Sinopec Shanghai Petrochemical Co Ltd 20-F/A, filed Oct 12, 2022
Sinopec Shanghai Petrochemical Co Ltd (SPTJF)
20-F/A
2022-10-12
For: 2021-12-31
View Original
Added on
August 22, 2026
About this 20-F/A
Sinopec Shanghai Petrochemical Co Ltd filed this 20-F/A on October 12, 2022, covering the fiscal year ended December 31, 2021.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F/A
(Amendment No. 1)
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 , 2021
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)
(Translation of Registrant’s name into English)
(Jurisdiction of incorporation or organization)
(Address of principal executive offices)
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 | ||
| * | 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. |
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.
(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.
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 Yes ☒ No ☐
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). 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. | ☒ | 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 ☐ | |
☒ | Other ☐ | |||||
| by the International Accounting Standards Board |
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. |
PCAOB ID: |
PCAOB ID: |
Explanatory Note
Sinopec Shanghai Petrochemical Company Limited (the “Company”) is filing this Amendment No. 1 on Form
20-F
(this “Amendment No. 1”) to our annual report on Form 20-F
for the fiscal year ended December 31, 2021, filed with the U.S. Securities and Exchange Commission (the “SEC”) on April 28, 2022 (the “Original Filing”), to address several comments from the Staff of the SEC relating to certain legal and operational risks associated with our being based in and having the majority of our operations in China. Accordingly, we are restating in their entirety the following sections of our Form 20-F:
(i) Part I – Item 3 (Key Information) and Item 4 (Information on the Company) and (ii) Part III – Item 19 (Exhibits). Pursuant to Rule
12b-15
under the Securities Exchange Act of 1934, as amended, new certifications by our President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 are being filed as exhibits to this Amendment No. 1. Because no financial statements have been included in this Amendment No. 1 and this Amendment No. 1 does not contain or amend any disclosure with respect to Item 15 of Form 20-F,
paragraphs 3, 4, and 5 have been omitted from such certifications. The Company is not including certifications pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350) because no financial statements are filed with this Amendment No. 1. No attempt has been made in this Amendment No. 1 to modify or update in any way the financial statements or any other items or disclosures in the Original Filing except as required to reflect the amendments discussed above. Except as otherwise noted herein, this Amendment No. 1 continues to describe conditions as of the date of the Original Filing, and the disclosures contained herein have not been updated to reflect events, results or developments that occurred after the date of the Original Filing, or to modify or update those disclosures affected by subsequent events. Among other things, forward-looking statements made in the Original Filing have not been revised to reflect events, results or developments that occurred or facts that became known to us after the date of the Original Filing, and such forward-looking statements should be read in conjunction with the Original Filing and our filings with the SEC subsequent to the filing of the Original Filing. Accordingly, this Amendment No. 1 should be read in conjunction with the Original Filing and our other filings with the SEC subsequent to April 28, 2022.
TABLE OF CONTENTS
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i
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; |
| • | changes to environmental and economic regulations; |
| • | 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. 1
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 RMB 6.3726 to U.S. $1.00, the noon buying rate on December 30, 2021 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” and “Sinopec” 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 “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.
2
PART I
ITEM 3. KEY INFORMATION.
A. |
Capitalization and Indebtedness. |
Not applicable.
B. |
Reasons for the Offer and Use of Proceeds. |
Not applicable.
C. |
Risk Factors. |
An investment in our ADSs involves significant risks. The risks and uncertainties described below are not the only ones we face. You should consider carefully all of the information in this annual report, including the risks and uncertainties described below and our consolidated financial statements and related notes, before making an investment in our ADSs. Any of the following risks could have a material adverse effect on our business, financial condition and results of operations. In any such case, the market price of our ADSs could decline, and you may lose all or part of your investment.
Risks Related to Doing Business in China
The PRC government has significant authority to intervene or influence our operations at any time. If the PRC government exerts more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers and we were to be subject to such oversight and control, it may result in a material adverse change to our business operations, significantly limit or completely hinder our ability to offer or continue to offer securities to investors, and cause our ADSs to significantly decline or loss in value.
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, which could result in a material adverse change to our operations and the value of our securities.
Furthermore, given recent statements by the Chinese government indicating an intent to exert more oversight and control over offerings that are conducted overseas, although we are currently not required to obtain permission from the PRC government and have not received any denial to list on a U.S. exchange, it is uncertain whether or when we might be required to obtain permission from the PRC government to issue securities, to maintain our listing or to list additional securities on a U.S. exchange in the future. Even if such permission is obtained, it is uncertain whether it will be later denied or rescinded, which could significantly limit or completely hinder our ability to offer or continue to offer our securities to investors in the United States and result in a material adverse change to our business operations, and damage our reputation, and therefore causing the value of our ADSs to significantly decline or lose their value.
Changes in government regulations and legislation may limit our activities and affect our business operations and the price of our ADSs, and result in risks that affect our future financing plans and securities offerings, the liquidity of our investors, and the enforcement of court judgments and shareholders’ rights.
We are a joint stock limited company incorporated in China, and our controlling shareholder is China Petroleum & Chemical Corporation (a.k.a., Sinopec Corp.), which is in turn controlled by China Petrochemical Corporation. The controlling shareholder of China Petrochemical Corporation is Sinopec Group Company, which is in turn controlled by the State-owned Assets Supervision and Administration Commission of the State Council of China. Our management makes decisions with respect to our business strategies and operations in accordance with applicable laws and regulations, listing rules, and industrial policies based on procedures stipulated in our articles of association and other corporate governance documents and polices. All major corporate matters relating to our business operations are (i) submitted for the approval of our board of directors, which is required to review and approve certain operational matters, to convene general meetings of shareholders and to present certain matters to the shareholders for their approval, in each case in accordance with our articles of association, (ii) approved by resolutions adopted by our board of directors and/or shareholders, as appropriate, and (iii) carried out under the supervision of our board of supervisors. Because our business strategies are formulated, and our business operations are conducted, based on and pursuant to applicable laws and regulations and industrial policies, any changes thereto that bear on our business operations will likely have an impact on our business and our results of operations.
3
As an integrated petroleum and petrochemical company operating in China, our business operations may be directly affected by new laws and regulations covering our industries that are enacted by the PRC government or through the exercise of its supervisory power over our industries. The PRC government continues to exercise certain controls over the petroleum and petrochemical industry in China. These control mechanisms include setting periodically the upper limit of the retail prices for gasoline and diesel, collecting special oil income levies, deciding import and export quotas and procedures, setting safety, environmental and quality standards, and formulating policies to save energy and reduce emission.
In addition, the PRC government may continue to make and adopt changes to its existing macroeconomic and industry policies for the petroleum and petrochemical industry, including further reforming and improvement of the pricing mechanisms of refined oil products and natural gas, which could impact the development of the petroleum and petrochemical industry in China and the production and operations of the market players in such industry. Our board of directors and management, when developing and formulating our business plan and operating strategies, are required to take into consideration of those control mechanisms and industry policies, some of which may impose constraints and limitations on our business planning and strategy-making, and we cannot assure you there will not be material adverse effects on our operations and profitability. The Special Administrative Measures for Foreign Investment Access (Negative List) (2021 Version) currently in effect (the “Negative List”), while requiring enterprises incorporated in China and operating in industries that are subject to a foreign investment prohibition to obtain approval from relevant competent government authorities for their overseas securities offerings and listings, does not prohibit or impose restrictions on foreign investments in the petroleum and petrochemical industries. However, we cannot rule out the possibility that the PRC government may in the future amend and revise PRC laws and regulations in this area to advance new energy security policies.
In addition, the Measures for the Security Review of Foreign Investments (“Security Review Measures”), which were issued by the PRC government and came into effect on January 18, 2021, provide that a foreign investor must seek the approval of the competent PRC regulatory authorities prior to investing in key energy and resources sectors that have national security implications where such investment will result in such investor obtaining actual control over the invested enterprises. The Security Review Measures also provide that PRC regulatory authorities should enact implementing rules applicable to the acquisition by foreign investors of publicly-traded securities of listed companies that have or may have national security consequences, and pending the enactment of such implementing rules, there are uncertainties as to whether there are restrictions on open-market purchases of our publicly-traded ADSs by foreign investors under those measures. Given that Sinopec Corp., our controlling shareholder, and its concert parties currently hold approximately 50.85% of our outstanding shares, we do not expect any foreign investor will be able to obtain control over us by investing in our publicly-traded H shares or ADSs.
The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in Renminbi. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of the State Administration of Foreign Exchange (“SAFE”) by complying with certain procedural requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from the operations of our PRC subsidiaries in China may be used to pay dividends to our company. However, approval from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, we need to obtain SAFE approval to use cash generated from the operations of our PRC subsidiaries to pay off their respective debt in a currency other than Renminbi (if any) owed to entities outside China, or to make other capital expenditure payments outside China in a currency other than Renminbi.
Meanwhile, other than approvals and filing processes required under prevailing PRC laws and regulations, our ability to transfer money or other assets out of China or enter into business transactions with
non-Chinese
parties in the ordinary course of our business have not been substantively affected by the Security Review Measures. If the PRC government, in keeping with its national security policy, promulgates new laws and regulations in the future to regulate and restrict our ability to enter into cross-border transactions or obtain foreign investments, we may be required to make adjustments to our operating and financing plans, which may in turn affect our business operations and financial position, and have material impacts on the value of our ADSs. If, in the future, foreign investments in petroleum and/or petrochemical industries in China become prohibited or restricted, investors in our ADSs may need to seek exit for their investments in accordance with applicable laws and regulations, which may result in a significant decline in the price of our ADSs and materially and adversely affect the value of the investments made in our ADSs by foreign investors. 4
In addition, pursuant to the Special Regulations of the State Council concerning Offering and Listing of Shares Overseas by Companies Limited by Shares promulgated in 1994, currently in effect, as a PRC company with equity securities listed in the PRC and the U.S., we are required to obtain the prior approval of the China Securities Regulatory Commission for any public offering of equity securities to foreign investors. If we fail to obtain any requisite approvals with respect to future offerings of our equity securities to foreign investors, or if we inadvertently conclude that such approvals are not required, our ability to execute our financing and equity offering plans may be significantly limited or completely hindered. Any measures taken by the PRC authorities to regulate or exert more control over securities offerings conducted overseas and foreign investments in China-based issuers may limit or hinder our ability to offer or continue to offer securities to investors outside China, and the price of our ADSs may decline significantly, leading to a material adverse effect on the value of investments in our ADSs by investors.
In light of the dynamic nature of the Chinese economy and the continuing development of the PRC legal system, the PRC authorities may promulgate new laws and regulations regulating the petroleum and petrochemical industry, or overall investment and market activities in general. Certain legislative changes are required by law to go through review and comment procedures open to certain market participants or the general public, and to the extent that such changes are made to regulate our business operation, we may have the opportunity to participate in such review and comment procedures during the policy and rule-making process. However, we cannot assure you that the rules or policies finally adopted will not adversely affect our business operations. The new regulations and policies or the amendment of current ones may at times only afford a short period for transition or adjustment, and may influence the implementation of our established business plans and operation strategies. They may also subject us to enhanced compliance scrutiny, result in more compliance costs and expenses, or otherwise adversely affect our business by requiring adjustments to our business plans and operations. For example, the PRC government has recently adopted, and may further adopt, stricter laws and regulations with respect to environmental protection and carbon emissions, which may lead to higher operating costs and expenses, and a prolonged project development timetable. As a result of those new or amended rules and policies, we may not have control over the timing or outcome of approvals of certain of our planned projects, and may encounter significant constraints on our ability to implement our business strategies, to develop or expand our business operations or to maximize our profitability, which could in turn adversely affect our operations by raising our operating costs and lowering our profits or otherwise impeding our efforts to improve our operational efficiency and profitability, and further adversely affect the market expectations of our business operations. Depending on the extent to which our operations are so affected, there may be a material change in our operations and the value of our ADSs.
Specifically, the PRC government has recently taken various legislative initiatives in the area of data security and to address market monopoly concerns.
| • | With respect to data security protection, the revised Measures for Cybersecurity Review (the “Measures”) took effect on February 15, 2022 and provide that critical information infrastructure operators, must evaluate potential risks that the deployment of any products and services will have on national security prior to the procurement of such products and services, and must apply for a cybersecurity review if such products and services affect or may affect national security. “Online platform operators” must apply for a cybersecurity review if any of their data processing activities affects or may affect national security. If an “online platform operator” that is in possession of personal data of more than one million users intends to list its securities on a foreign stock exchange, it must apply for a cybersecurity review. However, the Measures have not clarified if any follow-on offering of ADSs by us will be regulated as a “listing shares on a foreign stock exchange” or whether public companies already listed overseas would be subject to regular cybersecurity reviews. |
| • | With respect to anti-monopoly laws and regulations, the PRC Anti-monopoly Law prohibits monopolistic activities by market participants such as the entering into monopoly agreements, the abuse of dominant market position and anti-competitive activities that have or may have an effect of eliminate or reduce competition. In addition, the National Development and Reform Commission (the “NDRC”), the State Administration of Market Regulation (the “SAMR”) and the Cyberspace Administration of China (the “CAC”), among others, jointly issued the Several Opinions on Promotion of the Standardized, Sound and Sustainable Development of Platform Economy (the “Platform Economy Opinions”), which embody legislative and regulatory anti-monopoly initiatives in relation to the “platform economy.” The Platform Economy Opinions focus on the following aspects of the platform economy: formulation and promulgation of regulations on the prohibition of unfair online anti-competitive activities; future issuance of detailed rules applicable to data processing activities conducted by online platform enterprises; the formulation of regulations on pricing; the investigation on monopoly and unfair competition activities; and the enforcement against monopolistic agreements, abuse of dominant market position and unlawful market concentration. During the reporting period of this annual report, we have not received from the CAC, the Ministry of Public Security or its local counterparts, or any industrial regulatory authorities, any notices imposing administrative penalties against us or demanding any remedial actions be taken in relation to data security matters. |
5
We do not believe the abovementioned rules currently have a material impact on our capacity to operate our business in the ordinary course, obtain foreign investment, or maintain our listing overseas, however that could change in the future.
Recent greater oversight by the Cyberspace Administration of China (“CAC”) over data security, particularly for companies seeking to list on a foreign exchange, could adversely impact our business.
The PRC government has recently taken various legislative initiatives in the area of data security and to address market monopoly concerns. On December 28, 2021, the CAC and other relevant PRC governmental authorities jointly promulgated the Cybersecurity Review Measures (the “CAC Revised Measures”) to replace the original Cybersecurity Review Measures. The CAC Revised Measures took effect on February 15, 2022 and provide that (i) critical information infrastructures operators, or CIIOs, must evaluate potential risks that the deployment of any products and services will have on national security prior to the procurement of such products and services, and must apply for a cybersecurity review if such products and services affect or may affect national security, and “online platform operators” must apply for a cybersecurity review if any of their data processing activities affects or may affect national security, and (ii) if an “online platform operator” that is in possession of personal data of more than one million users intends to list its securities on a foreign stock exchange, it must apply for a cybersecurity review. However, the measures have not clarified if any
follow-on
offering of ADSs by us will be regulated as a “listing shares on a foreign stock exchange” or whether public companies already listed overseas would be subject to regular cybersecurity reviews. In addition, the NDRC, the SAMR and the CAC, among others, jointly issued the Platform Economy Opinions, which embodies legislative and regulatory anti-monopoly initiatives in relation to the “platform economy.” The Platform Economy Opinions focus on the following aspects of the platform economy: formulation and promulgation of regulations on the prohibition of unfair online anti- competitive activities; future issuance of detailed rules applicable to data processing activities conducted by online platform enterprises; the formulation of regulations on pricing; the investigation on monopoly and unfair competition activities; and the enforcement against monopolistic agreements, abuse of dominant market position and unlawful market concentration. During the reporting period of this annual report, we have not received from the CAC, the Ministry of Public Security or its local counterparts, or any industrial regulatory authorities, any notices imposing administrative penalties against us or demanding any remedial actions be taken in relation to data security matters. We do not believe the abovementioned rules currently have a material impact on our capacity to operate our business in the ordinary course, obtain foreign investment, or maintain our listing overseas, they could in the future. To the extent any current regulation or policy promulgated by the CAC applies to us, we believe we are in full compliance. Up to now, we have not received any notices from the CAC, the Ministry of Public Security or its local counterparts that the company is a critical information infrastructures operator. Based on the advice of counsel provided by Beijing Haiwen Law Firm upon which we have relied, we do not believe that we are subject to the review of, nor require the approval of, the CAC at this time. We can provide no assurance, however, that the CAC will not take a different position, or other regulations and policies that may be issued in the future and their implementation may further require the company to comply with stricter compliance conditions, adjust the company’s business operation mode and business plan, or have a significant impact on our ability to accept foreign investment or maintain its listing in the United States or other overseas markets. Interpretation and enforcement of Chinese laws and regulations is uncertain and may change quickly, which could result in a material and negative impact our business operation, decrease the value of our ordinary shares and limit the legal protections available to us.
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 and prior court decisions have little precedential value, the interpretation and enforcement of these laws, regulations and legal requirements may change quickly and involve greater uncertainty than in other jurisdictions.
From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. Since PRC administrative and court authorities have discretion in interpreting and implementing statutory and contractual terms, it may be difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy. Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural rights, could materially and adversely affect our business and impede our ability to continue our operations.
6
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. See “— ” for information about the PRC foreign exchange regulations. 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 are 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 influence 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.
Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment
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 the rate of China’s economic growth has slowed down. Meanwhile, the global pandemic of
COVID-19
and geopolitical events since 2020 have affected the global and Chinese economies to varying degrees. Any continued 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. Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.
The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in Renminbi. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of the State Administration of Foreign Exchange (“SAFE”) by complying with certain procedural requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from the operations of our PRC subsidiaries in China may be used to pay dividends to our company. However, approval from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, we need to obtain SAFE approval to use cash generated from the operations of our PRC subsidiaries to pay off their respective debt in a currency other than Renminbi (if any) owed to entities outside China, or to make other capital expenditure payments outside China in a currency other than Renminbi.
Since 2016, the PRC government has imposed more restrictive foreign exchange policies and stepped up scrutiny of major outbound capital movement including overseas direct investment. More restrictions and substantial vetting processes are put in place by SAFE to regulate cross-border transactions falling under the capital account. If any of our shareholders regulated by such policies fail to satisfy the applicable overseas direct investment filing or approval requirement timely or at all, it may be subject to penalties from the relevant PRC authorities. The PRC government may at its discretion further restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.
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Certain judgments obtained against our directors and/or officers by our shareholders may not be enforceable.
We are a joint stock limited company incorporated under the laws of China. The majority of our directors and other members of management reside within China or Hong Kong. As a result, your ability to bring an action against us or against these individuals in the U.S. in the event that you believe your rights have been infringed under the U.S. federal securities laws or otherwise, or the procedures in relation thereto, may be subject to uncertainties. Even if you are successful in bringing an action of this kind, it may be difficult for you to enforce judgments against us or these individuals in U.S. courts.
In addition, there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts. Courts in China may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China does not have any treaties or other arrangements that provide for the reciprocal recognition and enforcement of foreign judgments with the United States. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates basic principles of PRC law or national sovereignty, security, or the public interest. These policies may make it even more difficult to enforce any judgments obtained from foreign courts against such persons compared to other jurisdictions.
Business and Operational Risk Factors
The coronavirus pandemic has and could continue to 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. Shanghai has implemented a slew of enhanced measures related to matters such as community prevention and control, patient transport, and disinfection since March 2022. The phased lockdown triggered by the COVID-19
outbreak in Shanghai will remain for the time being. The global outbreak of COVID-19
and related adverse public health developments have had and may continue to have a material adverse impact upon our normal operating activities, the demand for our end products and our financial performance. Our normal operating activities were disrupted by the temporary closure of our offices, suspension of business travel, disruptions to our normal working schedules, various restrictions on our employees’ activities and similar disruptive effects to our normal operations. In addition, the global spread of COVID-19,
and the implementation by governments around the world of measures intended to slow down the spread, have caused a material reduction in worldwide business activity, resulting in a drop in demand for our products. We have taken measures in response to the pandemic, 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. New outbreaks have occurred and may continue to occur within China and abroad. However, the extent to which these outbreaks impact our results will depend on global trends and future developments that are not within our control, including the emergence of new variants, the availability of effective vaccines, the development and availability of therapeutic treatments for
COVID-19,
the scope and severity of the outbreaks and the actions taken by governmental authorities to contain any outbreaks. The long-term impact of the COVID-19
pandemic on our performance also depends in large part on the effect of the pandemic on global and regional economies and the response of world financial markets. For example, the lockdown of Shanghai and other municipalities in China in early 2022 may adversely affect the near-term growth of the Chinese economy. 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.
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We consume large amounts of crude oil to manufacture our products of which more than 95% is typically imported. In 2021, crude oil costs accounted for RMB 43.182 billion, or 58.12% of our consolidated annual cost of sales (68.26% of parent company 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. The volatility of crude oil prices, as well as in the price of other energy products, has increased significantly as a result of the pending conflict between Russia and Ukraine. Russia is a major supplier of crude oil and natural gas to global markets. The sanctions imposed on Russia by numerous countries may result in a material reduction in oil and gas exports from Russia, which could increase price volatility for such products. We expect that the volatility and uncertainty of the prices of crude oil and petrochemical products will continue, and that increasing crude oil prices and declines in prices of petrochemical products may adversely affect our business and results of operations and financial condition.
Some of our major products are subject to government price controls, and we are not able to pass on all cost increases from rising crude oil prices through higher product prices.
We consume large amounts of crude oil to manufacture our products of which more than 95% is typically imported. We attempt to mitigate the effect of increased costs due to rising crude oil prices. However, our ability to pass on these increased costs to our customers is dependent on market conditions and government regulations. Given that the increase of the sales prices of our products may lag behind the increase of crude oil costs, we may fail to completely cover the increased costs by increasing our sales prices, particularly where government regulations restrict the prices of certain of our fuel products. In particular, gasoline, diesel and jet fuel, and liquefied petroleum gas are subject to government price controls at present. In 2019, 2020 and 2021 approximately 44.81%, 43.64%, and 47.01%, respectively, 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 Pricin
g), 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 possible 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 2022 of approximately RMB 3,500 million (U.S. $548.96 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, 2022, we had an aggregate outstanding indebtedness of approximately RMB 6,749 million (U.S.$1,058.55 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 Finance Company Limited (“Sinopec Finance”), provided a loan of RMB 700 million (US $109.79 million) for our debt for the year ended December 31, 2021 and for the three months ended March 31, 2022.
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 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.
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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. Sinopec Group carries out unified insurance for safety production liability insurance and environmental liability insurance. We also insured a safety production liability insurance for 1 year in August 2021. The annual cumulative compensation caps is RMB 135 million and the compensation caps for each accident is RMB 67.5 million. We carry a third party liability insurance with a coverage capped at RMB 50 million in 2022 to cover claims, subject to deductibles, in respect of personal injury, property or environmental damage arising from accidents on our property or relating to our operations other than on our transportation vehicles. Our insurance coverage may not be sufficient to cover all the financial losses caused by operating hazards. Resulting losses required to be compensated or otherwise paid for by us due to such operating hazards that are not fully insured against may have a material adverse effect on our financial condition and results of operations.
We are controlled by Sinopec Corp., whose interests may not be aligned with yours.
As of March 31, 2022, Sinopec Corp. owned 50.44% of our shares. Accordingly, it has voting and management control over us, and its interests may be different from the interests of our other shareholders. Subject to our Articles of Association and applicable laws and regulations, Sinopec Corp. will be in a position to cause us to declare dividends, determine the outcome of corporate actions requiring shareholder approval or effect corporate transactions without the approval of the holders of the H Shares and ADSs. Any such increase in our dividend payout would reduce funds available for reinvestment in our business and any such actions or transactions could adversely affect us or our minority shareholders. Sinopec Corp. may also experience changes in its own business strategy and policies. Although we are not currently aware of any specific changes, they could, in turn, lead Sinopec Corp. to change its policies or practices toward us in ways that we cannot predict, with corresponding unpredictable consequences for our business. Additionally, Sinopec Corp. may leverage its controlling shareholder position to influence our decisions with regard to the manufacturing and operation, allocation of financial resources and appointment and removal of senior management members, which could adversely affect us or our minority shareholders.
We have also engaged from time to time and will continue to engage in a variety of transactions with Sinopec Corp., Sinopec Group, the controlling company of Sinopec Corp., and their various subsidiaries or affiliates which provide a number of services to us, including the supply of raw materials, product distribution and sales agency, project design and installment service, petrochemical industry related insurance and financial services. We also sell oil and petrochemical products to Sinopec Corp. and its affiliates. Our transactions with these companies are governed by a Mutual Product Supply and Sales Services Framework Agreement with Sinopec Corp. and a Comprehensive Services Framework Agreement with Sinopec Group, the terms of which were negotiated on an
arm’s-length
basis. See Item 7. Major Shareholders and Related Party Transactions – B. Related Party
Transactions
. Our business and results of operations could be adversely affected if either Sinopec Corp. or Sinopec Group refuses to engage in such transactions or if one of them seeks to amend the its contracts with us in a way adverse to us. In addition, Sinopec Corp. has interests in businesses that compete or are likely to compete, either directly or indirectly, with our businesses. Because Sinopec Corp. is our controlling shareholder and its interests may conflict with our own interests, Sinopec Corp. may take actions that favor itself over our interests. We could face increasing competition in China.
Our principal market, Eastern China, which is comprised of Shanghai, Shandong, Jiangsu, Anhui, Zhejiang, Jiangxi and Fujian, has enjoyed stronger economic growth and a higher demand for petrochemical products than other regions of China. As a result, we believe that our competitors will try to expand their sales and build up their distribution networks in our principal market. We believe this will have an adverse impact on the production and sale of our major products. Moreover, Chinese private enterprises have gradually overcome technological and funding barriers to extend their business from the downstream processing sector to the upstream petrochemical field. These enterprises have advantages in many areas such as flexibility in operation costs, preferential policy treatments and regional presence, and may use these advantages to compete with us in our target market.
We face increasing foreign competition in our lines of business.
China joined the WTO on December 11, 2001 and committed to eliminate some tariff and
non-tariff
barriers to foreign competition in the domestic petrochemical industry that benefited us in the past. In particular, China: | • | has reduced tariffs on imported petrochemicals products that compete with ours; |
| • | increased levels of permitted foreign investment in the domestic petrochemicals industry, allowing foreign investors to own 100% of a domestic petrochemicals company from December 11, 2004; |
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| • | 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.
Cyber attacks and security breaches may threaten the integrity of our intellectual property and other sensitive information and disrupt our business operations, which could adversely affect our reputation, business and financial position.
We face numerous and evolving global cybersecurity threats, which may range from uncoordinated individual attempts to sophisticated and targeted measures directed at us. Cyber attacks and security breaches may include, but are not limited to, attempts to disrupt our operations including our information technology systems and data, gain access to confidential information, insertion of computer viruses, denial of service and other electronic security breaches, whether internal or external through third parties with whom we conduct business. In recent years, a number of major oil and petrochemical companies have been the subject of cyber attacks.
Although we have not experienced any material cybersecurity incidents in the past, we cannot assure you that we will not experience them in the future. Due to the evolving nature of cybersecurity threats, the scope and impact of any future incident cannot be predicted. While we continually work to safeguard our systems and mitigate potential risks, there is no assurance that such actions will be sufficient to prevent cyber attacks or security breaches that manipulate or improperly use our systems or networks, compromise confidential or otherwise protected information, destroy or corrupt data, or otherwise disrupt our operations. The occurrence of such events could disrupt our operations, cause physical harm to people or the environment, damage or destroy assets, compromise business systems, result in proprietary information, including information of our employees, customers, partners and other third parties, being altered, lost, stolen or compromised or otherwise disrupt our business operations. We could incur significant costs to remedy the effects of such a cybersecurity disruption as well as in connection with any resulting regulatory actions and litigation. In addition, a material cybersecurity incident could negatively impact our reputation and our competitive position, which could have an adverse effect on our financial condition and results of operations.
Risks associated with climate change.
In recent years, the petrochemical industry is facing more and more severe challenges as a result of concerns about global climate change. A series of international, domestic and regional agreements to limit greenhouse gas emissions have been signed and come into force. The Paris climate change agreement adopted in December 2015 included binding commitments by countries that have ratified the agreement since November 2016, which may lead to stricter national and regional measures in the near future. Compliance with these measures may lead to higher capital expenditures, tax expenditures, operating costs and other increased costs, resulting in reduced profits and income. Strategic investment may also be adversely affected.
Legal, Regulatory or Political Risk Factors
Our business operations may be adversely affected by present or future environmental regulations.
We are subject to extensive environmental protection laws and regulations in China. These laws and regulations permit:
| • | the imposition of environmental protection tax for the discharge of waste substances; |
| • | the levy of payments and fines for damages for serious environmental offenses; |
| • | the government to close down or suspend any facility which has caused or may cause environmental damages and require it to correct or stop operations causing environmental damages; and |
| • | lawsuits and liabilities arising from pollutions and damages to the environment and public interests. |
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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. On May 31, 2021, the Ministry of ecology and environment issued the guidance on strengthening the prevention and control of the source of ecological environment of high energy consumption and high emission construction projects, strictly approving the environmental impact assessment of “two high” projects such as petrochemical and modern coal chemical industry, and resolutely curbing the blind development of “two high” projects. 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. More stringent environmental requirements or a more rigorous enforcement program could impose significant additional costs on us, and may require us to undertake capital investments to conform with the new requirements. We cannot quantify such additional costs at this time. 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.
Changes in the monetary policy and fluctuations in the value of Renminbi may have an adverse impact on Sinopec Group’s business and operating results
The exchange rate of the Renminbi against the US Dollar and other foreign currencies may fluctuate and is subject to alterations due to changes on the Chinese political and economic situations. In July 2005, the PRC government overhauled its policy of pegging the value of the Renminbi to the US dollar by permitting the Renminbi to fluctuate within a certain band against a basket of foreign currencies. Since the adoption of this new policy, the value of the Renminbi against the US dollar fluctuates daily. In addition, the PRC government has been under international pressure to further ease its exchange rate policy, and may as a result further change its currency policy. Early in 2020, the Renminbi had weakened against the US dollar to levels not seen since 2008, but steadily rebounded at the end of the year.
A small portion of our cash and cash equivalents is denominated in foreign currencies (mainly the U.S. Dollar). As of December 31, 2021, our bank deposits denominated in foreign currencies were equivalent to RMB 166 million. Any increase in the value of Renminbi against other currencies, including the U.S. dollar, may decrease the Renminbi value of our cash and cash equivalents that are denominated in foreign currencies.
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Although most of our revenue is denominated in Renminbi, most of our procurement of crude oil, certain equipment and certain debt repayments are denominated in foreign currencies. Any depreciation of the Renminbi in the future would increase our costs and adversely affect profitability. In addition, any depreciation of the Renminbi could adversely affect the value of the dividends of our H Shares and ADSs, which we declare in Renminbi and pay in foreign currencies.
Our business may be limited or adversely affected by government regulations.
The Chinese central and local governments continue to exercise a certain degree of control over the petrochemical industry in China by, among other things:
| • | mandating distribution channels for our fuel products; |
| • | setting the allocations and pricing of certain resources, products and services; |
| • | assessing taxes and fees payable; |
| • | setting import and export quotas and procedures; and |
| • | setting safety, environmental and quality standards. |
As a result, we may face significant constraints on our flexibility and ability to expand our business operations or to maximize our profitability. In the past, we have benefited from favorable regulatory policies. Existing policies that favor our industry may change in the future and our business could be adversely affected by any such changes.
Our development plans may require regulatory approval.
We are currently engaged in a number of construction and expansion projects. Most of our projects are subject to governmental review and approval. The timing and cost of completion of these projects will depend on numerous factors, including approvals from relevant government authorities and general economic conditions in China.
While in general we attempt to obtain governmental approval as far in advance as practicable, we are unable to predict the timing and outcome of these governmental reviews and approvals. If any of our important projects required for our future growth are not approved, or not approved on a timely basis, our results of operations and financial condition could be adversely affected.
Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and results of operations.
Substantially all of our operations are conducted in China. Accordingly, our business, prospects, financial condition and results of operations may be influenced to a significant degree by political, economic and social conditions in China generally and by continued economic growth in China as a whole.
The Chinese economy differs from the economies of most developed countries in many respects, including the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over China’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.
While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. Our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. In addition, the Chinese government has implemented in the past certain measures, including interest rate increases, to control the pace of economic growth. These measures may cause decreased economic activity in China, and since 2012, the rate of China’s economic growth has slowed down. Any prolonged slowdown in the Chinese economy may reduce the demand for our products and services and materially and adversely affect our business and results of operations.
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Interpretation and enforcement of Chinese laws and regulations is uncertain.
The Chinese legal system is based on statutory law. Under this system, prior court decisions may be cited as persuasive authority, but do not have the binding effect of precedents. Since 1979, the Chinese government has been developing a comprehensive system of commercial laws and considerable progress has been made in the promulgation of laws and regulations dealing with economic matters, such as corporate organization and governance, foreign investment, commerce, taxation and trade. Because these laws, regulations and legal requirements are relatively new or otherwise undeveloped and not all accessible to the public and because prior court decisions have little precedential value, the interpretation and enforcement of these laws, regulations and legal requirements involve greater uncertainty than in other jurisdictions.
You may not enjoy shareholders’ protections that you would be entitled to in other jurisdictions.
As most of our business is conducted in China, our operations are governed principally by the laws of China. Despite the continuing improvement of the PRC Company Law and Securities Law, Chinese legal provisions for the protection of shareholders’ rights and access to information are different from those applicable to companies formed in the United States, Hong Kong, the United Kingdom and other developed countries or regions. You may not enjoy shareholders’ protections under Chinese law that you would be entitled to in other jurisdictions. We are a foreign private issuer, and therefore exempt from certain rules under the Exchange Act that are applicable to U.S. domestic public companies, such as rules relating to the having a majority of independent directors; independent audit committee members, compensation committee members and nominating committee members; obtaining shareholder approval for certain issuances of securities; or certain reporting requirements and certifications. Significant differences between our corporate governance practices and those of U.S. issuers listed on the NYSE are further described under
Item 16G
. Corporate Governance
. Because of these exemptions, shareholders may be afforded fewer protections than they otherwise would under the NYSE corporate governance requirements applicable to U.S. domestic issuers, or shareholders may not be afforded the same information generally available to shareholders holding shares in public companies organized in the United States or traded on the NYSE that are not foreign private issuers. Our Articles of Association require you to submit your disputes with us and other persons defined by our Articles of Association regarding the Company’s affairs to arbitration. You will have no legal right to a court proceeding with respect to such disputes.
Our Articles of Association require holders of our H Shares or ADSs having a claim against, or a dispute with, us, our directors, supervisors, executive officers or a holder of our A Shares relating to any rights or obligations conferred or imposed by our Articles of Association, the PRC Company Law or other relevant Chinese laws or regulations relating to our affairs, to submit such claim or dispute to arbitration with the China International Economic and Trade Arbitration Commission or to the Hong Kong International Arbitration Center. Our Articles of Association further provide that any arbitration decisions with respect to such disputes or claims shall be final and binding on all parties. As a result, you will have no legal right to a court proceeding with respect to such disputes.
Our ADSs may be delisted under the Holding Foreign Companies Accountable Act if the PCAOB is unable to inspect auditors who are located in China. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment. Additionally, the inability of the PCAOB to conduct inspections deprives our investors with the benefits of such inspections.
The Holding Foreign Companies Accountable Act, or the HFCA Act, was enacted on December 18, 2020. The HFCA Act states if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares or ADSs from being traded on a national securities exchange or in the over the counter trading market in the U.S. Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which, if enacted, would amend the HFCAA and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three.
Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this
20-F,
as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Since our auditor is located in China, a jurisdiction where the PCAOB has been unable to conduct inspections without the approval of the Chinese authorities, our auditor is currently not inspected by the PCAOB. Our Audit Committee is aware of these limitations, but believes that it is important for us to use an auditor based in China as that is the principal location of our assets and operations. 14
The PCAOB’s inability to conduct inspections in China prevents it from fully evaluating the audits and quality control procedures of our independent registered public accounting firm. As a result, we and investors in our ordinary shares are deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB inspections, which could cause investors and potential investors in our stock to lose confidence in our audit procedures and reported financial information and the reliability and quality of our audited financial statements. In addition, under changes to the PRC Securities Law that became effective in March 2020, the SEC and other foreign securities regulators are not permitted to directly conduct investigations or depositions in China and no entity or individual is permitted to provide any document or material in connection with securities business to any offshore securities regulatory authority without the permission of the China Securities Regulatory Commission and the relevant departments of PRC State Council. These restrictions may further erode confidence in our financial reporting.
On December 2, 2021, the SEC adopted final rules relating to the implementation of certain disclosure and documentation requirements of the HFCA Act. On December 16, 2021, the PCOAB determined that it is unable to inspect or completely investigate registered public accounting firms headquartered in China, including our auditor. Because our auditor is subject to such determination by the PCAOB, we have been identified as a Commission-Identified Issuer for the fiscal year ended December 31, 2021. Under the final rules enacted by the SEC pursuant to the HFCA Act, Commission-Identified Issuer securities will be delisted and/or have a trading halt imposed as soon as practicable after it is classified as a Commission-Identified Issuer for three consecutive years. However, on June 22, 2021, the U.S. Senate passed a bill which, if passed by the U.S. House of Representatives and signed into law, would reduce the number of consecutive classification years required for triggering the prohibitions under the HFCA Act from three years to two years. During such period of time we would need to identify and engage an accounting firm that is subject to PCAOB inspections to avoid such trading prohibition.
On August 26, 2022, the PCAOB signed a Statement of Protocol with the China Securities Regulatory Commission and the Ministry of Finance of the People’s Republic of China relating to inspections and investigations by the PCAOB of audit firms based in mainland China and Hong Kong. PCAOB inspections under the Statement of Protocol are currently expected to commence in
mid-September
2022, at which time the PCAOB will have an opportunity to determine if it is receiving the complete access to audit work papers and personnel required under the HFCA Act. The Company and/or its auditor will be required to provide materials and information in accordance with the Statement of Protocol. The PCAOB is required to reassess its determinations with regard to inspecting and investigating in mainland China and Hong Kong by the end of 2022. The SEC may propose additional rules or guidance that could impact us if our auditor is not subject to PCAOB inspection. For example, on August 6, 2020, the President’s Working Group on Financial Markets, or the PWG, issued the Report on Protecting United States Investors from Significant Risks from Chinese Companies to the then President of the United States. This report recommended the SEC implement five recommendations to address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfil its statutory mandate. Some of the concepts of these recommendations were implemented with the enactment of the HFCA Act. However, some of the recommendations were more stringent than the HFCA Act. For example, if a company’s auditors were not subject to PCAOB inspection, the report recommended that the transition period before a company would be delisted would end on January 1, 2022. If our securities could be delisted or prohibited from being traded earlier than would be required by the HFCA Act and are unable to be listed on another securities exchange by then, such a delisting would substantially impair your ability to sell or purchase our ADSs when you wish to do so, and the risk and uncertainty associated with a potential delisting would have a negative impact on the price of our ADSs.
“over-the-counter”
If remedial measures are imposed on the “big four”
PRC-based
accounting firms, including our predecessor independent registered public accounting firm and successor independent registered public accounting firm, we might not be able to timely file future financial statements in compliance with the requirements of the Exchange Act. This could result in a suspension of trading or a delisting or deregistration of our ADSs. Starting in 2011, the Chinese affiliates of the “big four” accounting firms, including our predecessor independent registered public accounting firm and successor independent registered public accounting firm, were affected by a conflict between the United States and Chinese law. Specifically, for certain United States listed companies operating and audited in China, the SEC and the PCAOB sought to obtain from the Chinese accounting firms access to their audit work papers and related documents. The firms were, however, advised and directed that under Chinese law they could not respond directly to the United States regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the CSRC.
15
In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the
PRC-based
accounting firms, including predecessor independent registered public accounting firm and successor independent registered public accounting firm. In January 2014, an administrative law judge reached an initial decision to impose penalties on the firms including a temporary suspension of their right to practice before the SEC. The accounting firms filed a petition for review of the initial decision. On February 6, 2015, before a review by the Commissioners of the SEC had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms will receive matching requests, and are required to abide by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Remedies for any future noncompliance could include, as appropriate, an automatic six-month
bar on a single firm’s performance of certain audit work, commencement of a new proceeding against a firm, or in extreme cases the resumption of the current proceeding against all four firms. Under the terms of the settlement, the underlying proceeding against the four PRC-based
accounting firms was deemed dismissed with prejudice four years after entry of the settlement. The four-year mark occurred on February 6, 2019. In the event that the SEC brings new administrative proceedings, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act. Moreover, any negative news about any such future proceedings against these audit firms may cause investor uncertainty regarding
PRC-based,
United States listed companies and the market price of the ADSs may be adversely affected. If our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our consolidated financial statements, our consolidated financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of the ADSs from the NYSE or deregistration with the SEC, which would substantially reduce or effectively terminate the trading of the ADSs in the United States.
We may be or become a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. investors.
Generally, if, for any taxable year, at least 75% of our gross income is passive income, or at least 50% of the value of our assets is attributable to assets that produce passive income or are held for the production of passive income, we would be characterized as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes. Since PFIC status depends on the composition of our income and the composition and value of our assets from time to time, there can be no assurance that we are not currently a PFIC or that we will not be considered a PFIC for the current year, 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 could be sanctioned or otherwise penalized under relevant U.S. laws if we engage in business with certain entities in Iran or Russia and such transactions are determined by the U.S. governmental authorities to violate U.S. laws.
We have in the past sourced a small portion of crude oil from Iran. The United States has adopted a number of measures since 1996 that provide for the possible imposition of sanctions against
non-U.S.
companies engaged in certain activities in and with Iran in the energy and other sectors, including, the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRSHRA”) enacted August 10, 2012 and the Iran Freedom and Counter-Proliferation Act (“IFCA”) enacted January 2, 2013, Section 1245 of the National Defense Authorization Act of 2012 (“NDAA”) enacted December 31, 2011, and Executive Order 13846 of August 6, 2018 that was issued in connection with the termination of the participation by the United States in the Joint Comprehensive Plan of Action, or JCPOA, that became effective January 16, 2016, and resulted in the waiver of certain U.S. sanctions against non-U.S.
persons engaging in certain transactions with Iran. The withdrawal was effected in two stages that resulted on November 5, 2018, in the complete re-imposition
of the U.S. sanctions that were waived under the JCPOA. On November 5, 2018, the United States also granted a 180-day
waiver (that is potentially renewable) under Section 1245 of the NDAA to China (and seven other countries) allowing for the purchase of petroleum from Iran under specified conditions. The NDAA waiver does not authorize transactions that remain prohibited under other U.S. sanctions laws. On April 22, 2019, the U.S. Secretary of State announced that the United States would not grant any further waivers under the NDAA. In February 2021, U.S. President announced that the U.S. would not lift economic sanctions on Iran until Iran complies with the terms of the JCPOA. The sanctionable activities include certain investments, the provision of goods, services, technology, or support that could contribute to the development of petroleum and petrochemical resources or the production of refined petroleum products in Iran, the exportation of refined petroleum products to Iran, the transportation of crude oil from Iran, or the engagement in a significant transaction for the purchase or acquisition of petroleum or petroleum products from Iran, and the engagement in transactions with certain Iranian specially designated nationals and blocked persons (“SDNs”) as identified and published by U.S. Department of the Treasury’s Office of Foreign Assets Control, or OFAC, the agency primarily responsible for administering U.S. sanctions and embargoes.
16
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. In addition, the conflict between Russia and Ukraine has resulted in the imposition of new sanctions on the Russian energy sector and greater scrutiny of
pre-existing
sanctions. The continuation of the conflict may result in the imposition of additional or more severe sanctions, and may also generate a higher level of sanctions enforcement activity. The International Emergency Economic Powers Act currently prohibits dealings with designated Russian persons and entities if the transaction involves a nexus to the U.S., such as payment in U.S. dollars. Under U.S. law, penalties could be imposed upon us even if we purchase crude oil or natural gas through a third party, and we are not aware that the purchase was made from an entity subject to U.S. sanctions. The sanctions regime relating to the Russian energy sector is continuing to evolve, and no assurance can be given that the United States or other jurisdictions will not seek to impose penalties upon us if they believed that we had engaged in sanctionable activities. If we were to become involved in sanctions proceedings, our business reputation could be harmed and we could incur substantial costs in order to defend the proceedings or pay any resulting penalties 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 United States or in the possession or control of U.S. persons anywhere in the world. In addition, the IFCA requires the U.S. President to block the property of persons and entities within U.S. jurisdiction or control of U.S. persons if he determines that, among other things, such persons or entities are engaged in certain transactions involving the energy, shipping or shipbuilding sectors of Iran or with certain SDNs. It also requires the U.S. President to impose five or more sanctions under the ISA on a person that he determines has knowingly, on or after July 1, 2013, sold, supplied or transferred to or from Iran precious metals or certain other materials (including graphite, aluminum, steel, coal and certain software) if used for specified purposes. If the U.S. President determines that Sinopec Group, or an entity it owns or controls engages in any such activities and if the most extreme sanction under the ISA or other U.S. sanctions laws, blocking, were applied to Sinopec Group’s property, including controlled subsidiaries, Sinopec Group could be prohibited from engaging in business activities in the United States or with U.S. individuals or entities, and U.S. transactions in our securities and distributions to U.S. individuals and entities with respect to our securities could also be prohibited.
17
In addition, pursuant to the IFCA, Executive Order 13846 and other U.S. laws, the U.S. government can sanction financial institutions anywhere in the world that engage in certain Iran-related transactions. Such sanctions include prohibiting the financial institution from opening, or imposing strict conditions on maintaining, a correspondent or payable through account in the United States. The potential for financial institutions to be sanctioned for Iran related activities may impact our ability to engage in financial transactions related to Iran transactions.
General Risk Factors
The trading prices of our ADSs and H Shares have been volatile and may continue to be volatile regardless of our operating performance.
The trading prices of our ADSs and H Shares have been and may continue to be subject to wide fluctuations. The market price for our ADSs may continue to be volatile and subject to wide fluctuations in response to factors including the following:
| • | actual or anticipated fluctuations in our quarterly results of operations; |
| • | changes in financial estimates by securities research analysts; |
| • | conditions in petroleum and petrochemical markets; |
| • | changes in the operating performance or market valuations of other petroleum and petrochemical companies; |
| • | announcements by us or our competitors of new products, acquisitions, strategic partnerships, joint ventures or capital commitments; |
| • | fluctuations of exchange rates between RMB and the U.S. Dollar; and |
| • | general economic or political conditions in China or elsewhere in the world. |
In addition, the stock market in general, and the market prices for companies with operations in China in particular, have experienced volatility that often has been unrelated to the operating performance of such companies. The securities of some
PRC-based
companies that have listed their securities in the United States have experienced significant volatility since their initial public offerings in recent years, including, in some cases, substantial declines in the trading prices of their securities. The trading performances of these companies’ securities after their offerings may affect the attitudes of investors towards Chinese companies listed in the United States in general, which consequently may impact the trading performance of our ADSs, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or other matters of other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of whether we have engaged in any inappropriate activities. In particular, the global financial crisis and the ensuing economic recessions in many countries have contributed and may continue to contribute to extreme volatility in the global stock markets. These broad market and industry fluctuations may adversely affect the market price of our ADSs. 18
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, the 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). The Complex’s location was chosen because of accessibility by water and land transportation to Shanghai, a major industrial city of China, and the availability of reclaimable land. The Complex was initially under the administration of the Ministry of Textile Industry and in 1983 was placed under the administration of Sinopec.
Construction Projects
The Complex and we, as its successor, have completed six major stages of construction. The first stage of construction (1972-1976) included reclamation of land and the installation of 18 production units. The second stage of construction (1980-1986) increased the Complex’s capacity for processing crude oil and doubled its capacity for synthetic fiber production. The third stage of construction (1987-1992) primarily consisted of the installation of a 300,000 ton Rated Capacity ethylene unit, an additional crude oil refining unit and other units for the production of petrochemical products. The third stage of construction completed our transition from a synthetic fiber producer to a highly integrated producer of a wide variety of petrochemical products. The fourth stage of construction (2000-2002) mainly included the 700,000 ton Ethylene Expansion Project and Coal-Fired Power Plant Expansion Project. The fifth stage of construction (2003-2009) was mainly designed to optimize our structure and realize sustainable development, and mainly included 3,300,000t/a diesel hydrogenation unit, 1,200,000t/a delayed coking unit and other projects implemented for removing “bottlenecks” in refinery, the building of new 600,000t/a paraxylene hydrocarbon complex unit, 150,000t/a C5 segregation unit, 380,000t/a ethane unit,
etc..
The Company commenced the sixth stage of construction in 2010 (the “Phase 6 Project”) and completed the project in December 2012. The key component of the Phase 6 Project was the refinery revamping and expansion project. The Phase 6 Project also included the technology development and fine chemicals projects. The purpose of the Phase 6 Project was to improve the Company’s overall industrial structure, core competitiveness and the capability of maintaining sustainable developments. The Phase 6 Project was focused on the objective to achieve intensive utilization of natural resources and the
build-up
of a complete set of facilities, in accordance with the fundamental industrial model of integrating oil refining and petrochemical production. Through this project, the Company further enhanced its oil refining process and strengthened and expanded the Company’s core businesses while continuing to explore the development of fine chemicals and products with high value added. Over the past four decades, the Company has built up an infrastructure system to support its production needs. The Company has its own facilities to supply water, electricity, steam and other utilities and to treat waste water, as well as ocean and inland waterway wharfs and railroad and road transportation facilities.
Our Initial Public Offering and Listing
We were established as a subsidiary of Sinopec on June 29, 1993. In preparation for our initial public offering of ordinary shares, all assets and liabilities of the Complex were transferred either to us or to Sinopec Shanghai Jinshan Industrial Company (“JI”), a separate subsidiary of Sinopec. The Complex’s
non-core
businesses and assets, such as housing, stores, schools, transportation and medical services, were transferred to JI. The Complex’s core business and assets were transferred to us. The Complex then ceased to exist as a legal entity. In 1998, Sinopec was restructured into a limited liability company under the name of China Petrochemical Corporation (“Sinopec Group”). On February 25, 2000, Sinopec Group transferred its interest in us to its subsidiary, Sinopec Corp. In 1997, JI was restructured and its subsidiaries were either transferred to Sinopec or Shanghai Jinshan District. 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.
19
A Share Reform
Pursuant to regulations issued by the CSRC, we were required to obtain shareholder approval for and implement certain share reform. As a result of such share reform, all
non-publicly
tradable A Shares of the Company would be converted into publicly tradable A Shares and may be sold publicly on the Shanghai Stock Exchange subject to any applicable lock-up
period. In connection with the share reform, the Distribution Proposal regarding 2013 Interim Distribution of Cash Dividend and the Conversion of Capital Fund and Surplus Reserve into Shares of the Company (“Proposal”) was approved at the Company’s 2013 First Extraordinary General Meeting, 2013 First A Shareholders Class Meeting and 2013 First H Shareholders Class Meeting held on October 22, 2013. According to the Proposal, based on the Company’s total share capital of 7,200,000,000 shares as of June 30, 2013, RMB2,421 million of the capital surplus of the Company from its share premium account was used to fund the issue of 3.36 new bonus shares with respect to every 10 issued and outstanding shares, the surplus reserve was used to fund the issue of 1.64 new bonus shares with respect to every 10 issued and outstanding shares, and an interim cash dividend of RMB0.50 (tax included) for every 10 issued and outstanding shares was distributed to all shareholders.
In addition, Sinopec Corp. undertakes under the Proposal that it shall not, within 12 months from the date on which Sinopec Corp. becomes entitled to trade, deal in or transfer its
non-publicly
tradable shares of the Company in the market (meaning the first trading day after the implementation of the Proposal), trade such shares in the market. Also, after the expiration of the aforesaid 12-month
term, the amount of existing non-publicly
tradable shares to be disposed of by Sinopec Corp. through trading on the stock exchange shall not represent more than 5% of the total number of our shares held by Sinopec Corp. within the next 12 months, and not more than 10% within the next 24 months. Immediately upon completion of the conversion of capital surplus and surplus reserve into new shares of the Company, the total number of A Shares of the Company reached, as of December 4, 2013, 7,305,000,000, and the total amount of H Shares of the Company reached 3,495,000,000. Therefore, the Company’s total share capital consists of 10,800,000,000 shares. Sinopec Corp., being the controlling shareholder of the Company, holds 5,460,000,000 A Shares, representing 50.56% of the total share capital of the Company.
The share certificates of new H Shares issued in connection with the share reform were dispatched and the cash dividend was paid to the holders of H Shares on December 4, 2013. The dealings in the new H Shares commenced on December 5, 2013.
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. Immediately upon completion of the exercise of Share Option Incentive Scheme on February 14, 2018, the total number of A Shares of the Company reached, as of December 4, 2013, 7,328,813,500, and the total amount of H Shares of the Company reached 3,495,000,000.
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 major petrochemical companies in China based on 2021 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 2021 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.
20
Our net sales by business lines as a percentage of total net sales in each of 2019, 2020 and 2021 are summarized as follows:
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 | % | ||
| |
|
Net Sales of RMB61,560.9 million in 2020
| Synthetic fibers |
2.39 | % | ||
| Resins and plastics |
15.30 | % | ||
| Intermediate petrochemicals |
13.33 | % | ||
| Petroleum products |
48.96 | % | ||
| Trading of petrochemical products |
18.81 | % | ||
| Others |
1.21 | % | ||
| |
|
|||
| Total |
100.00 | % | ||
| |
|
Net Sales of RMB 75,888.8 million in 2021
| Synthetic fibers |
1.81 | % | ||
| Resins and plastics |
13.13 | % | ||
| Intermediate petrochemicals |
14.21 | % | ||
| Petroleum products |
55.19 | % | ||
| Trading of petrochemical products |
14.56 | % | ||
| Others |
1.10 | % | ||
| |
|
|||
| 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 2019, 2020 and 2021 are as follows:
2019 Net Sales by Region (%)
Eastern China |
Other parts of China |
Exports |
||||||||||
| Synthetic fibers |
89.32 | 10.68 | 0.00 | |||||||||
| Resins and plastics |
83.40 | 16.60 | 0.00 | |||||||||
| Intermediate petrochemicals |
93.88 | 5.42 | 0.70 | |||||||||
| Petroleum products |
85.40 | 0.55 | 14.05 | |||||||||
| Trading of petrochemical products |
48.48 | 48.26 | 3.26 | |||||||||
| Total net sales |
78.36 | 3.36 | 18.28 | |||||||||
2020 Net Sales by Region (%)
Eastern China |
Other parts of China |
Exports |
||||||||||
| Synthetic fibers |
89.85 | 10.15 | 0.00 | |||||||||
| Resins and plastics |
91.93 | 8.07 | 0.00 | |||||||||
| Intermediate petrochemicals |
94.72 | 4.06 | 1.22 | |||||||||
| Petroleum products |
91.35 | 0.24 | 8.41 | |||||||||
| Trading of petrochemical products |
61.08 | 5.61 | 33.31 | |||||||||
| Total net sales |
86.92 | 2.64 | 10.45 | |||||||||
21
2021 Net Sales by Region (%)
Eastern China |
Other parts of China |
Exports |
||||||||||
| Synthetic fibers |
91.68 | 8.32 | 0.00 | |||||||||
| Resins and plastics |
94.99 | 5.01 | 0.00 | |||||||||
| Intermediate petrochemicals |
97.12 | 1.18 | 1.70 | |||||||||
| Petroleum products |
91.80 | 0.39 | 7.81 | |||||||||
| Trading of petrochemical products |
64.54 | 3.11 | 32.35 | |||||||||
| Total net sales |
89.28 | 1.43 | 9.29 | |||||||||
Doing Business in China
As an integrated petroleum and petrochemical company operating in China, our business operations may be directly affected by new laws and regulations covering our industries that are enacted by the PRC government or the exercise of its supervisory power over our industries. The PRC government continues to exercise certain controls over the petroleum and petrochemical industry in China. These control mechanisms include periodically setting the upper limit of the retail prices for gasoline and diesel, collecting special oil income levies, deciding import and export quotas and procedures, setting safety, environmental and quality standards, and formulating policies to save energy and reduce emission. In addition, the PRC government may continue to make and adopt changes to its existing macroeconomic and industry policies for the petroleum and petrochemical industry, including further reform and improvement of pricing mechanisms of refined oil products and natural gas, which could impact the development of the petroleum and petrochemical industry in China and the production and operations of the market players in such industry. Our board of directors and management, when developing and formulating our business plan and operating strategies, are required to take into consideration those control mechanisms and industry policies, some of which may impose constraints and limitations on our business planning and strategy. We cannot assure you that these control mechanisms will not have a material adverse effect on our operations and profitability.
The Negative List, while requiring enterprises incorporated in China and operating in industries that are subject to foreign investment prohibition to obtain approval from relevant competent government authorities for their overseas securities offerings and listings, does not prohibit or impose restrictions on foreign investments in the petroleum and petrochemical industries. However, we cannot rule out the possibility that the PRC government may in the future amend and revise PRC laws and regulations in this area to advance new energy security policies. In addition, the Security Review Measures provide that a foreign investor must seek the approval of the competent PRC regulatory authorities prior to investing in key energy and resources sectors that have national security implications where such investment will result in such investor obtaining actual control over the invested enterprises. The Security Review Measures also provides that PRC regulatory authorities should enact implementing rules applicable to the acquisition by foreign investors of publicly-traded securities of listed companies that have or may have national security consequences, and pending the enactment of such implementing rules, there are uncertainties as to whether there are restrictions on open-market purchase of our publicly-traded ADSs by foreign investors under said measures. Given that Sinopec Corp., our controlling shareholder, and its concert parties currently hold approximately 50.85% of our outstanding shares, we do not expect any foreign investor will be able to obtain control over us by investing in our publicly traded H shares or ADSs.
The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in Renminbi. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of the State Administration of Foreign Exchange (“SAFE”) by complying with certain procedural requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from the operations of our PRC subsidiaries in China may be used to pay dividends to our company. However, approval from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, we need to obtain SAFE approval to use cash generated from the operations of our PRC subsidiaries to pay off their respective debt in a currency other than Renminbi (if any) owed to entities outside China, or to make other capital expenditure payments outside China in a currency other than Renminbi.
22
Meanwhile, other than approvals and filing processes required under prevailing PRC laws and regulations, our ability to transfer money or other assets out of China or enter into business transactions with
non-Chinese
parties in the ordinary course of our business has not been substantively affected by the Security Review Measures. If the PRC government, in keeping with its national security policy, promulgates new laws and regulations in the future to regulate and restrict our ability to enter into cross-border transactions or obtain foreign investments, we may be required to make adjustments to our operating and financing plans, which may in turn affect our business operations and financial position, and have material impacts on the value of our ADSs. If, in the future, foreign investments in petroleum and/or petrochemical industries in China become prohibited or restricted, investors in our ADSs may need to seek exit for their investments in accordance with applicable laws and regulations, which may result in a significant decline in the price of our ADSs and materially and adversely affect the value of the investments made by such foreign investors. 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. The PRC government has significant authority to intervene or influence our operations at any time, which could result in a material adverse change to our operations and the value of our securities.
Furthermore, given recent statements by the Chinese government indicating an intent to exert more oversight and control over offerings that are conducted overseas, although we are currently not required to obtain permission from the PRC government and have not received any denial to list on a U.S. exchange, it is uncertain whether or when we might be required to obtain permission from the PRC government to maintain our current listing or list additional securities on U.S. exchanges in the future. Even if such permission is obtained, it is uncertain whether it will be later denied or rescinded, which could significantly limit or completely hinder our ability to offer or continue to offer our securities to investors in the United States and result in a material adverse change to our business operations, and damage our reputation, and therefore causing the value of our ADSs to significantly decline or lose their value.
The PRC government has recently taken various legislative initiatives in the area of data security and to address market monopoly concerns. On December 28, 2021, the CAC and other relevant PRC governmental authorities jointly promulgated the Cybersecurity Review Measures (the “CAC Revised Measures”) to replace the original Cybersecurity Review Measures. The CAC Revised Measures took effect on February 15, 2022 and provide that (i) critical information infrastructures operators, or CIIOs, must evaluate potential risks that the deployment of any products and services will have on national security prior to the procurement of such products and services, and must apply for a cybersecurity review if such products and services affect or may affect national security, and “online platform operators” must apply for a cybersecurity review if any of their data processing activities affects or may affect national security, and (ii) if an “online platform operator” that is in possession of personal data of more than one million users intends to list its securities on a foreign stock exchange, it must apply for a cybersecurity review. However, the measures have not clarified if any
follow-on
offering of ADSs by us will be regulated as a “listing shares on a foreign stock exchange” or whether public companies already listed overseas would be subject to regular cybersecurity reviews. In addition, the NDRC, the SAMR and the CAC, among others, jointly issued the Platform Economy Opinions, which embodies legislative and regulatory anti-monopoly initiatives in relation to the “platform economy.” The Platform Economy Opinions focuses on the following aspects of the platform economy: formulation and promulgation of regulations on the prohibition of unfair online anti- competitive activities; future issuance of detailed rules applicable to data processing activities conducted by online platform enterprises; the formulation of regulations on pricing; the investigation on monopoly and unfair competition activities; and the enforcement against monopolistic agreements, abuse of dominant market position and unlawful market concentration. During the reporting period of this annual report, we have not received from the CAC, the Ministry of Public Security or its local counterparts, or any industrial regulatory authorities, any notices imposing administrative penalties against us or demanding any remedial actions be taken in relation to data security matters. We do not believe the abovementioned rules have a material impact on our capacity to operate our business in the ordinary course, obtain foreign investment, or maintain our listing overseas. To the extent any current regulation or policy promulgated by the CAC applies to us, we believe we are in full compliance. Up to now, we have not received any notices from the CAC, the Ministry of Public Security or its local counterparts that the company is a critical information infrastructures operator. Based on the advice of counsel provided by Beijing Haiwen Law Firm upon which we have relied, we do not believe that we are subject to the review of, nor require the approval of, the CAC at this time. We can provide no assurance, however, that the CAC will not take a different position, or other regulations and policies that may be issued in the future and their implementation may further require the company to comply with stricter compliance conditions, adjust the company’s business operation mode and business plan, or have a significant impact on our ability to accept foreign investment or maintain its listing in the United States or other overseas markets. 23
In light of the dynamic nature of the Chinese economy and the continuing development of the PRC legal system, the PRC authorities may promulgate new laws and regulations regulating the petroleum and petrochemical industry, or overall investment and market activities in general. Certain legislative changes are required by law to go through review and comment procedures open to certain market participants or the general public, and to the extent that such changes are made to regulate our business operation, we may have the opportunity to participate in such review and comment procedures during the policy and rule-making process. However, we cannot assure you that the rules or policies finally adopted will not adversely affect our business operations. The new regulations and policies or the amendment of current ones may at times only afford a short period for transition or adjustment, and may influence the implementation of our established business plans and operation strategies. They may also subject us to enhanced compliance scrutiny, result in more compliance costs and expenses, or otherwise adversely affect our business by requiring adjustments to our business plans and operations. For example, the PRC government has recently adopted, and may further adopt, stricter laws and regulations with respect to environmental protection and carbon emissions, which may lead to higher operating costs and expenses, and a prolonged project development timetable. As a result of those new or amended rules and policies, we may not have control over the timing or outcome of approvals of certain of our planned projects, and may encounter significant constraints on our ability to implement our business strategies, to develop or expand our business operations or to maximize our profitability, which could in turn adversely affect our operations by raising our operating costs and lowering our profits or otherwise impeding our efforts to improve our operational efficiency and profitability, and further adversely affect the market expectations of our business operations. Depending on the extent to which our operations are so affected, there may be a material change in our operations and the value of our ADSs.
The occurrence of any, some or all of the legal and operational risks described above and discussed under the heading “
Risks Related to Doing Business in China
” under Item 3.C of this Annual Report could cause the value of our securities to significantly decline or lose their value. Commission-Identified Issuer
The PCAOB issued a HFCA Act Determination Report to the SEC on December 16, 2021, notifying the SEC of its determination that it is unable to inspect or investigate completely registered public accounting firms headquartered in China because of a position taken by one or more authorities in China (the “PCAOB PRC Determination”). Our auditor is subject to the PCAOB PRC Determination. As a result, our ADSs may be delisted or prohibited from trading in the trading market in the United States under the HFCA Act, the occurrence or threatened occurrence of which may materially affect the value of our securities.
over-the-counter
On December 2, 2021, the SEC adopted amendments to finalize rules implementing the submission and disclosure requirements in the HFCA Act. These rules apply to certain registrants, or the Commission-Identified Issuers, that the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that the PCAOB has determined it is unable to inspect or investigate completely because of a position taken by an authority in the foreign jurisdiction. Because our auditor is subject to the PCAOB PRC Determination, we have been identified as a Commission-Identified Issuer for the fiscal year ended December 31, 2021.
Under the final rules enacted by the SEC pursuant to the HFCA Act, Commission-Identified Issuer securities will be delisted and/or have a trading halt imposed as soon as practicable after it is conclusively classified as a Commission-Identified Issuer for three consecutive years. However, on June 22, 2021, the U.S. Senate passed a bill which, if passed by the U.S. House of Representatives and signed into law, would reduce the number of consecutive
non-inspection
years required for triggering the prohibitions under the HFCA Act from three years to two years. Furthermore, the SEC may propose additional rules or guidance that could impose more stringent disclosure requirements or more unfavorable delisting and/or trading prohibition timeline under the HFCA Act regime. On August 26, 2022, the PCAOB signed a Statement of Protocol with the China Securities Regulatory Commission and the Ministry of Finance of the People’s Republic of China relating to inspections and investigations by the PCAOB of audit firms based in mainland China and Hong Kong. PCAOB inspections under the Statement of Protocol are currently expected to commence in mid-September 2022, at which time the PCAOB will have an opportunity to determine if it is receiving the complete access to audit work papers and personnel required under the HFCA Act. The Company and/or its auditor will be required to provide materials and information in accordance with the Statement of Protocol. The PCAOB is required to reassess its determinations with regard to inspecting and investigating in mainland China and Hong Kong by the end of 2022.
As stated above, our auditor is subject to the PCAOB PRC Determination and as a result we are classified as a “Commission-Identified Issuer.” Therefore, investors may lose confidence in our financial statements and reporting, the price of our securities may be adversely affected and our securities could be delisted or prohibited from being traded under the HFCA Act. Further, uncertainties relating to potential legislative changes in this area could cause the market price of our ADSs to be materially affected and our securities to be delisted or prohibited from trading earlier than the timeframe that is currently provided under the HFCA Act. In the event of the delisting of our securities or the prohibition of our securities from trading, investors in our ADS will need to dispose of their ADSs or exchange their ADSs for our H shares on applicable terms and conditions and may suffer significant loss on their investment. If any investor fails to exchange any of our ADSs for our H Shares for any reason, such ADSs may significantly decline in value or lose their value due to their loss of liquidity on the NYSE.
over-the-counter
24
Transfer of Cash through Our Organization
Sinopec Shanghai Petrochemical Co Ltd, is a joint stock limited company incorporated in China, and operates its business in China in accordance with the scope of business as set forth in its articles of association. The Company directly and indirectly owns equity interests in its PRC subsidiaries, and there is no variable interest entity within the group. All cash flows among the Company, the parent company and the subsidiaries represent equity contributions, dividends and distributions, loans and other cash flow items underlying business activities made during the ordinary course of their business.
The Company is not a holding company established solely to hold equity interest in its operating subsidiaries but an operating company and independently generates revenue from its business operations. The Company is not solely relying on dividends and distributions declared and paid by its subsidiaries to satisfy its needs of funding. Having considered the status of its business operation and financial management, the Company has established a centralized treasury system within the group with the aim to effectively coordinate the fund and budget management at group level based on consolidated funding and budgeting regime, for the purpose of maintaining a sufficient cash reserve for the Company while optimizing funding management efficiently. As of December 31, 2021, the Company directly owns more than 90% of total consolidated assets and more than 95% of the consolidated cash and cash equivalents of the group. For the year ended December 31, 2021, the Company directly generated more than 85% of the total consolidated revenue of the group. Therefore, the Company can continue to generate sufficient funding for its business operations. On the other hand, the sales from the Company’s business include inter-segment sales in the ordinary course of business, which are eliminated during the preparation of its consolidated financial statements and therefore will not be reflected under the line items of its consolidated revenues. As a result, the Company believes the preparation of cash flow and transfer of assets between the company and its subsidiaries is not meaningful to investors.
day-to-day
As disclosed on pages 28 to 29 of the Original Filing, our parent company, China Petroleum & Chemical Corporation (“Sinopec Corp.”) is the largest integrated petroleum company in China. Any cash flow and transfer of assets between our company and our parent company mainly involves (1) distribution of dividends based on shareholding and (2) funds transfer in the normal course of business. As disclosed on page 4 of the Form
20-F,
our parent company has from time to time provided a variety 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. These businesses are carried out on normal commercial terms and are in compliance with the relevant regulatory requirements in all material respects, and therefore the corresponding fund flows are not subject to any additional restrictions. Transactions between the Group and Sinopec Corp., its subsidiaries and joint ventures have been separately disclosed in Note 33 Related-party transactions of Item 17. Financial Statements. The current foreign exchange regulations have significantly reduced the government’s foreign exchange control over transactions under the current account, including trade, services and dividend payments involving foreign exchange transactions. Foreign exchange transactions under capital account (including payment of principal of foreign currency debt) are still subject to strict foreign exchange control and need to be approved by the State Administration of foreign exchange. Such restrictions may affect the company’s ability to obtain foreign exchange through debt or equity financing. The Chinese government has publicly announced its plan for the free convertibility of RMB in the future. However, the company cannot predict whether the government will continue to adopt the current foreign exchange management system and when it will allow the free convertibility of RMB. The company’s income denominated in foreign currency and the exchange of RMB to foreign currency are the main sources of the company’s foreign currency funds. Up to now, the company’s currency exchange has not been significantly restricted, and the company’s ability to carry out daily operations, dividend payment and investment plans has not been significantly affected; The foreign currency currently held by the company is also sufficient to meet the needs of performing the financial obligations denominated in foreign currency. If the company is subject to more stringent foreign exchange control measures in the future, and therefore cannot obtain the required foreign currency through exchange in time, the company’s ability to pay financial obligations denominated in foreign currency according to the business plan may be significantly affected. In the case that the company cannot further obtain sufficient foreign currency funds, the company may therefore breach some foreign-related agreements and fail to pay dividends according to the plan, or unable to further carry out overseas business and investment activities.
25
Dividend Distribution Policy
According to the articles of association, our board of directors will determine the payment of dividends, if any, with respect to our shares on a per share basis. Any final dividend for a financial year shall be subject to shareholders’ approval. The board may declare interim and special dividends at any time under general authorization by a shareholders’ ordinary resolution. A decision to declare or to pay any dividends in the future and the amount of any dividends will depend on our results of operations, cash flows, financial condition, the payment by our subsidiaries of cash dividends to us, future prospects and other factors which our directors may determine to be important.
For holders of our H shares, cash dividend payments, if any, shall be declared by our board of directors in Renminbi and paid in Hong Kong dollars. The depositary will convert the Hong Kong dollar dividend payments and distribute them to holders of ADSs in US dollars, less expenses of conversion.
The Company may distribute dividends in the following forms: cash, shares or other forms provided by laws, administrative rules, regulations of competent authorities and regulatory provisions in the place where the Company’s shares are listed. The Company shall give priority to the distribution of dividends in cash. The Company may make interim dividends distribution. The Company shall distribute cash dividends when the Company’s net profit and retained earnings, in separate financial statement, are positive and the Company has adequate cash inflows over the requirements of cash outflows of operation and sustainable development. The cash dividends per annum should not be less than thirty percent of the net profit of the Company in the current year. Dividends in the form of shares will be distributed to the depositary and, except as otherwise described in the Deposit Agreement, will be distributed by the depositary in the form of additional ADSs, to holders of ADSs. The Company will be required to, pursuant to applicable PRC laws and regulations, withhold
10-20%
dividend tax (based on the status of the shareholder) for dividends paid to holders of H shares (including ADSs representing such H shares), and make filing pursuant to applicable foreign exchange control procedures for the payment of such dividends. In addition, ADS holders will be required to pay applicable service fees in relation to the distribution of cash dividends pursuant to the Deposit Agreement for the Company’s American Depositary Shares. In addition, foreign exchange transactions under the capital account, including principal payments in respect of foreign currency-denominated obligations, continue to be subject to significant foreign exchange controls and require the approval of SAFE. While we have not been denied of our applications for foreign exchange for the payment of our dividends, we cannot rule out the possibility that such control and limitation could affect our ability to obtain foreign exchange to pay cash dividends declared on our H shares (including ADSs representing our H shares). Consequently, we cannot assure that foreign investors’ investment will not be subject to foreign exchange payment risks as a result of these foreign exchange control measures. See “Legal, Regulatory or Political Risk Factors—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.”
Since the Company’s shares were listed in Hong Kong and the U.S. in 1993, the Company has distributed dividends to its shareholders over 25 times, and has never experienced any restrictions.
During the reporting period of this annual report, the company used its own funds to distribute a final dividend of RMB 0.1 per share (tax included). For the financial year ended December 31, 2021, dividends of RMB 0.1 per share (tax included) were distributed throughout the year. For
H-share
holders, cash dividends are declared in Renminbi and paid in Hong Kong dollars. After receiving dividends in Hong Kong dollars, the depositary bank converts them into US dollars for distribution to holders of ADS. According to the relevant laws and regulations of China, the company shall withhold and pay 10% of the dividend tax when distributing dividends to the ADS holders who are paid through the depositary bank. In addition, the ADS holders shall bear the service fees related to cash dividend distribution in accordance with the deposit agreement. In 2021, each ADR (equal to 100 H shares) received a dividend of US $1.56. After deducting the 10% dividend tax withheld and the deposit bank’s distribution fee of US $0.21/ADS for each dividend, the ADS holders actually received US $1.35/ADS. In 2021, the aggregate dividend paid to the ADS holders through the depositary bank was about US $436.32m.
Permits and Approvals
We are required to obtain permits and approvals for the operation of our business pursuant to applicable PRC laws, regulation and industrial policies. The following chart sets forth our current licenses, allowing us to operate our business in certain places and industries:
26
| License |
Underlying Business/Activities |
Competent/Approving Authority | ||
| Port Operation License | Providing wharf facilities, storage, etc. for ships | Authorities of transportation | ||
| Newspaper Publishing License | Newspaper publishing | Authorities of press and publication | ||
| Power Business License | Engaging in power business | Authorities of energy management | ||
| Water-taking License | Using water resource | Authorities of water management | ||
| Radiation Safety License | Using specific radioactive sources | Authorities of environment protection management | ||
| Pollutant discharge License | Discharging pollutants into the environment | Authorities of ecological environment management | ||
| Work Safety License | Safe production activities | Authorities of Work Safe Regulation and Supervision (Ministry of Emergency Management and its counterparts) | ||
| Safety Production License for Hazardous Chemicals | Production of hazardous chemicals | Authorities of Work Safe Regulation and Supervision (Ministry of Emergency Management and its counterparts) | ||
| National Industrial Product Production License | Industrial product production | Authorities of quality and technology management | ||
| Mobile Pressure Vessel Filling License | Low pressure liquefied gas filling | Authorities of Work Safe Regulation and Supervision (Ministry of Emergency Management and its counterparts) | ||
| Shanghai Port Shoreline use License | Using shoreline | Authorities of port management |
We have obtained all approvals and permits that are material for our business operations under the PRC laws and regulations, and we have not been subject to any material administrative penalties from the PRC regulatory authorities nor have any permissions or approvals ever been denied. However, we cannot rule out the possibility of new requirements for approvals and permits in the future. If we fail to obtain relevant approvals and permits in time, our business operations of may be adversely affected. In addition, pursuant to the Special Regulations of the State Council concerning Offering and Listing of Shares Overseas by Companies Limited by Shares promulgated in 1994, currently in effect, as a PRC company with equity securities listed in the PRC and the U.S., we are required to obtain the prior approval of the China Securities Regulatory Commission (the “CSRC”) for any public offering of equity securities to foreign investors. In addition, we may be subject to legal liabilities under the PRC Securities Law if our offering or the trading of our securities overseas is deemed to “disrupt the order of PRC domestic market and harm legitimate rights and interests of PRC domestic investors”. We have received from the CSRC the approval for our public offerings of equity securities in the past. We are required to continue to comply with the provisions of the PRC Securities Law and we remain subject to the supervision of the PRC regulatory authorities. However, we cannot assure you that we can timely receive such approval if we wish to make any new equity offerings in the future.
If we fail to obtain any requisite approvals with respect to future offerings of our equity securities to foreign investors, or if we inadvertently conclude that such approvals are not required, our ability to execute our financing and equity offering plans may be significantly limited or completely hindered. In the absence of alternative sources of financing, this could impede our efforts to improve our liquidity or expand our business operation, and we cannot assure you that there will not be material negative impacts on our financial condition and result of operations, or a significant decline in the value of our ADSs. Furthermore, we cannot assure you that PRC authorities will not promulgate new laws to further regulate the listing of our ADSs, or impose new compliance obligations for us to maintain the listing of our ADSs. Certain of our actions in relation to our overseas listing may also constitute a violation of PRC Securities Law or other relevant laws, and as a consequence, subject us to penalties, including without limitation fines, limitations on our ability of financing activities, or the suspension or termination of certain aspects of our business operations, which may in turn result in substantial difficulty for us to maintain our listing overseas.
Pursuant to the Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments), and the Administrative Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments) issued by the CSRC on December 24, 2021, collectively, the Overseas Listing Rules, the abovementioned Special Regulations of the State Council concerning Offering and Listing of Shares Overseas by Companies Limited by Shares will be replaced upon the effectiveness of the Overseas Listing Rules. The Overseas Listing Rules provides that our overseas refinancing activities may be subject to a filing process within three business days after their completion. However, it is uncertain when and in what form the Overseas Listing Rules will be enacted. If we fail to obtain any requisite approvals with respect to future offerings of our equity securities to foreign investors, or if we inadvertently conclude that such approvals are not required, our ability to execute our financing and equity offering plans may be significantly limited or completely hindered. In the absence of alternative sources of financing, this could impede our efforts to improve our liquidity or expand our business operations, and we cannot assure you that there will not be material negative impacts on our financial condition and results of operations, or a significant decline in the value of our ADSs. Furthermore, we cannot assure you that PRC authorities will not promulgate new laws to further regulate the listing of our ADSs, or impose new compliance obligations for us to maintain the listing of our ADSs. Certain of our actions in relation to our overseas listing may also constitute a violation of PRC Securities Law or other relevant laws, and as a consequence, subject us to penalties, including without limitation, fines, limitations on our ability of financing activities, or the suspension or termination of certain aspects of our business operations, which may in turn result in substantial difficulty for us to maintain our listing overseas. Any measures taken by the PRC authorities to regulate or exert more control over securities offerings conducted overseas and foreign investments in China-based issuers may limit or hinder our ability to offer or continue to offer securities to investors, and the price of our ADSs may decline significantly, leading to a material adverse effect on the value of investments in our ADSs by investors.
27
Business Strategies
Our development objectives are to evolve itself into a “leading domestically, first-class globally” energy and chemical and new material enterprise. The key components of the Company’s development strategy are as follows: to take into account both low cost and differentiation, and to focus on both scale and refinement. The Company focuses on value and market orientation, creativity, talents as the backbone of the Company, the emphasis of environment and low carbon emissions and integrated development, to realize low cost and large scale of the upstream, and high value- added and refinement of the downstream. The Company will give full play to its advantages of a wide product chain, diversified products and close monitoring of the market to enhance competitiveness. Under the guidance of the above development strategy, according to the requirements of North- South Transformation Policy raised by Shanghai Government, the Company will (a) actively promote the transition from oil refining to chemical industry, the transition from chemical industry to materials, the transition from materials to new materials such as carbon fiber, and take polyester, polyolefin, elastomer, and new materials which should help the North-South transformation and the construction of Carbon Valley Green Bay and local industrial parks in Jinshan District. The Company will seek to develop wind, light, fire, and biological integrated power generation and green hydrogen production technology, with a view towards realizing the energy structure transformation from fossil energy to fossil energy combined with renewable energy to achieve energy saving. Through diversified industrial linkage development and cluster agglomeration, the Company plans to build an industrial base with green energy, fine chemical, and
high-end
products, and the transition from parks to ecology, (b) carry out comprehensive technological transformation and quality upgrades, and (c) further optimize refining product structure to better meet the market needs. The Company will seek to strengthen the core industries of mid-to-high-end
C-5
downstream fine chemical new materials as breakthrough and extension for the mid-to-high-end
high-end
material on the north bank of Hangzhou Bay with world-scale and first-class competitiveness. In 2022, Sinopec Group will continue to adhere to the market-oriented, efficiency-centered strategy, consolidate the foundation of environmental protection, optimize production and operation, improve corporate governance efficiency with a focus on building talent teams, achieve high-quality development of the Company and strive to create better economic benefits.
In 2022, the Company is looking to process a total of 13.65 million tons of crude oil and produce a total of 7.57 million tons of refined oil, 0.8252 million tons of ethylene, 0.666 million tons of paraxylene, 0.431 million tons of polyethylene, 0.453 million tons of polypropylene, 0.103 million tons of ethylene glycol, and 0.02 million tons of acrylic fiber. To achieve our business objectives in 2022, we intend to pursue the following strategies:
| • | Focus on green and clean energy for consolidating environmental protection |
The Company will seek to comprehensively promote the establishment of the HSSE management system and establish and improve the PDCA closed-loop management mechanism. Under the key theme of “identifying major risks, eliminating major hidden dangers, and preventing major accidents”, the Company seeks to strengthen risk management and control in key areas and key links, and continue to tighten contractor safety management and control. Furthermore, the Company will endeavor to continue to improve employees’ safety awareness and skills and promote the creation of a culture that values safety. The Company will also emphasize implementing a green and clean strategy and strengthen carbon emission management to realize stable and standard- meeting emission of waste gas and wastewater to ensure that VOCs’ average concentration at the boundary was less than 100 micrograms/m3 and strengthen carbon emission management. The Company also seeks to make a good effort in the supply of anti- epidemic materials, in dealing with emergencies and the workforce’s stability to ensure the safety and physical and mental health of employees, and to strengthen employee safety education and comprehensively improve employee health management standards.
| • | Focus on improving quality and efficiency through the continuous optimization of production and operation |
28
The Company intends to optimize its overall planning for operations shutdown and
start-up
and strengthen the plant’s management and control during the shutdown and start-up
phase. The Company shall also seek to improve its technical and economic indicators by improving safety management and its key control and maintenance plans. The Company also intends to optimize its systems to further improve the accuracy and reliability of crude oil comparison and selection, production and operation, and product structure optimization. The Company shall also further expand varieties in crude oil procurement and enhance deployment flexibility and will endeavor to reduce crude oil procurement costs. Furthermore, the Company strives to accurately grasp market conditions and adjust marketing strategies and product structures to maximize benefits. The Company shall also emphasize flexibly adjusting the yield of refined oil products and diesel-gasoline ratio, raise the total volume of high-grade gasoline, and develop new channels for exporting gasoline and jet fuel. The Company shall also seek to take advantage of market opportunities and devote efforts in developing new products and specialized materials. The Company intends to optimize its public projects and promote the optimization of its storage and transportation logistics system, and optimization its oil refining business. As a significant step forward, the Company is planning to implement full process safety management while strengthening its process stability and equipment integrity management, and continuously upgrade the automation and intelligence of its equipment. The Company will exert strict control of “Three Smalls” and eliminate “Three Nons”. Special competitions on the reliability of production equipment will continue to take place, while the “The Day of Excellence” activities are continuing to mobilize employees to eliminate safety risks in time, avoid accidents, and strengthen the smooth separation of the equipment. | • | Advance reformations further and raise efficiencies in corporate governance |
With a focus on its strategic planning, the Company seeks to explore its path in organizational reorganization along the business or industrial chain to establish an organizational system which is in line with the management scope. The Company plans to reorganize its organizations and streamline work processes as well as integrate positions, and focus on key tasks in the reform, such as the reformation of “three systems”, the reformation of its scientific research regime, and a sound market-oriented operating system. The Company shall continue to promote its process management to improve the efficiency of business collaboration between different departments. The Company shall also strive to strengthen the management of investment enterprises, and incorporate wholly-owned and controlling subsidiaries into the Company’s integrated management system. The Company shall also fully carry out benchmarking and upgrading, and strengthen cost target management across its entire staff, while further tapping potentials and raise efficiency, with strict control on various expenses and expenditures. The Company also plans to integrate business and finance, and transformation from accounting finance to management finance. The Company also intends to implement transparent management, optimize business processes, improve management efficiency and quality, and makes good use of information technology to quickly and effectively convey the Company’s decisions and plans to, and deployment at, the grass-roots level. The Company is also establishing a retroactive investigation mechanism designed to ensure all the employees are clear about the goals and responsibilities and provided with proper motivation.
| • | Focus on creativity-driven development so as to realize high-quality corporate development |
In accordance with the “3060” national carbon emission requirement (“3060” refers to having carbon dioxide emissions peak by 2030 and achieving carbon neutrality by 2060), the Company’s ultimate goal is to ensure “zero carbon emissions” and guarantee coordination of carbon reduction and transformation and development. The Company promoted the construction of large ton carbon fiber,
hundred-ton
high performance carbon fiber pilot plant project, 3rd circuit 220 kV power supply line project. We will speed up the construction of hydrogen energy demonstration projects and launch the thermoplastic elastomer project. The Company shall emphasize tackling key core technologies such as carbon fiber, increase investment in research and development, and improve the collaborative innovation mechanism. The Company shall also explore opportunities in differentiated high value-added products, and strive to build a new material industry cluster with the carbon fiber industry as its core and utilize polyester, polyolefin, elastomer, C5 downstream fine chemical new materials as the keys to seek breakthroughs and developments. The Company also promotes the construction of a data governance system and the application of advanced control and optimization technologies, and deepens the application of intelligent security by promoting the construction of an integrated platform for intelligent marketing and accelerating the advancement of digital transformation. | • | Focus on team building and cementing solid foundation for development |
The Company shall further empower the Company through recruiting talents and improve the recruitment of new graduates. The Company is devising a five-year training program for new college graduates and building a talent team with engineering thinking. The Company shall also clarify its employment orientation and evaluate the officer and talent selection and appointment mechanism. The Company continues to explore channels to select and appoint officers by introducing experienced talent through the selection and appointment of professional managers to nurture more young officers. The Company is also looking to uphold the pioneering spirit of the base-level and the public and improve staff medical services and improve medical protection standards to raise its staff’s happiness index while further enhancing the cohesion of the staff team.
29
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 2020 and 2021 by our major products.
Production |
Sales |
|||||||||||||||||||||||
Products |
2021 (10,000 tons) |
2020 (10,000 tons) |
Year-on-year change |
2021 (10,000 tons) |
2020 (10,000 tons) |
Year-on-year change |
||||||||||||||||||
| Diesel Note1 |
338.80 | 398.21 | -14.92 | % | 338.10 | 398.61 | -15.18 | % | ||||||||||||||||
| Gasoline |
339.64 | 327.30 | 3.77 | % | 340.23 | 328.18 | 3.67 | % | ||||||||||||||||
| Jet Fuel Note1 |
118.45 | 112.45 | 5.34 | % | 99.57 | 99.43 | 0.14 | % | ||||||||||||||||
| Paraxylene |
49.63 | 66.24 | -25.08 | % | 46.53 | 45.64 | 1.95 | % | ||||||||||||||||
| Benzene Note2 |
30.67 | 37.21 | -17.58 | % | 29.99 | 33.14 | -9.51 | % | ||||||||||||||||
| Ethylene Glycol |
15.07 | 23.67 | -36.33 | % | 4.14 | 12.73 | -67.48 | % | ||||||||||||||||
| Ethylene Oxide |
33.56 | 31.30 | 7.22 | % | 32.78 | 30.53 | 7.37 | % | ||||||||||||||||
| Ethylene Note2 |
71.28 | 82.52 | -13.62 | % | — | — | — | |||||||||||||||||
| Polyethylene |
49.62 | 58.12 | -14.62 | % | 49.63 | 57.85 | -14.21 | % | ||||||||||||||||
| Polypropylene |
45.59 | 49.29 | -7.51 | % | 42.26 | 45.16 | -6.42 | % | ||||||||||||||||
| Polyester Pellet Note2 |
34.34 | 33.99 | 1.03 | % | 30.24 | 29.33 | 3.10 | % | ||||||||||||||||
| Acrylic |
7.10 | 11.55 | -38.53 | % | 7.32 | 11.69 | -37.38 | % | ||||||||||||||||
| Polyester Staple |
2.62 | 3.37 | -22.26 | % | 2.73 | 3.40 | -19.71 | % | ||||||||||||||||
Notes: 1. Excludes sales volume of proceeds on order.
2. The difference between production and sales are internal sales.
The above-mentioned sales volume does not include the trading of our petrochemical products.
The following table shows our 2021 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 | 1.52 | Cotton type fabrics, wool type fabrics | ||
| Others | 0.07 | |||
Sub-total |
1.81 |
|||
| RESINS AND PLASTICS | ||||
| Polyester chips | 2.22 | Polyester fibers, films and containers | ||
| Polypropylene pellets | 4.80 | Films, ground sheeting, wire and cable compound and other injection molding products such as housewares and toys | ||
| Polyethylene pellets | 4.19 | Films or sheets, injection molding products such as housewares, toys and household electrical appliances and automobile parts | ||
| Polyvinyl alcohol (“PVA”) | 0.01 | PVA fibers, building coating materials and textile starch | ||
| Others | 1.91 | |||
| Sub-total |
13.13 |
|||
| INTERMEDIATE PETROCHEMICALS | ||||
| Ethylene | 0.00 | Feedstock for polyethylene, ethylene glycol, polyvinyl chloride and other intermediate petrochemicals which can be further processed into resins, plastics and synthetic fiber. | ||
| Ethylene oxide | 2.91 | Intermediate products for the chemical and pharmaceutical industry, including dyes, detergents and adjuvant | ||
| Benzene | 2.42 | Intermediate petrochemical products, styrene, plastics, explosives, dyes, detergents, epoxies and polyamide fiber |
30
| Paraxylene | 3.44 | Intermediate petrochemicals and polyester | ||
| Butadiene | 0.82 | Synthetic rubber and plastics | ||
| Ethylene glycol | 0.25 | Fine chemicals | ||
| Others | 4.37 | |||
| Sub-total |
14.21 |
|||
| PETROLEUM PRODUCTS | ||||
| Gasoline | 22.70 | Transportation fuels | ||
| Diesel | 18.13 | Transportation fuels and agricultural machinery fuels | ||
| Jet Fuel | 4.83 | Transportation fuels | ||
| Others | 9.53 | |||
| Sub-total |
55.19 |
|||
| Trading of petrochemical products | 14.56 | Import and export trade of petrochemical products (purchased from domestic and overseas suppliers) | ||
| Others | 1.10 | |||
| 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 | |||||
| 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 | International crude oil price, supply-demand balance |
31
| products such as resins, plastics and synthetic fibres | ||||||||||
| 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 |
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.
32
Intermediate Petrochemicals
Ethylene
Propylene
Vacuum gas oil
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
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
Polypropylene
33
Polyethylene
low-density
polyethylene (“LDPE”) using the kettle type process, and the other unit produces all density polypropylene products using the Borstar bimodal process. PVA
Raw Materials
In 2021, 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 2021 accounted for 82.94% 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. We further optimized the structure of our finished oil products, achieving a diesel to gasoline ratio of 0.99:1 for 2021. We strengthened our tracking of the margin contribution of our units, and continuously carried out daily profitability measurement for each product so as to promptly detect changes in profitability, quickly adjust the load and running schedule of our production units and afford priority to the production of products with high profitability and market demand.
Crude Oil
Crude oil is our primary raw material and the most significant raw material we purchase from outside sources. In 2021, crude oil accounted for approximately 58.12% of our consolidated annual cost of sales (68.26% of parent company annual cost of sales). Accordingly, the supply and price of crude oil are key factors in determining our profitability.
Supply and Transportation
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 13.65 million tons of imported crude oil in 2022. 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 2022. We believe that the mix of crude oil feedstock currently available is satisfactory for our 2022 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
In 2021, our crude oil was sourced as follows:
| Domestic offshore crude oil |
1.05 | % | ||
| Imported crude oil |
98.95 | % | ||
| |
|
|||
| Total: |
100.00 | % | ||
| |
|
34
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. The crude oil for our 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
sub-contract
basis). Until March 2001 the Chinese government implemented a unified pricing system for crude oil. Each month, the National Development and Reform Commission (“NDRC”) established an indicative price for each grade of domestic onshore crude oil based on comparable international market prices, inclusive of any duties that would have been imposed had the oil been imported. The actual price for domestic onshore oil would be such indicative price plus a surcharge. This surcharge was determined by China National Petroleum Corporation and Sinopec Group to reflect any transportation and other miscellaneous costs that would have been incurred in having the oil delivered to various refineries. Beginning March 2001, NDRC ceased publishing an indicative price. Instead, the indicative price for domestic onshore oil has been calculated and determined directly by China National Petroleum Corporation and Sinopec Group based on the principles and methods formerly applied by NDRC.
On January 13, 2016, NDRC issued the (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.
Circular on Several Issues on Further Improving the Pricing Mechanism of Refined Oil
We purchase crude oil through Sinopec Corp. and its affiliates from the sources selected and in the quantities confirmed by the Company at market prices. On this basis, we believe that changes in crude oil prices should not have a material effect on our competitiveness with other domestic producers. Nevertheless, any increase in the price of crude oil could have an adverse impact on our profitability to the extent that we are unable to pass cost increases on to our customers.
In 2021, the price of international crude oil market fluctuated and rose. The annual average price of West Texas Intermediate (WTI) crude oil was $68.21/barrel, an increase of 74.1% over the previous year; the average price of Brent crude oil was $70.89/barrel, an increase of 70.0%; and the average price of Dubai crude oil was $69.23/barrel, an increase of 64.1%.
As of December 31, 2021, Sinopec Group had processed a total of 13.7644 million tons of crude oil (of which 404.7 thousand tons were processed on order), indicating a decrease of 6.18%, mainly due to the implementation of the largest overhaul in the Company’s history this year. The cost of crude oil processing for the whole year of 2021 was RMB3,232.29/ton, representing an increase of RMB 852.27 /ton or 35.81% from the same period last year. The annual crude oil processing total cost increased by RMB9.222 billion from the same period last year or 27.15%, accounting for 58.12% of the total cost of sales.
year-on-year
Coal
Most of the coal used for electricity generation is purchased through a unified system of procurement by Sinopec Corp.. 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 company-owned wharf and conveyer system. Our cost is primarily dependent on coal price and transportation charges.
We expect that our total requirement for coal to generate electricity in 2022 will be approximately 2 million tons. In 2021, we consumed approximately 1.7521 million tons of coal, a decrease of 138,700 tons from 2020 of 1.8908 million tons.
35
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 2021, the total cost of these materials accounted for approximately 15.73 % 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 2021 that were subject to planned distribution by Sinopec Group, sales by agents and sales based on our own discretion accounted for 59.86%, 32.09% and 8.05%, respectively, of the total sales volume in 2021.
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 2021. In general we managed to maintain a stable correlation between production and sales in 2021.
Product breakdown
Synthetic Fibers
end-users.
List of customers each accounting for more than 20% of the sales in this segment: Shaoxing Xiangyu Green Packing Co., Ltd: 27.44%. List of customers each accounting for more than 10% of the sales in this segment: China SDIC International Trade Co., Ltd: 10.81%. Resins and Plastics
Intermediate Petrochemicals
p-xylene,
ethylene oxide was relatively high in 2021. Shanghai SECCO Petrochemical Company Limited (“SECCO”) is the principal outside consumer of our petroleum benzene. In 2021, we sold 0.1582 million tons of petroleum benzene to SECCO, representing 52.75% of our total 2021 production of such product. List of customers each accounting for more than 10% of sales in this segment: SECCO: 52.75%; Sinopec Shanghai Gaoqiao Petrochemical Co., Ltd.: 22.16%; Zhejiang Baling Hengyi Caprolactam Co., Ltd.: 14.27%. Jiaxing Petrochemical Company Limited, Oriental Petrochemical (Shanghai) Corporation and Zhejiang Dushan Energy Co., Ltd. are the outside consumers of our paraxylene. In 2021, we sold 0.254 million tons, 0.153 million and 0.059 million tons of paraxylene, representing 54.62%, 32.77% and12.61% of our total 2021 production of such product, to Jiaxing Petrochemical Company Limited, Oriental Petrochemical (Shanghai) Corporation respectively and Zhejiang Dushan Energy Co., Ltd., at prices mutually agreed upon by the relevant parties.
Petroleum Products
36
Trading of Petrochemical Products
Major Suppliers and Customers
Sinopec Group’s top five suppliers in 2021 were China International United Petroleum & Chemical Co., Ltd., Sinochem Oil Co. Ltd., SECCO, SINOPEC East China Company, and Sinopec Commercial Reserve Co., Ltd.. Total procurement costs involving these five suppliers, which amounted to RMB 48,010.6 million, accounted for 69.01 % of the total procurement costs of Sinopec Group for the year. Among the top five suppliers, the purchase amount of related parties was RMB44,075.2 million, accounting for 63.36% of the total annual purchase amount. The procurement from the largest supplier amounted to RMB 35,378.0 million, representing 50.85 % of the total costs of purchases by Sinopec Group for the year.
Sinopec Group’s top five customers in 2021 were SINOPEC East China Company, China International United Petroleum & Chemical Co., Ltd., SECCO, Sinopec Sales Company Limited and Sinopec Refinery Sales Co., Ltd.. Total sales to these five customers amounted to RMB 57,169.8 million, representing 64.09% of Sinopec Group’s total turnover for the year. Among the sales of the top five customers, the sales of related parties was RMB57,169.8 million, accounting for 64.09% of the total annual sales. Sales to Sinopec Group’s largest customer amounted to RMB44,565.3 million, representing 49.96% of Sinopec Group’s total turnover for the year.
To the knowledge of the Board, among the suppliers and customers listed above, Shareholders and Directors of the Company and their close associates have no interest in Sinochem Oil Company Limited; SECCO is an associate company of the Company; China International United Petroleum & Chemical Co., Ltd., East China Branch of Sinopec Sales Company Limited, East China Branch of Sinopec Sales Co., Ltd., Sinopec Sales Company Limited and Sinopec Refinery Sales Co., Ltd. are subsidiaries of Sinopec Corp., a controlling shareholder of the Company. Sinopec Commercial Reserve Co., Ltd. is a subsidiary of Sinopec Group, the ultimate 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. In 2019, 2020 and 2021, approximately 44.81%, 43.64% and 47.01% 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 90.77% of our products in volume were sold in 2021. 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 2021, 89.28% 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.
37
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 2021, we had an approximate 0.23% share of total domestic polyester and acrylic consumption while imports had an approximate 0.86% share.
The following table summarizes the competitive position of our principal synthetic fibers according to domestic sales in 2021.
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 |
13.85 | 2 | Jilin Province | 36.12 | 14.62 | |||||||||||||||
Sources: Zhuochuang Information (
www.chem99.com
). Resins and Plastics
38
In 2021, we had an approximate 1.49% share of total domestic resins and plastics consumption while imports had an approximate 21.28% share. The following table summarizes the competitive position of our principal resins and plastics products according to domestic sales in 2021.
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 |
1.78 | 4 | Jiangsu Province | 4.86 | 2.14 | |||||||||||||||
| Polyethylene |
1.34 | 24 | Guangdong Province | 2.04 | 39.45 | |||||||||||||||
| Polypropylene |
1.49 | 31 | Zhejiang Province | 3.40 | 10.43 | |||||||||||||||
Sources: Zhuochuang Information (
www.chem99.com
). Intermediate Petrochemicals
In 2021, we were one of the largest sellers of intermediate petrochemicals in China, holding an approximate 1.32% share of total domestic consumption, while imports had an approximate 16.64% share of domestic consumption. Ethylene glycol, paraxylene, benzene and butadiene are our major intermediate petrochemical products. In 2021, we were a major producer of ethylene, paraxylene and benzene in China. The following table summarizes the competitive position of our principal intermediate petrochemicals according to domestic sales in 2021.
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 |
0.73 | 8 | Zhejiang Province | 5.85 | 41.06 | |||||||||||||||
| Paraxylene |
1.42 | 13 | Zhejiang Province | 11.32 | 39.04 | |||||||||||||||
| Benzene |
1.75 | 5 | Zhejiang Province | 7.41 | 16.87 | |||||||||||||||
| Butadiene |
2.34 | 27 | Jiangsu Province | 2.50 | 6.21 | |||||||||||||||
Sources: Zhuochuang Information (
www.chem99.com
). Petroleum Products
In 2021, we had an approximate 2.32% share of total domestic petroleum products market while imports had an approximate 7.38% 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 2021, we sold approximately 91.80% of our petroleum products in Eastern China.
Research and Development, Patents and Licenses, etc.
We have a number of technology development units, including Advanced Materials Innovation Research Institute, the Petrochemical Research Institute, the Plastics Research Institute, and the Environmental Protection Research Institute. These units are charged with various research and development tasks with respect to new technology, new products, new production processes and equipment and environmental protection. Our research and development expenditures in 2019, 2020 and 2021 were RMB 93.0 million, RMB 110.6 million and RMB 94.3 million, respectively. The increase was mainly due to the increase in research and development investment in projects related to carbon fiber.
We are not, in any material aspect, dependent on any patents, licenses, industrial, commercial or financial contracts, or new production processes.
39
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 2021, SECCO achieved a sales revenue of RMB 29.72 billion (U.S.$ 4.61 billion), representing an increase of 37.40% from its sales revenue of RMB 21.63 billion (U.S.$ 3.31 billion) in 2020. SECCO produced 269,564 tons of ethylene in 2021, representing a decrease of 20,032 tons over the previous year. SECCO had a net profit of RMB 3.13 billion (U.S.$ 485.47 million) in 2021, representing a decrease of RMB 0.72 billion (U.S.$ 111.67 million) over the previous year.
Environmental Protection
We are subject to national and local environmental protection regulations, which currently impose a graduated schedule of fees for the discharge of waste substances, require the payment of fines for pollution and provide for the forced closure of any facility that fails to comply with orders requiring it to cease or cure certain environmentally damaging practices. We have established environmental protection systems which consist of pollution control facilities to treat certain of our waste materials and to safeguard against accidents. Because of the nature of our business, however, we store a significant amount of waste substances in the plants and discharge them into the environment after making such waste substances meet the discharge standards. In 2021, the Company paid a total of RMB 11.45 million in environmental taxes, a decrease of 24.67% compared with 2020.
We were subject to various administrative penalties for its violations of the relevant PRC environmental laws and regulations in the past three years. In 2021, we were subject to two administrative penalty for violations of the relevant PRC environmental laws and regulations, with fines of RMB 0.3798 million.
We believe our environmental protection facilities and systems are adequate for the existing national and local environmental protection regulations. In 2021, we continued to carry out various energy-saving and emissions reduction measures in accordance with the relevant domestic energy conservation and emissions reduction requirements, and achieved all energy-saving and emissions reduction goals set by the Chinese government during the year.
During 2021, the Company’s overall level of energy consumption per RMB 10,000 of product value was 0.991 ton of standard coal, increased by 33.38% from the previous year. As compared with 2020, the total volume of chemical oxygen demand, sulfur dioxide, nitrogen oxides decreased 1.92%, 4.96%, and 12.78%, respectively. The volume of annual average cumulative average VOCs concentration at the plant boundary is 104.09 micrograms/m3, an increase of 5.86% compared with last year. At the same time, the comprehensive compliance rate of effluent wastewater was 99.95%, the compliance rate of controlled 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 93.08%, which was similar to the prior year.
Insurance
We currently participate in a package of insurance coverage plan through Sinopec Group as its controlled subsidiary, which, as of December 31, 2021, was approximately RMB 43.31 billion (U.S.$ 6.81 billion) on our property and facilities and approximately RMB 2,273.03 million (U.S.$ 357.61 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 RMB 50 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.
40
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 2021, we did not experience any material cybersecurity incidents or related losses.
Government Regulations
Following the development of several major oil fields and a growth in demand for petroleum and petrochemical products in China in the early 1970s, the Chinese government organized petroleum refining and petrochemical production and processing plants into large complexes that would permit integrated production of petroleum products, intermediate petrochemicals, resins and plastics, and synthetic fibers.
Although the Chinese government is liberalizing its control over the petroleum and petrochemical industries in China, significant government regulations that limit the business strategies available to us remain. Central government agencies and their local or provincial level counterparts do not own or directly control our production plants. However, they exercise significant control over the petrochemical industry in areas such as pricing, production quotas, quality standards, allocation of raw materials and finished products, allocation of foreign exchange and Renminbi loans for capital construction projects. The Chinese government’s intentions with respect to the development objectives and policies for the petrochemical industry are stated as part of the Five Year Plans for National Economic and Social Development formulated every five years. These plans at both the national and Shanghai municipality level have identified the petrochemical industry as a “development industry.”
Historically, we were supervised by Sinopec, a ministry-level enterprise under the direct supervision of the State Council, China’s highest administrative body. As a result of a governmental restructuring in 1998, we became subject to the administration of the State Bureau of Petroleum and Chemical Industry. After its functions were terminated in March 2001, we became subject to the administration of the State Economic and Trade Commission. The State Economic and Trade Commission was dissolved in March 2003 and its function in directing the reform and management of state-owned enterprises was assumed by the State-owned Assets Supervision and Administration Commission, its function in industry planning and policy making was assumed by NDRC, and its functions in administering domestic trade, coordinating and implementing import and export plans of critical industrial products and raw materials were assumed by the Ministry of Commerce. Since then, we have been subject to the industrial oversight of these three governmental agencies at the national level.
As part of this restructuring, Sinopec was also restructured in July 1998. The succeeding entity, Sinopec Group, was authorized to conduct petrochemical business and to control the exploration of crude oil and natural gas and crude oil refining, mainly in the southern and eastern regions of China. China Petroleum and Natural Gas Corporation, another major state-owned petrochemical company, was also restructured, renamed China National Petroleum Corporation and authorized to conduct the same type of business, mainly in the northern and western regions of China. On December 31, 1999, Sinopec Group completed a reorganization pursuant to which certain of its core oil and gas and chemical operations and businesses and related assets and liabilities were transferred to its subsidiary, Sinopec Corp., currently our controlling shareholder.
Business Operations Relating to Iran and other U.S. Sanctioned Countries
In 2021, we sourced no crude oil from Iran.
In addition, based on feedback to our inquiries to Sinopec Corp., in 2021, it did not source any of its refinery throughputs of crude oil from Iran. Based on Sinopec Corp.’s internal reports and statistics, Sinopec Corp. recorded no revenue or net profit from its trading activities with Iranian companies.
In addition, based on feedback to our inquiries to Sinopec Group, the controlling shareholder of Sinopec Corp., Sinopec Group engaged in a small amount of business activities in Iran such as providing engineering services and designs. Sales revenue and profits from these business activities accounted for 0.021% and 0.43% 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 2022.
41
C. |
Organizational Structure. |
Our Subsidiaries
As of December 31, 2021, our significant subsidiaries are listed below. All of the subsidiaries named below are incorporated in China.
Subsidiary Name |
Our ownership interest (%) |
Our voting power (%) |
||||||
| Shanghai Petrochemical Investment Development Company Limited |
100.00 | 100.00 | ||||||
| China Jinshan Associated Trading Corporation |
67.33 | 67.33 | ||||||
| Shanghai Jinchang Engineering Plastics Company Limited |
74.25 | 71.43 | ||||||
| Shanghai Golden Phillips Petrochemical Company Limited |
100.00 | 100.00 | ||||||
| Shanghai Jinshan Trading Corporation |
67.33 | 67.33 | ||||||
| Zhejiang Jinlian Petrochemical Storage and Transportation Company Limited |
100.00 | 100.00 | ||||||
Sinopec Corp.
We are a member of a group (defined as a parent and all its subsidiaries) for purposes of the disclosure rules of the SEC. The parent company of this group is Sinopec Corp., our controlling shareholder. Sinopec Corp. is operated by separate management and from time to time uses its interest as a shareholder to direct our policies and management.
Sinopec Corp. is the largest integrated petroleum and petrochemical company in China and one of the largest in Asia in terms of operating revenues. Sinopec Corp. is one of the largest refiners, distributors and marketers of gasoline, diesel, jet fuel and most other major refined products in China and Asia with principal markets in the eastern and southern regions of China. Sinopec Corp. is also a producer and distributor of petrochemicals in China and additionally explores, develops and produces crude oil and natural gas principally to supply its refining and chemical operations.
Subsidiaries
Details of Sinopec Corp.’s principal subsidiaries are given in the table below. Except for Sinopec Kantons Holdings Limited and Sinopec Overseas Investment Holding Limited, which are incorporated in Bermuda and Hong Kong respectively, all of the below principal subsidiaries are incorporated in China.
| Name of Company |
Particulars of issued capital |
Type of legal entity |
Percentage of equity held by Sinopec Corp. and its subsidiary |
Principal activities | ||||||||
(millions) |
(%) |
|||||||||||
| Sinopec International Petroleum Exploration and Production Company Limited |
RMB8,250 | Limited company |
100.00 | Investment in exploration, development, production, sales of petroleum and natural gas and other areas | ||||||||
| Sinopec Great Wall Energy and Chemical Company Limited |
RMB22,761 | Limited company |
100.00 | Coal chemical industry investment management, production and sale of coal chemical products | ||||||||
| Sinopec Yangzi Petrochemical Company Limited |
RMB15,651 | Limited company |
100.00 | Manufacturing of intermediate petrochemical products and petroleum products | ||||||||
| Sinopec Yizheng Chemical Fiber Limited Liability Company |
RMB4,000 | Limited company |
100.00 | Production and sale of polyester chips and polyester fibers | ||||||||
| Sinopec Lubricant Company Limited |
RMB3,374 | Limited company |
100.00 | Production and sale of lubricant products, lubricant base oil, and petrochemical materials | ||||||||
| Sinopec Qingdao Petrochemical Company Limited |
RMB1,595 | Limited company |
100.00 | Manufacturing of intermediate petrochemical products and petroleum products | ||||||||
42
| China International United Petroleum & Chemical Company Limited |
RMB5,000 | Limited company |
100.00 | Trading of crude oil and petrochemical products | ||||||||
| Sinopec Chemical Sales Company Limited |
RMB1,000 | Limited company |
100.00 | Marketing and distribution of petrochemical products | ||||||||
| Sinopec Overseas Investment Holding Limited |
U.S.$3,009 | Limited company |
100.00 | Investment of overseas business and equity interests management | ||||||||
| China Petrochemical International Company Limited |
RMB1,400 | Limited company |
100.00 | Trading of petrochemical products | ||||||||
| Sinopec Catalyst Company Limited |
RMB1,500 | Limited company |
100.00 | Production and sale of catalyst products | ||||||||
| Sinopec Beihai Refining and Chemical Limited Liability Company |
RMB5,294 | Limited company |
98.98 | Import and processing of crude oil, production, storage and sales of petroleum and petrochemical products | ||||||||
| Sinopec Qingdao Refining and Chemical Company Limited |
RMB5,000 | Limited company |
85.00 | Manufacturing of intermediate petrochemical products and petroleum products | ||||||||
| Sinopec Hainan Refining & Chemical Company Limited |
RMB9,606 | Limited company |
100.00 | Manufacturing of intermediate petrochemical products and petroleum products | ||||||||
| Sinopec Marketing Co. |
RMB28,403 | Limited company |
70.42 | Marketing and distribution of refined petroleum products | ||||||||
| Shanghai SECCO Petrochemical Company Limited |
RMB500 | Limited company |
67.59 | Manufacturing and sales of petrochemical products | ||||||||
| Sinopec-SK (Wuhan) Petrochemical Company Ltd. |
RMB7,193 | Limited company |
59.00 | Production, sale, research and development of petroleum products, petrochemical products, ethylene and downstream derivatives | ||||||||
| Sinopec Kantons Holdings Limited |
HK$248 | Limited company |
60.33 | Provision of crude oil jetty services and natural gas pipeline transmission services | ||||||||
| Sinopec Shanghai Gaoqiao Petrochemical Company Limited |
RMB10,000 | Limited company |
55.00 | Manufacturing of intermediate petrochemical products and petroleum products | ||||||||
| Sinopec Shanghai Petrochemical Company Limited |
RMB10,824 | Limited company |
50.44 | Manufacturing of synthetic fibers, Resin and plastics, intermediate petrochemical products and petroleum products | ||||||||
| Fujian Petrochemical Company Limited |
RMB10,492 | Limited company |
50.00 | Manufacturing of plastics, intermediate petrochemical products and petroleum products |
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.
43
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 2021:
| Production Unit (number of units) |
Rated Capacity (tons) |
Utilization Rate (%) |
||||||
| Crude oil distillation units (2) |
14,000,000 | 95.32 | ||||||
| Hydrocracker (2) |
3,000,000 | 89.14 | ||||||
| Ethylene unit |
700,000 | 105.97 | ||||||
| *Aromatics units (2) |
835,000 | 100.15 | ||||||
| PTA unit |
400,000 | 80.32 | ||||||
| Ethylene oxide / ethylene glycol units (2) |
525,000 | 86.26 | ||||||
| Cracking and catalyzing |
3,500,000 | 104.87 | ||||||
| Delayed coking (2) |
2,200,000 | 88.90 | ||||||
| Diesel oil hydrogenation units (2) |
3,850,000 | 90.87 | ||||||
| **Acrylonitrile unit |
650,000 | 93.23 | ||||||
| C5 segregation units (2) |
205,000 | 139.51 | ||||||
| * | The No. 1 paraxylene unit (235,000 tons/year) was suspended for 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 2021, the actual quantity of crude oil we processed was approximately 13.7644 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 2021:
| Production Unit (number of units) |
Rated Capacity (tons) |
Utilization Rate (%) |
||||||
| *Polyester units (3) |
550,000 | 88.53 | ||||||
| **Polyester staple units (2) |
158,000 | 88.27 | ||||||
| Polyester filament unit |
21,000 | — | ||||||
| Acrylic staple fiber units (3) |
141,000 | 107.19 | ||||||
| Polypropylene units (3) |
408,000 | 88.56 | ||||||
| Polypropylene units (3) |
400,000 | 96.41 | ||||||
| Vinyl acetate unit |
86,000 | 105.22 | ||||||
| * | 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.
44
Power Facilities
Our electricity requirements are currently supplied by our own 425 megawatt coal-fired power plant and petroleum coke power plant. These power plants are designed to provide sufficient power supply needed by our facilities. We are connected to the Eastern China electricity grid, which provides a
back-up
source of power in case of a shortfall in our self-generated power supply. Other Facilities
We also have facilities to produce industrial water, steam, hydrogen, oxygen and nitrogen which we use in our production facilities.
Maintenance
We engage in production stoppages for facility maintenance and repairs and implement our routine monthly maintenance and repair plans according to the needs of our production facilities, our requirements for product quality, and our commitment to security and environmental protection. The technicians in our facility management department have responsibility for the daily management of maintenance and repair work. We also outsource facility maintenance and repair projects to qualified contractors.
In 2021, Sinopec Group focused on building up and implementing stable production as its top priority in production management, and implemented and consolidated its foundation in production operation while cementing safety management. The Company seeks to implement the HSSE management system and put into practice process safety management, and further enhance its ensure equipment integrity assurance regime. We did not encounter serious accidents involving production safety, environmental pollution or occupational poisoning in 2021. Among the 58 major indicators that measure technical and economic capacity, 33 exceeded those of the previous year with a year-over-year growth rate of 58.90%.
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 2021, approximately 91.28% of our products by sales volume were picked up by customers from our premises, and the others were delivered by us. Our major ethylene customer is supplied via a pipeline. And some of the products were 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 2021, products representing 29.65% 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 2021, products representing 3.22% 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 2021, products representing 0.12% of total sales volume were transported from the factory by rail.
Capital Expansion Program
We have planned or started a number of other principal capital expansion projects. In 2019, 2020 and 2021, we invested RMB 1.8 billion, RMB 2.1 billion and RMB 3.533 billion, respectively, in capital expansion projects. We expect that total investment in the projects described below will be approximately RMB 3.5 billion in 2022.
Increasing Quality of Oil Products
In 2016, we launched No. 2 Diesel Hydrogenation Unit Reconstruction and Diesel Quality Upgrading Project so as to further improve the quality of oil products and perfect oil product structure. In 2017, we launched an oil cleaning project with 400,000 tons/year clean gasoline components units, which was completed and put into operation in 2020.
45
Expansion of New and Existing Downstream Petrochemical Products
As a large-scale integrated petrochemical enterprise, we produce a wide range of intermediate and downstream petrochemical products. In order to adapt to the changes in the world’s energy market and the development trends in the oil and chemical products market in China, we will seek to further integrate the existing refining, olefin and aromatic processing chains, and further develop our chemical business.
To take advantage of our specialty in producing acrylics fiber and to improve our industrial structure and upgrade certain products, we plan to construct a carbon fiber project with a capacity of 1,500 tons/year. Sinopec Corp. approved the basic design for this project in December 2010; pile foundation construction was commenced in December 2010; civil engineering was commenced in February 2011 and one series of facilities under phase I were launched for trial operation in 2012. Subject to the market conditions, we commenced the construction of Phase II of the Project in April 2019, and completed the
mid-term
delivery of it in March 2021. We commenced raw silks (24,000 ton/year) and 48K large-tow
carbon fiber (12,000 ton/year) project in November 2020, and plan to complete Phase I mid-term
delivery of them in June 2022. Upgrading Environmental Protection Facilities Projects
To enhance our capacity for sustainable development and response to the government requirements of environmental protection, we intend to increase our capital expenditures on a series of environmental projects, mainly including 400,000 tons/year clean gasoline components units, transformation project for “ultra clean discharge” work in cogeneration unit, transformation of No. 2 olefin cracking burner, and Thermoelectric Department’s renovation project involving furnaces Nos. 3 and 4 meeting emission standards. All the projects were completed in 2020.
PART III
ITEM 19. |
EXHIBITS. |
46
| 12.2* | Certification of Chief Financial Officer Required by Rule 13a-14(a). | |
| 13.1** | Certification of President Required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code. | |
| 13.2** | Certification of Chief Financial Officer Required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code. | |
| 99.1** | Financial statements of SECCO | |
| 104* | Cover Page Interactive Data File (embedded within the Inline XBRL document) | |
| * | Filed with this Amendment No. 1. |
| ** | Filed with Original Filing. |
47
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form
20-F
and that it has duly caused and authorized the undersigned to sign this annual report on Form 20-F
on its behalf. SINOPEC SHANGHAI PETROCHEMICAL COMPANY LIMITED | ||||
| Date: October 12, 2022 | /s/ DU JUN | |||
| Du Jun, Chief Financial Officer | ||||
48
Exhibit 12.1
CERTIFICATION
I, Du Jun, certify that:
1. I have reviewed this Amendment No. 1 to the annual report on Form 20-F of Sinopec Shanghai Petrochemical Company Limited.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
Date: October 12, 2022
| By: | /s/ Du Jun | |
| Du Jun | ||
| Chief Financial Officer |
Exhibit 12.2
CERTIFICATION
I, Guan Zemin, certify that:
1. I have reviewed this Amendment No. 1 to the annual report on Form 20-F of Sinopec Shanghai Petrochemical Company Limited.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
Date: October 12, 2022
| By: | /s/ Guan Zemin | |
| Guan Zemin | ||
| President |