investment Banking Department of China Jianyin Investment Securities from April 2008 to May 2012. He served as CEO and sponsor Deputy of Investment Banking Department of Caida Securities from June 2012 to June 2015. Mr. Chen served as independent Director of Cnnc Hua Yuan Titanium Dioxide Company Limited (listed on Shenzhen Stock Exchange, stock code: 002145) from February 2015 to October 2018. He served as CEO and sponsor Deputy of Investment Banking Department in Dongxing Securities from July 2015 to September 2017. Mr. Chen has been a non independent Director of Zhejiang Yueling Wheels Corporation from October 2017 to December 2020 (listed on the Shenzhen Stock Exchange, Stock Code: 002725). He served as an independent non-executive director, member of the audit committee and member of the nomination committee of the company since June 2020. He served as a Senior Director of the Shanghai MindMotion Microelectronics Co., Ltd. Since January 2021.
Yang Jun, born in August 1957, is serving as an Independent Non-executive Director, Chairman of the Nomination Committee, the Remuneration and Appraisal Committee Director (vice president level) of Gansu Gangtai Holding (Group) Co., Ltd. Mr. Yang graduated from East China University of Political Science and Law with a degree in Law in September 1979 and from Peking University with a Master’s degree in Civil Law in July 1991. He worked in Shanghai Intermediate Court and Supreme Court from July 1983 to July 2005. He served as an assistant to the president and general legal officer of Shanghai United Assets and Equity Exchange, General Manager of Beijing Headquarter of Central Enterprise Equity Exchange, operation Director of Equity Exchange and General Manager of Financial Equity Exchange from July 2005 to September 2017. He has served as an arbitrator of China International Economic and Trade Arbitration Commission from March 2007 to March 2015 and served as an arbitrator of Shanghai International Economic and Trade Arbitration Commission since March 2007. He served as independent non executive Director of China Merchants Securities Co., Ltd. (listed on the Hong Kong stock exchange, stock code: 06099) from June 2011 to January 2018. He has served as independent Director of Shanghai Zhenhua Heavy Industries Co., Ltd. (listed on Shanghai Stock Exchange, stock code: 600320) since April 2015 and Director (Vice President level) of Gansu Gangtai Holding (Group) Co., Ltd. since September 2017. He served as the independent non-executive director, chairman of the nomination committee and chairman of the remuneration and assessment committee of the company since June 2020.
Gao Song, born in June 1970, is serving as an Independent Director, member of remuneration and appraisal committee and Strategy Committee, Professor of Business School of East China University of Science and Technology and Director of China’s Institute for action learning. Mr. Gao graduated from Shandong University with a degree in Computer Software in 1992, from the School of Management of Fudan University with a Master’s degree in Corporate Management in 1998 and from the Antai College of Economics & Management of Shanghai Jiao Tong University with a doctorate in Corporate Management in 2006. He served as Director of Marketing Department of Shanghai Guanshengyuan Group Co., Ltd.. From March 1998 to May 2002 and General Manager of Shanghai Aichu Food Co., Ltd.. From May 2002 to March 2007. He has served as Professor of Business School of East China University of Science and Technology and Director of China’s Institute for action learning since May 2009. He was a visiting scholar at the University of Illinois at Urbana-Champaign from 2014 to 2015. From June 2020, he served as the independent non-executive director, chairman of the remuneration and appraisal committee and member of the strategy committee of the company.
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, born in February 1971, is a Supervisor, the Chairman of Supervisory Committee,, the Deputy Secretary of the Communist Party Committee, Secretary of the Communist Party Discipline Supervisory Committee and Chairman of the Labour Union of the Company. Mr. Ma started his career in 1996. He served as Secretary of Office of Yanhua Refinery, Secretary and Deputy Director of Yanhua Office of Great Wall Lubricant Oil, Supervisor and Acting Director and Deputy Director of Integrated Corporate Reform Department of China Petrochemical Corporation, and Deputy Director and Director of Structure Reform Sector, Corporate Reform Department of Sinopec Assets Management Co., Ltd., etc. From June 2008 to August 2017, Mr. Ma was Director of Integrated Corporate Reform Department of China Petrochemical Corporation (Sinopec Group). From August 2017, Mr. Ma was the Deputy Secretary of the Communist Party Committee and Secretary of the Communist Party Discipline Supervisory Committee of the Company. He was appointed as Supervisor, 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.
Zhang Feng, born in June 1969, is currently a Supervisor and the Auditing Director of the Company. Mr. Zhang started his career in the Complex in 1991. He served as Assistant of Chief and Deputy Chief of Finance Section of Polyester II Factory, Deputy Chief of Finance Section of Polyester Department, Deputy Chief and Chief of Cost Section of Finance Division of Polyester Department, Deputy Chief and Chief of Finance Division, Director Assistant, Deputy Director, Deputy Director (Hosting Work), Director of Finance Department and Chief of Finance Division, etc. He worked as Auditing Director of the Company from December 2018 to March 2020, and as Supervisor in October 2019. From March 2020, he worked as the Auditing Director of the Company. Mr. Zhang graduated from Shanghai University of Finance and Economics in 1991, majoring in Accounting, and obtained a Bachelor’s degree in Economics. Mr. Zhang is a senior accountant by professional title.
Chen Hongjun, born in January 1971, is currently a Supervisor, Vice-President of Labour Union, Director of the Public Affairs Department and Vice-President of the Association of Science and Technology of the Company. Mr. Chen started his career in the Complex in 1996. He served as Vice Party Branch Secretary of Fibre Polymer Office, Deputy Director of Spinning Office, Director of Simulation Office, Section Manager of Scientific Research Management Department, Deputy Secretary and Secretary of Youth League Committee of the Company, Party Secretary and Deputy Director of the Chemical Engineering Department, Party Secretary and Assistant Manager of Fine Chemicals Department and Director of Public Affairs Department. Mr. Chen was appointed as Vice-President of Labour Union of the Company in November 2013. He was appointed as Vice President of the Association of Science and Technology in December 2017. He served as Director of the Public Affairs Department of the Company from April 2018 to March 2020, and he was elected as Supervisor of the Company in October 2019. He was the Director of Public Affairs of the Company since march 2020. In 1993, Mr. Chen graduated from Chengdu University of Science and Technology, majoring in Dyeing and Finishing Engineering, and obtained a Bachelor’s degree in Engineering. In 1996, he obtained a Master’s degree in Chemical Fibre from Sichuan Unite University. Mr. Chen is a senior engineer by professional title.
Zhang Xiaofeng, born in March 1970, is currently serving as External Supervisor, Deputy General Manager of the Enterprise Reform and Legal Department of Sinopec Group and Deputy Director of the Company’s Commission Office for Public Sector Reform. Mr. Zhang currently holds the position of supervisor of Sinopec Insurance Limited, Sinopec Oilfield Equipment Corporation and Sinopec Petroleum Reserve Company Limited. Starting his career in 1995, Mr. Zhang has served as Deputy chief of the Office Management Division of the Legal Department of Sinopec Group, Deputy chief and chief of the Contract Project Division, chief of the Dispute Management Division and chief of the General Management Division of Legal Department of Sinopec Group. He has served as Deputy Director of the Legal Department of Sinopec Group from January 2018 to December 2019. He has also served as Deputy General Manager of the Enterprise Reform and Legal Department of Sinopec Group and Deputy Director of the Company’s Commission Office for Public Sector Reform since December 2019. Mr. Zhang, majoring in International Economic Law, graduated from China University of Political Science and Law with a Bachelor’s degree in Law in July 1995, and he is a senior economist.
Independent Supervisor
Zheng Yunrui, born in December 1965, is an Independent Supervisor of the Company, 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 Member of Expert Consultation Committee of Shanghai Yangpu District People’s Procuratorate and Mediator of Shanghai Second Intermediate People’s Court. He has served as the Company’s Independent Supervisor since December 2014. He is currently an independent Director of Jiangxi XinyuGuoke Technology Co., Ltd. (listed on the Shenzhen Stock Exchange, stock code: 300722), independent Director of Fuxin Dare Automotive Parts Co, Ltd. (listed on the Shenzhen Stock Exchange, stock code: 300473), Dalian Insulator Group Co., Ltd (listed on the Shenzhen Stock Exchange, stock code: 002606) and Wuxi New Hongtai Electrical Technology Co., Ltd. (listed on Shanghai Stock Exchange, stock code: 603016). Mr. Zheng graduated from the 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. From April 2013 to May 2019, he served as independent director of Hangzhou Xianfeng Electronic Technology Co., Ltd. (listed on Shenzhen Stock Exchange, stock code: 002767). From 2019 to February 2021, he served as the external supervisor of Zhejiang Weihai Construction Group Co., Ltd. (listed on Shenzhen Stock Exchange, stock code: 002586). In November 2019, he served as a member of the second shareholding exercise Expert Committee of China Securities small and Medium Investors Service Center. In September 2020, he was appointed as a legal consultant of Wuxi intermediate people’s court. 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 Xuzhou and Wuxi. Mr. Zheng was appointed as member of Expert Advisory Committee of the People’s Procuratorate of Shanghai Yangpu District and mediator of Shanghai No. 2 intermediate People’s Court on 24 March 2017 and 26 June 2017, respectively.
Cai Tingki, born September 1954, 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 Independent Non-Executive Director of the Company from June 2011 to June 2017 and has been 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 Hong Kong Stock Exchange, stock code: 00294) and YGM Trading Limited (listed on the Main Board of the Hong Kong Stock Exchange, 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 Partner of the audit department of KPMG Hong Kong Office, Executive Partner of KPMG Shanghai Office, Senior Partner of KPMG Huazhen Shanghai Office as well as Senior Partner of KPMG Huazhen in Eastern and Western China. Mr. Choi retired from KPMG Huazhen in April 2010.
Senior Management
Du Jun, Du Jun, born in March 1970, is the Deputy President, Chief Financial Officer of the Company, Chairman of China Jinshan Associated Trading Corporation (“Jinshan Associated Trading”) and a Director of the Shanghai Chemical Industry Park Development Co., Ltd.. Mr. Du Jun started his career in 1990 and has successively served the Chief of Second Division of the Secretary of President’s Office of the Sinopec Yangzi Petrochemical Company Ltd., Deputy Director of Finance Office and Deputy Director of Finance Department of Sinopec Yangzi Petrochemical Co., Ltd. From August 2004 to July 2007, he served as Director of Finance Department of Sinopec Yangzi Petrochemical Co., Ltd.. From July 2007 to August 2012, he served as Director of Finance Department of Sinopec Yangzi Petrochemical Company Limited. From August 2012 to August 2016, he served as Chief Accountant of Sinopec Yangzi Petrochemical Company Limited. From December 2015 to September 2020, he served as Supervisor of BASF-YPC Company Limited. From June 2016 to September 2020, he served as Director of Sinopec Yangzi Petrochemical Company Limited. From August 2016 to September 2020, he served as Chief Accountant of Sinopec Yangzi Petrochemical Company Limited. From September 2020, he served as the Deputy General Manager and the Chief Financial Officer of the Company. He served as the Chairman of the Jinshan Associated Trading, and as Director of the Shanghai Chemical Industry Park Development Co., Ltd. since December 2020. Mr. Du Jun graduated from Southeast University with a Bachelor’s degree in Industrial Corporate Management in 1990. He obtained a Master’s degree in Business Administration (MBA) from Southeast University in 2004. He is a Professorate senior accountant by title.
| B. | Compensation. |
The aggregate amount of cash compensation we paid to our directors, supervisors and executive officers during the year ended December 31, 2020 was approximately RMB10.30 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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| Name |
Position with the Company |
Salaries and other benefits |
Retirement scheme contributions* |
Discretionary bonus |
Fees | Total Remuneration in 2020 (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 |
Chairman & Executive Director | 359 | 44 | 799 | — | 1,202 | ||||||||||||||||
| Guan Zemin |
Executive Director, Vice Chairman & President | 367 | 41 | 397 | — | 805 | ||||||||||||||||
| Jin Qiang |
Executive Director & Vice President | 354 | 44 | 716 | — | 1,114 | ||||||||||||||||
| Jin Wenmin |
Executive Director & Vice President | 250 | 44 | 721 | — | 1,015 | ||||||||||||||||
| Huang Xiangyu |
Executive Director & Vice President | 275 | 39 | 440 | — | 754 | ||||||||||||||||
| Huang Fei |
Executive Director, Vice President & Secretary to the Board | 217 | 39 | 426 | — | 682 | ||||||||||||||||
| Xie Zhenglin |
Independent Director | — | — | — | — | — | ||||||||||||||||
| Peng Kun |
Independent Director | 96 | 25 | 246 | — | 367 | ||||||||||||||||
| Li Yuanqin |
Independent Director | — | — | — | 150 | 150 | ||||||||||||||||
| Tang Song |
Independent Director | — | — | — | 75 | 75 | ||||||||||||||||
| Chen Haifeng |
Independent Director | — | — | — | 75 | 75 | ||||||||||||||||
| Yang Jun |
Independent Director | — | — | — | 75 | 75 | ||||||||||||||||
| Gao Song |
Independent Director | — | — | — | 75 | 75 | ||||||||||||||||
| Ma Yanhui |
Chairman of Supervisory Committee | 332 | 42 | 720 | — | 1,094 | ||||||||||||||||
| Zhang Feng |
Supervisor | 148 | 40 | 485 | — | 673 | ||||||||||||||||
| Chen Hongjun |
Supervisor | 159 | 38 | 485 | — | 682 | ||||||||||||||||
| Zhang Xiaofeng |
Supervisor | — | — | — | — | — | ||||||||||||||||
| Zheng Yunrui |
Independent Supervisor | 100 | — | — | — | 100 | ||||||||||||||||
| Choi Tingki |
Independent Supervisor | 100 | — | — | — | 100 | ||||||||||||||||
| Du Jun |
Vice President & Chief Financial Officer | 95 | 12 | 48 | — | 155 | ||||||||||||||||
| Lei Dianwu |
Former Independent Director | — | — | — | — | — | ||||||||||||||||
| Mo Zhenglin |
Former Independent Director | — | — | — | — | — | ||||||||||||||||
| Zhou Meiyun |
Former Executive Director, Vice President & Chief Financial Officer | 181 | 33 | 668 | — | 882 | ||||||||||||||||
| Zhang Yimin |
Former Independent Director |
— | — | — | 75 | 75 | ||||||||||||||||
| Liu Yunhong |
Former Independent Director |
— | — | — | 75 | 75 | ||||||||||||||||
| Du Weifeng |
Former Independent Director |
— | — | — | 75 | 75 | ||||||||||||||||
| Zhai Yalin |
Former Supervisor |
— | — | — | — | — | ||||||||||||||||
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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 2023. 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 June 18, 2020, which consists of five Independent Non-executive Directors. The current members are Ms. Li Yuanqin, Mr. Tang Song, Mr. Chen Haifeng, Mr. Yang Jun and Mr. Gao Song. 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, 2022.
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 2023. 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, 2020, the members of the remuneration committee are Mr. Yang Jun (Chairman of the Committee), Mr. Tang Song and Mr. Gao Song. 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 2023.
Audit Committee
We formed an audit committee on June 15, 1999 which consists of three Directors. As of December 31, 2020, the members are Ms. Li Yuanqin (Chairman of the Committee), Mr. Tang Song and Mr. Chen Haifeng. 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 2023.
Nomination Committee
We formed a nomination committee on June 27, 2012 which consists of three Directors. As of December 31, 2020, the members are Mr. Yang Jun (Chairman of the Committee), Mr. Chen Haifeng 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 2023.
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, 2020, the members are Mr. Wu Haijun (Chairman of the Committee), Mr. Guan Zemin (Vice-Chairman of the Committee), Mr. Xie Zhenglin, Mr. Huang Fei and Mr. Gao Song. 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 2023.
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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 provided a statement of these differences under Item 16G. Corporate Governance.
| D. | Human Capital Resources. |
As of December 31, 2020, we had 8,466 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, | ||||||||||||
| 2018 | 2019 | 2020 | ||||||||||
| Management |
1,057 | 1,081 | 1,066 | |||||||||
| Engineers, technicians and factory personnel |
5,753 | 5,430 | 5,094 | |||||||||
| Accounting, marketing and others |
2,787 | 2,367 | 2,306 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
9,597 | 8,878 | 8,466 | |||||||||
|
|
|
|
|
|
|
|||||||
Approximately 30.75% of our work force are graduates with a bachelor’s 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.
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, 2020, 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 2020, we incurred RMB3,143.2 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 19,095 retired employees under the above retirement insurance plans. During 2020, we terminated employment with 412 persons (including the retired and voluntary leave), accounting for 4.64% of 8,878 employees we had as of January 1, 2020.
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.
| 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, 2021:
| 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) | 0.002781 | 0.00411 | ||||||||
| Jin Wenmin |
Executive Director and Vice President | 175,000 A shares (L) | 0.001617 | 0.00239 | ||||||||
| Huang Xiangyu |
Executive Director and Vice President | 140,000 A shares (L) | 0.001293 | 0.00190 | ||||||||
| Zhang Feng |
Supervisor | 10,000 A shares (L) | 0.000092 | 0.00014 | ||||||||
| Chen Hongjun |
Supervisor | 31,400 A shares (L) | 0.000290 | 0.00043 | ||||||||
(L): Long position
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Share Option Incentive Scheme
The Share Option Incentive Scheme of the Company took effect from 23 December 2014, with a validity period of 10 years until 22 December 2024. The first grant of A-share share options under the Share Option Incentive Scheme was on 6 January 2015. For details, please refer to the relevant announcements uploaded on the websites of Shanghai Stock Exchange, Hong Kong Stock Exchange and the Company on 6 January 2015. All the exercise periods of the first grant have ended on 28 December 2018. For details, please refer to the relevant announcements uploaded on the websites of Shanghai Stock Exchange, Hong Kong Stock Exchange and the Company on 28 December 2018. At present, the Company has no other granting scheme.
During 2020, the Company did not grant A-share share options under the Share Option Incentive Scheme, nor did the grantees exercise any A-share share options, and no A-share share options were cancelled or lapsed.
| 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.
The table below sets forth information regarding ownership of our shares as of March 31, 2021 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(%) |
|||||||
| Sinopec Corp. |
5,460,000,000A shares (L) | 50.44 | 74.50 | |||||||
| 349,485,220 H shares (L) | 3.23 | 9.99 | ||||||||
| The Bank of New York Mellon |
320,908,300 H shares (S) | 2.96 | 9.18 | |||||||
| Corporation |
27,803,520 H shares (P) | 0.26 | 0.80 | |||||||
| 199,065,902 H shares (L) | 1.84 | 5.70 | ||||||||
| BlackRock, Inc. |
8,434,000 H shares (S) | 0.08 | 0.24 | |||||||
| 211,008,000 H shares (L) |
1.95 | 6.04 | ||||||||
| Hung Hin Fai(1) |
200,020,000 H shares (S) | 1.85 | 5.72 | |||||||
| Chan Kin Sun(2) |
200,020,000 H shares (L) | 1.85 | 5.72 | |||||||
(L): Long position; (S): Short position; (P): Lending Pool
Notes:
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| (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, 2021, 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, 2021, 3,209,083 ADSs, representing the equivalent of 320,908,300 H Shares, were held of record by 78 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.
As the above-mentioned framework agreement expired on December 31, 2019, to ensure that the normal operation of the Company is not affected, we renewed the Mutual Product Supply and Sales Services Framework Agreement with Sinopec Group and Sinopec Corp. and the Comprehensive Services Framework Agreement with Sinopec Group on October 23, 2019, and intended to continue the above-mentioned continuing connected transactions from 2020 to 2022, valid for three years until December 31, 2022. We disclosed the two agreements and the respective continuing connected transactions under the agreements in an announcement dated 23 October 2019 and a circular dated November 13, 2019. These two agreements and the respective continuing connected transactions under the agreements together with the associated annual caps from 2020 to 2022 were considered and approved at the first extraordinary general meeting for 2019 held on December 10, 2019. The transaction amounts of the relevant connected transactions in 2020 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 2020.
| Transaction Amount during the reporting |
Unit: RMB’000 Of the total |
|||||||||||||||||
| Type of major transactions | Connected parties | Annual cap for 2020 | Period | (%) | ||||||||||||||
| Mutual Product Supply and Sales Services Framework Agreement |
||||||||||||||||||
| Purchases of raw materials |
Sinopec Corp., Sinopec Group and their associates | 78,453,000 | 40,644,615 | 40.89 | % | |||||||||||||
| Sales of petroleum and petrochemical products |
Sinopec Corp. and its associates | 70,113,000 | 48,076,872 | 64.36 | % | |||||||||||||
| Property leasing |
Sinopec Corp. and its associates | 37,000 | 32,829 | 40.23 | % | |||||||||||||
| Agency sales of petrochemical |
Sinopec Corp. and its associates | 166,000 | 104,598 | 100.00 | % | |||||||||||||
| Comprehensive Services Framework Agreement |
||||||||||||||||||
| Construction, installation and engineering design services |
Sinopec Group and its associates | 684,000 | 233,591 | 26.36 | % | |||||||||||||
| Petrochemical industry insurance services |
Sinopec Group and its associates | 120,000 | 107,495 | 100.00 | % | |||||||||||||
| Financial services |
Sinopec Group and its associates | 200,000 | 2,088 | 0.48 | % | |||||||||||||
During the 19th meeting of the ninth Session of the Board of Directors of the Company on 27 December 2019, the Company approved the oil tanks lease agreement entered into on 31 December 2019 between the Company and the Sinopec Petroleum Storage and Reserve Limited (“Sinopec Reserve”) which is a wholly owned subsidiary of the Sinopec Group (the de facto controller of the Company), and the Baishawan subsidiary of Sinopec Reserve (“Baishawan Branch”). Pursuant to the agreement, Baishawan branch is to provide the storage service for the Company for one year, with the leasing period from 1 January 2020 to 31 December 2020, at an annual storage fee of a maximum of RMB114.0 million (including VAT). Related announcements were published on the websites of the Shanghai Stock Exchange, the Hong Kong Stock Exchange and the Company on 27 December 2019, as well as on the Shanghai Securities News and the China Securities Journal on 28 December 2019. During the Reporting Period, the Company incurred a related service fees in the amount of RMB109 million (including VAT).
As the above oil tanks lease agreement services agreement expired on 31 December 2020, the Company entered into an oil tanks lease agreement with the Sinopec Reserve and the Baishawan Subsidiary on 31 December 2020, pursuant to which the Baishawan Branch provides storage services to the Company for a term of three years commencing from 1 January 2021 to 31 December 2023. The annual aggregate amount payable by the Company to the Baishawan Branch in 2021, 2022 and 2023 shall not exceed RMB114.0 million (VAT inclusive). The oil tanks lease agreement was considered and approved at the fourth meeting of the tenth Session of the Board of Directors held on 8 December 2020. The relevant announcement was published on the websites of the Shanghai Stock Exchange, the Hong Kong Stock Exchange and the Company, respectively, on 8 December 2020 and 11 December 2020, and was published on the Shanghai Securities News and the China Securities Journal on 9 December 2020.
On December 28, 2018, the Company entered into a technical service agreement with Petro-CyberWorks Information Technology Co., Ltd. (“PCITC”), a non wholly-owned subsidiary of the Company’s de facto controller, Sinopec Group. Pursuant to the technical service agreement, the Company appointed PCITC to implement the design, construction, operation and maintenance of smart plant project for a total amount of RMB30,580,000 (inclusive of tax). The term of the technical service agreement starts from the date of signing by both parties, and the main function construction has past the completion acceptance in December 2020. Related announcements were published on the official websites of the Shanghai Stock Exchange, the Hong Kong Stock Exchange and the Company on December 28, 2018, as well as on “Shanghai Securities News” and “China Securities Journal” on December 29, 2018.
HKSE connected transactions rules
We are required by HKSE listing rules to obtain advance shareholder approval for certain transactions with related parties such as Sinopec Group, Sinopec Corp., or its associates. We comply with such HKSE listing rules by obtaining advance shareholder approval at least every three years for the renewal of our framework agreements (e.g., the Mutual Product Supply and Sales Services Framework Agreement and the Comprehensive Services Framework Agreement) with Sinopec Corp. and Sinopec Group for setting maximum aggregated annual values spent on the supply of products and services under these agreements. The independent non-executive directors will need to confirm each year, upon reviewing our continuing connected transaction, that these transactions are conducted in the ordinary and usual course of our business, on normal commercial terms and in accordance with the terms of these agreements.
C. Interests of Experts and Counsel.
Not applicable.
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| ITEM 8. | FINANCIAL INFORMATION. |
A. Consolidated Statements and Other Financial Information.
Please see Item 18. Financial Statements for our audited consolidated financial statements filed as part of this annual report.
Litigation
Neither we nor any of our subsidiaries is a party to, nor is any of our or their property the subject of any legal or arbitration proceedings which may have significant effects on our financial position or profitability or cash flows. We are not aware of any litigation or arbitration proceedings in which any of our directors, any member of our senior management or any of our affiliates is an adverse party or has a material adverse interest.
Dividend Policy
Our Board of Directors may propose dividend distributions subject to the approval of the shareholders. The Articles of Association also provide that, the aggregate profits distributed in cash in the recent three years shall not be less than 30% of the average annual distributable profits within such three-year period. Shareholders receive dividends in proportion to their shareholdings.
The Articles of Association require that cash dividends and other distributions in respect of H Shares be declared in Renminbi and paid by us in Hong Kong Dollars while cash dividends and other distributions in respect of our A Shares be paid in Renminbi. If we record no profit for the year, we may not distribute dividends in such year.
We expect to continue to pay dividends, although there can be no assurance as to the particular amounts that might be paid from year to year. Payment of future dividends will depend upon our revenue, financial condition, future earnings and other factors. See Item 5. Operating and Financial Review and Prospects and Item 3. Key Information – A. Selected Financial Data – Dividends.
B. Significant Changes.
No significant change has occurred since the date of the financial statements included in this annual report.
| ITEM 9. | THE OFFER AND LISTING. |
A. Offer and Listing Details
The principal trading market for our H Shares is the HKSE. The ADSs, each representing 100 H Shares, have been issued by The Bank of New York Mellon as a depositary under a Deposit Agreement with us and are listed on the NYSE under the symbol “SHI.” We have also listed our A Shares on the Shanghai Stock Exchange. Prior to our initial public offering on July 26, 1993 and subsequent listings on the HKSE and NYSE, there was no market for our H Shares or the ADSs. Public trading in our A Shares commenced on November 8, 1993.
B. Plan of Distribution
Not applicable.
C. Markets
Our H Shares are listed for trading on the HKSE (Code: 00338), our ADSs are listed for trading on the NYSE under the symbol “SHI” and our A Shares are listed for trading on the Shanghai Stock Exchange (Code: 600688).
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issuer
Not applicable.
| ITEM 10. | ADDITIONAL INFORMATION. |
A. Share Capital
Not applicable.
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B. Memorandum and Articles of Association.
We are a joint stock limited company established in accordance with the PRC Company Law and certain other laws and regulations of the PRC. We are registered with the Shanghai Administration of Industry and Commerce with business license number 91310000132212291W.
The following is a summary based upon provisions of our Articles of Association as currently in effect, the PRC Company Law (1993) (as amended) and other selected laws and regulations applicable to us. You should refer to the text of the Articles of Association and to the texts of applicable laws and regulations for further information.
Our Articles of Association provide, at article 12, that our purpose is:
| • | to build and operate a diversified industrial company which will be one of the world’s leading petrochemical companies; |
| • | to promote the development of the petrochemical industry in China through the production of a broad variety of outstanding products; and |
| • | to practice advanced, scientific management and apply flexible business principles, and to develop overseas markets for our products so that we and our shareholders receive reasonable economic benefits. |
Our scope of business is limited to matters approved by Chinese authorities. Article 13 provides that our primary business scope includes:
Refining crude oil, petroleum products, petrochemical products, synthetic fibers and monomers, plastic products, raw materials for knitting and textile products, preparation of catalysts and recover waste catalysts, power, heat, water and gas supply, water treatment, railway cargo loading and unloading, inland water transport, wharf operation, warehousing, design, research and development, technology development, transfer, consultancy and other services, property management, lease of self-owned premises, internal staff training, design and fabrication of various advertisements, release of advertisements on self-owned media and quality technology services (administrative license should be obtained when required). We may adjust these subject to approval by governmental authorities.
The following discussion primarily concerns our shares and the rights of our shareholders. Holders of our ADSs will not be treated as our shareholders and will be required to surrender their ADSs for cancellation and withdrawal from the depositary facility in which the H Shares are held in order to exercise shareholder rights in respect of H Shares.
A Shares and overseas-listed foreign invested H Shares are both ordinary shares in our share capital. A Shares are shares we issue to domestic Chinese investors for subscription in Renminbi, while H Shares are shares we issue for subscription in other currencies to investors from Hong Kong, Macau, Taiwan and outside of China.
Sources of Shareholders’ Rights
China’s legal system is based on written statutes and is a system in which decided legal cases have little precedent value. China’s legal system is similar to civil law systems in this regard. In 1979, China began the process of developing its legal system by undertaking to promulgate a comprehensive system of laws. In December 1993, the Standing Committee of the 8th National People’s Congress adopted the PRC Company Law. Although the PRC Company Law is expected to serve as the core of a body of regulatory measures, which will impose a uniform standard of corporate behavior on companies and their directors and shareholders, only a limited portion of this body of regulatory measures has so far been promulgated.
Currently, the primary sources of shareholder rights are the Articles of Association, the PRC Company Law and the HKSE listing rules, which, among other things, impose standards of conduct, fairness and disclosure on us, our directors and our controlling shareholder. To facilitate the offering and listing of shares of Chinese companies overseas, and to regulate the behavior of companies whose shares are listed overseas, the former State Council Securities Committee and the former State Commission for Restructuring the Economic System issued the Mandatory Provisions for articles of association of Companies Listing Overseas on August 27, 1994. These provisions have been incorporated into our Articles of Association and any amendment to those provisions will only become effective after approval by the companies approval department authorized by the State.
In addition, upon the listing of and for so long as the H Shares are listed on the HKSE, we will be subject to those relevant ordinances, rules and regulations applicable to companies listed on the HKSE, the Securities and Futures Ordinance and the Codes on Takeovers and Mergers and Share Repurchases.
Unless otherwise specified, all rights, obligations and protections discussed below derive from our Articles of Association and/or the PRC Company Law.
Enforceability of Shareholders’ Rights
There has not been any public disclosure in relation to the enforcement by holders of H Shares of their rights under the charter documents of joint stock limited companies or the PRC Company Law or in the application or interpretation of the Chinese or Hong Kong regulatory provisions applicable to Chinese joint stock limited companies.
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In most states of the United States, shareholders may sue a corporation “derivatively.” A derivative suit involves the commencement by a shareholder of a corporate cause of action against persons who have allegedly wronged the corporation, where the corporation itself has failed to enforce the claims directly. This would include suits against corporate officers, directors, or the controlling shareholder. This type of action is brought based upon a primary right of the corporation, but is asserted by a shareholder on behalf of the corporation. In accordance with the PRC Company Law, if a company incurs losses due to the violation of any provision of laws, administrative regulations or the Company’s articles of association by any of its directors, supervisors and officers during his/her discharge of duties entrusted by the Company, or due to any other person’s infringement of the Company’s legal rights or interests, the shareholders of the Company may take legal action before a court under the PRC Company Law.
Our Articles of Association provide that all differences or claims
| • | between a holder of H Shares and us; |
| • | between a holder of H Shares and any of our directors, supervisors, manager or other senior officers; or |
| • | between a holder of H Shares and a holder of A Shares, |
involving any right or obligation provided in the Articles of Association, the PRC Company Law or any other relevant law or administrative regulation which concerns our affairs must, with certain exceptions, be referred to arbitration at either the China International Economic and Trade Arbitration Commission in China or the Hong Kong International Arbitration Center. Our Articles of Association also provide that the arbitration will be final and conclusive. On June 21, 1999, an arrangement was made between Hong Kong and China for the summary mutual enforcement of each other’s arbitration awards in a manner consistent with the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards and practices that occurred before the handover of Hong Kong to China. This arrangement was approved by the Supreme Court of China and the Hong Kong Legislative Council, and became effective on February 1, 2000.
All of our directors and officers reside outside the United States (principally in China) and substantially all of our assets and of those persons are located outside the United States. Therefore, you may not be able to effect service of process within the United States against any of those persons. In addition, China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts within the United States or most other countries that are members of the Organization for Economic Cooperation and Development. This means that administrative actions brought by regulatory authorities such as the SEC, and other actions which result in foreign court judgments could only be enforced in China if the judgments or rulings do not violate the basic principles of the law of China or the sovereignty, security and social public interest of the society of China, as determined by a People’s Court of China which has jurisdiction for recognition and enforcement of judgments. We have been advised by our Chinese counsel, Haiwen & Partners, that there is doubt as to the enforceability in China of any actions to enforce judgments of United States courts arising out of or based on the ownership of our H Shares or ADSs, including judgments arising out of or based on the civil liability provisions of United States federal or state securities laws.
Restrictions on Transferability and the Share Register
All fully paid up H Shares will be freely transferable in accordance with the Articles of Association unless otherwise prescribed by law and/or administrative regulations. Under current laws and regulations, H Shares may be traded only among investors who are not Chinese persons, and may not be sold to Chinese investors. Consequences under Chinese law of a purported transfer of H Shares to Chinese investors are unclear.
As provided in our Articles of Association, we may refuse to register a transfer of H Shares without providing any reason unless:
| • | all relevant transfer fees and stamp duties are paid; |
| • | the instrument of transfer is accompanied by the share certificates to which it relates and any other evidence reasonably required by our board to prove the transferor’s right to make the transfer; |
| • | there are no more than four joint holders as transferees; and |
| • | the H Shares are free from any lien of ours. |
Additionally, no transfers of shares may be registered within the 30 days prior to a shareholders’ general meeting or within five days before we decide on the distribution of dividends.
We are required to keep a register of our shareholders which shall be comprised of various parts, including one part which is to be maintained in Hong Kong in relation to H Shares listed on the HKSE. Shareholders have the right to inspect the share register. For a reasonable fee, shareholders may copy any part of the share register, obtain background information regarding our directors, supervisors, manager and other senior officers, minutes of shareholder general meetings and reports regarding our share capital and any share repurchases in the prior year.
Dividends
Upon approval by ordinary resolution at a shareholders’ meeting, our Board of Directors may propose dividend distribution at any time. The Articles of Association permits dividends issued in the form of cash or shares. Special resolution of the shareholders’ general meeting is required for dividends issued in the form of shares.
Dividends may only be distributed, however, after allowance has been made for:
| • | recovery of losses, if any; |
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| • | allocations to the statutory common reserve fund; and |
| • | allocations to a discretionary common reserve fund. |
The Articles of Association require us to appoint on behalf of the holders of H Shares a receiving agent which is registered as a trust corporation under the Trustee Ordinance of Hong Kong to receive dividends we declare in respect of the H Shares on behalf of the H shareholders. The Articles of Association require that cash dividends and other distributions in respect of H Shares be declared in Renminbi and paid by us in Hong Kong Dollars while cash dividends and other distributions of the A Shares shall be paid in Renminbi.
If we record no profit for the year, we may not normally distribute dividends for the year.
Dividend payments may be subject to Chinese withholding tax. See Item 10. Additional Information – E. Taxation.
Voting Rights and Shareholders’ Meetings
Our Board of Directors must convene a shareholders’ annual general meeting once every year within six months from the end of the preceding financial year. Our board must convene an extraordinary general meeting within two months of the occurrence of any one of the following events:
| • | where the number of directors is less than five as required by the PRC Company Law or two-thirds of the number specified in our Articles of Association; |
| • | where our unrecovered losses reach one-third of the total amount of our share capital; |
| • | where shareholder(s) holding 10% or more of our issued and outstanding voting shares request(s) in writing; or |
| • | whenever our board deems necessary or our Supervisory Committee so requests. |
Meetings of a special class of shareholders must be called in specified situations when the rights of the holders of that class of shares may be varied or abrogated, as discussed below. The Board of Directors, the Supervisory Committee, and shareholders individually or collectively holding 3% or more of our total voting shares are entitled to make written proposals to a shareholders’ meeting. Shareholders individually or collectively holding more than 3% of our total shares may submit written interim proposals to the convener of a shareholders’ meeting ten days before the meeting.
All shareholders’ meetings must be convened by our board by notice given to shareholders by personal service, mail or announcement in the newspaper not less than 45 days before the meeting. Based on the written replies we receive 20 days before a shareholders’ meeting, we will calculate the number of voting shares represented by shareholders who have indicated that they intend to attend the meeting. We can convene the shareholders’ general meeting if the number of voting shares represented by those shareholders is more than one-half of our total voting shares. Otherwise, we shall, within five days, inform the shareholders again of the motions to be considered and the date and venue of the meeting by way of public announcement. After the announcement is made, the shareholders’ meeting may be convened. Our accidental omission to give notice of a meeting to, or the non-receipt of notice of a meeting by, a shareholder will not invalidate the proceedings at that shareholders’ meeting. However, an extraordinary shareholders meeting cannot conduct any business not contained in the notice of meeting.
Shareholders at meetings have the power, among other things, to decide on our operational policies and investment plans, to approve or reject our proposed annual budget, approve our profit distribution plans, an increase or decrease in share capital, the issuance of debentures, our merger or liquidation and any amendment to our Articles of Association. Shareholders also have the right to review any proposals by a shareholder owning 3% or more of our shares.
In general, holders of H Shares and A Shares vote together as a single class at all meetings and on all matters. However, the rights of a class of shareholders may not be varied or abrogated, unless approved by both a special resolution of all shareholders at a general shareholders’ meeting and by a special resolution of shareholders of that class of shares at a separate meeting. Our Articles of Association specify, without limitation, that the following amendments would be deemed to be a variation or abrogation of the rights of a class of shareholders:
| • | increasing or decreasing the number of shares of a class or of a class having voting or distribution rights or privileges equal or superior to that class; |
| • | removing or reducing rights to receive dividends in a particular currency; |
| • | creating shares with voting or distribution rights superior to shares of that class; |
| • | restricting or adding restrictions to the transfer of ownership of shares of that class; |
| • | allotting and issuing rights to subscribe for, or to convert into, shares of that class or another class; |
| • | increasing the rights or privileges of any other class; or |
| • | modifying the provision of our Articles of Association that specifies which amendments would be deemed a variation or abrogation of the rights of a class of shareholder. |
For votes on any of these matters, or any other matter that would vary or abrogate the rights of the A Shares or H Shares, the holders of A Shares and H Shares are deemed to be separate classes and vote separately. However, “Interested Shareholders” are not entitled to vote at class meetings. The meaning of “Interested Shareholder” depends on the proposal to be voted on at the class meeting:
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| • | If the proposal is for us to repurchase our shares either from all shareholders proportionately or by purchasing share on a stock exchange, an “Interested Shareholder” is our controlling shareholder; |
| • | If the proposal is for us to repurchase our shares from a shareholder by a private contract, an “Interested Shareholder” is the shareholder whose shares would be repurchased; |
| • | If the proposal is for our restructuring, an “Interested Shareholder” is any shareholder that has an interest in the restructuring different from the other shareholders of the class or who bears a burden under the proposed restructuring that is less than proportionate to his shareholdings of the class. |
Our Articles of Association specifically provide that an issue of up to 20% of A and H Shares would not be a variation or abrogation of the rights of A shareholders or H shareholders, therefore, separate approval of the A shareholders or H Shareholders would not be required.
Each share is entitled to one vote on all matters submitted to a vote of our shareholders at all shareholders’ meetings, except for meetings of a special class of shareholders where only holders of shares of the affected class are entitled to vote on the basis of one vote per share of the affected class.
Shareholders are entitled to attend and vote at meetings either in person or by proxy. Proxy authorization forms must be in writing and deposited at our company’s principal offices, or at such other place specified in the notice of shareholders meeting not less than 24 hours before the time that such meeting will be held or the time appointed for passing upon the relevant resolutions. If a proxy authorization form is signed by a third party on behalf of the relevant shareholder, then such proxy authorization form must be accompanied by the signature authorization letter or other such document authorizing such third party to sign on behalf of the shareholder.
Except for those actions discussed below, which require supermajority votes, or special resolutions, resolutions of the shareholders are passed by a simple majority of the voting shares held by shareholders who are present in person or by proxy. Special resolutions must be passed by more than two-thirds of the voting rights represented by shareholders who are present in person or by proxy.
The following decisions must be adopted by special resolution:
| • | an increase or reduction of our share capital or the issue of shares of any class, warrants and other similar securities; |
| • | the issue of our debentures; |
| • | our division, merger, dissolution and liquidation; |
| • | amendments to our Articles of Association; |
| • | significant acquisition or disposal of material assets or provision of guarantees conducted within the period of one year with a value exceeding 30% of our latest audited total assets; |
| • | share incentive schemes; and |
| • | any other matters considered by the shareholders in a general meeting and which they have resolved by way of an ordinary resolution to be material and should be adopted by special resolution. |
All other actions taken by the shareholders, including the appointment and removal of our directors and independent auditors and the declaration of normal dividend payments, will be decided by an ordinary resolution of the shareholders.
Our listing agreement with the HKSE provides that we may not permit amendments to certain sections of our Articles of Association that are subject to the Mandatory Provisions. These sections include provisions relating to (i) varying the rights of existing classes of shares, (ii) voting rights, (iii) our ability to purchase our own shares, (iv) rights of minority shareholders and (v) procedures on liquidation. In addition, certain amendments to the Articles of Association require the approval and assent of Chinese authorities.
Board of Directors
Our Articles of Association authorize 11 to 15 directors. Directors are elected by shareholders at a general meeting for a three year term from among candidates nominated by the Board of Directors or by shareholders holding 3% or more of our shares (Independent Directors may be nominated by shareholders each holding 1% or more of our shares). Because our directors do not serve staggered terms, the entire Board of Directors will stand for election, and could be replaced, every three years. Our directors are not required to hold any shares in us, and there is no age limit requirement for the retirement or non- retirement of our directors.
In addition to obligations imposed by laws, administrative regulations or the listing rules of the stock exchanges on which our shares are listed, the Articles of Association place on each of our directors, supervisors, manager and any other senior officers a duty to each shareholder, in the exercise of our functions and powers entrusted to them:
| • | not to cause us to exceed the scope of business stipulated in our business license; |
| • | to act honestly in what he considers our best interests; |
| • | not to expropriate our assets in any way, including (without limitation) usurpation of opportunities which may benefit us; and |
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| • | not to expropriate the individual rights of shareholders, including (without limitation) rights to distributions and voting rights, except according to a restructuring which has been submitted to the shareholders for their approval in accordance with the Articles of Association. |
Our Articles of Association further place on each of our directors, supervisors, manager and other senior officers:
| • | a duty, in the exercise of their powers and discharge of their duties, to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances; |
| • | a fiduciary obligation, in the discharge of his duties, not to place himself or herself in a position where his or her interests may conflict with his or her duty to us; and |
| • | a duty not to cause a person or an organization related or connected to him or her in specified relationships to do what they are prohibited from doing. |
We pay all expenses that our directors incur for their services as directors. Directors also receive compensation for their services under service contracts that are negotiated by the Board of Directors and approved by the shareholders.
Subject to the stipulations of relevant laws and regulations, the shareholders in a general meeting may by ordinary resolution remove any director before the expiration of his term of office. Except for the restrictions placed on the controlling shareholder, discussed below, our shareholders in general meeting have the power to relieve a director or supervisor from liability for specific breaches of duty.
Cumulative voting is required for a meeting of shareholders held for the election of two or more of our directors or supervisors as long as more than 30% of our outstanding shares are held by a single shareholder. Cumulative voting allows shareholders to cast a number of votes for a candidate equal to the number of shares held multiplied by the number of directors being elected at the shareholders’ meeting. If a shareholder attempts to cast more votes than he is entitled to under this system, all of the shareholder’s votes will be invalid and will be deemed an abstention.
More than one third of our directors of board must be independent from our shareholders and not hold any office with us (each, “Independent Director”). At least one Independent Director must be an accounting professional and all Independent Directors must possess a basic knowledge of the operations of a listed company and be familiar with relevant laws and rules and have at least five years working experience in law, economics or other area required for the fulfillment of responsibilities as an Independent Director. Independent Directors may not serve for terms exceeding six years. In addition, there are specific persons who are disqualified from acting as Independent Director. These include:
| • | immediate family members of persons who work for us or our associated entities; |
| • | persons or their immediate family who hold one percent or more of our shares or are among our ten largest shareholders; |
| • | any persons that satisfied the foregoing conditions within the past one year; |
| • | persons providing financial, legal, consultation or other services to us or our associated entities; |
| • | persons who already serve as Independent Director for five other listed companies; and |
| • | anyone identified by the CSRC as unsuitable for serving as an Independent Director. |
If the resignation of an Independent Director would cause our Board of Directors to have less than one third Independent Directors, the resignation will only become effective after a new Independent Director has been appointed.
Our Board will be required to meet at least four times each year. Directors who miss two consecutive Board meetings without appointing an alternate director to attend on their behalf will be proposed for removal at the next shareholders’ meeting, provided that Independent Directors may miss three consecutive meetings in person before being proposed for removal.
Directors may not vote on any matter in which he has a material interest, nor will he be counted for purposes of forming a quorum on such a matter.
Board resolutions are passed by a simple majority of the Directors except for the following matters which require the consent of more than two thirds of the Directors:
| • | proposals for our financial policies; |
| • | the increase or reduction of our registered capital; |
| • | the issue of securities of any kind and their listing; |
| • | any repurchase of our shares; |
| • | significant acquisitions or disposals; |
| • | our merger, division or dissolution; and |
| • | any amendment to our Articles of Association. |
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Our Board of Directors or Supervisory Committee may nominate candidates for our Board of Directors and Supervisory Committee. In addition, shareholders holding one percent or more of our shares have the right to nominate candidates for Independent Director or Independent Supervisor and shareholders holding three percent or more of our shares have the right to nominate other candidates for Director or Supervisor. For candidates for Director, the nominator and candidates will be responsible for providing truthful and complete information about the candidate for disclosure. Candidates for Independent Director must publicly declare that there does not exist any relationship between himself and us that may influence his independent, objective judgment. The CSRC may veto any candidate for Independent Director.
Any material connected transactions are subject to prior approval by our Independent Directors. Connected transactions are those defined by the HKSE and by Chinese rules and regulations, but would generally include transactions with any of the following:
| • | any company that, directly or indirectly, controls us or is under common control with us; |
| • | any shareholders owning 5% or more of our shares; |
| • | our directors, supervisors and other senior management; |
| • | any of our key technical personnel or key technology suppliers; and |
| • | any close relative or associate of any of the above. |
Our Independent Directors can also propose to the Board of Directors the appointment or removal of our auditors, the convening of a Board meeting, independently appoint external auditors, solicit votes from shareholders and report circumstances directly to shareholders, Chinese securities regulatory authorities or other government departments. Two or more may request that the Board convene an extraordinary meeting of shareholders.
Our Independent Directors will have to express their opinion on specified matters to the Board or to the shareholders at a shareholders’ meeting, either by a single unanimous statement or individually. These matters are:
| • | the nomination, removal and remuneration of directors or senior management; |
| • | any major loans or financial transactions with our shareholders or related enterprises and whether we have taken adequate steps to ensure repayment; |
| • | matters that the Independent Director believes may harm the rights and interests of minority shareholders; and |
| • | any other matter that they are required to opine on by applicable law or rules. |
These opinions must be expressed as either, agree, qualified agreement, opposition or unable to form an opinion. All but agreement must also be accompanied by a supporting explanation. If public disclosure of the matter is required, we must also disclose the opinions of our Independent Directors.
Any Independent Director may engage independent institutions to provide independent opinions as the basis of their decision. We must arrange the engagement and bear any costs.
Supervisory Committee
The Supervisory Committee is responsible for supervising our directors and senior officers and preventing them from abusing their positions and powers or infringing upon the rights and interests of our company or those of our shareholders and employees. The Supervisory Committee has no power over the decisions or actions of our directors or officers except for requesting the directors or officers to correct any acts that are harmful to our interests. The Supervisory Committee is composed of six members appointed for a three year term. It has the right to:
| • | attend the meetings of our Board of Directors; |
| • | inspect our financial affairs; |
| • | supervise and evaluate the conduct of our directors, general manager and other senior officers in order to determine whether they violate any laws, regulations or the Articles of Association in performing their duties; |
| • | require our directors, general manager or other senior officers to correct any act harmful to our interests and those of our shareholders and employees; |
| • | verify financial reports, accounting reports, business reports, profit distribution plans and other financial information proposed to be tabled at the shareholders’ general meeting, and entrust registered accountants and practicing accountants to re-review such documents upon its discovery of any problems; |
| • | require the Board of Directors to convene an extraordinary general meeting of shareholders; |
| • | represent us in negotiations with directors or in initiating legal proceedings against a director on our company’s behalf; |
| • | conduct investigation into any identified irregularities in our operations, and where necessary, to engage accountants, legal advisers or other professionals to assist in the investigation; and |
| • | any other matters authorized by the Articles of Association. |
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One third of our Supervisory Committee members must be employee representatives appointed by our employees. The remaining members are appointed by the shareholders in a general meeting, provided that our directors, general manager and senior officers are not eligible to serve as supervisors. The Supervisory Committee must meet at least four times a year. Decisions of the Supervisory Committee can be passed by the consents of over two thirds of all the supervisors. We will pay all reasonable expenses incurred by the Supervisory Committee in appointing professional advisors, such as lawyers, accountants or auditors.
Liquidation Rights
In the event of our liquidation, payment of borrowings out of our remaining assets will be made in the order of priority prescribed by applicable laws and regulations. After payment of borrowings, we will distribute the remaining property to shareholders according to the class and proportion of their shareholdings. For this purpose, the H Shares will rank equally with the A Shares.
Obligation of Shareholders
Shareholders are not obligated to make any further contributions to our share capital other than as agreed by the subscriber of the relevant shares on subscription. This provision means that holders of ADSs will also not be obligated to make further contributions to our share capital.
Duration
We are organized as a stock limited company of indefinite duration.
Increase in Share Capital
The Articles of Association require that approval by a resolution of the shareholders be obtained prior to issuing new shares. New issues of shares must also be approved by the relevant Chinese authorities.
Reduction of Share Capital and Purchase by Us of Our Shares
We may reduce our registered share capital only upon obtaining the approval of the shareholders and, when applicable, relevant Chinese authorities. Repurchases may be made either by way of a general offer to all shareholders in proportion to their shareholdings, by purchasing our shares on a stock exchange or by an off-market contract with shareholders.
Restrictions on Large or Controlling Shareholders
Our Articles of Association provide that, in addition to any obligation imposed by laws and administrative regulations or required by the listing rules of the stock exchanges on which our shares are listed, a controlling shareholder cannot exercise voting rights in a manner prejudicial to the interests of the shareholders generally or of some part of the shareholders:
| • | to relieve a director or supervisor from his or her duty to act honestly in our best interest; |
| • | to approve the expropriation by a director or supervisor (for his or her own benefit or for the benefit of another person) of our assets in any way, including, without limitation, opportunities which may benefit us; or |
| • | to approve the expropriation by a director or supervisor (for his or her own benefit or for the benefit of another person) of the individual rights of other shareholders, including, without limitation, rights to distributions and voting rights (but not according to a restructuring of our company which has been submitted for approval by the shareholders in a general meeting in accordance with our Articles of Association). |
A controlling shareholder, however, will not be precluded by our Articles of Association or any laws and administrative regulations or the listing rules of the stock exchanges on which our shares are listed from voting on these matters.
A controlling shareholder is defined by our Articles of Association as any person who, acting alone or together with others:
| • | has the power to elect more than one-half of the Board of Directors; |
| • | has the power to exercise, or to control the exercise of, 30% or more of our voting rights; |
| • | holds 30% or more of our issued and outstanding shares; or |
| • | has de facto control of us in any other way. |
Minutes, Accounts and Annual Report
Our shareholders may inspect copies of the minutes of the shareholders’ general meetings during our business hours free of charge. Shareholders are also entitled to receive copies of these minutes within seven days of receipt of the reasonable charges we may require.
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Our fiscal year is the calendar year ending December 31. Each fiscal year, we must mail our financial report to shareholders not less than 21 days before the date of the shareholders’ annual general meeting. These and any interim financial statements must be prepared in accordance with Chinese accounting standards and, for so long as H Shares are listed on the HKSE, must also be prepared in accordance with or reconciled to either Hong Kong accounting standards or international accounting standards. The financial statements must be approved by an ordinary resolution of the shareholders at the annual general meeting.
Independent auditors are appointed each year by the shareholders at the annual meeting.
C. Material Contracts.
We have not entered into any material contracts in the last two years other than in the ordinary course of business and other than those described in Item 4. Information on the Company or elsewhere in this annual report on Form 20-F.
D. Exchange Controls.
Our Articles of Association require that cash dividends on our H Shares be declared in Renminbi and paid in HK Dollars. The Articles of Association further stipulate that unless otherwise provided in law and administrative regulations, such dividends must be converted to HK Dollars at a rate equal to the average of the closing exchange rates for HK Dollars as announced by the Chinese Foreign Exchange Trading Center for the calendar week preceding the date on which the dividends are declared.
The Renminbi currently is not a freely convertible currency. SAFE, under supervision of the People’s Bank of China (“PBOC”), controls the conversion of Renminbi into foreign currency. Chinese governmental policies were introduced in 1996 to reduce restrictions on the convertibility of Renminbi into foreign currency for current account items. In recent years, the Chinese government has gradually simplified and improved the foreign exchange administration policies in relation to capital items, such as the cancellation of foreign exchange registration and approval for domestic and overseas foreign direct investment. However, foreign exchange control over the capital items is not completely abolished. The limitations on foreign exchange could affect our ability to obtain foreign exchange through borrowings or equity financing, or to obtain foreign exchange for capital expenditures.
On July 21, 2005, the Chinese government changed its policy of pegging the Renminbi to the U.S. Dollar. Under the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. Since the adoption of this new policy, the value of the Renminbi has fluctuated daily within a narrow band, but overall has appreciated against the U.S. Dollar. Nevertheless, the Chinese government continues to receive significant international pressure to further liberalize its currency policy which could result in a further and more significant appreciation in the value of the Renminbi against the U.S. Dollar. The value of the Renminbi depreciated by 5.15% against the U.S. Dollar in the year of 2018.
While the impact of the foregoing developments is not entirely clear, it appears that the trend in the Chinese government’s foreign exchange policy is toward easier convertibility of the Renminbi.
The holders of the ADSs will receive the HK Dollar dividend payments in U.S. Dollars at conversion rates related to market rates and subject to fees as set forth in our Deposit Agreement with The Bank of New York Mellon, as Depositary. The HK Dollar is currently linked to and trades within a narrow band against the U.S. Dollar at a rate that does not deviate significantly from HK$7.80 = U.S.$1.00. The Hong Kong government has stated its intention to maintain such link, although there can be no guarantee that such link will be maintained.
E. Taxation
PRC Taxation
The following is a summary of those taxes, including withholding provisions, to which United States security holders are subject under existing Chinese laws and regulations. The summary is subject to changes in Chinese law, including changes that could have retroactive effect. The summary does not take into account or discuss the tax laws of any country other than China, nor does it take into account the individual circumstances of a security holder. This summary does not purport to be a complete technical analysis or an examination of all potential tax effects under such laws and regulations.
Tax on Dividends
For an Individual Investor
According to the Individual Income Tax Law of the People’s Republic of China, as amended on August 31, 2018 and effective on January 1, 2019 (the “Individual Income Tax Law”) dividends paid by Chinese companies to individual investors are subject to Chinese withholding tax at a flat rate of 20%. As for a foreign individual investor that neither has a domicile nor resides in China, or that has no domicile and has resided in China for no more than one year, the dividends received by such an investor in China are generally subject to a withholding tax at a flat rate of 20% under the individual income tax law, subject to exemption or reduction by an applicable income tax treaty. According to the State Administration of Taxation’s tax treatments with regard to the dividends of H Shares paid by onshore non-foreign invested enterprises listed on the HKSE, we will withhold and pay the individual income tax at the tax rate of 10% for individual shareholders who are residents of Hong Kong, Macau, or countries which have entered into tax treaties with China, which provide for a 10% dividends tax rate, and we will temporarily withhold and pay the individual income tax at the tax rate of 10% for individual shareholders who are residents of countries which have entered into tax treaties with China, which provide for a less than 10% dividends tax rate. Shareholders of H Shares may directly or through our Company apply to the in-charge tax authority for the preferential treatments provided by the relevant tax treaties.
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Upon the approval by the in-charge tax authority, the excessive amount being paid will be refunded. For individual shareholders who are residents of countries which have entered into tax treaties with China providing for a more than 10% but less than 20% dividends tax rate, we will withhold and pay the individual income tax at the specific tax rate required therein. We will withhold and pay the individual income tax at the dividends tax rate of 20% for individual shareholders who are residents of countries which have not entered into any forms of tax treaties with China or in circumstances other than above described.
For a Corporation
According to the Enterprise Income Tax Law of the People’s Republic of China (“Enterprise Income Tax Law”) and its implementation rules, as amended on December 29, 2018, dividends by Chinese resident enterprises to non-resident enterprises are ordinarily subject to a Chinese withholding tax levied at a flat rate of 10%. For purposes of the Enterprise Income Tax Law, a “Chinese resident enterprise” is an enterprise which is either (i) set up in China in accordance with PRC laws or (ii) set up in accordance with the laws of a foreign country (region) but whose actual administrative headquarters is in China. For purposes of the Enterprise Income Tax Law, a “non-resident enterprise” is an enterprise which is set up in accordance with the laws of a foreign country (region) and whose actual administrative headquarters is located outside China but which has either (i) set up a legal presence in China or (ii) has income originating from China despite not having formally set up a legal presence in China. The State Administration of Taxation issued a Circular on Issues Relating to the Withholding of Enterprise Income Tax for Dividends Distributed by Resident Enterprises in China to Non-resident Enterprises Holding H-shares of the Enterprises (Guo Shui Han [2008] No. 897) on November 6, 2008, which further clarifies that Chinese resident enterprises should, in distributing dividends for 2008 or any year hereafter to non-resident enterprises holding H-shares of the Chinese resident enterprise, withhold enterprise income tax for such dividends at a tax rate of 10%. After receiving dividends, non-resident enterprises holding H-shares of any Chinese resident enterprise can, on their own or through an agent, file an application to the relevant taxation authorities for such dividends to be covered by any applicable tax treaty (or other arrangement). The relevant taxation authorities should, upon reviewing and verifying the application and supporting materials to be correct, refund the difference between the tax levied and the tax payable calculated at a tax rate specified by the applicable tax treaty (or other arrangement).
Capital Gains Tax
For an Individual Investor
So far as we are aware, in practice, capital gains derived by a foreign individual investor from the sale of overseas-listed shares are temporarily exempted from individual income tax.
For a Corporation
According to the Enterprise Income Tax Law and its implementation rules, a non-resident enterprise is subject to a 10% withholding tax for capital gains derived from the disposal of overseas-listed shares unless such payment is exempted or deducted pursuant to applicable double taxation treaties or otherwise. According to the Circular issued by the State Administration of Taxation on Issues regarding Income Tax Payable by Foreign Invested Enterprises, Foreign Enterprises and Individuals for Capital Gains Derived from the Disposal of Shares (Equity Interests) and Dividends (Guoshuifa [1993] No. 45), capital gains derived by a non-resident enterprise from the disposal of overseas-listed shares are temporarily exempted from withholding tax in China. However, this circular has been revoked in 2011. Therefore, technically, PRC withholding tax should be applied to non-resident enterprises on capital gains derived from the disposal of overseas-listed shares unless it is tax exempted under the applicable double tax treaty. So far as we are aware, practically, there is no consistent enforcement of the collection of such withholding tax in China at current stage. However, we are aware of cases where the PRC tax authorities try to levy PRC withholding tax when they became aware of the disposal of the overseas- listed shares that the profits from the disposal of shares are derived from China.
Tax Treaties
China has an income tax treaty with the United States that currently limits the rate of Chinese withholding tax to 10% for dividends paid to individuals and corporations that qualify for treaty benefits. However, this treaty does not offer reduced tax rates for capital gains.
However, if certain conditions under the double tax treaty are satisfied (e.g., the shareholding in H-shares is less than 25% and the H-share company is not ‘land rich’), the capital gains may be exempted from the 10% PRC withholding tax.
Stamp Tax
While no express exemption exists for the imposition of Chinese stamp tax on transfers of Overseas Shares pursuant to the Provisional Regulations of the People’s Republic of China Concerning Stamp Tax, as amended on January 8, 2011, we are not aware of any circumstance under which Chinese stamp tax has actually been imposed on the transfer of Overseas Shares.
Estate or Gift Tax
China does not currently impose any estate or gift tax.
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U.S. Taxation
The following is a summary of the material U.S. federal income tax consequences of the ownership and disposition of H Shares or ADSs to U.S. Holders (as defined below). The following discussion is not exhaustive of all possible tax considerations. This summary is based upon the Internal Revenue Code of 1986, as amended (the “Code”), regulations promulgated under the Code by the U.S. Treasury Department (including proposed and temporary regulations), rulings, current administrative interpretations and official pronouncements of the Internal Revenue Service (“IRS”), and judicial decisions, all as currently available and all of which are subject to differing interpretations or to change, possibly with retroactive effect. Such change could materially and adversely affect the tax consequences described below. No assurance can be given that the IRS will not assert, or that a court will not sustain, a position contrary to any of the tax consequences described below.
This discussion does not address state, local, or foreign tax consequences, or the net investment income tax consequences, of the ownership and disposition of H Shares or ADSs. (See “PRC Taxation” above).
This summary is for general information only and does not address all aspects of U.S. federal income taxation that may be important to a particular holder in light of its investment or tax circumstances or to holders subject to special tax rules, such as: banks; financial institutions; insurance companies; dealers in stocks, securities, or currencies; entities treated as partnerships for U.S. federal income taxes or partners therein; traders in securities that elect to use a mark-to-market method of accounting for their securities holdings; tax-exempt organizations; real estate investment trusts; regulated investment companies; qualified retirement plans, individual retirement accounts, and other tax-deferred accounts; expatriates of the United States; individuals subject to the alternative minimum tax; persons holding H Shares or ADSs as part of a straddle, hedge, conversion transaction, or other integrated transaction; persons who acquired H Shares or ADSs pursuant to the exercise of any employee stock option or otherwise as compensation for services; persons actually or constructively holding 10% or more of the voting power or value of our stock; U.S. Holders (as defined below) whose functional currency is other than the U.S. Dollar; and persons holding our H Shares or ADSs in connection with a trade or business conducted outside the United States.
This discussion is not a comprehensive description of all of the U.S. federal tax consequences that may be relevant with respect to the ownership and disposition of H Shares or ADSs. We urge you to consult your own tax advisor regarding your particular circumstances and the U.S. federal income and estate tax consequences to you of owning and disposing of H Shares or ADSs, as well as any tax consequences arising under the laws of any state, local, or foreign or other tax jurisdiction and the possible effects of changes in U.S. federal or other tax laws.
This summary is directed solely to U.S. Holders (defined below) who hold their H Shares or ADSs as capital assets within the meaning of Section 1221 of the Code, which generally means as property held for investment. For purposes of this discussion, the term “U.S. Holder” means a beneficial owner of H Shares or ADSs that is any of the following:
| • | a citizen or resident of the United States or someone treated as a U.S. citizen or resident for U.S. federal income tax purposes; |
| • | a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof, or the District of Columbia; or |
| • | a trust or estate, the income of which is subject to U.S. federal income taxation regardless of its source. |
ADSs
As it relates to the ADSs, this discussion is based in part upon the representations of the depositary and the assumption that each obligation in the Deposit Agreement and any related agreement will be performed in accordance with its terms.
Generally, a holder of ADSs will be treated as the owner of the underlying H Shares represented by those ADSs for U.S. federal income tax purposes. Accordingly, no gain or loss will be recognized if the holder exchanges ADSs for the underlying H Shares represented by those ADSs. The holder’s adjusted tax basis in the H Shares will be the same as the adjusted tax basis of the ADSs surrendered in exchange therefor, and the holding period for the H Shares will include the holding period for the surrendered ADSs.
TAXATION OF U.S. HOLDERS
The discussion in “Distributions on H Shares or ADSs” and “Dispositions of H Shares or ADSs” below is based on the assumption that we will not be treated as a PFIC for U.S. federal income tax purposes. For a discussion of the rules that apply if we are treated as a PFIC, see the discussion in “Passive Foreign Investment Company” below.
Distributions on H Shares or ADSs
General. Subject to the discussion in “Passive Foreign Investment Company” below, if you actually or constructively receive a distribution on H Shares or ADSs, you must include the distribution in gross income as a taxable dividend on the date of your (or in the case of ADSs, the depositary’s) receipt of the distribution, but only to the extent of our current or accumulated earnings and profits, as calculated under U.S. federal income tax principles. Such amount must be included without reduction for any foreign taxes withheld. Dividends paid by us will not be eligible for the dividends received deduction allowed to corporations with respect to dividends received from certain domestic corporations. Dividends paid by us may or may not be eligible for preferential rates applicable to qualified dividend income, as described below.
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To the extent a distribution exceeds our current and accumulated earnings and profits, it will be treated first as a non-taxable return of capital to the extent of your adjusted tax basis in the H Shares or ADSs, and thereafter as capital gain. Preferential tax rates for long term capital gain may be applicable to non-corporate U.S. Holders.
We do not intend to calculate our earnings and profits under U.S. federal income tax principles. Therefore, you should expect that a distribution generally will be reported as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above.
Qualified Dividend Income. With respect to non-corporate U.S. Holders (i.e., individuals, trusts, and estates), dividends that are treated as qualified dividend income (“QDI”) are taxable at a maximum tax rate of 20%. Among other requirements, dividends generally will be treated as QDI if either (i) our H Shares or ADSs are readily tradable on an established securities market in the United States, or (ii) we are eligible for the benefits of a comprehensive income tax treaty with the United States which includes an information exchange program and which is determined to be satisfactory by the U.S. Treasury. It is expected that our ADSs will be “readily tradable” as a result of being listed on the NYSE.
In addition, for dividends to be treated as QDI, we must not be a PFIC (as discussed below) for either the taxable year in which the dividend was paid or the preceding taxable year. Please see the discussion under “Passive Foreign Investment Company” below. Additionally, in order to qualify for QDI treatment, you generally must have held the H Shares or ADSs for more than 60 days during the 121-day period beginning 60 days prior to the ex-dividend date. However, your holding period will be reduced for any period during which the risk of loss is diminished.
Moreover, a dividend will not be treated as QDI to the extent you are under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property. Since the QDI rules are complex, you should consult your own tax advisor regarding the availability of the preferential tax rates for dividends paid on H Shares or ADSs.
Foreign Currency Distributions. A dividend paid in foreign currency (e.g., Hong Kong Dollars or Chinese Renminbi) must be included in your income as a U.S. Dollar amount based on the exchange rate in effect on the date such dividend is received, regardless of whether the payment is in fact converted to U.S. Dollars. If the dividend is converted to U.S. Dollars on the date of receipt, you generally will not recognize a foreign currency gain or loss. However, if you convert the foreign currency to U.S. Dollars on a later date, you must include in income any gain or loss resulting from any exchange rate fluctuations. The gain or loss will be equal to the difference between (i) the U.S. Dollar value of the amount you included in income when the dividend was received and (ii) the amount that you receive on the conversion of the foreign currency to U.S. Dollars. Such gain or loss generally will be ordinary income or loss and U.S. source for U.S. foreign tax credit purposes.
Foreign Tax Credits. Subject to certain conditions and limitations, any foreign taxes paid on or withheld from distributions from us and not refundable to you may be credited against your U.S. federal income tax liability or, alternatively, may be deducted from your taxable income. This election is made on a year-by-year basis and applies to all foreign taxes paid by you or withheld from you that year.
Distributions will constitute foreign source income for foreign tax credit limitation purposes. The foreign tax credit limitation is calculated separately with respect to specific classes of income. For this purpose, distributions characterized as dividends distributed by us generally will constitute “passive category income” or, in the case of certain U.S. Holders, “general category income.” Special limitations may apply if a dividend is treated as QDI (as defined above).
Since the rules governing foreign tax credits are complex, you should consult your own tax advisor regarding the availability of foreign tax credits in your particular circumstances.
Dispositions of H Shares or ADSs
Subject to the discussion in “Passive Foreign Investment Company” below, you generally will recognize taxable gain or loss realized on the sale or other taxable disposition of H Shares or ADSs equal to the difference between the U.S. Dollar value of (i) the amount realized on the disposition (i.e., the amount of cash plus the fair market value of any property received), and (ii) your adjusted tax basis in the H Shares or ADSs. Such gain or loss will be a capital gain or loss. Capital gain from the sale or other taxable disposition of H Shares or ADSs held by certain non-corporate U.S. Holders will be taxed at preferential rates if such H Shares or ADSs have been held for more than one year and certain other requirements are met. The deductibility of capital losses is subject to limitations. Any gain or loss recognized generally will be treated as gain or loss from sources within the United States for U.S. foreign tax credit limitation purposes.
If you receive currency other than U.S. Dollars upon the disposition of H Shares or ADSs, the tax consequences will generally be as described under “—Foreign Currency Distributions” above.
Passive Foreign Investment Company
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. 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 the current year until its close, or for any future 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.
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Certain “look through” rules apply for purposes of the income and asset tests described above. If we own, directly or indirectly, 25% or more of the total value of the outstanding shares of another corporation, we generally will be treated as if we (a) held directly a proportionate share of the other corporation’s assets, and (b) received directly a proportionate share of the other corporation’s income. In addition, passive income does not include any interest, dividends, rents, or royalties that are received or accrued by us from a “related person” (as defined in Section 954(d)(3) of the Code), to the extent such items are properly allocable to income of such related person that is not passive income.
Under the income and asset tests, our PFIC status must be determined annually at the end of each year based upon the composition of our income and the composition and valuation of our assets, all of which are subject to change. In determining whether we are a PFIC, we rely on a current valuation of our assets including goodwill, not reflected in our financial statements, and our projection of our income for the current year. We determine the value of our assets in large part by reference to the market value of our ordinary shares at the end of each quarter. We believe this valuation approach is reasonable. However, the IRS may successfully challenge our valuation of our assets, and the market price of our ordinary shares may fluctuate.
Because the PFIC determination is highly fact intensive and made at the end of each taxable year, there can be no assurance that we will not be a PFIC for the current or any future taxable year or that the IRS will not challenge our determination concerning our PFIC status.
Default PFIC Rules under Section 1291 of the Code. If we are treated as a PFIC with respect to a U.S. Holder, the U.S. federal income tax consequences to the U.S. Holder of the ownership and disposition of ordinary shares will depend on whether such U.S. Holder makes an election to treat us as a qualified electing fund (“QEF”) under Section 1295 of the Code (a “QEF Election”) or a mark-to-market election under Section 1296 of the Code (a “Mark-to-Market Election”). A U.S. Holder owning ordinary shares while we were or are a PFIC that has not made either a QEF Election or a Mark-to-Market Election will be referred to in this summary as a “Non-Electing U.S. Holder.”
If you are a Non-Electing U.S. Holder, you will be subject to the default tax rules of Section 1291 of the Code with respect to:
| • | any “excess distribution” paid on ordinary shares, which means the excess (if any) of the total distributions received by you during the current taxable year over 125% of the average distributions received by you during the three preceding taxable years (or during the portion of your holding period for the ordinary shares prior to the current taxable year, if shorter); and |
| • | any gain recognized on the sale or other taxable disposition (including a pledge) of ordinary shares. |
Under these default tax rules:
| • | any excess distribution or gain will be allocated ratably over your holding period for the ordinary shares, |
| • | the amount allocated to the current taxable year and any period prior to the first day of the first taxable year in which we were a PFIC will be treated as ordinary income in the current year, |
| • | the amount allocated to each of the other years will be treated as ordinary income and taxed at the highest applicable tax rate in effect for that year, and |
| • | the resulting tax liability from any such prior years will be subject to the interest charge applicable to underpayments of tax. |
In addition, notwithstanding any election you may make, dividends that you receive from us will not be eligible for the preferential tax rates applicable to QDI (as discussed above in “Distributions on H Shares or ADSs”) if we are a PFIC either in the taxable year of the distribution or the preceding taxable year, but will instead be taxable at rates applicable to ordinary income.
Special rules for Non-Electing U.S. Holders will apply to determine U.S. foreign tax credits with respect to foreign taxes imposed on distributions on H Shares or ADSs.
If we are a PFIC for any taxable year during which you hold H Shares or ADSs, we will continue to be treated as a PFIC with respect to you for all succeeding years during which you hold H Shares or ADSs, regardless of whether we actually continue to be a PFIC.
If we are treated as a PFIC in any year with respect to you, you will be required to file an annual return on IRS Form 8621 regarding distributions received on H Shares or ADSs and any gain realized on the disposition of H Shares or ADSs.
QEF Election. We currently do not intend to prepare or provide you with certain tax information that would permit you to make a QEF Election to mitigate the adverse tax consequences associated with owning PFIC stock.
Mark-to-Market Election. U.S. Holders may make a Mark-to-Market Election, but only if the H Shares or ADSs are marketable stock. The mark-to-market election is available only for “marketable stock,” which is stock that is traded in other than de minimis quantities on at least 15 days during each calendar quarter on a qualified exchange or other market, as defined in the applicable U.S. Treasury regulations. There can be no assurances, however, that our H Shares or ADSs will be treated, or continue to be treated, as marketable stock.
If you own (or owned) H Shares or ADSs while we are (or were) a PFIC and you make a Mark-to-Market Election, you generally will not be subject to the default rules of Section 1291 of the Code discussed above. Rather, you generally will be required to recognize ordinary income for any increase in the fair market value of the H Shares or ADSs for each taxable year that we are a PFIC. You will also be allowed to deduct as an ordinary loss any decrease in the fair market value to the extent of net marked-to-market gain previously included in prior years. Your adjusted tax basis in the H Shares or ADSs will be adjusted to reflect the amount included or deducted.
The Mark-to-Market Election will be effective for the taxable year for which the election is made and all subsequent taxable years, unless the H Shares or ADSs cease to be marketable stock or the IRS consents to the revocation of the election. You should consult your own tax advisor regarding the availability of, and procedure for making, a Mark-to-Market Election.
Since the PFIC rules are complex, you should consult your own tax advisor regarding them and how they may affect the U.S. federal income tax consequences of the ownership and disposition of H Shares or ADSs.
Information reporting regarding specified foreign financial assets
Certain U.S. Holders who are individuals (and under proposed regulations, certain entities) may be required to report information relating to an interest in our H Shares or ADSs, subject to certain exceptions (including an exception for shares held in accounts maintained by U.S. financial institutions). U.S. Holders are urged to consult their tax advisors regarding their information reporting obligations, if any, with respect to their ownership and disposition of our H Shares or ADSs. In the event a U.S. Holder does not file such required reports, the statute of limitations on the assessment and collection of U.S. federal income taxes of such U.S. holder for the related tax year will not close before such report is filed.
If you are a U.S. Holder, you are urged to consult with your own tax advisor regarding the application of the specified foreign financial assets information reporting requirements and related statute of limitations tolling provisions with respect to our H Shares and ADSs.
Information Reporting and Backup Withholding
Generally, information reporting requirements will apply to distributions on H Shares or ADSs or proceeds from the disposition of H Shares or ADSs paid within the United States (and, in certain cases, outside the United States) to a U.S. Holder unless such U.S. Holder is an exempt recipient, such as a corporation. Furthermore, backup withholding (currently at 24%) may apply to such amounts unless such U.S. Holder (i) is an exempt recipient that, if required, establishes its right to an exemption, or (ii) provides its taxpayer identification number, certifies that it is not currently subject to backup withholding, and complies with other applicable requirements.
A U.S. Holder may generally avoid backup withholding by furnishing a properly completed IRS Form W-9.
Backup withholding is not an additional tax. Rather, amounts withheld under the backup withholding rules may be credited against your U.S. federal income tax liability. Furthermore, you may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS and furnishing any required information in a timely manner.
F. Dividends and Paying Agents.
Not applicable.
G. Statement by Experts.
Not applicable.
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H. Documents on Display.
We are subject to the periodic reporting and other informational requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Under the Exchange Act, we are required to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F no later than four months after the close of each fiscal year, which is December 31 of each year. The SEC also maintains a Web site at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short- swing profit recovery provisions contained in Section 16 of the Exchange Act.
I. Subsidiary Information.
Not applicable.
| ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Our market risk exposures primarily consist of fluctuations in oil and gas prices, exchange rates and interest rates.
Commodity Price Risk
We are exposed to commodity price risk related to price volatility of crude oil and refined oil products.
At the end of July 2019, crude oil inventories were below normal levels. In order to ensure market supply, 1.42 million barrels of Saudi Crude oil were borrowed from Sinopec Group Petroleum Commercial Reserve Co., Ltd. according to the actual production demand of oil, and the monthly weighted balance price was $ 62.63/ barrel. The price of the international crude oil market dropped sharply at the beginning of 2020, and to lock in the cost of oil, in February and March, the Company bought 1.42 million barrels of Dubai oil swaps in May and November. The operation has no risk exposure, and the maximum possible loss is RMB0 and the comprehensive income is RMB238 million.
In May 2020, the price of crude oil was at a low level rarely seen in history. It was estimated that the price of crude oil in the second half of 2020 would rebound substantially with the stabilization of the epidemic situation, and tend to the normal price level. In order to avoid the risk of rising crude oil purchase price, we bought 400 thousand barrels of Dubai oil swaps in November and December at an average price of about $33/barrel. The operation has no risk exposure, and the maximum possible loss is RMB0, and the comprehensive income is RMB33.6614 million.
See Item 3. Key Information – D. Risk Factors—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.
Interest Rate Risk
We are subject to risk resulting from fluctuations in interest rates. Our borrowings are fixed and variable rate bank and other borrowings, with original maturities ranging from 1 to 5 years. Accordingly, fluctuations in interest rates can lead to significant fluctuations in the fair value of such debt instruments. We had no program of interest rate hedging activities and did not engage in any such activities in 2019 or 2020.
The following table provides information, by maturity date, regarding our interest rate sensitive financial instruments, which consist of fixed and variable rate short term and long term debt obligations, as of December 31, 2020 and 2019.
| As of December 31, 2020 | ||||||||||||||||||||||||||||
| 2021 | 2022 | 2023 | 2024 | 2025 | Total Recorded Amount |
Fair Value | ||||||||||||||||||||||
| (RMB equivalent in thousands, except interest rates) | ||||||||||||||||||||||||||||
| Fixed rate bank and other loans |
||||||||||||||||||||||||||||
| In U.S. Dollars |
— | — | — | — | — | — | — | |||||||||||||||||||||
| Average interest rate |
— | — | — | — | — | — | — | |||||||||||||||||||||
| In RMB |
1,500,000 | — | — | — | — | 1,500,000 | 1,500,000 | |||||||||||||||||||||
| Average interest rate(1) |
2.60% | — | — | — | — | 2.60% | 2.60% | |||||||||||||||||||||
| Variable rate bank and other loans |
||||||||||||||||||||||||||||
| In U.S. Dollars |
— | — | — | — | — | — | — | |||||||||||||||||||||
| Average interest rate(1) |
— | — | — | — | — | — | — | |||||||||||||||||||||
| In RMB |
48,000 | — | — | — | — | 48,000 | 48,000 | |||||||||||||||||||||
| Average interest rate(1) |
3.70% | — | — | — | — | 3.70% | 3.70% | |||||||||||||||||||||
| (1) | The average interest rates for variable rate bank and other loans are calculated based on the year end indices. |
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| As of December 31, 2019 | ||||||||||||||||||||||||||||
| 2020 | 2021 | 2022 | 2023 | 2024 | Total Recorded Amount |
Fair Value | ||||||||||||||||||||||
| (RMB equivalent in thousands, except interest rates) | ||||||||||||||||||||||||||||
| Fixed rate bank and other loans |
||||||||||||||||||||||||||||
| In U.S. Dollars |
— | — | — | — | — | — | — | |||||||||||||||||||||
| Average interest rate |
— | — | — | — | — | — | — | |||||||||||||||||||||
| In RMB |
1,500,000 | — | — | — | — | 1,500,000 | 1,500,000 | |||||||||||||||||||||
| Average interest rate(1) |
3.30% | — | — | — | — | 3.30% | 3.30% | |||||||||||||||||||||
| Variable rate bank and other loans |
||||||||||||||||||||||||||||
| In U.S. Dollars |
— | — | — | — | — | — | — | |||||||||||||||||||||
| Average interest rate(1) |
— | — | — | — | — | — | — | |||||||||||||||||||||
| In RMB |
47,600 | — | — | — | — | 47,600 | 47,600 | |||||||||||||||||||||
| Average interest rate(1) |
4.52% | — | — | — | — | 4.52% | 4.52% | |||||||||||||||||||||
| (1) | The average interest rates for variable rate bank and other loans are calculated based on the year end indices. |
Exchange Rate Risk
We are also exposed to foreign currency exchange rate risk as a result of our foreign currency denominated short term borrowing and, to a limited extent, cash and cash equivalents denominated in foreign currencies. The following table provides information, by maturity date, regarding our foreign currency exchange rate sensitive financial instruments, which consist of cash and cash equivalents, short term debt obligations as of December 31, 2020 and 2019.
| As of December 31, 2020 | ||||||||||||||||||||||||||||||||
| 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total Recorded Amount |
Fair Value |
|||||||||||||||||||||||||
| (RMB equivalent in thousands, except interest rates) | ||||||||||||||||||||||||||||||||
| On-balance sheet financial instruments |
||||||||||||||||||||||||||||||||
| Cash and cash equivalents: |
||||||||||||||||||||||||||||||||
| In Hong Kong Dollars |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| In U.S. Dollars |
207,727— | — | — | — | — | 207,727 | 207,727 | |||||||||||||||||||||||||
| In Euro |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| In Japanese Yen |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| In Swiss Frank |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Debt: |
||||||||||||||||||||||||||||||||
| Fixed rate bank and other loans in U.S. Dollars |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Average interest rate(1) |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Variable rate bank and other loans in U.S. Dollars |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Average interest rate(1) |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| (1) | The average interest rates for variable rate bank and other loans are calculated based on the year end indices. |
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| As of December 31, 2019 | ||||||||||||||||||||||||||||||||
| 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | Total Recorded Amount |
Fair Value |
|||||||||||||||||||||||||
| (RMB equivalent in thousands, except interest rates) | ||||||||||||||||||||||||||||||||
| On-balance sheet financial instruments |
||||||||||||||||||||||||||||||||
| Cash and cash equivalents: |
||||||||||||||||||||||||||||||||
| In Hong Kong Dollars |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| In U.S. Dollars |
336,078 | — | — | — | — | — | 336,078 336,078 | |||||||||||||||||||||||||
| In Euro |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| In Japanese Yen |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| In Swiss Frank |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Debt: |
||||||||||||||||||||||||||||||||
| Fixed rate bank and other loans in U.S. Dollars |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Average interest rate(1) |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Variable rate bank and other loans in U.S. Dollars |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Average interest rate(1) |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| (1) | The average interest rates for variable rate bank and other loans are calculated based on the year end indices. |
| ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES. |
A. Debt Securities.
Not applicable.
B. Warrants and Rights.
Not applicable.
C. Other Securities.
Not applicable.
D. American Depositary Shares.
In connection with our ADR program, a holder of our ADSs may have to pay, either directly or indirectly, certain fees and charges, as described in Item 12.D.3. In addition, we receive fees and other direct and indirect payments from The Bank of New York Mellon that are related to our ADS as described in Item 12.D.4.
12.D.3 Fees and Charges that a holder of our ADSs May Have to Pay
The Bank of New York Mellon collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The Bank of New York Mellon also collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The Bank of New York Mellon may collect its annual fee for depositary services by deductions from cash distributions.
| Persons depositing or withdrawing shares must pay: |
For: | |
| $5.00 (or less) per 100 ADSs (or portion of 100 ADSs) |
Issuance and withdrawal of ADSs, including issuances resulting from a distribution of shares or rights or other property | |
| A fee equivalent to the fee that would be payable if securities distributed to you had been shares and the shares had been deposited for issuance of ADSs |
Distribution of securities distributed to holders of deposited securities which are distributed by The Bank of New York Mellon to ADS registered holders | |
| A fee of $.05 (or less) per ADS (or portion thereof) Registration or transfer fees |
Any cash distribution made pursuant to the Deposit Agreement Transfer and registration of shares on our share register to or from the name of the depositary or its agent when you deposit or withdraw shares | |
| Expenses of The Bank of New York Mellon |
Cable, telex and facsimile transmissions (when expressly provided in the Deposit Agreement); | |
| Converting foreign currency to U.S. Dollars | ||
| Taxes and other governmental charges The Bank of New York Mellon or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes |
As necessary | |
| Any charges incurred by The Bank of New York Mellon or its agents for servicing the deposited securities |
As necessary |
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12.D.4 Fees and Other Payments Made by the Bank of New York Mellon
From January 1, 2020 through March 31, 2021, a total of U.S.$0 was paid by the Bank of New York Mellon on our behalf for our ADSs program.
The standard out-of-pocket maintenance costs for our ADSs program were U.S.$138,516.75,