Company Quick10K Filing
Sinopec Shanghai Petrochemical
20-F 2019-12-31 Filed 2020-04-28
20-F 2018-12-31 Filed 2019-04-29
20-F 2017-12-31 Filed 2018-04-27
20-F 2016-12-31 Filed 2017-04-27
20-F 2015-12-31 Filed 2016-04-27
20-F 2014-12-31 Filed 2015-04-27
20-F 2013-12-31 Filed 2014-04-30
20-F 2012-12-31 Filed 2013-04-30
20-F 2011-12-31 Filed 2012-04-30
20-F 2010-12-31 Filed 2011-06-27
20-F 2009-12-31 Filed 2010-06-10

SHI 20F Annual Report

Part I
Item 1. Identity of Directors, Senior Management and Advisors.
Item 2. Offer Statistics and Expected Timetable.
Item 3. Key Information.
Item 4. Information on The Company.
Item 4A. Unresolved Staff Comments.
Item 5. Operating and Financial Review and Prospects.
Item 6. Directors, Senior Management and Employees.
Item 7. Major Shareholders and Related Party Transactions.
Item 8. Financial Information.
Item 9. The Offer and Listing.
Item 10. Additional Information.
Item 11. Quantitative and Qualitative Disclosures About Market Risk.
Item 12. Description of Securities Other Than Equity Securities.
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies.
Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds.
Item 15. Controls and Procedures.
Item 16A. Audit Committee Financial Expert.
Item 16B. Code of Ethics.
Item 16C. Principal Accountant Fees and Services.
Item 16D. Exemptions From The Listing Standards for Audit Committees.
Item 16E. Purchases of Equity Securities By The Issuer and Affiliated Purchasers.
Item 16F. Change in Registrant's Certifying Accountant.
Item 16G. Corporate Governance.
Item 16H. Mine Safety Disclosure.
Part III
Item 17. Financial Statements.
Item 18. Financial Statements.
Item 19. Exhibits.
EX-8 d868834dex8.htm
EX-12.1 d868834dex121.htm
EX-12.2 d868834dex122.htm
EX-13.1 d868834dex131.htm
EX-13.2 d868834dex132.htm
EX-99.1 d868834dex991.htm

Sinopec Shanghai Petrochemical Earnings 2019-12-31

Balance SheetIncome StatementCash Flow

20-F 1 d868834d20f.htm FORM 20-F Form 20-F
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

 

 

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

OR

 

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

For the fiscal year ended December 31, 2019

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

100 H Shares, par value RMB1.00 per Share

H Shares, par value RMB1.00 per Share

 

SHI

 

New York Stock Exchange

 

New York Stock Exchange*

 

*

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


Table of Contents

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

None

(Title of Class)

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

None

(Title of Class)

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

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

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

 

 

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

Act.     Yes  ☒    No  ☐

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

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

Indicate by check mark whether the registrant has submitted electronically 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.


Table of Contents

Table of Contents

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

   ii

EXCHANGE RATES

   iii

CERTAIN TERMS AND CONVENTIONS

   iii

PART I

     1

ITEM 1.

 

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS.

   1

ITEM 2.

 

OFFER STATISTICS AND EXPECTED TIMETABLE.

   1

ITEM 3.

 

KEY INFORMATION.

   1

ITEM 4.

 

INFORMATION ON THE COMPANY.

   12

ITEM 4A.

 

UNRESOLVED STAFF COMMENTS.

   36

ITEM 5.

 

OPERATING AND FINANCIAL REVIEW AND PROSPECTS.

   36

ITEM 6.

 

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.

   54

ITEM 7.

 

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.

   65

ITEM 8.

 

FINANCIAL INFORMATION.

   70

ITEM 9.

 

THE OFFER AND LISTING.

   70

ITEM 10.

 

ADDITIONAL INFORMATION.

   71

ITEM 11.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

   86

ITEM 12.

 

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.

   88

PART II

     89

ITEM 13.

 

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.

   89

ITEM 14.

 

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

   89

ITEM 15.

 

CONTROLS AND PROCEDURES.

   90

ITEM 16A.

 

AUDIT COMMITTEE FINANCIAL EXPERT.

   91

ITEM 16B.

 

CODE OF ETHICS.

   91

ITEM 16C.

 

PRINCIPAL ACCOUNTANT FEES AND SERVICES.

   91

ITEM 16D.

 

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.

   92

ITEM 16E.

 

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.

   92

ITEM 16F.

 

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT.

   92

ITEM 16G.

 

CORPORATE GOVERNANCE.

   92

ITEM 16H.

 

MINE SAFETY DISCLOSURE.

   96

PART III

     96

ITEM 17.

 

FINANCIAL STATEMENTS.

   96

ITEM 18.

 

FINANCIAL STATEMENTS.

   96

ITEM 19.

 

EXHIBITS.

   97

 

i


Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

 

   

amount and nature of future development;

 

   

future prices of and demand for our products;

 

   

future earnings and cash flow;

 

   

capital expansion programs;

 

   

future plans and capital expenditures;

 

   

expansion and other development trends of the petrochemical industry;

 

   

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

 

   

expansion and growth of our business and operations; and

 

   

our prospective operational and financial information.

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

 

   

fluctuations in crude oil and natural gas prices;

 

   

fluctuations in prices of our products;

 

   

failures or delays in achieving production from development projects;

 

   

potential acquisitions and other business opportunities;

 

   

continued availability of capital and financing;

 

   

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

 

   

other risks and factors beyond our control.

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

 

ii


Table of Contents

EXCHANGE RATES

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

We publish our financial statements in Renminbi. Unless otherwise indicated, all translations from Renminbi to U.S. Dollars have been made at a rate of RMB6.9618 to U.S. $1.00, the noon buying rate on December 31, 2019 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.

CERTAIN TERMS AND CONVENTIONS

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

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

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

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

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

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

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

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

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

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

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

 

iii


Table of Contents

PART I

 

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS.

Not applicable.

 

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE.

Not applicable.

 

ITEM 3.

KEY INFORMATION.

A. Selected Financial Data.

Our selected consolidated statements of operations data (except for ADS data) and cash flows data for each of the years ended December 31, 2017, 2018 and 2019 and our selected consolidated balance sheets data as of December 31, 2018 and 2019 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, 2015 and 2016 and our consolidated balance sheets data as of December 31, 2015, 2016 and 2017 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,  
    2015
(RMB million)
    2016
(RMB million)
    2017
(RMB million)
    2018
(RMB million)
    2019
(RMB million)
 

CONSOLIDATED STATEMENTS OF OPERATIONS DATA

         

Net sales:

         

Synthetic fibers

    2,328.2       1,855.5       2,005.3       2,182.4       2,158.9  

Resins and plastics

    9,992.2       9,797.6       10,218.4       10,542.1       9,979.9  

Intermediate petrochemicals

    9,332.0       8,827.6       10,070.2       12,160.6       10,313.6  

Petroleum products

    30,802.0       24,002.6       32,400.6       43,403.0       43,125.9  

Trading of petrochemical products

    13,718.2       20,585.4       23,697.3       26,544.0       21,690.7  

Others

    864.6       867.8       826.5       781.4       786.7  

Profit from operations

    3,908.9       6,777.9       6,401.9       5,585.1       1,320.5  

Profit before income tax

    4,237.2       7,778.3       7,852.9       6,808.1       2,656.1  

Net profit attributable to owners of the Company

    3,274.3       5,968.5       6,143.2       5,336.3       2,215.7  

Net profit/(loss) attributable to non-controlling interests

    36.1       13.0       11.0       (0.1     11.4  

Basic earnings per share(RMB) (a)

    0.303       0.553       0.569       0.493       0.205  

Basic earnings per ADS(RMB) (b)

    30.32       55.26       56.86       49.30       20.45  

 

(a)

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

(b)

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

 

1


Table of Contents
     Year Ended December 31,  
     2015
(RMB million)
    2016
(RMB million)
    2017
(RMB million)
    2018
(RMB million)
    2019
(RMB million)
 

CONSOLIDATED STATEMENTS OF CASH FLOWS DATA

          

Net cash generated from operating activities

     4,932.8       7,181.8       7,060.8       6,659.4       5,057.8  

Net cash used in investing activities

     (439.0     (189.9     (2,400.7     (1,928.4     (4,623.2

Net cash used in financing activities

     (3,695.7     (2,637.2     (2,589.8     (3,507.2     (1,737.4

Capital expenditure

     (695.3     (901.5     (1,197.1     (1,187.0     (1,430.4

Proceeds from borrowings

     31,999.8       2,589.4       2,119.1       2,536.8       4,755.1  

Repayments of borrowings

     (35,684.7     (4,113.0     (2,059.4     (2,646.2     (3,695.2

 

     As of December 31,  
     2015
(RMB million)
     2016
(RMB million)
     2017
(RMB million)
     2018
(RMB million)
     2019
(RMB million)
 

CONSOLIDATED BALANCE SHEETS DATA

              

Current assets

     8,144.0        14,875.9        19,866.1        25,298.9        22,309.2  

Property, plant and equipment

     14,383.3        13,474.3        12,866.4        11,646.4        11,300.8  

Total assets

     27,820.6        33,945.6        39,443.5        44,385.9        45,494.1  

Short term borrowings (a)

     2,070.0        546.4        606.2        497.2        1,547.6  

Current liabilities

     7,726.3        8,942.4        10,922.2        13,913.0        15,479.6  

Long term borrowings (excluding current portion)

     —          —          —          —          —    

Total equity attributable to owners of the Company

     19,797.3        24,722.0        28,230.2        30,346.1        29,863.3  

 

(a)

Including corporate bonds and current portion of long term borrowings.

Dividends

The following table sets forth certain information concerning the dividends of the Company since January 1, 2015:

 

Dividend Period

  

Dividend per Share

January 1, 2015-December 31, 2015

  

RMB0.10 (U.S.$0.015)

January 1, 2016-December 31, 2016

  

RMB0.25 (U.S.$0.036)

January 1, 2017-December 31, 2017

  

RMB0.30 (U.S.$0.046)

January 1, 2018-December 31, 2018

  

RMB0.25 (U.S.$0.036)

January 1, 2019-December 31, 2019

  

RMB0.12 (U.S.$0.017) (a)

 

(a)

Pursuant to the resolution of the Board on March 25, 2020, the Company proposed cash dividend to all the shareholders, RMB0.12 per share (including tax). The proposal remains to be approved at our 2019 Annual General Meeting.

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

B. Capitalization and Indebtedness.

Not applicable.

C. Reasons for the Offer and Use of Proceeds.

Not applicable.

 

2


Table of Contents

D. Risk Factors.

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

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 outbreak of the coronavirus and related adverse public health developments have had 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 this time, we are unable to predict the duration or severity of the COVID-19 pandemic and its long-term impact upon our future performance and financial condition. The long-term impact of the COVID-19 pandemic on our performance depends in large part on factors that are not within our control, such as the scope and severity of the outbreak, 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.

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 2019, crude oil costs accounted for RMB 47.08 billion, or 56.20% 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.

 

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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 2017, 2018 and 2019 approximately 36.95%, 41.62% and 44.81% 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 2020 of approximately RMB1.5 billion (U.S.$ 215.5 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, 2020, we had an aggregate outstanding indebtedness of approximately RMB 3,037 million (U.S.$ 436 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, 2019 and for the three months ended March 31, 2020.

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.

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.

 

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

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

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

 

   

debt service costs on foreign currency-denominated debt;

 

   

purchases of imported equipment;

 

   

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

 

   

import of crude oil and other materials.

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

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

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

The exchange rate 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 Chinese government has been under international pressure to further ease its exchange rate policy, and may as a result further change its currency policy.

A portion of our cash and cash equivalents is denominated in foreign currencies (mainly the U.S. Dollar). As of December 31, 2019, our bank deposits denominated in foreign currencies were equivalent to RMB336.08 million. Any increase in the value of Renminbi against other currencies, including the US 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 purchase of crude oil and some equipment and repayments of certain borrowings are made in foreign currencies. Any depreciation of the Renminbi would increase our cost and adversely affect our capacity of making profits. In addition, any depreciation of the Renminbi could adversely affect the value of the dividends of our H Shares and ADSs, which we declare in Renminbi and pay in foreign currencies.

 

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

As of March 31, 2020, Sinopec Corp. owned 50.44% of our shares. Accordingly, it has voting and management control over us, and its interests may be different from the interests of our other shareholders. Subject to our Articles of Association and applicable laws and regulations, Sinopec Corp. will be in a position to cause us to declare dividends, determine the outcome of corporate actions requiring shareholder approval or effect corporate transactions without the approval of the holders of the H Shares and ADSs. Any such increase in our dividend payout would reduce funds available for reinvestment in our business and any such actions or transactions could adversely affect us or our minority shareholders. Sinopec Corp. may also experience changes in its own business strategy and policies. Although we are not currently aware of any specific changes, they could, in turn, lead Sinopec Corp. to change its policies or practices toward us in ways that we cannot predict, with corresponding unpredictable consequences for our business. Additionally, Sinopec Corp. may leverage its controlling shareholder position to influence our decisions with regard to the manufacturing and operation, allocation of financial resources and appointment and removal of senior management members, which could adversely affect us or our minority shareholders.

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

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

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

We maintain a package of insurance coverage plan through Sinopec Group on our property, facilities and inventory. In addition, we maintain insurance policies for such assets as the engineering construction projects and products in transit with third-party commercial insurance companies. We carry a third party liability insurance with a coverage capped at RMB50 million in 2020 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.

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.

 

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Our development plans may require regulatory approval.

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

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

We could face increasing competition in China.

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

We face increasing foreign competition in our lines of business.

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

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

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, China’s economic growth has slowed down. Any prolonged slowdown in the Chinese economy may reduce the demand for our products and services and materially and adversely affect our business and results of operations.

Interpretation and enforcement of Chinese laws and regulations is uncertain.

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

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

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

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

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

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

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.

 

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The audit report included in this annual report is prepared by an auditor who is not inspected by the Public Company Accounting Oversight Board and, as such, our investors are deprived of the benefits of such inspection.

Auditors of companies that are traded publicly in the United States are registered with the U.S. Public Company Accounting Oversight Board, or the PCAOB, and are required by the laws of the U.S. to undergo regular inspections by the PCAOB to assess their compliance with the laws of the U.S. and applicable professional standards. Because our auditors are located in the People’s Republic of China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditors are not currently inspected by the PCAOB. On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. In a statement issued on December 9, 2019, the SEC reiterated concerns over the inability of the PCAOB to conduct inspections of the audit firm work papers with respect to U.S.-listed companies that have operations in China, and emphasized the importance of audit quality in emerging markets, such as China. On April 21, 2020, the SEC and the PCAOB issued a new joint statement, reminding investors that in many emerging markets, including China, there is substantially greater risk that disclosures will be incomplete or misleading and, in the event of investor harm, substantially less access to recourse, as compared to U.S. domestic companies. The SEC/PCAOB statement noted the PCAOB’s inability to inspect audit work papers in China and its potential harm to investors. However, it remains unclear what further actions the SEC and PCAOB will take to address the problem.

Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures and quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. In light of the lack of inspections, investors may lose confidence in our reported financial information and procedures and the quality of our consolidated financial statements.

In June 2019, a bipartisan group of lawmakers introduced bills in both houses of the U.S. Congress, which if passed, would require the SEC to maintain a list of issuers for which PCAOB is not able to inspect or investigate an auditor report issued by a foreign public accounting firm. The proposed Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges (EQUITABLE) Act would prescribe increased disclosure requirements for these issuers and, beginning in 2025, the delisting from U.S. national securities exchanges such as the NYSE of issuers included on the SEC’s list for three consecutive years. Enactment of this legislation or similar measures could cause investor uncertainty for affected issuers, including us, and the market price of the ADSs could be adversely affected. It is unclear if this proposed legislation will be enacted.

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.

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 mainland 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 Chinese 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 China-based accounting firms was deemed dismissed with prejudice four years after entry of the settlement. The four-year mark occurred on February 6, 2019.

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 China-based, United States listed companies and the market price of the ADSs may be adversely affected.

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.

 

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

Generally, if, for any taxable year, at least 75% of our gross income is passive income, or at least 50% of the value of our assets is attributable to assets that produce passive income or are held for the production of passive income, we would be characterized as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes. We do not anticipate that we will be a PFIC for our current taxable year. However, since PFIC status depends on the composition of our income and the composition and value of our assets from time to time, there can be no assurance that we will not be considered a PFIC for 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.

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.

 

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

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

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

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

 

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

 

ITEM 4.

INFORMATION ON THE COMPANY.

A. History and Development of the Company

General Information

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

Our Predecessor

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

 

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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.

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.

 

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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 2019 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 2019 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 2017, 2018 and 2019 are summarized as follows:

Net Sales of RMB79,218.3 million in 2017

 

Synthetic fibers

     2.53

Resins and plastics

     12.90

Intermediate petrochemicals

     12.71

Petroleum products

     40.90

Trading of petrochemical products

     29.91

Others

     1.05
  

 

 

 

Total

     100.00
  

 

 

 

 

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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
  

 

 

 

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 2017, 2018 and 2019 are as follows:

2017 Net Sales by Region (%)

 

     Eastern China      Other parts of China      Exports  

Synthetic fibers

     88.07        11.93        0.00  

Resins and plastics

     92.75        7.25        0.00  

Intermediate petrochemicals

     96.52        2.25        1.23  

Petroleum products

     91.99        3.81        4.20  

Trading of petrochemical products

     40.86        47.49        11.65  

Total net sales

     92.68        7.13        0.19  

2018 Net Sales by Region (%)

 

     Eastern China      Other parts of China      Exports  

Synthetic fibers

     87.61        12.39        0.00  

Resins and plastics

     94.13        5.87        0.00  

Intermediate petrochemicals

     90.25        8.67        1.08  

Petroleum products

     86.60        0.90        12.50  

Trading of petrochemical products

     50.67        5.42        43.91  

Total net sales

     78.63        3.60        17.77  

 

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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  

Business Strategies

In 2020, we will continue to adhere to the market-oriented and efficiency-centered strategy, constantly improve the level of safety and environmental protection, further strengthen system optimization and cost reduction and promote industrial restructuring, reform and innovation as well as the establishment of leader teams to strive to overcome the impact caused by COVID-19, weather the global economic downturn, ease the pressure of the sharp decline of crude oil prices on the Company’s short-term performance, and maintain stable production and operation.

In 2020, the Company plans to process a total of 15.30 million tons of crude oil and produce a total of 9.27 million tons of refined oil, 0.82 million tons of ethylene, 0.66 million tons of paraxylene, 0.92 million tons of plastic resin, 0.65 million tons of raw materials of synthetic fibers, 0.44 million tons of synthetic fiber polymers and 0.20 million tons of synthetic fibers.

To achieve our business objectives in 2020, we intend to pursue the following strategies:

 

   

Improve the level of safety and environmental protection

We will promote the effective operation of HSSE management system and fully implement the responsibilities of a HSSE management entity; strengthen learning to promote employees to consciously develop habits of safety and environmental protection, establish a sound linking mechanism of employees’ production safety behaviors and assessment and incentives, and form the long-term and effective HSSE management culture. In order to promote centralized management of safe production, we will fully promote process safety management, strengthen the management of contractor and direct operation, and formally establish the ledger of dangerous chemicals (major hazard sources). Furthermore, we will continuously strengthen management of environmental protection facilities to achieve consistent compliance and operation, and promote programs such as LDAR Full Coverage and “10,000 Employees Checking Odor” to ensure a declining concentration of VOCs at the plant boundary. We will strengthen carbon emission management, continue to promote energy efficiency and energy conservation to continuously reduce energy and resource consumption.

 

   

Keep smooth operation of production devices

Based on the reinforcing of unplanned halt control, we will strictly control “three minors”, namely, minor fluctuation, minor anomaly and minor deviation, and resolutely guard against “three unplanneds”, namely, unplanned halt, unplanned shutdown and unplanned closedown in an attempt to improve the level of stable operation. We will promote the construction of equipment integrity management system, strengthen preventive maintenance and overhaul, ensure the quality management system of the whole process, and focus on the device maintenance mainly for B series replacement of RDS device. Besides, we will reinforce alert management, change management, self-control rate management and intelligent inspection, organize labor competitions to improve the reliability of devices, and continuously improve the level of automation control and long-term operation of devices. Improve production optimization and explore potential cost control measures to increase production efficiency

 

   

Improve system optimization and tap potential for cost reduction and efficiency improvement

We will reinforce the analysis of the crude oil market situation, and research and apply hedging tools to reduce crude oil costs. To improve the level of system optimization, we will deepen the concept of whole process optimization, promote the construction of crude oil online reconciliation system, and timely carry out the outsourcing of resources such as raw oil and MTBE. Meanwhile, we will further advance the implementation of a number of strategies including increasing the production of gasoline and aviation fuel, reducing the production of diesel and coke, ensuring profitability in petrochemical sector and expanding marine fuel oil. We will adhere to dynamic adjustment, strengthen the tracking of marginal contribution of chemical equipment in each product chain, and optimize product structure timely. Besides, we will attach great importance to mutual supply of raw materials with Shanghai SECCO Petrochemical Company Limited (“SECCO”), actively strive for Sinopec’s internal and social high-quality resources, to ensure the efficient high load operation of devices. In addition, we will strictly control inventory and reduce costs, adhere to the low inventory strategy, strengthen comprehensive dynamic management, purchase crude oil reasonably, so as to control crude oil inventory. Meanwhile, we will pay attention to material reserve management, optimize material reserve manner, ensure the inventory control management of raw material, intermediate material and finished products at a reasonable level. As a result, the inventory structure can be further optimized. Furthermore, we will vigorously promote the standardized material procurement, and improve procurement quality and efficiency, so as to control procurement costs. We will continue to focus on the evaluating of major costs and expenses and increase the budget and final account management of major costs such as inspection and maintenance, to achieve overall control of costs and expenses.

 

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Accelerate the adjustment of industrial structure and make breakthrough in core technologies

We will fully launched the establishment work of “14th Five-Year Plan”, initiated the construction of 48K large tow carbon fiber and other projects, and actively promoted the implementation of refining clean-up transformation, environmentally friendly ethylene project and third circuit 220KV power line project, ensuring oil cleaning project, the second phase of the carbon fiber project and other projects can be put into production on time. Meanwhile, we will continue to promote the investment and construction of projects such as pipeline company and China Aviation Oil transport base and advance the implementation of projects such as Baling Petrochemical Corp’s elastic new materials and Shanghai Huayi MMA. In order to accelerate the formation of industrial cluster superiority, we will promote the R&D of carbon fiber composite and industrial cultivation. Besides, we will continue to make breakthrough in large tow carbon fiber project and domestication of oxidation furnaces and carbonization furnaces and focus on the development and application of core technologies for carbon fiber and its composite materials. Furthermore, we will pay close attention to the development trend of hydrogen energy to promote its development, explore and establish new materials innovation research centers, accelerate the promotion and application of 5G technology and the transformation of information infrastructure, and explore the application of artificial intelligence and big data.

 

   

Further strengthen corporate management and advance the reform of management system

In accordance with the development needs of the industry, the Company will explore the development models of its four major sectors, namely, oil refining, petrochemical, new materials and capital operations, adjust and optimize capabilities and settings of functional departments, sort out problems and difficulties of the existing management process, and study methods for system improvement to promote management optimization. In addition, the Company will improve the performance evaluation system based on the balanced scorecard, highlighting value unleash, benefit orientation, innovation and vitality, and effectively transforming strategic goals into action goals. The Company will promote the strategy of “boosting enterprises through talents”, actively advance the establishment of competence system for management leaders and the implementation of fault tolerance and error correction systems, intensify the training and recruitment of medium- and high-level technical and skilled personnel, improve the cultivation and incentive mechanism of scientific and technological talents, and carry out and strengthen staff training to improve the comprehensive quality, operational skills and emergency response capabilities of skilled personnel in an all-round way.

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 2018 and 2019 by our major products.

 

    Production     Sales  

Products

  2019
(10,000
tons)
    2018
(10,000
tons)
    Year-on-year
change
    2019
(10,000
tons)
    2018
(10,000
tons)
    Year-on-year
change
 

DieselNote1

    384.50       373.08       3.06     384.14       372.70       3.07

Gasoline

    346.84       322.92       7.41     345.31       325.67       6.03

Jet FuelNote1

    187.86       146.82       27.95     135.39       100.37       34.89

Paraxylene

    66.68       67.30       -0.92     45.55       49.82       -8.57

BenzeneNote2

    37.33       34.86       7.09     32.98       31.02       6.32

Ethylene Glycol

    28.67       41.52       -30.95     18.23       30.65       -40.52

Ethylene Oxide

    27.55       19.43       41.79     26.69       18.48       44.43

EthyleneNote2

    84.13       77.78       8.16     0.19       2.90       -93.45

Polyethylene

    53.73       41.79       28.57     53.58       41.62       28.74

Polypropylene

    46.96       49.36       -4.86     43.36       49.37       -12.17

Polyester PelletNote2

    35.90       40.65       -11.69     28.09       27.18       -3.35

Acrylic

    13.69       11.32       20.94     13.70       11.33       20.92

Polyester Staple

    3.94       4.77       -17.40     3.94       4.16       -5.29

 

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.

 

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The following table shows our 2019 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

     2.08      Cotton type fabrics, wool type fabrics

Others

     0.15     

Sub-total

     2.45     

RESINS AND PLASTICS

     

Polyester chips

     1.99      Polyester fibers, films and containers

Polypropylene pellets

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

Polypropylene pellets

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

Polyvinyl alcohol (“PVA”)

     0.12      PVA fibers, building coating materials and textile starch

Others

     0.40     

Sub-total

     11.33     

INTERMEDIATE PETROCHEMICALS

     

Ethylene

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

Ethylene oxide

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

 

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Product

   % of net sales     

Typical Use

Benzene

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

Paraxylene

     3.19      Intermediate petrochemicals and polyester

Butadiene

     0.90      Synthetic rubber and plastics

Ethylene glycol

     0.87      Fine chemicals

Others

     3.14     

Sub-total

     11.71     

PETROLEUM PRODUCTS

     

Gasoline

     19.37      Transportation fuels

Diesel

     18.21      Transportation fuels and agricultural machinery fuels

Jet Fuel

     6.38      Transportation fuels

Others

     5.02     

Sub-total

     48.98     

Trading of petrochemical products

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

Others

     0.90     
  

 

 

    

Total

     100.00     
  

 

 

    

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

 

Product

  

Industry segment

  

Primary upstream
raw material

  

Transport/storage

method

  

Primary downstream

application fields

  

Key price-influencing

factors

Diesel

   Petroleum products    Petroleum    Pipeline transportation and shipping/ storage tank    Transportation fuel, agricultural machinery fuel    International crude oil price, government control

Gasoline

   Petroleum products    Petroleum    Pipeline transportation and shipping/ storage tank    Transportation fuel    International crude oil price, government control

Jet Fuel

   Petroleum products    Petroleum    Pipeline transportation and shipping/ storage tank    Transportation fuel    International crude oil price, supply-demand balance

Paraxylene

   Intermediate petrochemicals    Naphtha    Road transportation/ storage tank    Intermediate petrochemical products and polyester    Raw material price, supply-demand balance

Benzene

   Intermediate petrochemicals    Naphtha    Road transportation, shipping, rail transportation/ storage tank    Intermediate petrochemical products, styrene, plastic, explosive, dye, detergent, epoxy resin, chinlon    International crude oil price, market supply-demand condition

Ethylene Glycol

   Intermediate petrochemicals    Naphtha    Road transportation/ storage tank    Fine Chemicals engineering    International crude oil price, market supply-demand condition

 

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Product

  

Industry segment

  

Primary upstream
raw material

  

Transport/storage

method

  

Primary downstream

application fields

  

Key price-influencing

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.

 

LOGO

 

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Table of Contents

Intermediate Petrochemicals

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

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

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

Resins and Plastics and Synthetic Fibers

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

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

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

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

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

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

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

Raw Materials

In 2019, 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 2019 accounted for 100% of the total purchase of crude oil.

To enhance the overall profitability, we optimized our ethylene cracking stocks, adjusted and improved our natural gas and fuel gas structure, optimized our hydrogen system, reduced the emission and increased the efficiency of flare gas, increased the outputs of gasoline and aviation kerosene, and optimized naphtha, residual oil and wax oil processing lines. By reducing the output of paraxylene, we increased our supply of high-octane gasoline blending components to produce more gasoline. By substituting aviation kerosene hydrogenation equipment for diesel hydrogenation equipment and upgrading the 3.3 million tons of diesel hydrogenation equipment, we further optimized the structure of our finished oil products, achieving a diesel to gasoline ratio of 1.11:1 for 2019. 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.

 

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Table of Contents

Crude Oil

Crude oil is our primary raw material and the most significant raw material we purchase from outside sources. In 2019, crude oil accounted for approximately 56.20% 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 2019, we did not experience any significant problems in obtaining sufficient crude oil to meet our production needs.

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

We have received confirmation from Sinopec Corp. that it will purchase on our behalf 15.30 million tons of imported crude oil in 2020. 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 2020. We believe that the mix of crude oil feedstock currently available is satisfactory for our 2020 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.

In 2019, our crude oil was sourced as follows:

 

Domestic offshore crude oil

     1.03

Imported crude oil

     98.97
  

 

 

 

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 2019 was RMB 3,321.09 (U.S.$ 477.04) per ton and RMB 3,661.41 (U.S.$ 525.93) per ton, respectively. In 2019, we processed 14,013,663 tons of imported crude oil and 1,185,699 tons of domestic offshore crude oil (including 1,064,566 tons of crude oil processed on a sub-contract basis).

 

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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.

The international crude oil market fluctuated in 2019. From the initial concerns about tightening supply gradually to the global economic slowdown, dragging down oil demand, international crude oil prices have shown a trend of rising and then declining, moving in a wide range. The crude oil price went up unilaterally in the first quarter, shock fell in the second quarter, moved in a wide range in the third quarter, and went up unilaterally again in the fourth quarter. Brent crude oil futures basically ran between USD53-73/barrel throughout the year, within which the futures fluctuated in the range of USD58-65/barrel most of the time. By the end of 2019, the Brent crude oil price increased by 23.00% year-on-year, while the West Texas Intermediate crude oil (WTI) increased by 34.50% year-on-year. However, the average price of crude oil in 2019 was still lower than that in 2018. The average price of WTI crude oil in 2019 was USD57.01/barrel, down by 11.23% from USD64.22/barrel in 2018; the average price of Brent crude oil in 2019 was USD64.16/barrel, down by 10.38% from USD71.59/barrel in 2018; the average price of Dubai crude oil in 2019 was USD63.95/barrel, down by 8.47% from USD69.87/barrel in 2018.

For the year ended December 31, 2019, we processed a total of 15.2 million tons of crude oil (including 1.1 million tons of crude oil processed on a sub-contract basis), representing a slight increase of 820,400 tons, or 5.71%, over the previous year. The average unit cost of crude oil processed (by us) in 2019 was RMB 3,330.63/ton (RMB3,382.38/ton in 2018), representing a decrease of 1.53% over the previous year. Our total cost of crude oil processed reached RMB47.08 billion in 2019, representing an increase of 1.97% as compared to RMB46.17 billion in 2018, which represented 56.20% 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 2020 will be approximately 1.85 million tons. In 2019, we consumed approximately 1.89 million tons of coal, a decrease of 0.11 million tons from 2018 of 2.00 million tons.

 

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Table of Contents

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 2019, the total cost of these materials accounted for approximately 11.96% 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 2019 that were subject to planned distribution by Sinopec Group, sales by agents and sales based on our own discretion accounted for 62.55%, 34.21% and 3.24%, 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 2019. In general we managed to maintain a stable correlation between production and sales in 2019.

Product breakdown

Synthetic Fibers – In 2019, 32.0% 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 22% of our sales of synthetic fibers in 2019. List of customers each accounting for more than 10% of the sales in this segment: Shanghai Xinshan Chemical Co., Ltd.: 14.2%; Shaoxing Xiangyu Green Packing Co., Ltd.: 21.9%.

Resins and Plastics – In 2019, approximately 46.3% of our resins and plastics sales were to provincial and municipal government trading companies and approximately 53.7% were sold to industrial users. No single customer accounted for more than 5% of our sales of resins and plastics in 2019.

Intermediate Petrochemicals – We sell a variety of intermediate petrochemical products, among which the sale volume of petroleum benzene and paraxylene was relatively high in 2019. SECCO is the principal outside consumer of our petroleum benzene. In 2019, we sold 0.1802 million tons of petroleum benzene to SECCO, representing 54.81% of our total 2019 production of such product. List of customers each accounting for more than 10% of sales in this segment: SECCO: 54.81%; Sinopec Shanghai Gaoqiao Petrochemical Co., Ltd.: 10.27%.

Jiaxing Petrochemical Company Limited and Oriental Petrochemical (Shanghai) Corporation are the outside consumers of our paraxylene. In 2019, we sold 0.3954 million tons and 0.0591 million tons of paraxylene, representing 86.76% and 12.97% of our total 2019 production of such product, to Jiaxing Petrochemical Company Limited and Oriental Petrochemical (Shanghai) Corporation respectively, at prices mutually agreed upon by the relevant parties.

 

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Table of Contents

Petroleum Products – In 2019, our primary gasoline and diesel customer was Sinopec Huadong Sales Company Limited.

Trading of Petrochemical Products – In 2019, our largest trading customer for petrochemical products was Sinopec Chemical Commercial Holding Company Limited.

Major Suppliers and Customers

Our top five suppliers in 2019 were China International United Petroleum & Chemical Co., Ltd., Materials and Equipment Department of China Petroleum and Chemical Corporation, Shengyuan Ji (Jiangsu) Industrial Co., Ltd., Shanghai Gas Co., Ltd. and Shanghai International Holding Co. Total procurement costs involving these five suppliers, which amounted to RMB 49,147.6 million, accounted for 51.59% of our total procurement costs for the year. The procurement from the largest supplier amounted to RMB 43,887.0 million, representing 46.07% of the total costs of purchases by our Group for the year.

Our top five customers in 2019 were East China Branch of Sinopec Sales Company Limited, Jiaxing Petrochemical Co., Ltd., Hengli Petrochemical (Dalian) Co., Ltd., Macau New Solar Co., Ltd., and Zhongtuo (Fujian) Industry Limited. Total sales to these five customers amounted to RMB 48,734.6 million, representing 48.57% of our total turnover for the year. Sales to our largest customer amounted to RMB 42,658.0 million, representing 42.51% of our total revenue for the year.

To the knowledge of the Board, among the suppliers and customers listed above, none of the directors or shareholders of the Company (and their respective close associates) had any interests in Shengyuan Ji (Jiangsu) Industrial Co., Ltd., Shanghai Gas Co., Ltd., Shanghai International Holding Co., Ltd., Jiaxing Petrochemical Co., Ltd., Hengli Petrochemical (Dalian) Co., Ltd., Macau New Solar Co., Ltd., and Zhongtuo (Fujian) Industry Co., Ltd. China International United Petroleum & Chemical Co. Ltd., Materials and Equipment Department of China Petroleum and Chemical Corporation, and East China Branch of Sinopec Sales Company Limited are subsidiaries of Sinopec Corp., the 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 2017, 2018 and 2019, approximately 36.95%, 41.62% and 44.81% 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 81.7% of our products in volume were sold in 2019. 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 2019, 78.4% 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.

 

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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;

 

   

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 2019, we had an approximate 0.5% share of total domestic polyester and acrylic consumption while imports had an approximate 1.19% share.

 

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The following table summarizes the competitive position of our principal synthetic fibers according to domestic sales in 2019.

 

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

     19.57        2      Jilin Province      38.58        12.8  

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

Resins and Plastics

In 2019, we had an approximate 1.85% share of total domestic resins and plastics consumption while imports had an approximate 28.52% share. The following table summarizes the competitive position of our principal resins and plastics products according to domestic sales in 2019.

 

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

     2.61        5      Zhejiang Province      5.12        4.14  

Polyethylene

     1.57        22      Guangdong Province      2.55        48.56  

Polypropylene

     1.84        22      Zhejiang Province      1.80        13.69  

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

Intermediate Petrochemicals

In 2019, we were one of the largest sellers of intermediate petrochemicals in China, holding an approximate 1.97% share of total domestic consumption, while imports had an approximate 23.32% share of domestic consumption. Ethylene glycol, paraxylene, benzene and butadiene are our major intermediate petrochemical products. In 2019, 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 2019.

 

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

     1.61        6      Zhejiang Province      2.71        55.76  

Paraxylene

     2.25        11      Zhejiang Province      5.40        50.55  

Benzene

     2.87        3      Jiangsu Province      3.02        14.92  

Butadiene

     3.20        23      Zhejiang Province      1.23        8.83  

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

 

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Table of Contents

Petroleum Products

In 2019, we had an approximate 2.87% share of total domestic petroleum products market while imports had an approximate 7.3% 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 2019, we sold approximately 85.40% of our petroleum products in Eastern China.

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 2017, 2018 and 2019 were RMB36.7 million, RMB37.3 million and RMB93.0 million, respectively. The increase was mainly due to the increase in research and development investment in projects related to the control of potential safety hazards.

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 2019, SECCO achieved a sales revenue of RMB28.34 billion (U.S.$ 4.07 billion), representing an increase of 7.67% from its sales revenue of RMB26.32 billion (U.S.$3.83 billion) in 2018. SECCO produced 288,473 tons of ethylene in 2019, representing an increase of 79,398 tons over the previous year. SECCO had a net profit of RMB3.38 billion (U.S.$ 485.51 million) in 2019, representing an increase of RMB0.15 billion (U.S.$ 21.55 million) over the previous year.

Environmental Protection

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

We were subject to various administrative penalties for its violations of the relevant PRC environmental laws and regulations in the past three years. In 2019, we were subject to 3 administrative penalties for violations of the relevant PRC environmental laws and regulations, with fines in a total of RMB2.15 million.

We believe our environmental protection facilities and systems are adequate for the existing national and local environmental protection regulations. In 2019, 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.

 

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Table of Contents

During 2019, the Company’s overall level of energy consumption per RMB10,000 of product value was 0.745 ton of standard coal, decreased by 1.97% from the previous year. As compared with 2018, the total volume of ammonia nitrogen discharged was increased by 143.58%, while that of chemical oxygen demand, sulfur dioxide, nitrogen oxides and volatile organic compounds declined by 9.02%, 7.14%, 12.70% and 3.83%, respectively. At the same time, the compliance rate of waste water and waste gas emissions reached 100%, and all hazardous waste was disposed of properly at 100%. The average heat efficiency of heaters was 92.60%, which was basically the same as last year.

Insurance

We currently participate in a package of insurance coverage plan through Sinopec Group as its controlled subsidiary, which, as of December 31, 2019, was approximately RMB43.448 billion (U.S.$ 6.241 billion) on our property and facilities and approximately RMB4.82 billion (U.S.$ 692.35 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 2019, 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.

 

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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 2019, we sourced no crude oil from Iran.

In addition, based on feedback to our inquiries to Sinopec Corp., in 2019, it sourced approximately 2.0% of its total 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 and profits from these business activities accounted for 0.05% and 0.06% of its total unaudited sales revenue and profits, respectively.

We have no performance obligations under any contract to continue to purchase crude oil sourced from Iran in 2020.

C. Organizational Structure.

Our Subsidiaries

As of December 31, 2019, 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  

Sinopec Corp.

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

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

 

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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
equity held by
Sinopec Corp.
and its
subsidiary
    

Principal activities

     (millions)         (%)       

Sinopec International Petroleum Exploration and Production Company Limited

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

Sinopec Great Wall Energy and Chemical Company Limited

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

Sinopec Yangzi Petrochemical Company Limited

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

Sinopec Pipeline Storage & Transportation Company Limited

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

Sinopec Yizheng Chemical Fiber Limited Liability Company

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

Sinopec Lubricant Company Limited

   RMB3,374    Limited company      100.00      Production and sale of refined petroleum products, 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 holding of overseas business

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

   RMB9,628    Limited company      75.00      Manufacturing of intermediate petrochemical products and petroleum products

 

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Name of Company

  

Particulars
of issued
capital

  

Type of
legal
entity

   Percentage of
equity held by
Sinopec Corp.
and its
subsidiary
    

Principal activities

     (millions)         (%)       

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 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

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

D. Property, Plant and Equipment.

Real Property

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

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 2019:

 

Production Unit (number of units)

   Rated Capacity (tons)      Utilization Rate (%)  

Crude oil distillation units (2)

     14,000,000        99.15  

Hydrocracker (2)

     3,000,000        90.18  

Ethylene unit

     700,000        109.76  

*Aromatics units (2)

     835,000        98.91  

PTA unit

     400,000        81.40  

Ethylene oxide / ethylene glycol units (2)

     525,000        91.04  

Cracking and catalyzing

     3,500,000        102.32  

 

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Production Unit (number of units)

   Rated Capacity (tons)      Utilization Rate (%)  

Delayed coking (2)

     2,200,000        87.94  

Diesel oil hydrogenation units (2)

     3,850,000        96.20  

**Acrylonitrile unit

     650,000        101.37  

C5 segregation units (2)

     205,000        137.85  

 

*

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 2019, the actual quantity of crude oil we processed was approximately 15.20 million tons. Our hydrocracker uses technology from United Oil Products Corporation of the United States. Our second ethylene unit uses technology from ABB Lummus Global Inc. of the United States. The aromatics unit uses technology from Universal Oil Products Corporation of the United States. The PTA unit uses technology from Mitsui Petrochemical Corporation of Japan. The ethylene oxide / ethylene glycol unit was constructed using technology from Scientific Design Corporation of the United States.

The following table sets forth the Rated Capacities and weighted average utilization rates of our principal production units for resins and plastics and synthetic fibers in 2019:

 

Production Unit (number of units)

   Rated Capacity (tons)      Utilization Rate (%)  

*Polyester units (3)

     550,000        88.11  

**Polyester staple units (2)

     158,000        88.39  

Polyester filament unit

     21,000        82.47  

Acrylic staple fiber units (3)

     141,000        113.58  

Polypropylene units (3)

     408,000        97.80  

Polypropylene units (3)

     400,000        98.48  

Vinyl acetate unit

     86,000        93.54  

 

*

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.

 

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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 2019, we continued to place emphasis on quality, health, safety & environment (“QHSE”) by implementing a QHSE responsibility system at each level to strengthen the safety supervision at our operations and construction sites and to improve the QHSE-related performance appraisal. We believe these efforts have resulted in continued improvement in our safety and environmental protection practices. We did not encounter serious accidents involving production safety, environmental pollution or occupational poisoning in 2019. Among the 59 major indicators that measure technical and economic capacity, 34 exceeded those of the previous year with a year-over-year growth rate of 57.63%.

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 2019, approximately 89.97% 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 2019, products representing 28.37% 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 2019, products representing 0.95% of total sales volume were shipped from these facilities. We believe that we have a competitive advantage because a greater proportion of our products are shipped by water as opposed to rail and truck, which is subject to capacity constraints on China’s rail and highway networks. Additionally, we own facilities for receiving crude oil and coal at docks that we own and transporting such materials by pipeline or conveyor to our production facilities.

Rail

We own a railroad loading depot with an annual capacity of 500,000 tons. The depot provides access via a spur line to the national Chinese railway system. In 2019, products representing 0.29% of total sales volume were transported from the factory by rail.

 

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Capital Expansion Program

We have planned or started a number of other principal capital expansion projects. In 2017, 2018 and 2019, we invested RMB1.4 billion, RMB1.0 billion and RMB1.8 billion, respectively, in capital expansion projects. We expect that total investment in the projects described below will be approximately RMB1.5 billion in 2020.

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 is anticipated to complete 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 plan to complete the mid-term delivery of it in December 2020.

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. Except the 400,000 tons/year clean gasoline components units, all the other projects were completed in 2019.

 

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 2019. 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.

 

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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.

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, 2017, 2018 and 2019.

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 2017, 2018 and 2019, approximately 36.95%, 41.62% and 44.81% 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.

 

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

Inflation

Inflation or deflation did not have a significant impact on our results of operations for the year ended December 31, 2019.

Summary

In 2019, China’s economy generally remained stable. The gross domestic product (GDP) grew by 6.1%, decreased by 0.5% from the previous year. China’s petrochemical industry has been affected by multiple incidents such as Sino-US trade frictions, frequent safety accidents, industrial park closures, and corporate shutdowns and rectification. The downward pressure on the industry’s economic operation has increased. The market has continued to weaken. Corporate profits have declined significantly. In 2019, we actively responded to the complex and severe domestic and international economic and industry situations, paid close attention to safety and environmental protection, operation optimization, cost reduction and fee reduction, transformation and development, reform and tough work, and team building, and carried out all work in an orderly manner.

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

 

     Year ended December 31,  
     2017      2018      2019  
     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

     172.6        2,005.3        2.5        156.0        2,182.4        2.3        177.9        2,158.9        2.5  

Resins and plastics

     1,262.4        10,218.4        12.9        1,208.6        10,542.1        11.0        1,292.4        9,979.9        11.3  

Intermediate petrochemicals

     1,938.5        10,070.2        12.7        2,134.4        12,160.6        12.7        2,193.7        10,313.6        11.7  

Petroleum products

     9,233.5        32,400.6        40.9        9,917.3        43,403.0        45.4        10,294.6        43,125.9        49.0  

Trading of petrochemical products

     —          23,697.3        29.9        —          26,544.0        27.8        —          21,690.7        24.6  

Others

     —          826.5        1.1        —          781.4        0.8        —          786.7        0.9  

Total

     12,607.0        79,218.3        100.0        13,416.3        95,613.5        100.0        13,958.6        88,055.7        100.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Year ended December 31,  
     2017     2018     2019  
     RMB
million
    % of
Net sales
    RMB
million
    % of
Net sales
    RMB
million
    % of
Net sales
 

Synthetic fibers

            

Net sales

     2,005.3       2.5       2,182.4       2.3       2,158.9       2.5  

Operating expenses

     (2,480.6     (3.1     (2,755.9     (2.9     (2,699.2     (3.1

Segment loss

     (475.3     (0.6     (573.5     (0.6     (540.3     (0.6

 

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     Year ended December 31,  
     2017     2018     2019  
     RMB million     % of
Net sales
    RMB million     % of
Net sales
    RMB million     % of
Net sales
 

Resins and plastics

            

Net sales

     10,218.4       12.9       10,542.1       11.0       9,979.9       11.3  

Operating expenses

     (8,862.5     (11.2     (9,641.7     (10.1     (9,578.5     (10.9

Segment profit

     1,355.9       1.7       900.4       0.9       401.4       0.4  

Intermediate petrochemicals

            

Net sales

     10,070.2       12.7       12,160.6       12.7       10,313.6       11.7  

Operating expenses

     (7,864.1     (9.9     (10,225.7     (10.7     (9,899.6     (11.2

Segment profit

     2,206.1       2.8       1,934.9       2.0       414.0       0.5  

Petroleum products

            

Net sales

     32,400.6       40.9       43,403.0       45.4       43,125.9       49.0  

Operating expenses

     (29,280.6     (37.0     (40,493.0     (42.4     (42,420.4     (48.2

Segment profit

     3,120.0       3.9       2,910.0       3.0       705.5       0.8  

Trading of petrochemical products

            

Net sales

     23,697.3       29.9       26,544.0       27.8       21,690.7       24.6  

Operating expenses

     (23,636.7     (29.8     (26,439.1     (27.7     (21,637.5     (24.5

Segment profit

     60.6       0.1       104.9       0.1       53.2       0.1  

Others

            

Net sales

     826.5       1.1       781.4       0.8       786.7       0.9  

Operating expenses

     (691.9     (0.9     (473.0     (0.5     (500.0     (0.6

Segment profit

     134.6       0.2       308.4       0.3       286.7       0.3  

Total

            

Net sales

     79,218.3       100.0       95,613.5       100.0       88,055.7       100.0  

Operating expenses

     (72,816.4     (91.9     (90,028.4     (94.2     (86,735.2     (98.5

Profit from operations

     6,401.9       8.1       5,585.1       5.8       1,320.5       1.5  

Net finance income

     207.3       0.3       337.4       0.4       363.0       0.4  

Investment income

     —         —         —         —         —         —    

Share of profit of associates and jointly controlled entities

     1,243.7       1.6       885.6       0.9       972.6       1.1  

Profit before income tax

     7,852.9       10.0       6,808.1       7.1       2,656.1       3.0  

Income tax

     (1,698.7     (2.2     (1,471.9     (1.5     (429.0     (0.5

Net profit

     6,154.2       7.8       5,336.2       5.6       2,227.1       2.5  

Attributable to:

            

Equity shareholders of the Company

     6,143.2       7.8       5,336.3       5.6       2,215.7       2.5  

Non-controlling interests

     11.0       0.0       (0.1     0.0       11.4       0.0  

Net profit

     6,154.2       7.8       5,336.2       5.6       2,227.1       2.5  

 

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, 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.

 

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(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.

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.

 

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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.

 

   

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.

 

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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.

 

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(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.

(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.

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

Net sales

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

(i) Synthetic fibers

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

 

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

(ii) Resins and plastics

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

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

(iii) Intermediate petrochemicals

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

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

(iv) Petroleum products

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

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

(v) Trading of petrochemical products

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

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

 

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(vi) Others

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

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

Cost of sales and operating expenses

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

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

 

   

Cost of sales

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

 

   

Selling and administrative expenses

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

 

   

Other operating income

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

 

   

Other operating expenses

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

 

   

Other gains/(losses)-net

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

Profits/(losses) from operations

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

 

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(i) Synthetic fibers

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

(ii) Resins and plastics

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

(iii) Intermediate petrochemicals

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

(iv) Petroleum products

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

(v) Trading of petrochemical products

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

(vi) Others

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

Net finance income

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

 

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Profit before income tax

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

Income tax

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

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

Net profit

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

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, 2017, 2018 and 2019.

 

    Year Ended December 31,  
    2017     2018     2019  
    (RMB million)  

Net cash generated from operating activities

    7,060.8       6,659.4       5,057.8  

Net cash used in investing activities

    2,400.7       1,928.4       4,623.2  

Net cash used in financing activities

    2,589.8       3,507.2       1,737.4  

Net increase/(decrease) in cash and cash equivalents

    2,070.3       1,223.9       (1,302.8

Net cash generated from operating activities

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 decease of RMB1,271.9 million from the income tax payable of RMB1,806.4 million in the previous year.

 

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

Net cash used in investing activities

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.

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

Net cash used in financing activities

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.

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

Borrowings and banking facilities

Due to the Company’s net profit position and the reduced capital expenditure, the Company managed to maintain the balance of cash and cash equivalents at a prudent level with a decrease in the amount of borrowings in 2019. Our total borrowings at the end of 2019 amounted to RMB1,547.6 million, representing an increase of RMB1,050.4 million as compared to RMB497.2 million at the end of the previous year. See Item 11 Quantitative and Qualitative Disclosures about Market Risk – Interest Rate Risk for more information on the maturity and the interest rate of the borrowings. We have generally been able to arrange short term loans with several PRC financial institutions as and when needed. The debt obligations as of December 31, 2018 and 2019 were as follows.

 

    Year Ended December 31,  

Debt instruments

  2018     2019  
    (RMB million)  

Short term bank loans (1)

    497.2       1,547.6  

Long term bank loans

    —         —    
 

 

 

   

 

 

 
    497.2     1,547.6  
 

 

 

   

 

 

 

 

(1)

As of December 31, 2019, 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, 2019, the current assets exceeded current liabilities by RMB6.83 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, 2019, we had standby credit facilities of RMB21.3 billion, within which the maturity dates of unused facility amounting to RMB15.1 billion will be after December 31, 2020. 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, 2020. Based on such forecast, we believe that we will be able to renew these facilities when they expire based on our well-established relationships with various lenders and adequate sources of liquidity exist to fund our working capital and capital expenditure requirements.

 

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

 

   

the cost of financing and the condition of financial markets;

 

   

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

 

   

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

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

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

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

Gearing ratio

As of December 31, 2019, our gearing ratio was 34.07%, while as of December 31, 2018, our gearing ratio was 31.37%. The ratio is calculated using this formula: total liabilities divided by total assets.

Capital expenditure

In 2019, our capital expenditure amounted to RMB1,820.0 million, representing an increase of 80.02% as compared to RMB1,011.0 million in capital expenditure in 2018. Major projects include the following:

 

Major Project

  Total amount of project
investment
RMB
million
    Amount of project
Investment in 2019
RMB
million
   

Project progress as of

December 31, 2019

Oil cleaning project 400,000 tons/year clean gasoline components units

    782       420     Under construction

Second stage of PAN (Polyacrylonitrile) based carbon fiber project with annual production of 1500 tons

    323       210     Under construction

Function Reconstruction of Emergency Shut-off Valve in the Tank Area of the Storage and Transportation Department

    77       54     Under construction

Separation of Waste and Clear Water Project in the Tank Area of Storage and Transportation Department

    64       38     Under construction

Upgraded Factory Facilities Reconstruction of Bunker Fuel Oil

    48       38     In Operation

Equity Investment in Shanghai Shidian Energy Co., Ltd. (“Shidian Energy”)

    400       320     In Progress

Our capital expenditure for 2020 is estimated at approximately RMB1.5 billion.

 

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Proposed Dividend Distribution

A dividend for the year ended December 31, 2019 of RMB0.12 per share (including tax), based on 10,823,813,500 shares outstanding, amounted to a total dividend of RMB1,298,857,620, was proposed by the Board of Directors on March 25, 2020. The proposal remains to be approved at our 2019 Annual General Meeting.

 

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

We have a number of technology development units, including the Petrochemical Research Institute, the Plastics Research Institute, the Polyester Fiber Research Institute, the Acrylic Fiber Research Institute and the Environmental Protection Research Institute. These units are charged with various research and development tasks with respect to new technology, new products, new production processes and equipment and environmental protection. Our research and development expenditures in 2017, 2018 and 2019 were RMB36.7 million, RMB37.3 million and RMB93.0 million, respectively. The increase was mainly due to the increase in research and development investment in projects related to the control of potential safety hazards.

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 2020 edition of World Economic Outlook that the global economy is projected to contract sharply by –3 percent in 2020, much worse than during the 2008–09 financial crisis as a result of the pandemic. In a baseline scenario—which assumes that the pandemic fades in the second half of 2020 and containment efforts can be gradually unwound—the global economy is projected to grow by 5.8 percent in 2021 as economic activity normalizes, helped by policy support.

At present, the world economy is still undergoing in-depth adjustments in the wake of the international financial crisis. Due to the sudden outbreak of COVID-19 in multiple localities, it is expected that the global turmoil and risks will further increase in 2020. Although the progress of trade negotiations between China and the United States has turned around, the global trade frictions have not been fundamentally improved. International direct investment remains sluggish, the room for global policy adjustment is limited, and the overall economic situation is still not optimistic.

China’s economy is facing an interlacing of increasing unstable and uncertain factors in the external environment as well as internal structural, institutional, and cyclical issues. There are still many risks and challenges faced by the economic operation and rising downward pressure on the economy. However, the basic trend of China’s economy maintaining a steady and long-term growth remains unchanged. China will continue to implement proactive fiscal policy and prudent monetary policy, further deepen the reform of economic system and promote high-quality development; therefore, it is estimated that China’s economic operation will be kept within a reasonable range.

In 2020, the world oil market witnesses more uncertainties. The easing trade tension and more proactive fiscal policies and loose monetary policies adopted by countries will bring a boost to oil demand to some extent. In terms of supply, the non-OPEC oil supply increment will still exceed the demand increment. In general, the fundamentals of the world oil market still face excessive pressure: geopolitical events may increase the volatility of oil prices; the impact of the US dollar on oil prices may continue to decline; and factors such as the Sino-US trade relations, Brexit and the US general election may also materially bear on the trend of oil prices. The outbreak of COVID-19 at the beginning of the year and the sudden increase in crude oil production by Saudi Arabia has greatly affected oil prices. It is expected that the overall international crude oil prices will face greater downward pressure in 2020.

The domestic petrochemical industry is facing the challenge of a downturn cycle. In 2020, a number of large projects integrating refinery and petrochemical capacity will enter the production capacity launch period, directly affecting the market pattern and product prices. The more stringent national requirements for the safety and environmental protection of the petrochemical industry, the establishment of China Oil & Gas Piping Network Corporation, the full implementation of new regulations for low-sulfur marine fuel oil and other in-depth advancement of industry reforms will have a direct and long-term impact on the industry. The outbreak of COVID-19 at the beginning of the year weakened industry demand, and there may be recoverable growth after the epidemic, while the industry situation is expected to be more complicated throughout the year.

In 2020, despite the increasing instability and uncertainty of the international economic situation, and the inevitable impact on China’s economy by coronavirus outbreak in the short term, we expect the fundamentals sustaining sound economic growth in China remain unchanged. Domestic demand for energy and chemical products will be relatively weak in the first half, but the accumulated demand is expected to be released rapidly after outbreak. Considering the abundant supply capacity of oil-producing countries, global demand growth, inventory levels, and geopolitics and the existing situation, we expect that the international oil prices will continue to be at a low level and experience fluctuation.

 

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Since the beginning of 2020, there has been a significant negative impact to the Company’s business and operations due to the coronavirus outbreak and the slump of crude oil prices, which led to a drop in revenue. We recorded a loss for the first quarter of 2020. As of the date of this report, the Company is in the process of assessing such impact and its implications for the future. We will focus on optimization of the entire business value chain, as well as market expansion, risk prevention, and seizing opportunities so as to do our best to reduce the adverse impact of the foregoing factors, and strive to achieve healthy business performance.

E. Off-balance Sheet Arrangements

As of December 31, 2019, we had no contingent liabilities in respect of guarantees issued to banks in favor of our associated companies and other unlisted investments (December 31, 2018: nil). Other than our capital commitments disclosed in Note 33 in our consolidated financial statements included in Item 18. Financial Statements, we do not have any other off-balance sheet arrangements.

F. Contractual Obligations and Commercial Commitments

The following table sets forth our obligations to make future payments under contracts effective as of December 31, 2019.

 

       As of December 31, 2019/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

     1,547,600        1,547,600        —          —          —    

Long term borrowings

     —          —          —          —          —    

Lease liabilities

     23,476        11,700        8,846        2,435        495  

Total contractual obligations

     1,571,076        1,559,300        8,846        2,435        495  

Estimated future interest payments

              

Fixed rate

     26,352        —          —          —          —    

Variable rate

     1,224        —          —          —          —    

Total estimated future interest payments

     27,576        —          —          —          —    

Investment commitments

              

Capital contribution to SECCO (Note 30(h))

     111,263        —          —          —          —    

Capital contribution to Shidian Energy (Note 30(h))

     80,000        —          —          —          —    

T Total investment commitments

     191,263        —          —          —          —    

Other commercial commitments

              

Capital commitments (Note 33)

     247,220        —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

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G. Other Information

Purchase, Sale and Investment

Except as disclosed in this report, during the year ended December 31, 2019, we engaged in no material purchase or sale of our subsidiaries or associated companies or any other material investments.

Pledge of Assets

As of December 31, 2019, we did not pledge any of our property or equipment.

 

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ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.

A. Directors and Senior Management.

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

 

Name

   Age     

Position

Directors

     

Wu Haijun

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

Jin Qiang

     54      Executive Director and Vice President

Zhou Meiyun

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

Jin Wenmin

     55      Executive Director and Vice President

Lei Dianwu

     57      Non-executive Director and Member of Strategy Committee

Mo Zhenglin

     55      Non-executive Director and Member of Strategy Committee

Zhang Yimin

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

Liu Yunhong

     43      Independent Director and Member of Audit Committee

Du Weifeng

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

Li Yuanqin

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

Supervisory Committee

     

Ma Yanhui

     49      Chairman of the Supervisory Committee

Zhang Feng(1)

     50      Employee Supervisor

Chen Hongjun(1)

     49      Employee Supervisor

Zhai Yalin

     55      Supervisor

Zheng Yunrui

     54      Independent Supervisor

Cai Tingki

     65      Independent Supervisor

Senior Management

     

Guan Zemin(2)

     55      President

Huang Xiangyu(2)

     51      Vice President

Huang Fei(2)

     43      Vice President

 

(1)

On 11 October 2019, the staff association of the Company through democratic election procedure elected Mr. Zhang Feng and Mr. Chen Hongjun as employee representative supervisors of the Company.

(2)

Mr. Guan Zemin was appointed as President of the Company at the 20th meeting of the Ninth Session of the Board on 3 February 2020. Mr. Huang Xiangyu and Mr. Huang Fei were appointed as the Company’s Vice President on the same day.

 

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Directors

Wu Haijun, aged 57, is an Executive Director, Chairman, President, Chairman of the Strategy Committee, member of the Nomination Committee of the Company, Acting Secretary to the Board and Chairman of Shanghai SECCO. 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. In April 2010, he was appointed as a Director of Shanghai SECCO. From April 2010 to February 2011, Mr. Wu was President of Shanghai SECCO. In April 2010, 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. Mr. Wu was appointed Chairman of Shanghai SECCO in October 2017. He has served as Chairman, President and Secretary of the Communist Party Committee of the Company since December 2017. In December 2019, he was appointed as Acting Secretary to the Board. 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 professor-grade senior engineer by professional title.

Jin Qiang, aged 54, is an Executive Director and a Vice President of the Company. Mr. Jin joined Zhenhai General Petrochemical Works in 1986 and has held various positions, including the Deputy Chief of the Utilities Department, Deputy Director and Director of the Machinery and Power Division of SINOPEC Zhenhai Refining & Chemical Co., Ltd., and a Director of the Machinery and Power Division of SINOPEC Zhenhai Refining & Chemical Company. Mr. Jin was the Deputy Chief Engineer of SINOPEC Zhenhai Refining & Chemical Company from March 2007 to October 2011, and was appointed as a Vice President of the Company in October 2011. In June 2014, Mr. Jin was appointed as an Executive Director of the Company. Mr. Jin graduated from East China Institute of Chemical Technology in 1986 majoring in chemical machinery, and graduated from the Graduate School of Central Party School in 2007 majoring in economic management. He is a professor-grade senior engineer by professional title.

Zhou Meiyun, aged 50, is an Executive Director, a Vice President, the Chief Financial Officer, a member of the Remuneration and Appraisal Committee and the Strategy Committee of the Company. Mr. Zhou joined Complex in 1991 and has held various positions, including an Officer, Assistant to Manager, Deputy Manager and Manager of the Finance Department of the Company. He served as Manager of the Finance Department of SECCO from May 2011 to March 2017, and was appointed Vice President and the Chief Financial Officer of the Company in February 2017. He has been serving as an Executive Director of the Company since June 2017 and Chairman of China Jinshan Associated Trading Corporation (“Jinshan Associated Trading”) since July 2017. Mr. Zhou has been serving as the General Counsel of the Company since May 2019. Mr. Zhou graduated from Shanghai University of Finance and Economics in 1991 majoring in accounting, and obtained a master’s degree in economics from Huazhong University of Science and Technology majoring in western economics in 1997. He is a senior accountant by professional title.

Jin Wenmin, aged 55, is an Executive Director and a Vice President of the Company. Mr. Jin joined Complex in 1985 and served as the Secretary of the Communist Party Committee of the Company’s No.1 Oil Refining Device of Refining Unit, Head of Butadiene Device, Manager of the storage and transportation, branch company, manager and Deputy Secretary of the Communist Party Committee of Storage and Transportation Department, manager and Deputy Secretary of the Communist Party Committee of Oil Refining Department etc. From April 2013 to February 2017, Mr. Jin was appointed as the Head of Production Department of the Company. From May 2013 to August 2016, Mr. Jin was appointed as the Assistant to the President of the Company and was appointed as a Vice President of the Company in September 2016 and an Executive Director of the Company in June 2018. Mr. Jin graduated from Shanghai Second Polytechnic University in July 2003, majoring in business administration. He is a senior engineer by professional title.

 

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External Directors

Lei Dianwu, aged 57, is a Non-executive Director and a member of the Strategy Committee of the Company, Senior Vice President of Sinopec Corp., the controlling shareholder of the Company. Since June 2005, Mr. Lei has been serving as a Non-executive Director of the Company. Mr. Lei has held various positions, including the Deputy Director of Planning Division and Director of the Preparation Office of the Joint Venture of Yangzi Petrochemical Company, and a Vice President and manager of the Production Division of Yangzi BASF Stylene Company Limited. He acted as the Deputy Manager of Yangzi Petrochemical Company and Deputy Director of its Joint Venture Office, Director of the Development and Planning Division of China Dong Lian Petrochemical Limited Liabilities Company, Deputy General Manager of Yangzi Petrochemical Limited Liabilities Company and Deputy Director of the Development and Planning Division of Sinopec Corp. From March 2001 to August 2013, he was the Director of Development and Planning Division of Sinopec Corp. From March 2009 to October 2018, Mr. Lei was the Assistant to the President of Sinopec Group. From May 2009 to October 2018, he was a Vice President of Sinopec Corp. From August 2013 to October 2018, he was the Chief Economist of Sinopec Group. From October 2015 to October 2018, Mr. Lei was the Secretary to the board of directors of Sinopec Group. From June 2018 to December 2018, Mr. Lei was the head of International Cooperation Department, director of the Foreign Affairs Bureau and head of the Hong Kong, Macau and Taiwan Office of Sinopec Group, and the head of the International Cooperation Department of Sinopec Corp.. Mr. Lei has been serving as a Senior Vice President of Sinopec Corp. since October 2018. Mr. Lei has rich experience in enterprise planning and investment development management. In 1984, Mr. Lei graduated from East China Petroleum Institute majoring in basic organic chemicals and obtained a bachelor’s degree in engineering. He is a professor-grade senior engineer by professional title.

Mo Zhenglin, aged 55, is a Non-executive Director and a member of the Strategy Committee of the Company, Deputy Director of the Finance Division of Sinopec Corp., controlling shareholder of the Company. In June 2014, Mr. Mo was appointed as Non-executive Director of the Company. Mr. Mo began his career in August 1986 and has held various positions, including Deputy Director of the Finance Department and Head of the Accounting Department of Beijing Yanshan Petrochemical Corporation and Chief Accountant and Director of the Finance Department of its Refinery Division, Deputy Chief Accountant of Sinopec Beijing Yanshan Company, Chief Accountant of its Refinery Division, Director of Beijing Yanshan Petrochemical Company Limited and Chief Accountant of Sinopec Beijing Yanshan Company. Mr. Mo has been Chief Accountant of the Chemical Division of Sinopec Corp. from August 2008 to August 2017, and a Director of SECCO from November 2008 to October 2017. From March 2015 to August 2017, he was Deputy Director of the Chemical Division of Sinopec Corp. In August 2017, Mr. Mo was appointed as Deputy Director of the Finance Division of Sinopec Corp. Mr. Mo obtained a bachelor’s degree in management from Zhongnan University of Economics in 1986, majoring in finance and accounting. He is a senior accountant by professional title.

Independent Directors

Zhang Yimin, aged 65, is an Independent Non-executive Director, the Chairman of the Remuneration and Appraisal Committee and the Nomination Committee of the Company and a Professor of Economics and Finance at China Europe International Business School. He has been an Independent Non-executive Director of the Company since October 2013. Mr. Zhang has been an independent director of Shanghai Huayi Group Corporation Ltd. (listed on the Shanghai Stock Exchange, stock code: 600623) since April 2015. Mr. Zhang obtained a doctorate’s degree majoring in finance and political studies at the Business School of University of British Columbia, Canada, and has held various positions, including a Post-doctoral Fellow at the Business School of University of British Columbia, Canada, an Assistant Professor at the Business School of University of New Brunswick, Canada, and Associate Professor of the Economics and Finance Department at City University of Hong Kong. He was appointed as a Professor of the China Europe International Business School in September 2004. He was appointed as an Honorary Professor of Finance at China Europe International Business School in January 2020. His major area of research is in operations, financing and industrial economic studies. He possesses a wealth of professional expertise and experience.

Liu Yunhong, aged 43, is an Independent Non-executive Director and a member of Audit Committee of the Company, the Deputy Head of the Institute of International M&A and Investment, Renmin University of China and Institute Director of Foresea Life Insurance (Shanghai). He has been an Independent Non-executive Director of the Company since June 2015. Mr. Liu was an Independent Director of Guangdong HEC Technology Holding Co., Ltd. (listed on the Shanghai Stock Exchange, stock code: 600673) from May 13, 2014 to March 24, 2018. Mr Liu is an Independent Director of Shanghai Aerospace Automobile Electromechanical Co., Ltd. (listed on the Shanghai Stock Exchange, stock code: 600151), Shenergy Company Limited (listed on the Shanghai Stock Exchange, stock code: 600642) and Bank of Guiyang Co., Ltd. (listed on the Shanghai Stock Exchange, stock code: 601997). From June 2008 to August 2010, Mr. Liu has been the Head of Legal and Compliance Division of Guotai Asset Management Co., Ltd. From October 2008 to August 2010, Mr. Liu conducted post-doctoral research in economics at Guanghua School of Management, Peking University and was conferred as an assistant professor and master postgraduate instructor. From October 2010 to July 2012, he worked for fund product development and supervision of listed companies at the Shanghai Stock Exchange. From August 2012 to September 2013, Mr. Liu was the General Manager of Investment Banking Department of Aerospace Securities Co., Ltd. From October 2013 to November 2017, Mr. Liu was the General Manager of the Institutional Business Department (renamed as the Investment Banking Department in May 2015) of Hwabao Securities Co. Ltd.. Mr. Liu was the Assistant to General Manager of Hwabao Securities Co. Ltd. from September 2015 to May 2019. Since May 2014, Mr. Liu has been the Deputy Head of the Institute of International M&A and Investment, Renmin University of China. In May 2019, he served as Institute Director of Foresea Life Insurance (Shanghai). Mr. Liu obtained a doctorate’s degree in law from Renmin University of China, majoring in civil and commercial Law in 2008. Mr. Liu is a research fellow by professional title.

 

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Du Weifeng, aged 43, is an Independent Non-executive Director, a member of the Audit Committee, the Remuneration and Appraisal Committee and the Nomination Committee of the Company, and a Partner of Beijing JunZeJun (Shanghai) Law Offices. He has been serving as an Independent Non-executive Director since June 2015. Mr. Du began his career in July 1998. He has held various positions, including Clerk and Assistant Judge of Shanghai Pudong New Area People’s Court and worked as a lawyer at Watson & Band Law Offices in Shanghai and at Wintell & Co Law Firm in Shanghai. He has been a Partner of the Shanghai branch of Beijing JunZeJun Law Offices since February 2009. With extensive experience as a lawyer, Mr. Du is a designated lawyer of some banks’ headquarters, Shanghai branches, Shanghai branch of the state-owned asset management companies and private asset management companies. Mr. Du obtained a bachelor’s degree in Commercial Law from Shanghai University in July 1998, and a master’s degree in commercial law from Bristol University in September 2005. He also obtained a master’s degree in business administration from China Europe International Business School in 2013.

Li Yuanqin, aged 46, is an Independent Non-executive Director, the Chairman of the Audit Committee and a member of the Strategy Committee of the Company, a professor of the School of Management and the associate head of the Department of Accountancy at Shanghai University. She is currently an independent director of Shanghai New World Co., Ltd. (listed on Shanghai Stock Exchange, stock code: 600628). From April 2000 to March 2003, she served at the Settlement Department at the headquarters of ICBC. From June 2006 to September 2009, she was a lecturer at the School of Management at Shanghai University. From September 2009 to March 2019, she was an associate professor of the School of Management at Shanghai University. She has been the professor of 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-executive member of the Chinese Institute of Certified Public Accountants. She received a PhD in Management from Antai College of Economics and Management (ACEM) at Shanghai Jiao Tong University.

Supervisory Committee

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

Ma Yanhui, aged 49, is a Supervisor, Chairman of Supervisory Committee, the Deputy Secretary of the Communist Party Committee, Secretary of the Communist Party Discipline Supervisory Committee and Chairman of the Labor Union of the Company. Mr. Ma started his career in 1996. He served as the Secretary of Office of Yanhua Refinery, Secretary and Deputy Director of Yanhua Office of Great Wall Lubricant Oil, Supervisor and Acting Director of Integrated Corporate Reform Department of Sinopec Group, Deputy Director of Integrated Corporate Reform Department of Sinopec Group, Deputy Director and Director of Structure Reform Sector, Corporate Reform Department of Sinopec Assets Management Co., Ltd.. From June 2008 to August 2017, Mr. Ma was the Director of Integrated Corporate Reform Department of Sinopec Group. In August 2017, Mr. Ma was appointed as the Deputy Secretary of the Communist Party Committee and Secretary of the Communist Party Discipline Supervisory Committee of the Company. He was appointed as a Supervisor, the Chairman of Supervisory Committee and Chairman of the Labour Union of the Company in October 2017. Mr. Ma graduated from East China University of Science and Technology in July 1996, majoring in petroleum processing, and obtained a bachelor’s degree in engineering. In June 2006, he obtained a master’s degree in corporate management from Renmin University of China. Mr. Ma is a senior economist by professional title.

 

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Zhang Feng, aged 50, is currently Supervisor and Auditing Director of the Company. Mr. Zhang started his career in Shanghai Petrochemical 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. He has been the Auditing Director of the Company in December 2018 and Supervisor in October 2019. 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 holds a senior accountant title.

Chen Hongjun, aged 49, is currently 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 Company 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 in April 2018, and he was elected as Supervisor of the Company in October 2019. 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 holds a senior engineer title.

Zhai Yalin, aged 55, is an External Supervisor of the Company, and leader of the first perambulatory group of Sinopec Group’s Leading Party Group. Mr. Zhai has been an External Supervisor of the Company since June 2008. Mr. Zhai started his career in 1986 and successively served as the Deputy Head of the Head Office and Director of the Auditing Department of Qianguo Refinery, Deputy Director of the General Office of Sinopec Huaxia Auditing Company, Deputy Director of the General Administrative Office of the Auditing Bureau of Sinopec Group, Director of the General Administrative Office of the Auditing Bureau of Sinopec Group, and a Director of the General Administrative Office of the Auditing Bureau of Sinopec Group (Auditing Department of Sinopec Corp.). From December 2001 to December 2019, Mr. Zhai concurrently holds the posts of the Deputy Director of the Auditing Bureau of Sinopec Group and the Deputy Director of Auditing Department of Sinopec Corp. From April 2018 to March 2019, he was appointed the ninth group leader of Sinopec leading Party group inspection group. He has served as the leader of the first perambulatory group of Sinopec Group’s Leading Party Group since April 2019. In June 2019, he has been served as Supervisor of Sinopec Oilfield Service Corporation (listed on the main board of the Hong Kong Stock Exchange, stock code: 1033; listed on the Shanghai Stock Exchange, stock code: 600871). Mr. Zhai graduated from the Jilin Siping Normal College in 1986 and is a senior economist by professional title.

Independent Supervisor

Zheng Yunrui, aged 54, is an Independent Supervisor of the Company and a professor in civil and commercial law at the Faculty of Law of the East China University of Political Science and Law in the PRC and Member of Expert Consultation Committee of Shanghai Yangpu District People’s Procuratorate and Mediator of Shanghai Second Intermediate People’s Court. He has been serving as an Independent Supervisor since December 2014. From April 2013 to May 2019, Mr. Zheng was an independent director of Hangzhou Innover Technology Co., Ltd. (listed on the Shenzhen Stock Exchange, stock code: 002767). He is an independent director of Jiangxi XinyuGuoke Technology Co., Ltd. (listed on the Shenzhen Stock Exchange, stock code: 300722), an External Supervisor 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 Zhejiang Reclaim Construction Group Co., Ltd (listed on the Shenzhen Stock Exchange, stock code: 002586). Mr. Zheng graduated from Shangrao Normal University in Jiangxi Province, majoring in English Language. Mr. Zheng obtained a master’s degree in law and a doctorate’s degree in law from the Faculty of Law of Peking University in July 1993 and July 1998, respectively. Mr. Zheng previously worked at the Education Bureau of Shangrao County, Jiangxi Province, Hainan Airport Limited, China Township Enterprise Investment and Development Company Limited and the Legal Affairs Office of the Shanghai Municipal People’s Government. He has been teaching at East China University of Political Science and Law since August 2001. He was a visiting scholar at the Faculty of Law of National University of Singapore between July 2002 and December 2002. Mr. Zheng has been engaged in trials, teaching and research relating to civil law, property law, contract law, company law, insurance law, social insurance law and government procurement law. He is experienced in the legal affairs on corporate governance and has great academic achievements. He is also an arbitrator at the Arbitration Commission of Shenzhen, Shenyang, Xuzhou and Wuxi. Mr. Zheng was appointed as a member of Expert Advisory Committee of the People’s Procuratorate of Shanghai Yangpu District and mediator of Shanghai No. 2 intermediate People’s Court on March 24, 2017 and June 26, 2017, respectively.

 

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Cai Tingki, aged 65, 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. Cai served as an Independent Non-executive Director of the Company from June 2011 to June 2017, and has been an Independent Supervisor since June 2017. Mr. Cai has been an independent non-executive director of Yangtzekiang Garment Limited (listed on the Main Board of the HKSE, stock code: 00294) and YGM Trading Limited (listed on the Main Board of the HKSE, stock code: 00375) since December 2012. Mr. Cai graduated from the Department of Accounting, Hong Kong Polytechnic in 1978. He joined KPMG in the same year and has held various positions, including a Partner of the audit department of KPMG Hong Kong Office, an Executive Partner of KPMG Shanghai Office, a Senior Partner of KPMG Huazhen Shanghai Office as well as a Senior Partner of KPMG Huazhen in Eastern and Western China. Mr. Cai retired from KPMG Huazhen in April 2010.

Senior Management:

Guan Zemin, aged 55, is the President of the Company. Mr. Guan started to work in 1990, and he has successively served as Director of Catalyzing Workshop, Deputy Director and Director of Production Scheduling Department, and Deputy Chief Engineer of Sinopec Corp., Wuhan Branch (“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 President and a member of the Board of Sinopec-SK (Wuhan) Petrochemical Company Limited. From December 2018 to December 2019, he served as the Director and Deputy Party Secretary of Wuhan Petrochemical Works and President of Wuhan Branch. Mr. Guan Zemin graduated from the East China University of Chemical Technology in July 1990 with a master’s degree in fine chemical engineering and obtained a master’s degree in engineering. He obtained the title of Senior Engineer.

Huang Xiangyu, aged 51, is a Deputy General Manager of the Company. Mr. Huang started his career in 1990 and joined Shanghai Petrochemical Complex in 1992. He served as the Deputy Director of the chemical workshop, Deputy Director of Jinyang Unitof of Shanghai Jinyang Acrylic Plant, Deputy Director and Director of Jinyang Acrylic Equipment of Acrylic Business Unit and Chief Engineer of Acrylic Business Divison of the Company. From July 2011 to January 2020, he served as the Director of the Acrylic Fiber Research Institute of the Company. From November 2011 to January 2020, he served as the Chief Engineer of the Acrylic Fiber Division of the Company. From February 2019 to January 2020, he served as Deputy Chief Engineer 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 Engineering in June 2013. He obtained the title of professor-level Senior Engineer.

Huang Fei, aged 43, is a Deputy General Manager of the Company. 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 and Vice Party Secretary of Statistical Center. From February 2017 to December 2018, he served as Manager and Deputy Party Secretary of Olefin Department. From December 2018 to January 2019, he served as General Manager Assistant and the Director of Production Department. From January 2019 to December 2019, Mr. Huang served as General Manager Assistant and Manager of Production Department of SECCO. In July 2000, 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. He graduated from Chemical Engineering Major of East China University of Science and Technology with a master’s degree. He obtained the title of Senior Engineer in April 2008.

 

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B. Compensation.

The aggregate amount of cash compensation we paid to our directors, supervisors and executive officers during the year ended December 31, 2019 was approximately RMB9.35 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.

The following tables set forth the compensation on an individual basis for our directors, supervisors and executive officers who received compensation from us in 2019.

 

Name

  

Position with the
Company

   Salaries and
other
benefits
     Retirement
scheme
contributions*
     Discretionary
bonus
     Fees      Total
Remuneration
in 2019
(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      343        26        557        —          926  

Jin Qiang

   Executive Director, & Vice President      289        26        745        —          1,060  

Zhou Meiyun

   Executive Director, Vice President & Chief Financial Officer      248        26        709        —          983  

Jin Wenmin

   Executive Director & Vice President      260        26        721        —          1,007  

Lei Dianwu

   External Director      —          —          —          —          —    

Mo Zhenglin

   External Director      —          —          —          —          —    

Zhang Yimin

   Independent Director      —          —          —          150        150  

Liu Yunhong

   Independent Director      —          —          —          150        150  

Du Weifeng

   Independent Director      —          —          —          150        150  

Li Yuanqin

   Independent Director      —          —          —          150        150  

Ma Yanhui

   Chairman of Supervisory Committee      267        22        685        —          974  

Zhang Feng(1)

   Supervisor      31        9        107        —          147  

Chen Hongjun(1)

   Supervisor      34        9        110        —          153  

Zhai Yalin

   Supervisor      —          —          —          —          —    

Zheng Yunrui

   Independent Supervisor      100        —          —          —          100  

Cai Tingki

   Independent Supervisor      100        —          —          —          100  

 

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Shi Wei(2)

   Former Executive Director, & President      329        26        797        —          1,152  

Guo Xiaojun(2)

   Former Executive Director, Vice President, Secretary to the Board & Joint Company Secretary      283        26        751        —          1,060  

Zuo Qiang(3)

   Former Supervisor      102        15        324        —          441  

Li Xiaoxia(4)

   Former Supervisor      102        14        529        —          645  

Fan Qingyong(5)

   Former Supervisor      —          —          —          —          —    

Guan Zemin(6)

   President      —          —          —          —          —    

Huang Xiangyu(6)

   Vice President      —          —          —          —          —    

Huang Fei(6)

   Vice President      —          —          —          —          —    

 

*

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

(1)

On October 11, 2019, the staff association of the Company through democratic election procedure elected Mr. Zhang Feng and Mr. Chen Hongjun as employee representative supervisors of the Company. The changes in shareholdings of Mr. Zhang Feng and Mr. Chen Hongjun occurred before serving as employee representative supervisors.

(2)

On December 19, 2019, the Board of directors received the resignation letter from Mr. Shi Wei, tendering his resignation from his position as an Executive Director and Vice President due to his age at retirement. On the same day, the Board received the notice of resignation from Mr. Guo Xiaojun, tendering his resignation from his position as Executive Director, Vice President and Secretary to the Board due to other work arrangements. Mr. Shi’s and Mr. Guo Xiaojun’s resignation will take effect once the notices of resignation are sent to the Board on December 19, 2019.

(3)

On September 2, 2019, the supervisory committee of the Company received the resignation letter from Mr. Zuo Qiang, tendering his resignation from his position as an employee supervisor of the Supervisory Committee due to other work arrangements. Mr. Zuo Qiang’s resignation takes effect upon the submission of the resignation letter to the Supervisory Committee on September 2, 2019.

(4)

On September 30, 2019, the supervisory committee of the Company received the notice of resignation from Ms. Li Xiaoxia, tendering her resignation from her position as an employee supervisor of the Supervisory Committee due to other work arrangements. Given that the departure of Ms. Li will result in the proportion of employee supervisors in the Supervisory Committee falling below the statutory requirement, according to regulations in the Company Law and the Articles of Association of the Company, Ms. Li Xiaoxia’s notice of resignation took effect on October 11, 2019, the staff association of the Company through democratic election procedure elected Mr. Zhang Feng and Mr. Chen Hongjun as employee representative supervisors of the Company.

(5)

On December 27, 2019, the supervisory committee of the Company received the notice of resignation from Mr. Fan Qingyong, tendering his resignation from his position as a supervisor of the Supervisory Committee due to other work arrangements. Mr. Fan Qingyong’s notice of resignation will take effect upon the submission of the notice of resignation to the Supervisory Committee on December 27, 2019.

(6)

Mr. Guan Zemin was appointed as President of the Company at the 20th meeting of the Ninth Session of the Board on February 3, 2020. Mr. Huang Xiangyu and Mr. Huang Fei were appointed as the Company’s Vice President on the same day.

C. Board Practices.

Board of Directors

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

 

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Independent Board Committee

 

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

Supervisory Committee

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

Remuneration and Appraisal Committee

We formed a remuneration and appraisal committee on December 25, 2001 which consists of three Directors. As of December 31, 2019, the members of the remuneration committee are Mr. Zhang Yimin (Chairman of the Committee), Mr. Zhou Meiyun and Mr. Du Weifeng. The key responsibility of the Remuneration Committee is to formulate and review the remuneration policy and plan for the Directors and executive officers, formulate the standards for evaluation of the Directors and executive officers and conduct such evaluations. The members of the remuneration and appraisal committee will hold office for the same term as their directorships which will expire in June 2020.

Audit Committee

We formed an audit committee on June 15, 1999 which consists of three Directors. As of December 31, 2019, the members are Ms. Li Yuanqin (Chairman of the Committee), Mr. Liu Yunhong and Mr. Du Weifeng. The key responsibility of the Audit Committee is to advise the Board on the appointment, dismissal, remuneration and terms of engagement of external auditors, review and supervise our financial reporting process, internal controls and risk management systems, and review our connected transactions. The members of the audit committee will hold office for the same term as their directorships which will expire in June 2020.

Nomination Committee

We formed a nomination committee on June 27, 2012 which consists of three Directors. As of December 31, 2019, the members are Mr. Zhang Yimin (Chairman of the Committee), Mr. Du Weifeng and Mr. Wu Haijun. The key responsibility of the Nomination Committee is to review the Board composition, make recommendations to the Board on the procedures and criteria for the selection and appointment of Directors and senior management and assess the independence of Independent Non-executive Directors. The members of the audit committee will hold office for the same term as their directorships which will expire in June 2020.

Strategy Committee

We formed a strategy committee on June 15, 2017 which consists of four Executive Directors, two Non-executive Directors and one Independent Non-executive Director. As of December 31, 2019, the members are Mr. Wu Haijun (Chairman of the Committee), Mr. Zhou Meiyun, Mr. Lei Dianwu, Mr. Mo Zhenglin and Ms. Li Yuanqin. The key responsibility of the Strategy Committee is to conduct researches and give recommendations to the Board on major investment decisions, projects and major issues that affect our development, and monitor our long-term development strategic plan. The members of the audit committee will hold office for the same term as their directorships which will expire in June 2020.

 

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Summary Corporate Governance Differences

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

D. Employees.

As of December 31, 2019, we had 8,878 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,  
     2017      2018      2019  

Management

     1,148        1,057        1,081  

Engineers, technicians and factory personnel

     6,197        5,753        5,430  

Accounting, marketing and others

     3,016        2,787        2,367  
  

 

 

    

 

 

    

 

 

 

Total

     10,361        9,597        8,878  
  

 

 

    

 

 

    

 

 

 

Approximately 56.49% of our work force are graduates with a tertiary degree or higher. In addition, we offer our employees opportunities for education and training based upon our development plans and requirements and the individual performance of each employee.

 

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A system of labor contracts has been adopted in our Company. The contract system imposes discipline, provides incentives to adopt better work habits and gives us greater management control over our work force. We believe that by linking remuneration to productivity, the contract system has also improved employee morale. As of December 31, 2019, 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 2019, we incurred RMB3,147.4 million in employment costs.

In compliance with Shanghai regulations, we and our employees participate in a defined contribution government pension scheme under which all employees upon retirement are entitled to receive pensions. In order to safeguard and properly enhance the living level of retired employees and improve the medium and long term incentive system, the Company established an enterprise annuity plan. According to the plan, to the extent that the employees volunteer for the related payments and have been with the Company for one year or more, such employees are entitled to participate in the enterprise annuity plan. We will make payments to match the payments made by the employees after giving considerations to our profitability, the employee’s work responsibilities, contributions, and treatments post retirement based on the principle of universal benefits. We have 18,750 retired employees under the above retirement insurance plans. During 2019, we terminated employment with 719 persons (including the retired and voluntary leave), accounting for 7.49% of 9,597 employees we had as of January 1, 2019.

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

 

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E. Share Ownership.

The table below sets forth information regarding the beneficial ownership of our shares held by our directors, supervisors and executive officers as of March 31, 2020:

 

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  

Zhang Feng

  

Supervisor

   10,000 A shares (L)      0.000092        0.00014  

Chen Hongjun

  

Supervisor

   31,000 A shares (L)      0.000290        0.00043  

 

(L): Long position

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 2019, 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.

 

LOGO

 

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The table below sets forth information regarding ownership of our shares as of March 31, 2020 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  

The Bank of New York Mellon

Corporation

 

436,867,031 H shares (L)  

367,331,900 H shares (S)  

61,158,279 H shares (P)  

 

4.04  

3.39  

0.57  

 

12.50  

10.51  

1.75  

BlackRock, Inc.  

282,286,866 H shares (L)  

5,906,000 H shares (S)  

 

2.61  

0.05  

 

8.08  

0.17  

Hung Hin Fai(1)   211,008,000 H shares (L)
   200,020,000 H shares (S)  
 

1.95  

1.85  

 

6.04  

5.72  

Chan Kin Sun(2)   200,020,000 H shares (L)     1.85     5.72  

Citigroup Inc.

 

244,040,695 H shares (L)  

2,204,900 H shares (S)  

223,103,401 H shares (P)  

 

2.25  

0.02  

2.06  

 

6.98  

0.06  

6.38  

Brown Brothers Harriman & Co.

 

177,771,311 H shares (L)  

177,771,311 H shares (P)  

 

1.64  

1.64  

 

5.09  

5.09  

 

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

Notes:

  (1)

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

  (2)

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

 

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As of March 31, 2020, 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, 2020, 3,568,441 ADSs, representing the equivalent of 356,844,100 H Shares, were held of record by 80 other registered shareholders domiciles in and outside of the United States. We have no further information as to our shares held, or beneficially owned, by U.S. persons.

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

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

B. Related Party Transactions.

Intercompany service agreements and business-related dealings

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

As the above-mentioned framework agreement expired on 31 December 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 23 October 2019, and intended to continue the above-mentioned continuing connected transactions from 2020 to 2022, valid for three years until 31 December 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 13 November 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 10 December 2019.

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.

 

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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.

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 2019.

 

Type of major transactions

  

Connected parties

   Annual cap for 2019      Transaction
Amount during
the reporting
Period
     Unit: RMB’000
Percentage
Of the total
Amount of the
same type of
transaction
(%)
 

Mutual Product Supply and Sales Services Framework Agreement

        

Purchases of raw materials

   Sinopec Corp., Sinopec Group and their associates      80,286,000        55,385,078        78.63

Sales of petroleum and petrochemical products

   Sinopec Corp. and its associates      102,914,000        58,996,676        58.79

Property leasing

   Sinopec Corp. and its associates      36,000        31,972        41.86
           

Agency sales of petrochemical

   Sinopec Corp. and its associates      240,000        125,619        100.00

Comprehensive Services Framework Agreement

        

Construction, installation and engineering design services

   Sinopec Group and its associates      3,444,000        143,560        23.92

Petrochemical industry insurance services

   Sinopec Group and its associates      180,000        108,223        100.00

Financial services

   Sinopec Group and its associates      200,000        1,295        0.33

 

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On December 31, 2018, the Company entered into an asset leasing agreement (the “Lease Agreement”) with Baishawan branch of Sinopec Petroleum Reserve Company Limited (the “Baishawan Branch”), a wholly owned subsidiary of the Company’s de facto controller, Sinopec Group. Pursuant to the Lease Agreement, the Company rents the oil tanks and ancillary equipment from the Baishawan Branch at an annual rent up to RMB95.0 million (including VAT) with the leasing period from January 1, 2019 to December 31, 2019. The Lease Agreement was considered and approved at the 14th meeting of the Ninth Session of the Board on December 28, 2018. Related announcements were published on the 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. During the reporting period, the Company incurred leasing costs of RMB82.00 million (including VAT).

On December 27, 2019, a storage service agreement among the Company, Sinopec Petroleum Reserve Company Limited of Sinopec Group and Baishawan Branch (the “Storage Service Agreement”) was considered and approved at the 19th meeting of the Ninth Session of the Board and was entered into on December 31, 2019. Pursuant to the Storage Service Agreement, the Baishawan Branch provides storage services to the Company for one year, with leasing period from January 1, 2020 to December 31, 2020 and the annual maximum storage fees of RMB114.0 million (including VAT). Related announcements were published on the official websites of the Shanghai Stock Exchange, the Hong Kong Stock Exchange and the Company on December 27, 2019, as well as on “Shanghai Securities News” and “China Securities Journal” on December 28, 2019.

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 was completed in February 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.

 

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E. Dilution

Not applicable.

F. Expenses of the Issuer

Not applicable.

 

ITEM 10.

ADDITIONAL INFORMATION.

A. Share Capital

Not applicable.

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.

 

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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.

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 Securities and Exchange Commission, 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.

 

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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;

 

   

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.

 

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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.

 

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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:

 

   

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.

 

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Board of Directors

Our Articles of Association authorize up to 12 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

 

   

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.

 

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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 dissoluti