FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO_______
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 TRANSACTION PERIOD FORM ____________ TO __________
Securities registered or to be registered pursuant to Section 12 (b) of the Act.
Name of Each Exchange
Title of Each Class On Which Registered
------------------- -------------------
American Depositary Shares, each
representing 100 H Shares of par value
RMB 1.00 per share ............................. New York Stock Exchange, Inc.
H Shares of par value RMB 1.00 per share........ New York Stock Exchange, Inc.*
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* Not for trading, but only in connection with the registration of American Depository Shares. Securities registered or to be registered pursuant to Section 12 (g) of the Act.
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to
Section 15 (d) of the Act.
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report.
Tradable shares with selling restriction, par value RMB 1.00 per share.................................. 66,337,951,000 H Shares, par value RMB 1.00 per share.......................... 16,780,488,000 A Shares, par value RMB 1.00 per share.......................... 3,584,000,000 |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes X 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 X
Note - Checking the box above will not relieve any registrant required
to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 from their obligations under those Sections.
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 X No__
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer X Accelerated filer __ Non-accelerated filer __
Indicate by check mark which financial statement item the Registrant has elected to follow.
Item 17 ___ Item 18 X
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 X
Table of Contents
Page
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PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS................4
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE..............................4
ITEM 3. KEY INFORMATION......................................................4
A. SELECTED FINANCIAL DATA..........................................4
B. CAPITALIZATION AND INDEBTEDNESS..................................7
C. REASONS FOR THE OFFER AND USE OF PROCEEDS........................7
D. RISK FACTORS.....................................................7
ITEM 4. INFORMATION ON THE COMPANY..........................................12
A. HISTORY AND DEVELOPMENT OF THE COMPANY..........................12
B. BUSINESS OVERVIEW...............................................14
C. ORGANIZATIONAL STRUCTURE........................................29
D. PROPERTY, PLANT AND EQUIPMENT...................................29
ITEM 4A UNRESOLVED STAFF COMMENTS...........................................30
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS........................30
A. GENERAL.........................................................30
B. CONSOLIDATED RESULTS OF OPERATIONS..............................33
C. DISCUSSIONS ON RESULTS OF SEGMENT OPERATIONS....................42
D. LIQUIDITY AND CAPITAL RESOURCES.................................52
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES..........................56
A. DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT....................56
B. COMPENSATION....................................................64
C. BOARD PRACTICE..................................................65
D. EMPLOYEES.......................................................65
E. SHARE OWNERSHIP.................................................66
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS...................66
A. MAJOR SHAREHOLDERS..............................................66
B. RELATED PARTY TRANSACTIONS......................................67
C. INTERESTS OF EXPERTS AND COUNSEL................................68
ITEM 8. FINANCIAL INFORMATION...............................................68
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION.........68
B. SIGNIFICANT CHANGES.............................................68
ITEM 9. THE OFFER AND LISTING...............................................68
A. OFFER AND LISTING DETAILS.......................................68
ITEM 10. ADDITIONAL INFORMATION..............................................70
A. SHARE CAPITAL...................................................70
B. MEMORANDUM AND ARTICLES OF ASSOCIATION..........................70
i
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C. MATERIAL CONTRACTS..............................................77
D. EXCHANGE CONTROLS...............................................77
E. TAXATION........................................................77
F. DIVIDENDS AND PAYING AGENTS.....................................81
G. STATEMENT BY EXPERTS............................................81
H. DOCUMENTS ON DISPLAY..............................................
I. SUBSIDIARY INFORMATION..........................................81
ITEM 11. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK..........81
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES..............87
PART II ....................................................................87
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.....................87
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
USE OF PROCEEDS.....................................................87
A. MATERIAL MODIFICATIONS TO THE RIGHTS TO SECURITIES HOLDERS......87
B. USE OF PROCEEDS.................................................87
ITEM 15. CONTROLS AND PROCEDURES.............................................87
ITEM 16. RESERVED............................................................89
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT....................................89
ITEM 16B. CODE OF ETHICS......................................................89
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES..............................89
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDITS COMMITTEES.........89
ITEM 16E. PURCHASERS OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS..........................................................89
PART III
ITEM 17. FINANCIAL STATEMENTS................................................89
ITEM 18. FINANCIAL STATEMENTS................................................89
ITEM 19. EXHIBITS............................................................90
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CERTAIN TERMS AND CONVENTIONS
Definitions
Unless the context otherwise requires, references in this annual report to:
o "Sinopec Corp.", "we", "our" and "us" are to China Petroleum & Chemical Corporation, a PRC joint stock limited company, and its subsidiaries;
o "Sinopec Group Company" are to our controlling shareholder, China Petrochemical Corporation, a PRC limited liability company;
o "Sinopec Group" are to the Sinopec Group Company and its subsidiaries other than Sinopec Corp. and its subsidiaries;
o "China" or the "PRC" are to the People's Republic of China, excluding for purposes of this annual report Hong Kong, Macau and Taiwan;
o "provinces" are to provinces and to provincial-level autonomous regions and municipalities in China which are directly under the supervision of the central PRC government;
o "RMB" are to Renminbi, the currency of the PRC;
o "HK$" are to Hong Kong dollar, the currency of the Hong Kong Special Administrative Region of the PRC; and
o "US$" are to US dollars, the currency of the United States of America.
Conversion Conventions
Conversions of crude oil from tonnes to barrels are made at a rate of one tonne to 7.35 barrels for crude oil we purchase from external sources and one tonne to 7.1 barrels for crude oil we produce, representing the typical gravity of the respective source of crude oil. Conversions of natural gas from cubic meters to cubic feet are made at a rate of one cubic meter to 35.31 cubic feet.
Glossary of Technical Terms
Unless otherwise indicated in the context, references to:
o "BOE" are to barrels-of-oil equivalent; natural gas is converted at a ratio of 6,000 cubic feet of natural gas to one BOE.
o "primary distillation capacity" are to the crude oil throughput capacity of a refinery's crude oil distillation units, calculated by estimating the number of days in a year that such crude oil distillation units are expected to operate, excluding downtime for regular maintenance, and multiplying that number by the amount equal to the units' optimal daily crude oil throughput.
o "rated capacity" are to the output capacity of a given production unit or, where appropriate, the throughput capacity, calculated by estimating the number of days in a year that such production unit is expected to operate, excluding downtime for regular maintenance, and multiplying that number by an amount equal to the unit's optimal daily output or throughput, as the case may be.
CURRENCIES AND EXCHANGE RATES
We publish our financial statements in Renminbi. Unless otherwise indicated, all translations from Renminbi to US dollars have been made at a rate of RMB 7.8041 to US$ 1.00, the noon buying rate as certified for customs purposes by the Federal Reserve Bank of New York on December 29, 2006. We do not represent that Renminbi or US dollar amounts could be converted into US dollars or Renminbi, as the case may be, at any particular rate, the rates below or at all.
The following table sets forth noon buying rate for US dollars in New York City for cable transfers in Renminbi as certified for customs purposes by the Federal Reserve Bank of New York for the periods indicated:
Noon Buying Rate
-------------------------------------------------------
Period End Average(1) High Low
------ ------------- ------------- ----------- ------------
(RMB per US$1.00)
2002.................................. 8.2800 8.2772 8.2800 8.2759
2003.................................. 8.2767 8.2772 8.2800 8.2769
2004.................................. 8.2765 8.2767 8.2774 8.2764
2005.................................. 8.0702 8.1826 8.2765 8.0702
2006 7.8041 7.9723 8.0702 7.9723
October 2006 7.8785 - 7.9168 7.8728
November 2006 7.8340 - 7.8750 7.8303
December 2006 7.8041 - 7.8350 7.8041
January 2007 7.7714 - 7.8127 7.7705
February 2007 7.7410 - 7.7632 7.7410
March 2007 7.7232 - 7.7454 7.7232
April 2007 (up to April 6, 2007) 7.7248 - 7.7345 7.7248
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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:
o amount and nature of future exploration and development,
o future prices of and demand for our products,
o future earnings and cash flow,
o development projects and drilling prospects,
o future plans and capital expenditures,
o estimates of proved oil and gas reserves,
o exploration prospects and reserves potential,
o expansion and other development trends of the petroleum and
petrochemical industry,
o production forecasts of oil and gas,
o expected production or processing capacities, including expected
rated capacities and primary distillation capacities, of units or
facilities not yet in operation,
o expansion and growth of our business and operations, and
o 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:
o fluctuations in crude oil prices,
o fluctuations in prices of our products,
o failures or delays in achieving production from development
projects,
o potential acquisitions and other business opportunities,
o general economic, market and business conditions, and
o 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 Form 20-F. 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.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
The selected income statement data and cash flow data for the years ended December 31, 2004, 2005 and 2006, and the selected balance sheet data as of December 31, 2005 and 2006, presented in International Financial Reporting Standards (IFRS) section, have been derived from, and should be read in conjunction with, the audited consolidated financial statements included elsewhere in this annual report. The selected income statement data and cash flow data for the years ended December 31, 2002 and 2003 and the selected balance sheet data as of December 31, 2002, 2003 and 2004, presented in IFRS section, are derived from our audited consolidated financial statements which are not included elsewhere in this annual report and financial statements of the acquired businesses described below.
We acquired from Sinopec Group Company the operations of Sinopec Group Maoming Petrochemical Company (Sinopec Maoming), Xi'an Petrochemical Main Factory (Xi'an Petrochemical) and Tahe Oilfield Petrochemical Factory (Tahe Petrochemical) in 2003, the operations of Sinopec Group Tianjin Petrochemical Company, Sinopec Group Luoyang Petrochemical General Plant, Zhongyuan Petrochemical Company Limited, Sinopec Group Guangzhou Petrochemical General Plant and certain catalyst plants (collectively, Petrochemical and Catalyst Assets) in 2004, and the equity interest in Sinopec Hainan Refining and Chemical Company Limited (Sinopec Hainan) and certain oil and gas production companies (Oil Production Plants) in 2006. As we and these companies are under the common control of Sinopec Group Company, our acquisitions are considered as "combination of entities under common control" which are accounted for in a manner similar to a pooling-of-interests. Accordingly, the acquired assets and related liabilities have been accounted for at historical cost and our consolidated financial statements for periods prior to the combinations have been restated to include the financial condition and the results of operation of these companies on a combined basis.
Moreover, the selected financial data should be read in conjunction with our consolidated financial statements together with accompanying notes and "Item 5. Operating and Financial Review and Prospects" included elsewhere in this annual report. Unless otherwise indicated, our consolidated financial statements are prepared and presented in accordance with International Financial Reporting Standards, or IFRS. IFRS vary in certain significant respects from accounting principles generally accepted in the United States of America, or US GAAP. Information relating to the nature and effect of such differences is presented in Note 37 to the consolidated financial statements.
Years Ended December 31,
----------------------------------------------------------------
2002 2003 2004 2005 2006
------------ ------------ ----------- ------------- ------------
RMB RMB RMB RMB RMB
(in millions, except per share and per ADS data)
Income Statement Data(1):
IFRS
Consolidated results
Operating revenues........................ 350,213 449,168 619,915 823,272 1,071,402
Other income.............................. - - - 9,415 5,000
Purchased crude oil, products and
operating supplies and expenses......... (238,603) (312,616) (442,503) (651,201) (861,437)
Selling, general and administrative
expenses................................ (22,455) (27,319) (32,969) (33,880) (37,758)
Depreciation, depletion and amortization.. (26,618) (28,113) (32,493) (31,618) (34,235)
Exploration expenses, including dry holes. (4,420) (6,174) (6,396) (6,411) (7,983)
Personnel expenses........................ (15,080) (17,040) (18,719) (18,649) (19,857)
Employee reduction expenses............... (244) (1,040) (919) (369) (236)
Taxes other than income tax............... (12,028) (13,599) (16,347) (17,185) (28,639)
Other operating expenses, net............. (1,191) (3,981) (6,678) (5,128) (2,437)
------------ ------------ ----------- ------------- ------------
Operating income.......................... 29,574 39,286 62,891 68,246 83,820
Interest expense, net of interest income
and net foreign exchange gains (losses). (4,947) (4,462) (4,367) (4,625) (6,100)
Gains from issuance of shares by a
subsidiary.............................. - 136 - - -
Other income ............................. 569 506 918 1,035 1,203
------------ ------------ ----------- ------------- ------------
Income before income tax.................. 25,196 35,466 59,442 64,656 78,923
Income tax................................ (7,583) (10,789) (18,091) (19,880) (23,515)
------------ ------------ ----------- ------------- ------------
Net income................................ 17,613 24,677 41,351 44,776 55,408
============ ============ =========== ============= ============
Attributable to:
Equity shareholders of the Company...... 16,397 22,558 35,335 41,455 53,912
Minority interests...................... 1,216 2,119 6,016 3,321 1,496
------------ ------------ ----------- ------------- ------------
Net income................................ 17,613 24,677 41,351 44,776 55,408
============ ============ =========== ============= ============
Basic earnings per share(2)............... 0.19 0.26 0.41 0.48 0.62
Basic earnings per ADS(2)................. 18.91 26.02 40.75 47.81 62.18
Cash dividends declared per share......... 0.10 0.09 0.10 0.12 0.13
Segment results
Exploration and production.............. 15,060 19,565 26,397 48,334 63,182
Refining................................ 6,024 6,071 4,982 (3,536) (25,298)
Marketing and distribution.............. 8,401 11,943 14,716 10,350 30,234
Chemicals............................... 1,088 3,543 18,721 14,296 17,234
Corporate and others.................... (999) (1,836) (1,925) (1,198) (1,532)
------------ ------------ ----------- ------------- ------------
Operating income........................ 29,574 39,286 62,891 68,246 83,820
============ ============ =========== ============= ============
US GAAP
Depreciation, depletion and amortization.. (21,172) (22,747) (27,149) (25,303) (30,606)
Income tax................................ (8,917) (12,287) (19,890) (21,461) (23,710)
Net income................................ 19,832 26,542 39,291 45,147 54,862
Basic earnings per share (2).............. 0.23 0.31 0.45 0.52 0.63
Basic earnings per ADS(2)................. 22.87 30.61 45.31 52.07 63.28
Cash dividends declared per share......... 0.10 0.09 0.10 0.12 0.13
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As of December 31,
-------------------------------------------------------------
2002 2003 2004 2005 2006
------------ ----------- ----------- ----------- ------------
RMB RMB RMB RMB RMB
(in millions)
Balance Sheet Data(1):
IFRS
Cash and cash equivalents............... 19,374 16,478 18,251 14,069 8,088
Total current assets.................... 107,850 103,670 122,685 147,057 145,467
Total non-current assets(3)............. 302,771 319,413 358,152 401,983 466,323
Total assets(3)......................... 410,621 423,083 480,837 549,040 611,790
Short-term debts and loans from Sinopec
Group Company and its affiliates
(including current portion of
long-term debts)...................... 39,710 34,046 42,994 43,216 58,760
Long-term debts and loans from Sinopec
Group Company and its affiliates
(excluding current portion of
long-term debts)...................... 86,884 87,296 99,387 112,292 109,065
Equity attributable to equity
shareholders of the Company(3)........ 167,585 172,499 193,340 224,301 262,845
Capital employed(4)..................... 299,647 304,079 349,425 396,419 444,526
US GAAP
Total non-current assets................ 280,709 299,576 341,613 385,848 455,255
Total assets............................ 383,390 398,260 457,214 523,883 587,126
Long-term debts and loans from Sinopec
Group Company and its affiliates
(excluding current portion of
long-term debts)...................... 86,569 85,496 94,684 101,949 100,222
Shareholders' equity.................... 153,929 162,816 188,150 222,803 262,297
Years Ended December 31
-------------------------------------------------------------
2002 2003 2004 2005 2006
-------------------------------------------------------------
RMB RMB RMB RMB RMB
------------ ----------- ----------- ----------- ------------
(in millions)
Other Financial Data(1):
IFRS
Net cash from operating activities...... 56,350 63,409 68,941 78,214 95,875
Net cash (used in)/generated from
financing activities.................. (16,160) (14,328) 8,650 (4,851) 1,192
Net cash used in investing activities... (43,290) (51,982) (75,819) (77,523) (103,023)
Capital expenditure
Exploration and production............ 20,228 20,628 21,234 23,095 31,734
Refining.............................. 6,698 9,791 15,319 19,100 21,969
Marketing and distribution............ 6,982 6,826 16,678 10,954 11,319
Chemicals............................. 7,769 7,680 11,025 9,386 12,629
Corporate and others.................. 816 518 1,550 1,164 2,170
------------ ----------- ----------- ----------- ------------
Total................................. 42,493 45,443 65,806 63,699 79,821
============ =========== =========== =========== ============
Capital expenditure of Oil Production Plants
Exploration and production............ 120 410 642 1,612 3,362
============ =========== =========== =========== ============
Capital expenditure of jointly controlled entities
Exploration and production............ - 1,200 1,323 772 102
Chemicals............................. - 2,993 5,178 1,830 160
------------ ----------- ----------- ----------- ------------
Total................................. - 4,193 6,501 2,602 262
============ =========== =========== =========== ============
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B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
D. RISK FACTORS
Risks Relating to Sinopec Corp.
We rely heavily on outside suppliers for crude oil and other raw materials, and we may not be able to pass on all increases in our crude oil costs and may even experience disruption of our ability to obtain crude oil and other raw materials.
We currently consume large amount of crude oil and other raw materials to manufacture our refined products and petrochemical products. In 2006, approximately 80% of the crude oil required for our refinery business was sourced from outside suppliers. In addition, our development will leave us no choice but to source an increasing amount of crude oil from outside suppliers. While we try to match price increases in products produced by us with corresponding crude oil price increases, our ability to pass on cost increases to our customers is dependent on international and domestic market conditions as well as the PRC government price control over refined petroleum products. For example, crude oil price fluctuated at a historically high level in the past three years, but we were not able to fully pass the increased material cost to our customers, in part due to the government's price control over certain refined petroleum products including gasoline, diesel and jet fuel. Crude oil price began to decline since the later part of 2006 and may fluctuate in 2007 and the years beyond. Although it was reported that new petroleum products price-setting mechanism had been formulated by the relevant government authority, we cannot predict when the revised price-setting mechanism will be fully implemented, and if implemented, to what extent the new price-setting mechanism will allow us to pass our increased crude oil costs to our refined petroleum products customers.
Since we purchase a significant portion of our crude oil and other feedstock requirements from outside suppliers located in different countries and areas in the world, we are subject to the political, geographical and economic risks associated with these countries and areas. If one or more of our supply contracts were terminated or disrupted due to any natural disasters or political events, it is possible that we would be unable to find sufficient alternative sources of supply in a timely manner or on commercially reasonable terms. As a result, our business and financial condition could be materially and adversely affected.
Our continued business success depends in part on our ability to replace reserves and develop newly discovered reserves.
Our ability to achieve our growth objectives is dependent in part on our level of success in discovering or acquiring additional oil and natural gas reserves and further exploring our current reserve base. Our exploration and development activities for additional reserves expose us to inherent risks associated with drilling, including the risk that no economically productive oil or natural gas reservoirs will be encountered. Without reserve additions through further exploration and development or acquisition activities, our reserves and production will decline over time as our reserves will eventually become depleted. Exploring for, developing and acquiring reserves is highly risky and capital intensive. If these activities are unsuccessful and we do not acquire properties containing proved reserves, our total proved reserves will decline, which may materially and adversely affect our results of operations and financial condition.
We face strong competition from domestic and foreign competitors.
Among our competitors, some are major integrated petroleum and petrochemical companies within and outside the PRC, which have recently become more significant participants in the petroleum and petrochemical industry in China. On December 4, 2006, Ministry of Commerce of the PRC promulgated the "Administrative Rules for Crude Oil Market" and "Administrative Rules for Refined Petroleum Products Market" to open the wholesale market of crude oil and refined petroleum products to new market entrants. As a result, we expect to face more competition in both crude oil and refined petroleum products. We believe such trend will continue. Increased competition may have a material adverse effect on our financial condition and results of operations.
The oil and natural gas reserves data in this annual report are only estimates, and our actual production, revenues and expenditures with respect to our reserves may differ materially from these estimates.
There are numerous uncertainties inherent in estimating quantities of proved oil and natural gas reserves, and in the timing of development expenditures and the projection of future rates of production. The reserve data set forth in this annual report represent estimates only. Adverse changes in economic conditions may render it uneconomical to develop certain reserves. Our actual production, revenues, taxes and fees payable and development and operating expenditures with respect to our reserves may likely vary from these estimates.
The reliability of reserves estimates depends on:
o the quality and quantity of technical and economic data;
o the prevailing oil and gas prices applicable to our production;
o the production performance of the reservoirs;
o extensive engineering judgments; and
o consistency in the PRC government's oil policies.
In addition, new drilling, testing and production following the estimates may cause substantial upward or downward revisions in the estimates. Furthermore, the discounted future cash flow calculated by applying the 10% discount rate, which was included in "Consolidated Financial Statements-Supplemental Information on Oil and Gas Producing Activities (Unaudited)" following Item 19, may not represent the actual net present value of the relevant cash flow.
Related party transactions; non-competition; conflicts of interest.
We have engaged from time to time and will continue to engage in a variety of transactions with Sinopec Group Company, which provides to us a number of services, including, but not limited to, ancillary supply, engineering, maintenance, transport, educational and community services. The nature of our transactions with Sinopec Group Company is governed by a number of service and other contracts between Sinopec Group Company and us. In addition, Sinopec Group Company has interests in businesses which compete or are likely
to compete, either directly or indirectly, with our businesses. We and Sinopec Group Company have entered into a non-competition agreement whereby Sinopec Group Company has agreed to refrain from operating businesses which compete or could compete with us in any of our domestic or international markets; grant us an option to purchase Sinopec Group Company's operations that compete or could compete with our businesses; operate its sales enterprises and service stations in a manner uniform to our sales and service operations; and appoint us as sales agent for certain of its products which compete or could compete with our products. Notwithstanding the foregoing contractual arrangements, because Sinopec Group Company is our dominant shareholder and the interests of the Sinopec Group Company may conflict with our own interests, Sinopec Group Company or any of its members may take actions that favor its interests or other subsidiaries' interests over ours.
In addition, while we and Sinopec Group Company have entered into agreements which generally provide that these services provided by Sinopec Group Company will be priced on terms at least as favorable to us as ordinary commercial terms, we have limited or no practical alternative source of supply for some of these services, utilities, materials and equipment at reasonable cost. Moreover, the current terms in the agreements with respect to these services, utilities, materials and equipment may be subject to change when we renew these agreements with Sinopec Group Company.
Our financing costs are subject to change in interest rates
Changes in interest rates have affected and will continue to affect our financing costs and, ultimately, our results of operations. The People's Bank of China (PBOC) raised the benchmark one-year lending rates from 5.31% to 5.58% in October 2004 and had further raised the benchmark one-year lending rate three times since October 2004 to 6.39%, each time by 27 basis points. The increased lending rate drives up the cost of bank borrowings. Interest expenses (excluding capitalized interest) in 2004, 2005 and 2006 were RMB 4,583 million, RMB 5,926 million and RMB 7,437 million, respectively. We cannot assure you that we will be able to obtain bank loans or renew existing credit facilities in the future on reasonable terms or at all, nor can we assure that the PBOC will not further raise the lending rates, or that our business, financial condition and results of operations will not be adversely affected as a result.
Risks Relating to the Petroleum and Petrochemical Industry
Our business operations may be adversely affected by present or future environmental regulations.
As an integrated petroleum and petrochemical company, we are subject to extensive environmental protection laws and regulations in China. These laws and regulations permit:
o the imposition of fees for the discharge of waste substances;
o the levy of fines and payments for damages for serious environmental offenses; and
o the government, at its discretion, to close any facility which fails to comply with orders and require it to correct or stop operations causing environmental damage.
Our production operations produce substantial amounts of waste water, gas and solid waste materials. In addition, our production facilities require operating permits that are subject to renewal, modification and revocation. We have established a system to treat waste materials to prevent and reduce pollution and believe that our operations substantially comply with all applicable PRC environmental laws and regulations as they have been previously interpreted and enforced.
The PRC government has moved, and may move further, toward more rigorous enforcement of applicable laws, and toward the adoption of more stringent environmental standards, which, in turn, would require us to incur additional expenditures on environmental matters.
Our operations may be adversely affected by the cyclical nature of the market.
Most of our revenues are attributable to sales of refined petroleum products and petrochemical products, and certain businesses and related products have historically been cyclical and sensitive to the availability and prices of feedstock and general economic conditions, such as changes in industry capacity and output levels, cyclical changes in regional and global economic conditions,
prices andavailability of substitute products and changes in consumer demand. With the further reduction of tariffs and other import restrictions in the PRC, many of our products have become increasingly subject to the cyclicality of global markets. While we are a company integrated with upstream, midstream and downstream operations, it can help us reduce the effects of industry cycles only to a limited extent.
Our business faces operation risks and natural disasters that may cause significant property damages, personal injuries and interruption of operations, and we may not have sufficient insurance coverage for all the financial losses incurred by us.
Exploring for, producing and transporting crude oil and natural gas and producing and transporting refined and petrochemical products involve a number of operating hazards. For example, we handle many highly flammable, explosive, poisonous and harmful materials and operate many facilities under high pressure and high temperatures. As with many other companies in the world which conduct similar businesses, we have experienced accidents that have caused property damages and personal injuries and we cannot assure you that these industry-related accidents will not occur in the future. In addition, significant operating hazards and natural disasters may cause interruption to our operations as well as property or environmental damages, and each of these incidents could have a material adverse effect on our financial condition and results of operations.
Our insurance coverage may not be sufficient to cover all the financial losses caused by the operation risks and natural disasters. We maintain insurance coverage with Sinopec Group Company on our property, plant, equipment and inventory. The amount of coverage is determined on the basis of the historical value of the covered fixed assets and, with respect to inventory, twice each year on the basis of the average month-end inventory value of the most recent six months. The amount of our insurance coverage may be less than the replacement cost of the covered properties and may not be sufficient to cover all our financial losses. Furthermore, we do not carry any business interruption insurance or third party liability insurance to cover claims in respect of personal injuries, property or environmental damages arising from accidents on our properties or relating to our operations other than third party liability insurance with respect to certain transportation vehicles. Losses incurred or payments required to be made by us, which are not fully insured, may have a material adverse effect on our financial condition and results of operations.
Risks Relating to the PRC
Government regulations may limit our activities and affect our business operations.
The PRC government, though gradually liberalizing its regulation of petroleum and petrochemical industry, continues to exercise a certain degree of control over the petroleum and petrochemical industry in China by, among other measures:
o licensing the right to explore and produce crude oil and natural gas;
o publishing from time to time guidance prices for natural gas and refined petroleum products such as gasoline, diesel and jet fuel;
o assessing taxes and fees payable, such as the recently imposed special levy on revenues generated from sales of domestically produced crude oil when the realized price exceeds US$40 per barrel as well as the expansion of the scope of consumption tax for petroleum products;
o setting import and export quotas and procedures for crude oil and refined petroleum products; and
o setting safety, environmental and quality standards.
As a result, we may face constraints on our flexibility and ability to expand our business operations or to maximize our profitability.
Some of our development plans require compliance with state policies and regulatory confirmation and registration.
We are currently engaged in a number of construction, renovation and expansion projects. Some of our large construction, renovation and expansion projects are subject to governmental confirmation and registration. The timing and cost of completion of these projects will depend on numerous factors, including when we received the required confirmation and registration from relevant PRC government authorities and the general economic conditions in China. If any of our important projects required for our future growth are not confirmed or registered, or not confirmed or registered in a timely manner, our results of operations and financial condition could be adversely impacted.
Government control of currency conversion and exchange rate fluctuation may adversely affect our operations and financial results.
We receive substantially all of our revenues in Renminbi. A portion of such revenues will need to be converted into other currencies to meet our foreign currency needs, which include, among other things:
o import of crude oil and other materials;
o debt service on foreign currency-denominated debt;
o purchases of imported equipment; and
o payment of any cash dividends declared in respect of the H shares (including ADS) .
The existing foreign exchange regulations have significantly reduced government foreign exchange controls for transactions under the current account, including trade and service related foreign exchange transactions and payment of dividends. 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 the State Administration of Foreign Exchange. These limitations could affect our ability to obtain foreign exchange through debt or equity financing, or to obtain foreign exchange for capital expenditures. The PRC government has stated publicly that it intends to 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.
The value of the Renminbi against the US dollar and other currencies may fluctuate and is affected by, among other things, changes in China's political and economic conditions. The conversion of Renminbi into foreign currencies, including US dollars, has historically been set by the PBOC. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the US dollar. Under the new policy, the Renminbi is permitted to fluctuate within a band against a basket of certain foreign currencies. This change in policy resulted initially in an approximately 2.0% appreciation in the value of the Renminbi against the US dollar. Since the adoption of this new policy, the value of Renminbi against the US dollar has fluctuated on a daily basis within narrow ranges, but overall has further strengthened against the US dollar. There remains significant international pressure on the PRC government to further liberalize its currency policy, which could result in a further and more significant appreciation in the value of the Renminbi against the US dollar. As we outsource a significant portion of our crude oil requirement which are benchmarked to US dollar-denominated international prices, fluctuations in the value of the Renminbi against the US dollars and certain other foreign currencies may affect our crude oil costs.
Enforcement of shareholder rights; mandatory arbitration.
Currently, the primary sources of shareholder rights are our articles of association, the PRC Company Law and the Listing Rules of the Hong Kong Stock Exchange, which, among other things, impose certain standards of conduct, fairness and disclosure on us, our directors and our controlling shareholder. In general, their provisions for protection of shareholder's rights and access to information are different from those applicable to companies incorporated in the United States, the United Kingdom and other Western countries. In addition, the mechanism for enforcement of rights under the corporate framework to which we are subject may also be relatively undeveloped and untested. To our knowledge, there has not been any published report of judicial enforcement in the PRC by
H share shareholders of their rights under constituent documents of joint stock limited companies or the PRC Company Law or in the application or interpretation of the PRC or Hong Kong regulatory provisions applicable to PRC joint stock limited companies. We cannot assure you that our shareholders will enjoy protections that they may be entitled in other jurisdictions.
China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the United States, the United Kingdom or most other Western countries, and therefore recognition and enforcement in China of judgments of a court in any of these jurisdictions in relation to any matter not subject to a binding arbitration provision may not be assured. Our articles of association as well as the Listing Rules of the Hong Kong Stock Exchange provide that most disputes between holders of H shares and us, our directors, supervisors, officers or holders of domestic shares, arising out of the articles of association or the PRC Company Law concerning the affairs of our company or with respect to the transfer of our shares, are to be resolved through arbitration by arbitration organizations in Hong Kong or China, rather than through a court of law. On June 18, 1999, an arrangement was made between Hong Kong and the PRC for the mutual enforcement of arbitral awards. This new arrangement was approved by the Supreme People's Court of the PRC and the Hong Kong Legislative Council, and became effective on February 1, 2000. So far as we are aware, no action has been brought in China by any shareholder to enforce an arbitral award, and we are uncertain as to the outcome of any action brought in China to enforce an arbitral award granted to shareholders.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
Our legal and commercial name is China Petroleum & Chemical Corporation. Our head office is located at A6, Huixindong Street, Chaoyang District, Beijing 100029, the People's Republic of China, our telephone number is (8610) 6499-0060, and our fax number is (8610) 6499-0022. We have appointed SINOPEC USA Inc., 150 E. 52nd St., 28th Fl., New York, NY 10022, USA (telephone number: (212) 759-5085; fax number: (212) 759-6882) as our agent for service of processes for actions brought under the U.S. securities laws.
We were established as a joint stock limited company on February 25, 2000 under the Company Law of the PRC with Sinopec Group Company as the sole shareholder. Our principal businesses consist of petroleum and petrochemical businesses transferred to us by Sinopec Group Company pursuant to a reorganization agreement. Such businesses include:
o exploration for, development, production and marketing of crude oil and natural gas;
o refining of crude oil and marketing and distribution of refined petroleum products, including transportation, storage, trading, import and export of petroleum products; and
o production and sales of petrochemical products.
Sinopec Group Company's continuing activities consist, among other things, of:
o operating certain petrochemical facilities, small capacity refineries and retail service stations retained by Sinopec Group Company;
o providing physical geography exploration, and well drilling, survey, logging and downhole operational services;
o manufacturing production equipment and providing equipment maintenance services;
o providing construction services;
o providing utilities, such as electricity and water; and
o providing other operational services including transportation services.
Sinopec Group Company transferred the businesses to us either by transferring its equity holdings in subsidiaries or by transferring their assets and liabilities. Sinopec Group Company also transferred to us its shareholdings in 13 then listed companies. Sinopec Group Company also agreed in the reorganization agreement to transfer to us its exploration and production licenses and all rights and obligations under the agreements in connection with its core businesses transferred to us. The employees relating to these assets were also transferred to us.
In order to expand our core businesses, prevent competition among members of the same group and reduce related party transactions, between 2001 and 2004 we have acquired from Sinopec Group Company Sinopec National Star, Sinopec Maoming, Tahe Petrochemical and Xi'an Petrochemical, Petrochemical and Catalyst Assets, certain refining facilities and service stations. We have also sold and disposed of certain auxiliary assets to third parties.
On January 1, 2006, we reorganized Sinopec Shengli Oil Field Co., Ltd., one of our wholly-owned subsidiaries into Sinopec Shengli Branch Company, a branch company of Sinopec Corp.
We privatized Sinopec Zhenhai Refinery and Chemicals Co., Ltd., or ZRCC, by way of merger by absorption and purchased the publicly held H shares of ZRCC from its shareholders at HK$ 10.60 per share in cash, the total consideration being HK$ 7.672 billion. ZRCC was delisted from the Hong Kong Stock Exchange on March 24, 2006.
On February 25, 2006, we announced voluntary all-cash tender offers to acquire all the publicly-held shares of Sinopec Qilu Petrochemical Co., Ltd. at a price of RMB 10.18 per share, all the publicly-held shares of Sinopec Yangzi Petrochemical Co., at a price of RMB 13.95 per share, all the publicly-held shares of Sinopec Zhongyuan Petroleum Co., Ltd. at a price of RMB 12.12 per share, all the publicly-held shares of Shengli Oil Field Dynamic Co., Ltd. at a price of RMB 10.30 per share and all the non-tradable shares of Shengli Oil Field Dynamic Co., Ltd. held by other investors at a price of RMB 5.60 per share. Our tender offers became effective on April 6, 2006. Consequently, Sinopec Yangzi Petrochemical Co., Sinopec Zhongyuan Petroleum Co., Ltd. and Shengli Oil Field Dynamic Co., Ltd. have been delisted from Shenzhen stock exchange as of April 21, 2006, and Sinopec Qilu Petrochemical Co., Ltd. has been delisted from Shanghai Stock Exchange as of April 24, 2006. We paid an aggregate amount of approximately RMB 14.3 billion to the holders of the above shares.
On September 25, 2006, our reform plan to convert all non-tradable domestic shares into tradable domestic shares was approved by our shareholder's meeting. According to the plan, our shareholders of tradable A-shares shall receive 2.8 shares of us at no additional cost from our shareholders of non-tradable shares for every 10 tradable A-shares held by them; and all of our shareholders of the non-tradable shares shall have the rights to list their shares for trading on Shanghai Stock Exchange with certain selling restriction. On October 10, 2006, our shareholders of non-tradable shares transferred a total of 784 million consideration shares to our shareholders of tradable A-shares.
On October 11, 2006, Shengjun International Investment Co., Ltd. (Shengjun International), an overseas wholly-owned subsidiary of Sinopec Group Company, and us signed a joint venture contract. Shengjun International and us agreed to increase the registered capital of Sinopec Hainan by way of capital injection, of which, Sinopec Corp. shall inject RMB 2,989.5 million and Shengjun International shall inject RMB 996.5 million of foreign currency equivalents. After completion of the capital injection, Sinopec Corp. and Shengjun International held 75% and 25% of equity interest in Sinopec Hainan, respectively. Sinopec Hainan was put into commercial operation at the end of 2006 with an installed refining capacity of 8 million tonnes of crude oil per annum.
On December 6, 2006, our board of directors approved our plan to acquire the oil production assets of Shengli Petroleum Administration Bureau from Sinopec Group Company. In accordance with the acquisition plan, we acquired from Sinopec Group Company 64.73% equity interest in Shengli Oil Field Dongsheng Jinggong Petroleum Development Co., Ltd., 100% equity interest in Petroleum Development Center of Shengli Petroleum Administration Bureau, 52% equity interest in Shengli Oil Field Zhongsheng Petroleum Development Co., Ltd, and oil wells and relevant oil production assets of the former Shengda Group Oil & Gas Company in Shengli Oil Field for an aggregate consideration of RMB 3.5 billion.
B. BUSINESS OVERVIEW
Exploration and Production
Overview
We currently explore for, develop and produce crude oil and natural gas in a number of areas across China. As of December 31, 2006, we held 207 production licenses with terms ranging from 7 to 55 years. Our production licenses are renewable upon our application 30 days prior to expiration. During the term of our production license, we pay an annual production license fee of RMB 1,000 per square kilometer. Shengli oilfield is the second largest oilfield in China and accounted for more than 68.2% of our total crude oil production in 2006.
As of December 31, 2006, we held 357 exploration licenses for various blocks in which we engaged in exploration activities. The maximum term of our exploration licenses is 7 years. Our exploration licenses may be renewed upon our application 30 days prior to expiration of the original term with each renewal for a two-year term. We are obligated to make an annual minimum exploration investment relating to the exploration blocks in respect of which the exploration licenses are issued. In addition, we are also obligated to pay an annual exploration license fee starting from RMB 100 per square kilometer up to RMB 500 per square kilometer. We are entitled under state laws and regulations to apply for reduction and exemption of exploration license fee for exploration in the western region, ocean and northeast region of the PRC.
Properties
We currently operate 16 oil and gas producing fields, each of which consists of many oil and gas producing blocks and all of which are located in China.
Shengli oilfield is our most important producing oil field and the second largest producing oil field in China. It consists of 69 producing blocks of various sizes extending over an area of 61,000 square kilometers in northern Shandong province. Most of the blocks are located in the Jiyang trough with various oil producing levels. In 2006, Shengli field produced 195 million barrels of crude oil and 28.28 billion cubic feet of natural gas, with an average daily production of 546 thousand barrels-of-oil equivalent, accounting for approximately 60.8% of our total crude oil and natural gas production for the year.
Oil and Natural Gas Reserves
Our estimated proved reserves of crude oil and natural gas as of December 31, 2006 were 3,771 million barrels-of-oil equivalent (including 3,293 million barrels of crude oil and 2,856 billion cubic feet of natural gas), representing a slight decrease of 0.4% from December 31, 2005. Our estimated proved reserves do not include additional quantities recoverable beyond the term of the relevant production licenses, or that may result from extensions of currently proved areas, or from application of improved recovery processes not yet tested and determined to be economical.
The following tables set forth our proved oil and gas reserves and related data as of and for the years ended December 31, 2004, 2005 and 2006.
As of and for the Years Ended December 31,
--------------------------------------------------
2004 2005 2006
---------------- ----------------- -------------
Proved developed and undeveloped reserves (crude oil) (in million barrels)
Beginning of year........................................... 3,257 3,267 3,294
Revisions of previous estimates............................. 23 26 (10)
Improved recovery........................................... 127 142 146
Extensions and discoveries.................................. 134 138 148
Production.................................................. (274) (279) (285)
---------------- ----------------- -------------
End of year................................................. 3,267 3,294 3,293
================ ================= =============
Proved developed reserves (crude oil) (in million barrels)
Beginning of year........................................... 2,786 2,808 2,870
================ ================= =============
End of year................................................. 2,808 2,870 2,903
================ ================= =============
Proved developed and undeveloped reserves
(natural gas)
(in billion cubic feet)
Beginning of year........................................... 2,888 3,033 2,952
Revisions of previous estimates............................. (95) (42) (9)
Extensions and discoveries.................................. 447 183 170
Production.................................................. (207) (222) (257)
---------------- ----------------- -------------
End of year................................................. 3,033 2,952 2,856
================ ================= =============
Proved developed reserves (natural gas) (in billion cubic feet)
Beginning of year........................................... 1,249 1,398 1,557
================ ================= =============
End of year................................................. 1,398 1,557 1,472
================ ================= =============
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The following tables set forth proved developed and undeveloped crude oil and natural gas reserves of our major oil and gas producing fields as of December 31, 2004, 2005 and 2006.
As of December 31,
-------------------------------------------
2004 2005 2006
------------- ------------- ---------------
(in million barrels)
Proved developed and undeveloped crude oil reserves
Shengli........................................................... 2,307 2,362 2,352
Zhongyuan......................................................... 346 314 302
Xibei............................................................. 218 238 288
Henan............................................................. 173 154 136
Jiangsu........................................................... 112 112 91
Others............................................................ 111 114 124
------------- ------------- ---------------
Total............................................................. 3,267 3,294 3,293
============= ============= ===============
As of December 31,
-------------------------------------------
2004 2005 2006
------------- ------------- ---------------
(in billion cubic feet)
Proved developed and undeveloped natural gas reserves
Shengli........................................................... 357 322 313
Zhongyuan......................................................... 512 383 355
Xibei............................................................. 67 95 147
Jiangsu........................................................... 9 9 12
Xinan............................................................. 801 781 807
Huabei............................................................ 862 908 792
Others............................................................ 425 454 430
------------- ------------- ---------------
Total............................................................. 3,033 2,952 2,856
============= ============= ===============
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Oil and Natural Gas Production
In 2006, we produced an average of 898 thousand barrels-of-oil equivalent per day, of which approximately 87.0% was crude oil and 13.0% was natural gas.
The following tables set forth the average daily production of crude oil and natural gas for the years ended December 31, 2004, 2005 and 2006. The production of crude oil includes condensed oil.
For the Years Ended December 31,
--------------------------------------------
2004 2005 2006
------------- -------------- ---------------
(in thousand barrels)
Average daily crude oil production
Shengli.......................................................... 519 524 533
Zhongyuan........................................................ 65 62 60
Xibei............................................................ 69 82 92
Henan............................................................ 37 36 35
Jiangsu.......................................................... 31 32 33
Others........................................................... 28 28 28
------------- -------------- ---------------
Total Production................................................. 749 764 781
============= ============== ===============
For the Years Ended December 31,
--------------------------------------------
2004 2005 2006
------------- -------------- ---------------
(in million cubic feet)
Average daily natural gas production
Shengli.......................................................... 87 85 78
Zhongyuan........................................................ 169 161 159
Xibei............................................................ 47 50 84
Henan............................................................ 11 10 8
Jiangsu.......................................................... 5 6 6
Xinan............................................................ 185 203 213
Huabei........................................................... 9 39 101
Others........................................................... 54 54 54
------------- -------------- ---------------
Total Production................................................. 567 608 703
============= ============== ===============
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Lifting Cost & Realized Prices
The following table sets forth our average lifting costs per barrel-of-oil equivalent of crude oil and natural gas produced, average sales prices per barrel of crude oil and average sales prices per thousand cubic meters of natural gas for the years ended December 31, 2004, 2005 and 2006.
Total Shengli Others
------------- ------------- -------------
(RMB) (RMB) (RMB)
For the year ended December 31, 2006
Average petroleum lifting cost per BOE.......................... 73.31 77.16 67.34
Average realized sales price....................................
Per barrel of crude oil...................................... 449.93 443.66 463.70
Per thousand cubic meters of natural gas..................... 794.28 899.76 788.02
For the year ended December 31, 2005
Average petroleum lifting cost per BOE........................... 68.78 70.11 66.58
Average realized sales price.....................................
Per barrel of crude oil....................................... 375.30 379.01 366.98
Per thousand cubic meters of natural gas...................... 673.01 880.91 656.56
For the year ended December 31, 2004
Average petroleum lifting cost per BOE........................... 57.05 57.35 56.55
Average realized sales price.....................................
Per barrel of crude oil....................................... 275.56 279.37 266.78
Per thousand cubic meters of natural gas...................... 615.53 718.21 606.01
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Exploration and Development Activities
The following table sets forth the numbers of our exploration and development wells, including a breakdown of successful or productive wells and dry holes we drilled during the years ended December 31, 2004, 2005 and 2006.
Total Shengli Xibei Others
------------- -------------- ------------- --------------
For the year ended December 31, 2006
Exploration
-- Successful.................................... 226 118 20 88
-- Dry holes..................................... 269 57 19 193
Development
-- Productive.................................... 2,620 1,125 94 1,401
-- Dry holes..................................... 29 4 10 15
For the year ended December 31, 2005
Exploration
-- Successful.................................... 256 109 14 133
-- Dry holes..................................... 289 91 16 182
Development
-- Productive.................................... 2,327 970 82 1,275
-- Dry holes..................................... 21 1 12 8
For the year ended December 31, 2004
Exploration
-- Successful.................................... 300 149 10 141
-- Dry holes..................................... 290 51 15 224
Development
-- Productive.................................... 2,365 999 56 1,310
-- Dry holes..................................... 17 - 17 -
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The following table sets forth the numbers of our development crude oil and natural gas wells as of December 31, 2006.
As of December 31, 2006
---------------------------------------
Total Shengli Others
---------- -------------- -------------
Crude oil development wells
-- Total......................................... 32,238 21,741 10,497
-- Productive.................................... 25,925 16,921 9,004
Natural gas development wells
-- Total......................................... 2,362 350 2,012
-- Productive.................................... 1,851 88 1,763
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Refining
Overview
We processed approximately 146.3 million tonnes of crude oil in 2006, representing approximately 50.7% of China's total crude oil throughput. We produce a full range of refined petroleum products. The following table sets forth our production of our principal refined petroleum products for the years ended December 31, 2004, 2005 and 2006.
For the Years Ended December 31,
----------------------------------------------------
2004 2005 2006
--------------- ---------------------- -------------
(in million tonnes)
Gasoline....................................... 23.6 23.0 23.0
Diesel......................................... 50.9 54.9 57.9
Kerosene including jet fuel.................... 6.4 6.6 6.4
Light chemical feedstock....................... 17.7 21.1 22.7
Lubricant...................................... 1.3 1.3 1.1
Liquefied petroleum gas........................ 7.1 7.4 6.9
Fuel oil....................................... 7.8 6.9 6.0
|
Gasoline and diesel are our largest revenue producing products, and are sold mostly through our marketing and distribution segment through both retail and wholesale channels. We use most of our production of chemical feedstock as feedstock for our own chemical operations. Most of our other refined petroleum products are sold domestically to a wide variety of industrial and agricultural customers, and a small amount are exported.
Refining Facilities
We operate 27 refineries in China. As of December 31, 2006, our consolidated primary distillation capacity was 176.1 million tonnes per annum.
The following table sets forth our total primary distillation capacity per annum and refinery throughputs as of and for the years ended December 31, 2004, 2005 and 2006.
As of and for the Years Ended December 31,
-----------------------------------------------
2004 2005 2006
--------------- ------------------ ------------
Primary distillation capacity (million tonnes per annum)....... 155.2 160.1 176.1
Refinery throughputs (million tonnes).......................... 132.9 139.9 146.3
|
In 2006, measured by the total output from our refineries, our overall gasoline yield was 15.7%, overall diesel yield was 39.5%, overall kerosene yield was 4.3% and overall light chemical feedstock yield was 15.6%. Our products include lubricant, liquefied petroleum gas, solvent, asphalt, petroleum coke, paraffin and fuel oil. For the years ended December 31, 2004, 2005 and 2006, our overall yield for all refined petroleum products at our refineries was 93.1%, 93.2% and 93.5%, respectively.
The following table sets forth the primary distillation capacity per annum as of and refinery throughput for the years ended, December 31, 2004, 2005 and 2006 of each of our refineries with the primary distillation capacity of 8 million or more per annum throughout 2006.
As of and for the Years Ended December 31,
------------------------------------------------------------------------------------------
2004 2005 2006
------------------------------ ------------------------------ ----------------------------
Primary Primary Primary
Distillation Refinery Distillation Refinery Distillation Refinery
Refinery Capacity Throughput Capacity Throughput Capacity Throughput
-------------- --------------- ---------------- ------------- --------------- ------------
(in million tonnes)
Zhenhai....... 20.0 16.0 20.0 17.1 20.0 17.7
Shanghai...... 8.8 9.1 14.0 9.5 14.0 9.1
Maoming....... 13.5 13.2 13.5 12.7 13.5 14.0
Guangzhou..... 7.7 7.4 7.7 6.7 13.2 7.4
Jinling....... 13.0 8.2 13.0 10.7 13.0 10.8
Gaoqiao....... 11.0 9.1 11.0 10.1 11.0 9.3
Qilu.......... 10.5 8.8 10.5 10.0 10.5 10.5
Yanshan....... 8.0 7.8 8.0 8.0 8.0 8.0
Yangzi........ 8.0 6.4 8.0 7.8 8.0 7.9
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In 2006, we newly added 18.5 million tonnes per annum in our primary distillation capacity in 2006, representing a net increase of 16 million tonnes per annum compared with December 31, 2005, of which the newly added distillation capacity of sour crude oil was 11.2 million tonnes per annum. Our hydro-refining
capacity and coking capacity increased by 16.5 million tonnes per annum and 2.6 million tonnes per annum, respectively. The revamping projects for a number of refining facilities aimed to improve capacities for refined petroleum product quality have progressed smoothly.
Sources of Crude Oil
Our most important raw material is crude oil. The following table sets forth the sources of our crude oil supply for the years ended December 31, 2004, 2005 and 2006.
For the Yeas ended December 31,
--------------------------------------------------
2004 2005 2006
---------------- ----------------- ---------------
Source of Supply (in million tonnes)
Self-supply..................... 28.1 28.6 29.6
PetroChina Company Ltd.......... 10.3 8.8 8.8
CNOOC Ltd....................... 6.7 5.1 4.9
Import.......................... 89.0 99.1 101.5
---------------- ----------------- ---------------
Total........................ 134.1 141.6 144.8
================ ================= ===============
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Marketing and Sales of Refined Petroleum Products
Overview
We operate the largest sales and distribution network for refined petroleum products in China. In 2006, we distributed and sold in China approximately 111.7 million tonnes of gasoline, diesel and kerosene including jet fuel, representing a market share of approximately 64.0% in China.
Most of the refined petroleum products sold by us are produced internally. In 2006, approximately 72.5% of our gasoline sales volume and approximately 82.8% of our diesel sales volumes were produced internally.
The table below sets forth a summary of key data in the marketing and sales of refined petroleum products for the year ended December 31, 2004, 2005 and 2006.
For the Years Ended December 31,
---------------------------------------------------------
2004 2005 2006
---------------- ------------------- --------------------
Sales volume of refined petroleum products 94.6 104.6 111.7
(in million tonnes) ...........................
Of which: Retail............................... 53.3 63.5 72.2
Direct Sales.................. 19.7 20.4 19.0
Wholesale .................... 21.7 20.7 20.6
Average annual throughput of service stations
(tonnes per station)........................... 2,003 2,321 2,577
Total number of service stations under Sinopec
brand........................... 30,063 29,647 28,801
Of which: Self-operated service stations....... 26,581 27,367 28,001
Franchised service stations.. 3,482 2,280 800
Percentage of retail volume in total sales
(%)............................................ 56.3 60.7 64.6
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Retail
All of our retail sales are made through a network of service stations and petroleum shops operated under the Sinopec brand. Through this unified network we are more able to implement consistent pricing policies, maintain both product and service quality standards and more efficiently deploy our retail network.
In 2006, we sold approximately 72.2 million tonnes of refined petroleum products through our retail network, representing approximately 64.6% of our total refined petroleum products sales volume. Our retail market share in 2006
was approximately 79.3% in our principal market. As of December 31, 2006, our retail network mainly consists of 28,001 service stations that are wholly-owned and operated by us or jointly-owned and operated or leased by us and 800 franchised service stations that are owned and operated by third parties.
Direct Sales
In 2006, we sold approximately 19.0 million tonnes of refined petroleum products, including 2.9 million tonnes of gasoline, 15.9 million tonnes of diesel and 0.2 million tonnes of kerosene, through direct sales to those commercial customers such as industrial enterprises, hotels, restaurants and agricultural producers, representing approximately 17.0% of our total sales volume of refined petroleum products.
Wholesale
In 2006, we sold approximately 20.6 million tonnes of refined petroleum products through wholesale channels, representing approximately 18.4% of our total sales volume of refined petroleum products. Our wholesale sales include sales to large commercial or industrial customers and independent distributors as well as sales to certain long-term customers such as railway, airlines, shipping and public utilities.
Through our wholesale centers, we operate 454 storage facilities with a total capacity of approximately 12.6 million cubic meters, substantially all of which are wholly-owned by us. Our wholesale centers are connected to our refineries by railway, waterway and, in some cases, by pipelines. We also own some dedicated railways, oil wharfs, oil barges, rail tankers and oil trucks.
In 2006, we further improved our refined petroleum products retail networks through acquisition, construction and renovation of service stations, and added a net of 634 self-operated service stations. We believe we have further strengthened our leading position in principal market, and further improved our brand awareness and customer loyalty.
Chemicals
Overview
We are the largest petrochemical producer in China. We produce a full range of petrochemical products including intermediate petrochemicals, synthetic resins, synthetic fiber monomers and polymers, synthetic fibers, synthetic rubber and chemical fertilizers. Synthetic resins, synthetic fibers, synthetic rubber, chemical fertilizers and some intermediate petrochemicals comprise a significant majority of our external sales. Synthetic fiber monomers and polymers and intermediate petrochemicals, on the other hand, are mostly internally consumed as feedstock for the production of other chemical products. Our chemical operations are integrated with our refining businesses, which supply a significant portion of our chemical feedstock such as naphtha. Because of strong domestic demand, most of our petrochemical products are sold in China's domestic market.
The following table sets forth our production of major chemical products for the years ended December 31, 2004, 2005 and 2006.
For the Years Ended December 31,
------------------------------------------
2004 2005 2006
------------- -------------- -------------
(in thousand tonnes)
Ethylene....................................................... 4,074 5,319 6,163
Synthetic resins............................................... 6,221 7,605 8,619
Synthetic rubbers.............................................. 561 626 668
Monomers and polymers for synthetic fibers..................... 6,021 6,725 7,242
Synthetic fibers............................................... 1,654 1,570 1,502
Urea........................................................... 2,630 1,780 1,609
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Note: The operational data for 2005 and 2006 include 100% production of the two joint venture ethylene facilities that we have joint control of 50% each, Shanghai SECCO and BASF-YPC.
Products
Intermediate Petrochemicals
We are the largest ethylene producer in China. Our rated ethylene capacity was 6.15 million tonnes per annum, which represented 62% of China's total domestic ethylene capacity, as of December 31, 2006. In 2006, we produced 6.16 million tonnes of ethylene, representing approximately 67.0 % of the total domestic output. Nearly all of our olefins production is used as feedstock for our petrochemical operations.
We produce aromatics mainly in the forms of benzene and para-xylene, which are used primarily as feedstock for purified terephthalic acid, or PTA, the preferred raw material for polyester. We are the largest aromatics producer in China.
Organic chemicals extracted mainly from olefins and aromatics are also intermediate petrochemicals and are essential raw materials for synthetic resins, synthetic rubber and synthetic fibers. We are the largest producer of butanol, styrene, paraxylene, vinyl acetate, phenol and acetone in China.
The following table sets forth our rated capacity per annum, production volume and major plants of production as of or for the year ended December 31, 2006 for our principal intermediate petrochemical products.
Our Rated Our
Capacity Production Major Plants of Production
----------------- ------------ --------------------------------
(thousand tonnes (thousand
per annum) tonnes)
Ethylene..................... 6,145 6,163 Yanshan, Shanghai, Yangzi, Qilu,
Maoming, Guangzhou, Tianjin,
Zhongyuan, SECCO and BASF-YPC
Propylene.................... 4,884 4,903 Yanshan, Shanghai, Yangzi, Qilu,
Maoming, Guangzhou, Tianjin,
Zhongyuan, SECCO, BASF-YPC,
Gaoqiao, Anqing, Jinan, Jingmen
and Wuhan
Benzene...................... 2,298 2,226 Yanshan, Shanghai, Yangzi, Qilu,
Guangzhou, Zhenhai, Tianjin,
Luoyang, SECCO and BASF-YPC
Styrene...................... 964 972 Yanshan, Qilu, Guangzhou,
Maoming and SECCO
Para-xylene.................. 2,168 2,239 Shanghai, Yangzi, Qilu, Tianjin
and Luoyang
Phenol....................... 350 390 Yanshan and Gaoqiao
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Note: The operational data include 100% production of the two joint ventures that we have joint control of 50% each, SECCO and BASF-YPC.
Synthetic Resins
We are the largest producer of polyethylene, polypropylene and polystyrene in China.
The following table sets forth our rated capacity per annum, production volumes and major plants of production for each of our principal synthetic resins as of or for the year ended December 31, 2006.
Our Rated Our
Capacity Production Major Plants of Production
----------------- ------------ --------------------------------
(thousand tonnes (thousand
per annum) tonnes)
Polyethylene..................... 4,073 4,090 Yanshan, Shanghai, Yangzi, Qilu,
Maoming, Guangzhou, Tianjin,
Zhongyuan, SECCO and BASF-YPC
Polypropylene.................... 3,455 3,449 Yanshan, Shanghai, Yangzi, Qilu,
Guangzhou, Miaoming, Tianjin,
Zhongyuan, SECCO, Wuhan
Fenghuang, Jingmen and Fujian
Polyvinyl chloride............... 600 575 Qilu
Polystyrene...................... 516 357 Yanshan, Qilu, Maoming,
Guangzhou and SECCO
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Synthetic Fiber Monomers and Polymers
Our principal synthetic fiber monomers and polymers are purified teraphthalic acid, ethylene glycol, acrylonitrile, caprolactam, polyester, polyethylene glycol and polyamide fiber. Based on our 2006 production, we are the largest producer of purified teraphthalic acid, ethylene glycol, caprolactam and polyester in China. Most of our production of synthetic fiber monomers and polymers are used as feedstock for synthetic fibers.
The following table sets forth our rated capacity per annum, our production volume and major plants of production as of or for the year ended December 31, 2006 for each type of our principal synthetic fiber monomers and polymers.
Our Rated Our
Capacity Production Major Plants of Production
----------------- ------------ --------------------------------
(thousand tonnes (thousand
per annum) tonnes)
Purified teraphthalic acid....... 3,034 2,838 Shanghai, Yangzi, Yizheng,
Tianjin and Luoyang
Ethylene glycol.................. 1,033 935 Yanshan, Shanghai, Yangzi,
Tianjin, Maoming and BASF-YPC
Acrylonitrile.................... 510 425 Shanghai, Anqing, Qilu, SECCO
Caprolactam...................... 140 180 Shijiazhuang and Baling
Polyester ..................... 2,766 2,664 Shanghai, Yizheng, Tianjing and
Luoyang
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Synthetic Fibers
We are the largest producer of polyester and acrylic fibers in China. Our principal synthetic fiber products are polyester fiber and acrylic fiber.
The following table sets forth our rated capacity per annum, production volume and major plants of production for each type of our principal synthetic fibers as of and for the year ended December 31, 2006.
Our Rated Our
Capacity Production Major Plants of Production
----------------- ------------ --------------------------------
(thousand tonnes (thousand
per annum) tonnes)
Polyester fiber................ 1,416 1,128 Yizheng, Shanghai, Tianjin and
Luoyang
Acrylic fiber.................. 315 369 Shanghai, Anqing and Qilu
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Synthetic Rubbers
Our principal synthetic rubbers are cis-polybutadiene rubber, styrene butadiene rubber, or SBR, styrene butadiene-styrene thermoplastic elastomer and isobutadiene isoprene rubber, or IIR. Based on our 2006 production, we are the largest producer of SBR and cis-polybutadiene rubber and the only producer of IIR in China.
The following table sets forth our rated capacity per annum, production volume and major plants of production as of or for the year ended December 31, 2006 for each of our principal synthetic rubbers.
Our Rated Our
Capacity Production Major Plants of Production
----------------- ------------ --------------------------------
(thousand tonnes (thousand
per annum) tonnes)
Cis-polybutadiene rubber......... 252 295 Yanshan, Qilu, Maoming and Gaoqiao
Styrene butadiene rubber......... 295 174 Yanshan, Qilu, Maoming and Gaoqiao
Styrene-butadiene-styrene 100 160 Yanshan and Maoming
thermoplastic elastomers ........
Isobulylene isoprene rubber...... 30 40 Yanshan
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Chemical Fertilizers
We produce synthetic ammonia and urea. Our synthetic ammonia is used to manufacture urea, caprolactam and acrylic nitrile.
The following table sets forth our rated capacity per annum, our production volume and major plants of production for ammonia and urea as of or for the year ended December 31, 2006.
Our Rated Our
Capacity Production Major Plants of Production
----------------- ------------ --------------------------------
(thousand tonnes (thousand
per annum) tonnes)
Ammonia.... 2,135 957 Zhenhai, Jinling, Anqing,
Jiujiang, Qilu, Hubei and Baling
Urea....... 3,610 1,609 Zhenhai, Jinling, Anqing,
Jiujiang, Qilu, Hubei and Baling
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Marketing and Sales of Petrochemicals
Price and volume of petrochemical sales are primarily market driven. The southern and eastern regions in China, where most of our petrochemical plants are located, constitute the major petrochemical market in China. Our proximity to the major petrochemical market gives us a competitive geographic advantage over our competitors.
Our principal sales and distribution channels consist of direct sales to end-users, most of which are large and medium size manufacturing enterprises, and sales to distributors in our national sales network. In 2006, we sold approximately 64% of our petrochemical products directly to end-users and 36% to our distributors.
We also provided after-sale services to our customers, including technical support. We continuously enhance technical content and added value of our products to meet the needs of market.
Competition
Exploration and Production
Because our production of crude oil can only meet approximately 20% of our crude oil requirements, we generally do not compete for crude oil customers. However, we compete with other market participants for the acquisition of desirable crude oil and natural gas prospects.
Refining and Marketing of Refined Petroleum Products
Market participants compete primarily on the basis of quality of products and service, efficiency of operations including proximity to customers, awareness of brand name and price. While we constantly face competition from other market participants, we believe that we have a competitive advantage in our principal market over our competitors in most of these aspects.
Chemicals
We compete with domestic and foreign chemicals producers in the chemicals market. We believe our proximity to customers has given us significant competitive geographical advantages. Most of our petrochemical production facilities are located in the eastern and southern regions in China, an area which has experienced higher economic growth rates in China in the past two decades. Proximity of our production facilities to our markets has given us an advantage over our competitors in terms of easy access to our customers, resulting in lower transportation costs, more reliable delivery of products and better service to customers.
Patents and Trademarks
In 2006, we were granted 703 patents in China and overseas. As of December 31, 2006, we owned a total of 3,285 patents in China. We may also use certain patents of Sinopec Group Company under royalty-free licenses. These patents expire from time to time and cover many products, processes and product uses. We also have royalty-free licenses from Sinopec Group Company to use certain Sinopec Group Company's trademarks and brands, including the "Sinopec" brand, for our products and services. Our trademark licenses from Sinopec Group Company are for a term of ten years commencing on February 25, 2000, and the licenses are renewable at our option.
Regulatory Matters
Overview
China's petroleum and petrochemical industry has seen significant liberalization in the past ten years. However, the exploration, production, marketing and distribution of crude oil and natural gas, as well as the production, marketing and distribution of certain refined petroleum products are still subject to regulation of many government agencies including:
National Development and Reform Commission ("NDRC")
The NDRC is responsible for formulating and implementing key policies in respect of petroleum and petrochemical industry, including:
o Formulating guidance plan for annual production, import and export amount of crude oil, natural gas and gasoline nationwide based on its forecast on macro economic conditions in China;
o Publishing guidance prices for certain refined petroleum products, including gasoline, diesel and jet fuel;
o Approving domestic and overseas resource investment projects whose capital expenditure is in excess of certain amount; and
o Approving Sino-foreign cooperation projects that are in excess of certain investment limits.
The Ministry of Commerce ("MOFCOM")
MOFCOM is responsible for examining and approving production sharing contracts, Sino-foreign equity joint venture contracts and Sino-foreign cooperation joint venture contracts for oil and gas development within PRC. It is also responsible to issue quotas and licenses for import and export of crude oil and refined oil.
Ministry of Land and Resources ("MLR")
The MLR is responsible for issuing the licenses that are required to explore and produce crude oil and natural gas in China.
Regulation of Exploration and Production
Exploration and Production Rights
The PRC Constitution provides that all mineral and oil resources belong to the state. In 1986, the standing committee of the National People's Congress passed the Mineral Resources Law which authorizes the Ministry of Land and Resources, or the MLR, to exercise administrative authority over the exploration and production of the mineral and oil resources within the PRC, including its territorial waters. The Mineral Resources Law and its supplementary regulations provide the basic legal framework under which exploration licenses and production licenses are granted. The MLR has the authority to grant exploration licenses and production licenses on a competitive bidding or other basis it considers appropriate. Applicants for these licenses must be companies approved by the State Council to engage in oil and gas exploration and production activities. Currently, only we, PetroChina, CNOOC and Yanchang Petroleum Group Ltd. have received such approval.
Applicants for exploration licenses must first register with the MLR blocks in which they intend to engage in exploration activities. The holder of an exploration license is obligated to make an annual minimum exploration investment relating to the exploration blocks in respect of which the license is issued. Investment ranges from RMB 2,000 per square kilometer for the initial year to RMB 5,000 for the second year and to RMB 10,000 for the third and subsequent years. Additionally, the holder has to pay an annual exploration license fee of RMB 100 per square kilometer for each of the first three years and increases by an additional RMB 100 per square kilometer per year for subsequent years up to a maximum of RMB 500 per square kilometer. The maximum term of an exploration license is 7 years. The exploration license may be renewed upon application by the holder 30 days prior to expiration of the original term with each renewal for a two-year term.
At the exploration stage, an applicant can also apply for a progressive exploration and production license that allows the holder to test and develop reserves not yet fully proved. The progressive exploration and production license has a maximum term of 15 years. Upon the reserves becoming proved for a block, the holder must apply for a full production license in order to undertake production.
The MLR issues full production licenses to applicants on the basis of the reserve reports approved by relevant authorities. The maximum term of a full production license is 30 years unless a special dispensation is given by the State Council. Due to a special dispensation granted to us by the State Council, the maximum term of our full production licenses is 55 years. The full production license is renewable upon application by the holder 30 days prior to expiration. A holder of the full production license has to pay an annual full production right usage fee of RMB 1,000 per square kilometer.
All companies approved by the State Council to engage in oil and gas exploration and production activities may apply for exploration and production licenses for onshore and off-shore oil and natural gas resources without geographical restrictions. We have exploration and production licenses for the exploration and production of both onshore and offshore crude oil and natural gas resources in China.
Exploration and production licenses do not grant the holders the right to enter upon any land for the purpose of exploration and production. Holders of exploration and production licenses must separately obtain the right to use the land covered by the licenses, and current owners of the rights to use such land may transfer or lease the land to the license holder.
Volume and Price of Natural Gas
The NDRC formulates the annual natural gas supply guidelines which require natural gas producers to distribute specified amount of natural gas to specified fertilizer producers. The actual production level of natural gas (excluding the amount supplied to the fertilizer producers) is determined by the natural gas producers themselves.
The price of natural gas has two components:
o ex-factory price; and
o pipeline transportation fee
Prior to December 2005, ex-factory prices vary depending on whether or not the natural gas sold is within the government-formulated natural gas supply guidelines. For natural gas sold within the government-formulated supply guidelines, the NDRC fixes the ex-factory prices according to the nature of the customers. Most of these customers are fertilizer producers. For sales of natural gas which is produced in excess of the government-formulated natural gas supply plan, the NDRC publishes the median guidance ex-factory price and allows the producers to set the price within +/-10% of this guidance price.
Since December 2005, the NDRC simplified the ex-factory price-setting mechanism by dividing gas prices into two tiers and publishing a median guidance ex-factory price for each tier. Producers may negotiate with their customers to set the price within +/-10% of the guidance price. In addition, the NDRC would adjust the guidance price once per year by up to 8% annually to reflect the price trends of crude oil and other alternative energies.
Natural gas producers also submit to the NDRC for examination and approval any proposed transportation fee for the natural gas transported by pipelines based on the capital investment made in the pipeline, the depreciation period for the pipeline and the ability of end users to pay.
Regulation of Refining and Marketing of Refined Petroleum Products
Volume and Price Controls on Gasoline, Diesel and Jet Fuel
The PRC government continues to exercise control over gasoline, diesel and jet fuel prices.
Beginning on October 17, 2001, the NDRC has started determining the retail guidance prices of gasoline, diesel and jet fuel based on the FOB prices on the Singapore, Rotterdam and New York markets. Within the limit of the total adjustable amount, the NDRC may adjust these prices according to the market conditions in China. The government has started to implement the policies to adjust the prices of refined petroleum products since March 2003, and imposed certain controls over the range and frequency of such adjustment. In 2006, it was reported the new refined petroleum products price-setting mechanism had been formulated by the relevant government authority. However, the revised price-setting mechanism has not been fully implemented.
We are permitted to set our own retail prices within +/-8% of the published guidance prices. There are no government restrictions on how we set prices for sales among our segments and subsidiaries.
Regulation of Crude Oil and Refined Petroleum Products Market
On December 4, 2006, Ministry of Commerce of the PRC promulgated the "Administrative Rules for Crude Oil Market" and "Administrative Rules for Refined Petroleum Products Market" to open the wholesale market of crude oil and refined petroleum products to new market entrants, respectively. We will face more competition in both crude oil and refined petroleum products markets. Such increased competition may have a material adverse effect on our financial conditions and results of operations.
Investment
Under the State Council's Decision on Investment System Reform, investments without the use of government funds are only subject to a licensing system or a registration system, as the case may be. Under the current system, only significant projects and the projects of restrictive nature are subject to approval so as to maintain social and public interests, and all other projects of any investment scale are only subject to a registration system.
Overseas investment by any Chinese party that is US$ 30 million or above and falls within the category of resources development shall be verified and approved by the NDRC. Other projects that involve the use of foreign exchange by the Chinese party of US$ 10 million or above shall be verified and approved by the NDRC. Any overseas investment projects other than the foregoing shall be filed with the NDRC and/or the MOFCOM if the investor is an enterprise managed by the central government, or approved by its local government according to law. Domestic enterprise's establishment of overseas enterprise (with the exception of financial enterprises) shall be approved by the MOFCOM.
Taxation, Fees and Royalty
Companies which operate petroleum and petrochemical businesses in China are subject to a variety of taxes, fees and royalties.
On March 26, 2006, the PRC government imposed a special oil income levy on revenues generated from the sale of domestically produced crude oil when its realized price exceeds US$ 40 per barrel. The special oil income levy has five levels and is calculated and charged according to the progressive ad valorem rates on the excess amounts. The levy is calculated on a monthly basis and collected on a quarterly basis. The applicable rate of the levy is determined based on the weighted average crude oil sale price of the exploration and production company of a particular month.
In 2006, the PRC government adjusted the scope of taxable items of oil consumption tax, and started to impose consumption tax on naphtha, solvent oil, lubricant, jet fuel and fuel oil.
On March 16, 2007, the PRC government enacted the new Corporate Income Tax Law of the PRC (the "New Corporate Income Tax Law"), which will take effect on January 1, 2008. According to the New Corporate Income Tax Law, the corporate income tax rate for entities other than certain qualified non-resident enterprises, high-tech enterprises and small-scale enterprises, as defined in the New Corporate Income Tax Law, will be 25%. In addition, enterprises that are currently taxed at preferential rates will be subject to a five-year transition period during which the tax rates will gradually be increased to the unified tax rate of 25% from January 1, 2008. Therefore, we, except for our high-tech enterprises and certain of our entities currently taxed at preferential rates, will be subject to the unified tax rate of 25% starting from January 1, 2008.
The table below sets forth the various taxes, fees and royalties generally payable by us or by such companies in China.
Tax Item Tax Base Tax Rate
-------- -------- --------
Corporate income tax Taxable income 33%; 25% starting from January 1, 2008
Value-added tax Revenue 13% for liquefied petroleum gas, natural gas, and low
density polyethylene for production of agricultural film
and fertilizers and 17% for other items. We generally
charge value-added tax to our customers at the time of
settlement on top of the selling prices of our products
on behalf of the taxation authority. We may directly
claim refund from the value-added tax collected from our
customers of any value-added tax that we paid for (i)
purchasing materials consumed during the production
process; (ii) charges paid for drilling and other
engineering services; and (iii) labor consumed during
the production process.
27
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Sales volume 5% for the Sino-foreign oil and gas exploration and
development cooperative projects. However, input
value-added tax cannot be deducted.
Business tax Revenue from pipeline 3%.
transportation services
Consumption tax Aggregate volume sold or RMB 277.6 per tonne for gasoline, RMB 117.6 per tonne
self-consumed for diesel, RMB 277 per tonne for naphtha, RMB
256.4 per tonne for solvent oil, RMB 225.2 per tonne for
lubricant, RMB 101.5 per tonne for fuel oil, and RMB
124.6 per tonne for jet fuel, payable by producer. The
actual applicable rates for naphtha, solvent oil,
lubricant and fuel oil is 30% of their respective tax
rates listed above, and the actual applicable rate for
kerosene including jet fuel is zero for the time being.
Import tariff CIF China price 5% for gasoline, 6% for diesel and 5% for jet fuel. The
actual applicable tax rate in 2007 for gasoline, diesel
and jet fuel is 2%.
Resource tax Aggregate volume sold or RMB 14 to RMB 30 per tonne for crude oil. RMB 7 to RMB
self-consumed 15 per thousand cubic meters for natural gas. The actual
applicable rate for each oil field may differ depending
on the volume of the exploration and production
activities and costs required for the production at the
particular oil field.
Compensatory fee for mineral Revenue of crude oil and 1%
resources natural gas
Exploration license fee Area RMB 100 to 500 per square kilometer per annum.
Production license fee Area RMB 1,000 per square kilometer per annum.
Royalty fee(1) Production volume Progressive rate of 0-12.5% for crude oil and 0-3% for
natural gas.
City construction tax Total amount of 1% to 7%.
value-added tax,
consumption tax and
business tax
Education Surcharge Total amount of 3%.
value-added tax,
consumption tax and
business tax
Special Oil Income Levy Any revenue derived from Progressive rate of 20% to 40% for revenue derived from
sale of domestically crude oil with realized price in excess of US$ 40 per
produced crude oil when barrel, i.e. 20% for the portion in excess of US$ 40 per
the realized crude oil barrel up to US$ 45 per barrel (inclusive); 25% for the
price exceeds US$ 40 per portion in excess of US$ 45 per barrel up to US$ 50 per
barrel. barrel (inclusive); 30% for the portion in excess of
US$ 50 per barrel to US$ 55 per barrel (inclusive); 35%
for the portion in excess of US$ 55 per barrel to US$ 60
per barrel (inclusive); and 40% for the portion in
excess of US$ 60 per barrel.
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C. ORGANIZATIONAL STRUCTURE
For a description of our relationship with Sinopec Group Company, see "Item 4. Information on the Company -- A. History and Development of the Company" and "Item 7. Major Shareholders and Related Party Transactions." For a description of our significant subsidiaries, see Note 33 to our consolidated financial statements.
D. PROPERTY, PLANT AND EQUIPMENT
We own substantially all of our properties, plants and equipment relating to our business activities. We hold production licenses covering all of our interests in our developed and undeveloped crude oil and natural gas fields and productive wells. See "Item 4. Information on the Company -- B. Business Overview" for description of our property, plant and equipment.
Environmental Matters
We are subject to various national environmental laws and regulations and also environmental regulations promulgated by the local governments in whose jurisdictions we have operations. For example, national regulations promulgated by the central government set discharge standards for emissions into air and water. They also set forth schedules of discharge fees for various waste substances. These schedules usually provide for discharge fee increases for each incremental increase of the amount of discharge up to a certain level. Above a certain level, the central regulations permit the local government to order any of our facilities to cure certain behavior causing environmental damage and subject to the central government's approval, the local government may also issue orders to close any of our facilities that fail to comply with the existing regulations.
Each of our production subsidiaries has implemented a system to control its pollutant emissions and to oversee compliance with the PRC environmental regulations. We have a central safety and environmental compliance department to set our internal environmental requirements and procedures, and to manage and supervise the environmental protection programs at the various production facilities. Each production subsidiary has an environmental compliance department which is responsible for supervising environmental matters at the subsidiary and implementing our environmental requirements and procedures. These departments report both to the management of the subsidiary and to the central environmental compliance department.
Our production facilities have their own facilities to treat waste water, solid waste and waste gases on site. Waste water first goes through preliminary treatment at our own waste water treatment facilities. Thereafter, the water is sent to nearby waste water treatment centers operated either by us or by Sinopec Group for further treatment. All solid waste materials generated by our production facilities are buried at disposal sites or burned in furnaces either operated by us or by Sinopec Group. Waste gases are generally treated and burned in furnaces before dissipation and the ash is disposed in accordance with our solid waste disposal procedures.
Environmental regulations also require companies to file an environmental impact report to the environmental bureau for approval before undertaking any construction of a new production facility or any major expansion or renovation of an existing production facility. Such an undertaking will not be permitted to operate until the environmental bureau has performed an inspection and is satisfied that environmentally sound equipment has been installed for the facility.
We believe our environmental protection systems and facilities are adequate for us to comply with current applicable national and local environmental protection regulations. The PRC government, however, may impose stricter regulations which require additional expenditure on compliance with environmental regulations.
We paid pollutant discharge fees of approximately RMB 248 million in 2004, RMB 493 million in 2005 and RMB 1,637 million in 2006.
Insurance
In respect of our refining, petrochemical production, and marketing and sales operations, we currently maintain with Sinopec Group Company, under the terms of its Safety Production Insurance Fund ("SPI Fund"), approximately RMB 302.3 billion of coverage on our property and plants and approximately RMB 43.2 billion of coverage on our inventory. In 2006, we paid an insurance premium of approximately RMB 1.3 billion to Sinopec Group Company for such coverage. Transportation vehicles and products in transit are not covered by
Sinopec Group Company and we maintain insurance policies for those assets with insurance companies in the PRC.
The insurance coverage under SPI Fund applies to all enterprises controlled by Sinopec Group Company under regulations published by the Ministry of Finance. We believe that, in the event of a major accident, we will be able to recover most of our losses from insurance proceeds paid under the SPI Fund or by insurance companies.
Pursuant to an approval of the Ministry of Finance, on January 29, 2002 Sinopec Group Company entered into an agreement with China People's Insurance Company to purchase a property and casualty policy which would also cover our assets. The policy provides for an annual maximum cumulative claim amount of RMB 4.0 billion and a maximum of RMB 2.36 billion per occurrence.
Consistent with what we believe to be customary practice among PRC enterprises, we do not currently carry any third party liability insurance to cover claims in respect of personal injury, 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 past three years. We also do not carry business interruption insurance, as such coverage is not customary in the PRC.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. GENERAL
The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and the accompanying notes. Certain financial information presented in this section is derived from our audited consolidated financial statements that have been prepared in accordance with IFRS. IFRS vary in certain significant respects from US GAAP. Information relating to the nature and effect of such differences is presented in Note 37 to the consolidated financial statements. Unless otherwise indicated, all financial data presented on a consolidated basis or by segment, are presented net of inter-segment transactions (i.e., inter-segment and other intercompany transactions have been eliminated).
We acquired Sinopec National Star Petroleum Company from Sinopec Group Company in 2001, Sinopec Maoming, Xi'an Petrochemical and Tahe Petrochemical Factory from Sinopec Group Company in 2003, certain Petrochemical and Catalyst Assets from Sinopec Group Company in 2004 and Sinopec Hainan and Oil Production Plants in 2006. As we and these companies are under the common control of Sinopec Group Company, our acquisitions are considered as "combination of entities under common control" which are accounted for in a manner similar to a pooling-of-interests. Accordingly, the acquired assets and related liabilities have been accounted for at historical cost and our consolidated financial statements for periods prior to the combinations have been restated to include the financial condition and the results of operation of these acquired companies on a combined basis.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations contained elsewhere in this annual report are based on our consolidated financial statements which have been prepared in accordance with IFRS. Our reported financial condition and results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of our financial statements. We base our assumptions and estimates on historical experience and on various other assumptions that we believe to be reasonable and which form the basis for making judgments about matters that are not readily apparent from other sources. On an on-going basis, our management evaluates its estimates. Actual results may differ from those estimates as facts, circumstances and conditions change.
The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing our financial statements. Our principal accounting policies are set forth in Note 2 to the consolidated financial statements.
We believe the following critical accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.
Oil and gas properties and reserves
The accounting for our upstream oil and gas activities is subject to special accounting rules that are unique to the oil and gas business. There are two methods to account for oil and gas business activities, the successful efforts method and the full cost method. We have elected to use the successful efforts method. A description of our policies for oil and gas properties, impairment, maintenance and repair activities is set forth in Note 2 to our consolidated financial statements.
The successful efforts method reflects the volatility that is inherent in exploring for mineral resources in that costs of unsuccessful exploratory efforts are charged to expense as they are incurred. These costs primarily include dry hole costs, seismic costs and other exploratory costs. Under the full cost method, these costs are capitalized and written-off (depreciation) over time.
Engineering estimates of our oil and gas reserves are inherently imprecise and represent only approximate amounts because of the subjective judgments involved in developing such information. There are authoritative guidelines regarding the engineering criteria that have to be met before estimated oil and gas reserves can be designated as "proved". Proved and proved developed reserves estimates are updated at least annually and take into account recent production and technical information about each field. In addition, as prices and cost levels change from year to year, the estimate of proved and proved developed reserves also changes. This change is considered a change in estimate for accounting purposes and is reflected on a prospective basis in related depreciation rates.
Despite the inherent imprecision in these engineering estimates, these estimates are used in determining depreciation expense and impairment expense, and in disclosing the supplemental standardized measure of discounted future net cash flows relating to proved oil and gas properties. Depreciation rates are determined based on estimated proved developed reserve quantities (the denominator) and capitalized costs of producing properties (the numerator). Producing properties' capitalized costs are amortized based on the units of oil or gas produced. Therefore, assuming all other variables are held constant, an increase in estimated proved developed reserves decreases our depreciation, depletion and amortization expense. Also, estimated reserves are often used to calculate future cash flows from our oil and gas operations, which serve as an indicator of fair value in determining whether a property is impaired or not. The larger the estimated reserves, the less likely the property is impaired. There have been no significant changes to the original reserve estimates during any of the three years ended December 31, 2004, 2005 and 2006.
Impairment for long-lived assets
If circumstances indicate that the net book value of a long-lived asset, including oil and gas properties, may not be recoverable, this asset may be considered "impaired", and an impairment loss may be recognized in accordance with IAS 36 "Impairment of Assets". The carrying amounts of long-lived assets are reviewed periodically in order to assess whether the recoverable amounts have declined below the carrying amounts. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to recoverable amount. For goodwill, the recoverable amount is estimated annually. The recoverable amount is the greater of the net selling price and the value in use. It is difficult to precisely estimate selling price because quoted market prices for our assets or cash-generating units are not readily available. In determining the value in use, expected cash flows generated by the asset or the cash-generating unit are discounted to their present value, which requires significant judgment relating to level of sale volume, selling price and amount of operating costs. We use all readily available information in determining an amount that is a reasonable approximation of recoverable amount, including estimates based on reasonable and supportable assumptions and projections of reserve quantities, sales volume, selling price and amount of operating costs.
Impairment losses recognized for each of the three years ended December 31, 2004, 2005 and 2006 in our statement of income and equity are summarized as follows:
Years ended December 31,
-------------------------------------
2004 2005 2006
----------- ------------ ------------
RMB RMB RMB
Impairment losses on long-lived assets recognized in statement of (in millions)
income
Exploration and production............................................ 98 60 552
Refining.............................................................. 14 -- --
Marketing and distribution............................................ 1,769 366 23
Chemicals............................................................. 2,038 1,425 250
----------- ------------ ------------
3,919 1,851 825
=========== ============ ============
Impairment losses on revaluated long-lived assets recognized in equity
attributable to equity shareholders of the Company
Chemicals............................................................. 709 -- --
=========== ============ ============
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Depreciation
Property, plant and equipment (other than oil and gas properties) are depreciated on a straight-line basis over the estimated useful lives of the assets, after taking into account the estimated residual value. We review the estimated useful lives of the assets regularly in order to determine the amount of depreciation expense to be recorded during any reporting period. The useful lives are based on our historical experience with similar assets and taking into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates. There have been no significant changes to the estimated useful lives and residual values during each of the three years ended December 31, 2004, 2005 and 2006.
Revaluation
As required by the relevant PRC rules and regulations, our property, plant and equipment were revalued in connection with our reorganization, and the property, plant and equipment of the companies that we acquired in 2001, 2003, 2004 and 2006 were also revalued in connection with these acquisitions. These revaluations were carried out for each asset class by independent valuers on a depreciated replacement cost basis. Subsequent to these revaluations, property, plant and equipment are carried at the revalued amount, being the fair value as at the date of the revaluation, less subsequent accumulated depreciation and impairment losses. Revaluations are performed with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the balance sheet date. We revalued our property, plant and equipment based on a depreciated replacement cost basis in accordance with our IFRS accounting policies as of December 31, 2004. The results of subsequent revaluations may have an impact on our future results to the extent the fair values of our property, plant and equipment change significantly.
Impairment of accounts receivable for bad and doubtful debts
We estimate impairment of accounts receivable for bad and doubtful debts resulting from the inability of our customers to make the required payments. We base our estimates on the aging of our accounts receivable balance, customer credit-worthiness, and historical write-off experience. If the financial condition of our customers were to deteriorate, actual write-offs would be higher than estimated. The changes in the impairment losses for bad and doubtful accounts are as follows:
Years ended December 31,
----------------------------------
2004 2005 2006
--------- ----------- ------------
RMB RMB RMB
(in millions)
At beginning of year.......................................... 3,350 3,671 3,140
Impairment losses recognized for the year..................... 935 328 438
Written-off/reversal of impairment losses..................... (454) (859) (244)
Less: Amount distributed to Sinopec Group Company............ (160) -- --
--------- ----------- ------------
At end of year................................................ 3,671 3,140 3,334
========= =========== ============
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Recently Pronounced International Financial Reporting Standards
Information relating to the recently pronounced IFRS is presented in Note 36 to the consolidated financial statements.
Overview of Our Operations
We are the largest integrated petroleum and petrochemical company in China and one of the largest in Asia in terms of operating revenues. We engage in exploring for, developing and producing crude oil and natural gas, operating refineries and petrochemical facilities and marketing crude oil, natural gas, refined petroleum products and petrochemicals. We have reported our consolidated financial results according to the following four principal business segments and the corporate and others segment.
o Exploration and Production Segment, which consists of our activities related to exploring for and developing, producing and selling crude oil and natural gas;
o Refining Segment, which consists of purchasing crude oil from our exploration and production segment and from third parties, processing of crude oil into refined petroleum products, selling refined petroleum products principally to our marketing and distribution segment;
o Marketing and Distribution Segment, which consists of purchasing refined petroleum products from our refining segment and third parties, and marketing, selling and distributing refined petroleum products by wholesale to large customers and independent distributors and retail through our retail network;
o Chemicals Segment, which consists of purchasing chemical feedstock principally from the refining segment and producing, marketing, selling and distributing chemical products; and
o Corporate and Others Segment, which consists principally of trading activities of the import and export subsidiaries and our research and development activities.
B. CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth certain income and expense items from our consolidated statements of income for the periods indicated.
Year Ended December 31,
---------------------------------------------
2004 2005 2006
------------- --------------- ---------------
RMB RMB RMB
(in billions)
Operating revenues
Sales of goods...................................... 597.3 799.3 1,044.6
Other operating revenues............................ 22.6 24.0 26.8
Total operating revenues.......................... 619.9 823.3 1,071.4
Other income........................................... -- 9.4 5.0
Operating expenses
Purchased crude oil, products and
operating supplies and expenses................. (442.5) (651.2) (861.5)
Selling, general and administrative expenses...... (33.0) (33.9) (37.8)
Depreciation, depletion and amortization.......... (32.5) (31.6) (34.2)
Exploration expenses, including dry holes......... (6.4) (6.4) (8.0)
Personnel expenses................................ (18.7) (18.6) (19.9)
Employee reduction expenses....................... (0.9) (0.4) (0.2)
Taxes other than income tax....................... (16.3) (17.2) (28.6)
Other operating expenses, net..................... (6.7) (5.1) (2.4)
------------- --------------- ---------------
Total operating expenses.......................... (557.0) (764.4) (992.6)
------------- --------------- ---------------
Operating income....................................... 62.9 68.3 83.8
Net finance costs...................................... (4.4) (4.6) (6.1)
Other income and gains................................. 0.9 1.0 1.2
------------- --------------- ---------------
Income before income tax............................... 59.4 64.7 78.9
Income tax............................................. (18.1) (19.9) (23.5)
------------- --------------- ---------------
Net income............................................. 41.3 44.8 55.4
============= =============== ===============
Attributable to:
Equity shareholders of the Company.................. 35.3 41.5 53.9
Minority interests.................................. 6.0 3.3 1.5
------------- --------------- ---------------
41.3 44.8 55.4
============= =============== ===============
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Year Ended December 31, 2006 Compared with Year Ended December 31, 2005
In 2006, our sales of goods and other operating revenues were RMB 1,044.6 billion and RMB 26.8 billion, respectively, representing an increase of 30.7% and 11.7%, respectively, from those in the previous year. Our operating income in 2006 was RMB 83.8 billion, representing an increase of 22.8% from 2005. These results were largely attributable to the following factors: by seizing the opportunities presented by the high market prices of petroleum and chemical products and strong growth of the Chinese economy, we actively implemented our strategy on expanding resources and increased our market share on a number of products. In addition, we sought to optimize our production of refined petroleum and chemical products through improved production safety, reduced energy and utilities, consumption and cost savings. All the above factors contributed to the comparatively good operating results.
Operating Revenues
In 2006, our sales of goods and other operating revenues were RMB 1,071.4 billion, representing an increase of 30.1% compared with 2005. Our sales of goods were RMB 1,044.6 billion, representing an increase of 30.7% compared with 2005. These results were largely attributable to our efforts in expanding resources and markets as well as further optimizing our sales and marketing structure in order to take advantage of the high prevailing market prices of crude oil, petroleum and chemical product. Our other operating revenues increased to RMB 26.8 billion in 2006, representing an increase of 11.7% compared with 2005. Other operating revenues primarily consist of revenues generated from our contractor services as well as our sale of raw and auxiliary materials and utilities such as water, electricity and gas.
The following table sets forth the average external sales prices and sales volumes by selected products, as well as the respective percentage changes from 2005 to 2006.
Average External Sales Rate of Rate of
Price Change Sales Volume Change
------------------------ from --------------------------- from
2005 2006 2005 to 2006 2005 2006 2005 to 2006
------------ ----------- --------------- ------------ -------------- ---------------
(RMB) (RMB) (%) (%)
Crude Oil................... 2,680(1) 3,218(1) 20.1 5.29(2) 5.08(2) (4.0)
Natural Gas................. 673(3) 789(3) 17.2 4.36(4) 5.37(4) 23.2
Gasoline ................... 4,432(1) 5,225(1) 17.9 30.19(2) 32.59(2) 7.9
Diesel ..................... 3,772(1) 4,469(1) 18.5 67.25(2) 72.93(2) 8.5
Kerosene ................... 3,710(1) 4,524(1) 21.9 6.00(2) 5.43(2) (9.6)
Selected Chemical Products:
Basic chemical
----------------------------
feedstock............ 4,846(1) 5,762(1) 18.9 8.66(2) 10.86(2) 25.5
Synthetic Resin ......... 9,005(1) 9,921(1) 10.2 6.34(2) 7.78(2) 22.6
Synthetic Fiber.......... 11,123(1) 11,389(1) 2.4 1.59(2) 1.61(2) 1.8
Synthetic Rubber......... 13,040(1) 13,928(1) 6.8 0.68(2) 0.80(2) 18.0
Synthetic Fiber Monomer
and Polymer............ 8,879(1) 8,846(1) (0.4) 2.99(2) 3.78(2) 26.1
Chemical fertilizer 1,539(1) 1,650(1) 7.2 1.82(2) 1.65(2) (9.4)
|
Sales of crude oil and natural gas
Most of crude oil and a small portion of natural gas produced by us were internally used by our refining and chemical production. The remaining was sold to the refineries controlled by our controlling shareholder, Sinopec Group and third party customers.
In 2006, external sales revenues from crude oil and natural gas amounted to RMB 23.4 billion, or 2.2% of our sales of goods and other operating revenues, representing an increase of 16.7% from 2005. Such increase was primarily attributable to the increase in crude oil prices and our expansion of natural gas business. The average external sales price of crude oil increased to RMB 3,218 per tonne from RMB 2,680 per tonne in 2005, representing an increase of 20.1%. The effect of increased price was partially offset by the decrease in the quantity of external sales from 5.29 million tonnes in 2005 to 5.08 million tonnes in 2006, representing a decrease of 4.0%. The external sales price of natural gas rose from RMB 673 per thousand cubic meters in 2005 to RMB 789 per thousand cubic meters in 2006, representing an increase of 17.2%, and the external sales volume increased from 4.36 billion cubic meters in 2005 to 5.37 billion cubic meters in 2006, representing an increase by 23.2%.
Sales of refined petroleum products
Both the refining and the marketing and distribution segments make sales of refined petroleum products, which consist of gasoline, diesel, kerosene (including jet fuel) and other refined petroleum products, to third parties.
In 2006, the external sales revenue of refined petroleum products recorded by these two segments amounted to RMB 687.5 billion, or 63.9% of our sales of goods and other operating revenues, representing an increase of 26.8% from 2005. The increase was mainly due to our proactive efforts in taking advantage of the high market prices of refined petroleum products through increasing sales volume, further optimizing sales and marketing structure and
expanding the market of other refined petroleum products. The sales revenue of gasoline, diesel and kerosene was RMB 520.8 billion, comprising 75.8% of the total sales revenue of our refined petroleum products, representing an increase of 27.1% from 2005.
The sales revenues of other refined petroleum products were RMB 166.7 billion, representing an increase of 25.9% over 2005, accounting for 24.2% of the total sales revenues of refined petroleum products.
Sales of chemical products
Our external sales revenues of chemical products were RMB 209.1 billion, representing an increase of 30.1% over 2005, accounting for 19.4% of our sales of goods and other operating revenues. The increase was mainly due to our efforts to capture the opportunity presented by the high market prices of chemical products by increasing our sales volume.
Other income
In 2006, we received a cash grant of RMB 5.0 billion, representing a decrease of 46.9% compared with 2005, from the central government as a compensation of loss incurred due to the distortion of the correlation of domestic refined petroleum products prices and the crude oil prices. There are no unfilled conditions and other contingencies attached to the receipt of this government grant. There is no assurance that we will continue to receive such grant in the future.
Operating expenses
In 2006, our operating expenses amounted to RMB 992.6 billion, representing an increase of 29.8% compared with 2005. The operating expenses mainly consisted of the following:
Purchased crude oil, products, and operating supplies and expenses
In 2006, our purchased crude oil, products and operating supplies and expenses were RMB 861.5 billion, representing an increase of 32.3% over 2005, accounting for 86.8% of the total operating expenses, of which:
o purchased crude oil expenses were RMB 428.8 billion, representing an increase of 26.8% compared with 2005, accounting for 43.1% of the total operating expenses. In 2006, our throughput of crude oil purchased externally was 114.3 million tonnes (excluding amounts processed for third parties), representing an increase of 5.9% compared with 2005. Our average cost for crude oil purchased externally in 2006 was RMB 3,750 per tonne, representing an increase of 19.7% compared with 2005.
o In 2006, our other purchase expenses were RMB 432.7 billion, representing an increase of 38.2% compared with 2005, accounting for 43.6% of the total operating expenses. The increase was mainly due to the increased costs of refined petroleum products and chemical feedstock purchased externally.
Selling, general and administrative expenses
In 2006, our selling, general and administrative expenses totaled RMB 37.8 billion, representing an increase of 11.4% compared with 2005. The increase was largely due to: an increase of RMB 1.3 billion in repair and maintenance expenses as a result of our renovation of gas stations, an increase of RMB 0.6 billion in lease expenses as a result of increased rents on leased land, an increase of RMB 0.7 billion in general and administrative expenses due to increased number of service outlets and increased expenses from support functions, and an increase of RMB 0.4 billion in mining resource compensation charge as a result of increased sales revenue of crude oil and natural gas.
Depreciation, depletion and amortization
In 2006, our depreciation, depletion and amortization amounted to RMB 34.2 billion, representing an increase of 8.3% compared with 2005. The increase was mainly due to the increased property, plant and equipment in recent years.
Exploration expenses
In 2006, our exploration expenses were RMB 8.0 billion, representing an increase of 24.5% compared with 2005. The increase was largely due to our enhanced exploration efforts made to the Southern marine bed and the new areas in West China.
Personnel expenses
In 2006, our personnel expenses were RMB 19.9 billion, up by 6.5% compared with 2005.
Employee reduction expenses
In 2006, in accordance with our voluntary employee reduction plan, we recorded employee reduction expenses of approximately RMB 236 million for approximately 4,000 employees, representing a decrease of RMB 133 million compared with that in 2005.
Taxes other than income tax
In 2006, the Company's taxes other than income tax were RMB 28.6 billion, representing an increase of 66.7% compared with 2005. The increase was largely due to a new special oil income levy in the amount of RMB 8.8 billion that we have been subject to from March 26, 2006, and an increase of RMB 1.7 billion in consumption tax as a result of our increased sales volume of gasoline and diesel and the enlarged tax scope of the consumption tax by the government.
Other operating expenses, net
In 2006, our other operating expenses, net, were RMB 2.4 billion, representing a decrease of 52.5% compared with 2005. The decrease was mainly due to a decrease of RMB 0.5 billion in loss on disposal of property, plant and equipment, a decrease of RMB 1.0 billion in impairment loss on long-lived assets and a debt-extinguishment income of RMB 0.5 billion from one of our subsidiaries.
Operating income
In 2006, our operating income was RMB 83.8 billion, representing an increase of 22.8 % compared with 2005.
Net finance costs
In 2006, our net finance costs were RMB 6.1 billion, representing an increase of 31.9% over 2005. The increase was mainly due to an increase of RMB 1.5 billion in net interest expense as a result of the increase in our outstanding loans and the increase in interest rates associated with these loans.
Income before income tax
In 2006, our income before income tax was RMB 78.9 billion, representing an increase of 22.1% compared with 2005.
Income tax
In 2006, our income tax was RMB 23.5 billion, representing an increase of 18.3% compared with 2005. In 2006, our effective tax rate was 29.8%, representing a decrease of 0.9 percentage point compared with 2005.
Net income attributable to minority interests
In 2006, our net income attributable to minority interests was RMB 1.5 billion, representing a decrease of 55.0% compared with 2005. The decrease was largely because we privatized a number of listed subsidiaries and thereby reduced minority interests in our subsidiaries.
Net income attributable to equity shareholders of the Company
In 2006, our net income attributable to equity shareholders of the Company was RMB 53.9 billion, up by 30.0% over 2005.
Year Ended December 31, 2005 Compared with Year Ended December 31, 2004
In 2005, our sales of goods and other operating revenues were RMB 799.3 billion and RMB 24.0 billion, respectively, representing an increase of 33.8% and 6.3%, respectively, from those in the previous year. These results were largely attributable to the following factors: international crude oil prices continued to be volatile and remained at a high level; chemical products prices remained at a high level; the effect of the government's tight price control over refined petroleum products which was offset by our effort in proactively developing the market, increasing crude oil and natural gas production, adjusting crude oil processing and output structure, and increasing chemicals production and sales of refined petroleum products. In addition, we received a cash government grant of RMB 9.4 billion from the central government to compensate our inability to fully pass the increased crude oil costs to the refined petroleum products customers due to the tight government control over prices of domestic refined petroleum products, which to some extent relieved the pressure imposed by the increased crude oil costs. All the above factors contributed to the comparatively good operating results.
Operating Revenues
Overview
In 2005, our sales of goods and other operating revenues were RMB 823.3 billion, representing an increase of 32.8% compared with 2004. Our sales of goods were RMB 799.3 billion, representing an increase of 33.8% compared with 2004. These results were largely attributable to the increase in international prices of crude oil and chemical products, and our efforts in expanding the sales volume of our petroleum and chemical products and further optimizing our sales and marketing structure. Our other operating revenues increased to RMB 24.0 billion in 2005, representing an increase of 6% compared with 2004. Other operating revenues primarily consist of revenues generated from our sale of raw and auxiliary materials to Sinopec Group as well as third parties.
The following table sets forth the average external sales prices and sales volumes by selected products, as well as the respective percentage changes from 2004 to 2005.
Average External
Sales Price Rate of Change
------------------------ Rate of Change from Sales Volume from
2004 2005 2004 to 2005 2004 2005 2004 to 2005
----------- ------------ ------------------------ ----------- ----------- ------------------
(RMB) (RMB) (%) (%)
Crude Oil.................... 1,872(1) 2,680(1) 43.2 6.01(2) 5.29(2) (12.0)
Natural Gas.................. 609(3) 673(3) 10.5 3.78(4) 4.36(4) 15.4
Gasoline .................... 3,765(1) 4,432(1) 17.7 27.35(2) 30.19(2) 10.4
Diesel ...................... 3,221(1) 3,772(1) 17.1 60.42(2) 67.25(2) 11.3
Kerosene .................... 2,923(1) 3,710(1) 26.9 5.68(2) 6.00(2) 5.7
Selected Chemical Products:
Basic chemical
feedstock............. 4,429(1) 4,846(1) 9.4 6.66(2) 8.66(2) 29.9
Synthetic Resin .......... 7,986(1) 9,005(1) 12.8 5.40(2) 6.34(2) 17.4
Synthetic Fiber........... 10,818(1) 11,123(1) 2.8 1.74(2) 1.59(2) (9.0)
Synthetic Rubber.......... 10,238(1) 13,040(1) 27.4 0.56(2) 0.68(2) 21.9
Synthetic Fiber Monomer
and Polymer............. 8,022(1) 8,879(1) 10.7 2.70(2) 2.99(2) 10.7
Chemical fertilizer 1,355(1) 1,539(1) 13.6 2.62(2) 1.82(2) (30.5)
|
Sales of crude oil and natural gas
Most of crude oil and a small portion of natural gas produced by us were internally used by our refining and chemical production. The remaining was sold to the refineries controlled by our controlling shareholder, Sinopec Group and third party customers.
In 2005, external sales revenues from crude oil and natural gas amounted to RMB 20.0 billion, or 2.4% of our sales of goods and other income, representing an increase of 24.3% compared with RMB 16.0 billion in 2004. Such increase was primarily attributable to the increase in crude oil and natural gas prices as well as our expansion of natural gas business. The average external sales price of crude oil increased to RMB 2,680 per tonne from RMB 1,872 per tonne in 2004, representing an increase of 43.2%. The effect of increased price was partially offset by the decrease in the quantity of external sales from 6.01 million tonnes in 2004 to 5.29 million tonnes in 2005, representing a decrease of 12.0%. The external sales price of natural gas rose from RMB 609 per thousand cubic meters in 2004 to RMB 673 per thousand cubic meters in 2005, representing an increase of 10.5%, and the external sales volume increased from 3.78 billion cubic meters in 2004 to 4.36 billion cubic meters in 2005, representing an increase by 15.4%.
Sales of refined petroleum products
Both the refining and the marketing and distribution segments make sales of refined petroleum products, which consist of gasoline, diesel, kerosene (including jet fuel) and other refined petroleum products, to third parties.
In 2005, the external sales revenue of refined petroleum products recorded by these two segments amounted to RMB 542.1 billion, or 65.8% of our sales of goods and other operating revenues and other income, representing an increase of 33.5% from RMB 406.2 billion in 2004. The increase was mainly due to the rise of refined petroleum products price and our proactive efforts in increasing sales volume, further optimizing sales and marketing structure and expanding the market of other refined petroleum products. The sales revenue of gasoline, diesel and kerosene was RMB 409.70 billion, comprising 75.6% of the total sales revenue of our refined petroleum products, representing an increase of 30.4% from 2004.
The sales revenues of other refined petroleum products were RMB 132.4 billion, representing an increase of 43.9% over 2004, accounting for 24.4% of the total sales revenues of refined petroleum products.
Sales of chemical products
Our external sales revenues of chemical products were RMB 160.8 billion, representing an increase of 27.6% over 2004, accounting for 19.5% of our sales of goods and other operating revenues. The increase was mainly due to the fact that we captured the opportunity of the high level price of chemical products and increased its sales volume accordingly.
Other income
In 2005, we received a cash government grant of RMB 9.4 billion, as a compensation of loss incurred due to the distortion of the correlation of domestic refined petroleum products prices and the crude oil prices. There are no unfilled conditions and other contingencies attached to the receipt of this government grant. There is no assurance that we will continue to receive such grant in the future.
Operating expenses
In 2005, our operating expenses amounted to RMB 764.4 billion, representing an increase of 37.2% compared with 2004. The operating expenses mainly consisted of the following:
Purchased crude oil, products, and operating supplies and expenses
In 2005, our purchased crude oil, products and operating supplies and expenses were RMB 651.2 billion, representing an increase of 47.2% over 2004, accounting for 85.2% of the total operating expenses, of which:
o purchased crude oil expenses were RMB 338.2 billion, representing an increase of 45.4% compared with 2004, accounting for 44.2% of the total operating expenses, up by 2.4 percentage points over 2004. To meet the increasing market demands in the fast growing Chinese economy, we increased our throughput of crude oil purchased from third parties. In 2005, our throughput of crude oil purchased externally was 107.95 million tonnes (excluding amounts processed for third parties), representing an increase of 7.3% compared with 2004. Our average cost for crude oil purchased externally in 2005 was RMB 3,133 per tonne, representing an increase of 35.5% compared with 2004.
o In 2005, our other purchase expenses were RMB 313.0 billion, representing an increase of 49.1% compared with 2004, accounting for 41.1% of the total operating expenses. The increase was mainly due to the increased costs of refined petroleum products and chemical feedstock purchased externally.
Selling, general and administrative expenses
In 2005, our selling, general and administrative expenses totaled RMB 33.9 billion, representing an increase of 2.8% compared with 2004. The increase was largely due to:
o An increase of RMB 1.5 billion in the selling expenses, such as transportation costs, compared with 2004, resulted from the increase in the total sales volume of refined petroleum products and chemical products, and increased sales volume through retail and direct distribution; and
o An increase of RMB 1.2 billion in operating lease expenses compared with 2004 mainly due to the increased lease of operating facilities to increase sales volume.
It was partially offset by a decrease in repairing and maintenance expenses by RMB 800 million, mainly as a result of the increased maintenance carried out in 2004 for petrol stations.
Depreciation, depletion and amortization
In 2005, our depreciation, depletion and amortization amounted to RMB 31.6 billion, down by 2.7% compared with 2004. The decrease was mainly due to disposal of, and impairment loss on less efficient assets in the previous years.
Exploration expenses
In 2005, our exploration expenses were RMB 6.4 billion, remaining at the same level as in 2004 since our level of exploration activities for unsuccessful wells in 2005 remained at the similar level as in 2004.
Personnel expenses
In 2005, our personnel expenses were RMB 18.6 billion, down by 0.4% compared with 2004. The decrease was mainly due to the reduction of operating personnel resulting from the disposal of downhole operation assets in 2004.
Employee reduction expenses
In 2005, in accordance with our voluntary employee reduction plan, we recorded employee reduction expenses of approximately RMB 369 million for approximately 7,000 employees, representing a decrease of RMB 550 million compared with that in 2004.
Taxes other than income tax
In 2005, the Company's taxes other than income tax were RMB 17.2 billion, representing an increase of 5.1% compared with 2004. The increase was largely due to the increased consumption tax and associated surcharges as a result of the increase in the sales volume of gasoline and diesel.
Other operating expenses, net
In 2005, our other operating expenses, net were RMB 5.1 billion, representing a decrease of 23.1% compared with 2004. In 2005 and 2004, in order to allocate our internal resources more efficiently, we revised the production plans in these years, and accordingly made a provision for impairment loss of RMB 1.9 billion in 2005 on certain less efficient chemical facilities, petrol stations and depots on the difference between the estimated recoverable value and the net book value of these assets, representing a decrease of RMB 2.1 billion compared with 2004. Meanwhile, our net losses on disposals of assets in 2005 were RMB 2.1 billion, representing an increase of RMB 0.4 billion compared with 2004.
Operating income
In 2005, our operating income was RMB 68.3 billion, representing an increase of 8.5 % compared with 2004.
Net finance costs
In 2005, our net finance costs were RMB 4.6 billion, representing an increase of 5.7% over 2004. The increase was mainly due to an increase of RMB 1.3 billion in net interest expense as a result of the increase in long term loans borrowed in accordance with our investment plans, and the increase in short term debts attributable to the increased working capital requirement, as a result of the increased crude oil price and the expansion of production and operation. It was partially offset by an increase of RMB 1.1 billion in net foreign exchange gains due to fluctuation of the foreign exchange rate.
Income before income tax
In 2005, our income before income tax was RMB 64.7 billion, representing an increase of 8.8% compared with 2004.
Income tax
In 2005, our income tax was RMB 19.9 billion, representing an increase of 9.9 % compared with 2004. The increase was primarily due to the increase in operating income. In 2005, our effective tax rate was 30.7%, representing an increase of 0.3 percentage point compared with 2004. The increase was primarily due to the decrease in operating income in certain of our subsidiaries which were taxed at a lower tax rate.
Net income attributable to minority interests
In 2005, our net income attributable to minority interests was RMB 3.3 billion, representing a decrease of 44.8% compared with 2004. The decrease was largely due to the decreased profit in certain subsidiaries and our privatization of Beijing Yanhua.
Net income attributable to equity shareholders of the Company
In 2005, our net income attributable to equity shareholders of the Company was RMB 41.5 billion, up by 17.3% over 2004.
C. DISCUSSIONS ON RESULTS OF SEGMENT OPERATIONS
We divide our operations into four business segments (exploration and production segment, refining segment, marketing and distribution segment and chemicals segment) and corporate and others. Unless otherwise specified, the inter-segment transactions have not been eliminated in the financial data discussed in this section. In addition, the operating revenue data of each segment have included the "other operating revenues" and "other income" of the segment.
The following table sets forth the operating revenues by each segment, the contribution of external sales and inter-segment sales as a percentage of operating revenues before elimination of inter-segment sales, and the contribution of external sales as a percentage of consolidated operating revenues (i.e. after elimination of inter-segment sales) for the periods indicated.
As a Percentage of
Consolidated
Operating As a Percentage of
Revenues Before Consolidated
Elimination Operating Revenues
of Inter-segment After Elimination of
Years Ended December 31, Sales Inter-segment Sales
-------------------------------- --------------------- ----------------------
2004 2005 2006 2005 2006 2005 2006
---------- --------- ----------- ---------- ---------- ---------- -----------
RMB RMB RMB (%) (%) (%) (%)
(in billions)
Exploration and Production
External sales(1)...... 25.4 30.8 37.5 2.3 2.1 3.7 3.5
Inter-segment sales...... 60.0 84.4 105.7 6.2 5.8
---------- --------- ----------- ---------- ----------
Total operating revenue. 85.4 115.2 143.2 8.5 7.9
========== ========= =========== ========== ==========
Refining
External sales(1)........ 68.5 88.2 103.8 6.5 5.7 10.6 9.6
Other income............ - 9.4 5.0 0.7 0.3 1.1 0.5
Inter-segment sales...... 289.8 386.5 471.6 28.3 26.1
---------- --------- ----------- ---------- ----------
Total operating revenue. 358.3 484.1 580.4 35.5 32.1
========== ========= =========== ========== ==========
Marketing and distribution
External sales(1)........ 343.6 460.7 589.0 33.8 32.6 55.3 54.7
Inter-segment sales...... 2.8 3.1 4.6 0.2 0.3
---------- --------- ----------- ---------- ----------
Total operating revenue. 346.4 463.8 593.6 34.0 32.9
========== ========= =========== ========== ==========
Chemicals
External sales(1)........ 132.2 166.6 215.8 12.2 11.9 20.0 20.0
Inter-segment sales...... 12.5 12.2 12.3 0.9 0.7
---------- --------- ----------- ---------- ----------
Total operating revenue. 144.7 178.8 228.1 13.1 12.6
========== ========= =========== ========== ==========
Corporate and others
External sales(1)........ 50.2 77.0 125.3 5.6 6.9 9.3 11.7
Inter-segment sales...... 32.0 44.9 136.7 3.3 7.6
---------- --------- ----------- ---------- ----------
Total operating revenue. 82.2 121.9 262.0 8.9 14.5
========== ========= =========== ========== ==========
Total operating revenue
before inter-segment
eliminations......... 1,017.0 1,363.8 1,807.3 100.0 100.0
========== ==========
Elimination of inter-segment
sales............... (397.1) (531.1) (730.9)
---------- --------- -----------
Consolidated operating
revenues............ 619.9 832.7 1,076.4 100.0 100.0
========== ========= =========== ========== ===========
|
The following table sets forth the operating revenues, other income, operating expenses and operating income by each segment before elimination of the inter-segment transactions for the periods indicated, and the rate of changes from 2005 to 2006.
Years Ended December 31, Rate of
--------------------------------------- Change
from 2005
2004 2005 2006 to 2006
------------ ------------ ----------- ----------
(RMB in billions) (%)
Exploration and Production
Total operating revenues.............. 85.4 115.2 143.2 24.3
Total operating expenses.............. (59.0) (66.9) (80.0) 19.6
------------ ------------ -----------
Total operating income.............. 26.4 48.3 63.2 30.7
============ ============ ===========
Refining
Total operating revenues.............. 358.3 474.7 575.4 21.2
Other income......................... - 9.4 5.0 (46.8)
Total operating expenses.............. (353.3) (487.6) (605.7) 24.2
------------ ------------ -----------
Total operating income/(loss)....... 5.0 (3.5) (25.3) 622.9
============ ============ ===========
Marketing and distribution
Total operating revenues.............. 346.4 463.8 593.6 28.0
Total operating expenses.............. (331.7) (453.4) (563.4) 24.2
------------ ------------ -----------
Total operating income.............. 14.7 10.4 30.2 190.4
============ ============ ===========
Chemicals
Total operating revenues.............. 144.7 178.8 228.1 27.6
Total operating expenses.............. (126.0) (164.5) (210.9) 28.2
------------ ------------ -----------
Total operating income.............. 18.7 14.3 17.2 20.3
============ ============ ===========
Corporate and others
Total operating revenues.............. 82.2 121.9 262.0 115.0
Total operating expenses.............. (84.1) (123.1) (263.5) 114.2
------------ ------------ -----------
Total operating loss................ (1.9) (1.2) (1.5) 25.0
============ ============ ===========
|
Exploration and Production Segment
The business activities of the exploration and production segment consist of exploration, development, production, and sale of crude oil and natural gas. Most of the crude oil and a small portion of the natural gas produced by the exploration and production segment were used for our refining and chemicals production. Most of the natural gas and a small portion of crude oil produced were sold to refineries owned by Sinopec Group Company and other customers.
Year Ended December 31, 2006 Compared with Year Ended December 31, 2005
In 2006, the operating revenues of this segment were RMB 143.2 billion, representing an increase of 24.3% over 2005, largely due to the increase in the sales volume and sales price of crude oil and natural gas compared with those in 2005.
In 2006, this segment sold 37.94 million tonnes of crude oil and 5.7 billion cubic meters of natural gas, representing an increase of 2.9% and 28.9%, respectively, compared with those in 2005. The average realized price of crude oil was RMB 3,195 per tonne, representing an increase of 19.9% over 2005. The average realized price of natural gas was RMB 794 per thousand cubic meters, representing an increase of 18.0% compared with 2005.
In 2006, the operating expenses of this segment were RMB 80.0 billion, representing an increase of 19.6% compared with 2005. The increase was mainly due to:
o An increase of RMB 9.4 billion in taxes other than income tax, which mainly consist of the special oil income levy and the mining resource compensation charge;
o An increase of RMB 1.6 billion in exploration expenses (including day hole costs) as a result of our enhanced exploration efforts in the Southern marine bed and the new areas in Western China; and
o An increase of RMB 1.8 billion in depreciation, depletion and amortization as a result of our continuous investments in property, plant and equipment.
In 2006, this segment's operating income was RMB 63.2 billion, representing an increase of 30.7% compared with 2005.
Year Ended December 31, 2005 Compared with Year Ended December 31, 2004
In 2005, the operating revenues of this segment were RMB 115.2 billion, representing an increase of 34.8% over 2004, largely due to the increase in the sales price and sales volume of crude oil and natural gas compared with those in 2004.
In 2005, this segment sold 36.86 million tonnes of crude oil and 4.44 billion cubic meters of natural gas, representing an increase of 1.7% and 14.7% respectively compared with those in 2004. The average realized price of crude oil was RMB 2,665 per tonne, representing an increase of 36.2% over 2004. The average realized price of natural gas was RMB 673 per thousand cubic meters, representing an increase of 9.3% compared with 2004.
In 2005, the operating expenses of this segment were RMB 66.9 billion, representing an increase of 13.2% compared with 2004. The increase was mainly due to:
o The rise of raw materials and utilities costs accounting for the increase of approximately RMB 2.2 billion in operating expenses compared with 2004;
o The increase of approximately RMB 1.6 billion in other operating expenses including expenses related to the sales of materials compared with 2004;
o The increase of RMB 1.5 billion resulted from the increased production activities in this segment to take advantage of the high crude oil price environment;
o The increase of approximately RMB 700 million in resources tax due to the change of tax rate, and the increased construction tax, education surcharges as well as mineral resources compensation fees associated with the increased sales revenues of crude oil.
In 2005, this segment's operating income was RMB 48.3 billion, representing an increase of 83.1% compared with 2004.
Refining Segment
The business activities of the refining segment consist of purchasing crude oil from the exploration and production segment and third parties, processing crude oil into refined petroleum products, selling gasoline, diesel and kerosene to marketing and distribution segment, selling a portion of chemical feedstock to chemicals segment and selling other refined petroleum products to domestic and foreign customers.
Year Ended December 31, 2006 Compared with Year Ended December 31, 2005
In 2006, this segment's operating revenues were approximately RMB 580.4 billion, representing an increase of 19.9% compared with 2005. The increase was mainly due to the increased sales prices and sales volume of various refined petroleum products.
The following table sets forth sales revenue and the percentage of total operating revenue for the segment by product category for 2005 and 2006, as well as the percentage changes in sales revenue from 2005 to 2006.
As a Percentage of
Rate of Refining Segment's
Year Ended December 31, Change from Total Operating Revenue
------------------------------ ----------------- -------------------------
2005 2006 2005 to 2006 2005 2006
------------- -------------- ---------------- ------------ ----------
(RMB) (RMB) (%) (%) (%)
(in billions)
Refining Segments, operating
revenues
Gasoline....................... 81.0 98.2 21.2 16.7 16.9
Diesel ........................ 187.4 222.2 18.6 38.7 38.3
Light chemical feedstock ...... 98.8 120.1 21.6 20.4 20.7
Other refined petroleum
products.................... 102.1 125.9 27.6 21.1 22.5
Other operating revenues....... 5.4 4.6 (14.8) 1.1 0.8
Other income................... 9.4 5.0 (46.8) 2.0 0.8
------------- -------------- ------------ ----------
Total............................. 484.1 580.4 100.0 100.0
============= ============== ============ ==========
|
In 2006, the sales revenues of gasoline by the segment were RMB 98.2 billion, representing an increase of 21.2% compared with 2005, accounting for 16.9% of this segment's operating revenues. In 2006, the sales revenues of diesel by the segment were RMB 222.2 billion, representing an increase of 18.6% compared with 2005, accounting for 38.3% of this segment's operating revenues. In 2006, the sales revenues of light chemical feedstock by the segment were RMB 120.1 billion, representing an increase of 21.6% compared with 2005, accounting for 20.7% of this segment's operating revenues. In 2006, the sales revenues of refined petroleum products other than gasoline, diesel and light chemical feedstock were RMB 125.9 billion, representing an increase of 27.6% compared with 2005, accounting for 22.5% of this segment's operating revenues.
The table below sets forth sales volume and average realized prices by product for 2005 and 2006, as well as the percentage changes in sales volume and average realized prices for the periods shown.
Rate of Rate of
change change
Sales volume from Average realized prices from
2005 2006 2005 to 2006 2005 2006 2005 to 2006
---- ---- ------------ ---- ---- ------------
(million tonnes) (%) (RMB per tonne) (%)
Gasoline................................ 21.52 21.86 1.6 3,763 4,492 19.4
Diesel.................................. 54.13 57.58 6.4 3,462 3,859 11.5
Light Chemical feedstock ............... 26.45 26.55 0.4 3,734 4,523 21.1
Other refined petroleum products........ 32.72 37.02 13.1 3,121 3,521 12.8
|
In 2006, the operating expenses of the segment were RMB 605.7 billion, representing an increase of 24.2% compared with 2005. The increase was primarily due to the increase in crude oil price and throughput. In 2006, the average crude oil cost was RMB 3,674 per tonne, representing an increase of 19.9% compared with 2005. Refining throughput was 143.6 million tonnes (excluding amounts processed for third parties) in 2006, representing an increase of 5.5% compared with 2005. The total crude oil costs in 2006 were RMB 527.4 billion, representing an increase of 26.5% compared with 2005, accounting for 87.1% of the total operating expenses of the segment, up by 1.6 percentage points over 2005.
In 2006, although crude oil prices remained at a high level, the Chinese government continued to tightly control domestic prices of refined petroleum products. As a result, while we sought to lower our crude oil cost through processing more higher-sulphur and higher acid crude oil as well as expanding our sales of other refined petroleum products than gasoline and diesel, particularly those higher value-added products, our refining segment incurred significant loss. In 2006, the operating losses of the segment, after the receipt of the one-time cash government grant of RMB 5.0 billion, were
RMB 25.3 billion, representing an increase in operating loss of RMB 21.8 billion compared with 2005.
Year Ended December 31, 2005 Compared with Year Ended December 31, 2004
In 2005, this segment's operating revenues were approximately RMB 484.1 billion, representing an increase of 35.1% compared with 2004. The increase was mainly due to the increased sales prices and sales volume of various refined petroleum products.
The following table sets forth sales revenue and the percentage of total operating revenue for the segment by product category for 2004 and 2005, as well as the percentage changes in sales revenue from 2004 to 2005.
As a Percentage of
Rate of Refining Segment's
Year Ended December 31, Change from Total Operating Revenue
------------------------------ ----------------- -------------------------
2004 2005 2004 to 2005 2004 2005
------------- -------------- ---------------- ------------ ----------
(RMB) (RMB) (%) (%) (%)
(in billions)
Refining Segments, operating
revenues
Gasoline....................... 63.8 81.0 27.0 17.8 16.7
Diesel ........................ 145.3 187.4 29.0 40.5 38.7
Light Chemical feedstock ...... 62.1 98.8 59.1 17.3 20.4
Other refined petroleum
products.................... 81.9 102.1 24.7 22.8 21.1
Other operating revenues....... 5.2 5.4 3.8 1.6 1.1
Other income................. - 9.4 - - 2.0
Total............................. 358.3 484.1 35.1 100.0 100.0
|
In 2005, the sales revenues of gasoline by the segment were RMB 81 billion, representing an increase of 27.0% compared with 2004, accounting for 16.7% of this segment's operating revenues.
In 2005, the sales revenues of diesel by the segment were RMB 187.4 billion, representing an increase of 29.0% compared with 2004, accounting for 38.7% of this segment's operating revenues.
In 2005, the sales revenues of chemical feedstock by the segment were RMB 98.8 billion, representing an increase of 59.1% compared with 2004, accounting for 20.4% of this segment's operating revenues. The increase in the sales revenues of light chemical feedstock was more than that in the sales revenues of gasoline and diesel, which was primarily due to the smaller increase in gasoline and diesel prices as compared with chemical feedstock prices as a result of tight government control over domestic gasoline and diesel prices. In addition, the segment also increased the sales volume of chemical feedstock.
In 2005, the sales revenues of refined petroleum products other than gasoline, diesel and chemical feedstock were RMB 102.1 billion, representing an increase of 24.7% compared with 2004, accounting for 21.1% of this segment's operating revenues.
In 2005, we received a cash government grant of RMB 9.4 billion, as a compensation of loss incurred due to the distortion of the correlation of domestic refined petroleum products prices and the crude oil prices.
The table below sets forth sales volume and average realized prices by product for 2004 and 2005, as well as the percentage changes in sales volume and average realized prices for the periods shown.
Rate of Rate of
change change
Sales volume from Average realized prices from
2004 2005 2004 to 2005 2004 2005 2004 to 2005
---- ---- ------------ ---- ---- ------------
(million tonnes) (%) (RMB per tonne) (%)
Gasoline................................ 21.42 21.52 0.5 2,977 3,763 26.4
Diesel.................................. 50.27 54.13 7.7 2,890 3,462 19.8
Light Chemical feedstock ............... 23.17 26.45 14.2 2,682 3,734 39.2
Other refined petroleum products........ 31.71 32.72 3.2 2,583 3,121 20.8
|
In 2005, the operating expenses of the segment were RMB 487.6 billion, representing an increase of 38.0% compared with 2004. The increase was primarily due to the increase in crude oil price and throughput.
In 2005, the average crude oil cost was RMB 3,064 per tonne, representing an increase of 35.5% compared with 2004. Refining throughput was 136.08 million tonnes (excluding amounts processed for third parties) in 2005, representing an increase of 5.6% compared with 2004. The total crude oil costs in 2005 were RMB 416.9 billion, representing an increase of 43.1% compared with 2004, accounting for 85.5% of the total operating expenses of the segment, up by 2.8 percentage points over 2004.
In 2005, although crude oil prices remained at a high level; the Chinese government implemented tight control over domestic prices of refined petroleum products, as a result, our refining segment incurred significant loss. To ensure our refining segment's normal operation, we strived to lower our production cost and adjusted the internal transfer prices between the different segments.
In 2005, the operating losses of the segment, after the receipt of the one-time cash government grant of RMB 9.4 billion, were RMB 3.5 billion, representing a decrease in operating income of RMB 8.5 billion compared with 2004.
Marketing and Distribution Segment
The business activities of marketing and distribution segment include purchasing refined petroleum products from the refining segment and third parities, and wholesale selling of refined petroleum products to domestic customers, directly selling and retail distributing the refined petroleum products through the retail network owned by this segment and provision of related services.
Year Ended December 31, 2006 Compared with Year Ended December 31, 2005
In 2006, the operating revenues of this segment were RMB 593.6 billion, representing an increase of 28.0% compared with 2005. The increase was primarily due to the increases in sales volume and prices of gasoline, diesel and kerosene including jet fuel and the further optimization of marketing structure with increased percentage of retail sales in the total sales volume of gasoline and diesel.
In 2006, the operating revenues from sales of gasoline and diesel were RMB 500.1 billion, accounting for 84.3% of the operating revenues of this segment. The percentage of retail sales in the total sales volume of gasoline and diesel increased from 59.6% in 2005 to 63.4% in 2006, up by 3.8 percentage points. The percentage of sales of gasoline and diesel by direct sales in the total sales volume decreased from 19.1% in 2005 to 17.0% in 2006, down by 2.1 percentage points. The percentage of wholesale sales in the total sales volume of gasoline and diesel decreased from 21.3% in 2005 to 19.6% in 2006, down by 1.7 percentage points.
The following table sets forth the sales volumes, average realized prices and the respective rate of changes of the four major product categories in 2005 and 2006 in different forms of sales channels for gasoline and diesel.
Average
Rate of Change Realized Prices Rate of Change
Sales Volume from --------------- from
2005 2006 2005 to 2006 2005 2006 2005 to 2006
---- ---- ------------ ---- ---- ------------
(million tonnes) (%) (RMB per tonne) (%)
Gasoline............................ 30.32 32.72 7.9 4,430 5,224 17.9
Retail sale...................... 21.63 23.89 10.4 4,562 5,350 17.3
Direct sale...................... 2.84 2.81 (1.0) 4,206 4,922 17.0
Wholesale........................ 5.85 6.02 2.9 4,050 4,867 20.2
Diesel ............................. 67.93 73.69 8.5 3,767 4,466 18.6
Retail sale...................... 36.90 43.53 18.0 3,885 4,527 16.5
Direct sale...................... 15.91 15.31 (3.8) 3,786 4,599 21.5
Wholesale........................ 15.12 14.86 (1.7) 3,458 4,152 20.1
Kerosene including jet fuel......... 5.96 5.40 (9.4) 3,710 4,524 21.9
Fuel Oil............................ 13.33 15.07 13.0 2,374 2,989 25.9
|
In 2006, the segment's operating expenses were RMB 563.4 billion, representing an increase of 24.2% compared with 2005. The increase was mainly due to the increase in purchase expenses, of which, purchase expenses for gasoline and diesel were RMB 443.8 billion, up by 24.8% over 2005, accounting for 78.8% of the segment's operating expenses. In 2006, average purchase prices of gasoline and diesel increased by 19.0% and 13.5%, respectively, to RMB 4,573 per tonne and RMB 3,992 per tonne compared with 2005. The purchase volume of gasoline and diesel increased by 7.9% and 8.5%, respectively, compared with 2005 to 32.7 million tonnes and 73.7 million tonnes.
In 2006 the segment's operating profit was RMB 30.2 billion, representing an increase of RMB 19.8 billion compared with 2005.
Year Ended December 31, 2005 Compared with Year Ended December 31, 2004
In 2005, the operating revenues of this segment were RMB 463.8 billion, representing an increase of 33.9% compared with 2004. The increase was primarily due to the increases in sales volume and prices of gasoline, diesel and kerosene including jet fuel, the continuous optimization of marketing structure to further increase the percentage of retail sales in the total sales volume of gasoline and diesel.
In 2005, the operating revenues from sales of gasoline and diesel were RMB 390.2 billion, accounting for 84.1% of the operating revenues of this segment. The percentage of retail sales in the total sales volume of gasoline and diesel increased from 54.6% in 2004 to 59.6% in 2005, up by 5.0 percentage points. The percentage of sales of gasoline and diesel by direct sales in the total sales volume decreased from 20.3% in 2004 to 19.1% in 2005, down by 1.2 percentage points. The percentage of wholesale sales in the total sales volume of gasoline and diesel decreased from 25.1% in 2004 to 21.3% in 2005, down by 3.8 percentage points.
The following table sets forth the sales volumes, average realized prices and the respective rate of changes of the four major product categories in 2004 and 2005 in different forms of sales channels for gasoline and diesel.
Average
Rate of Change Realized Prices Rate of Change
Sales Volume from --------------- from
2004 2005 2004 to 2005 2004 2005 2004 to 2005
---- ---- ------------ ---- ---- ------------
(million tonnes) (%) (RMB per tonne) (%)
Gasoline............................ 27.51 30.32 10.2 3,762 4,430 17.8
Retail sale...................... 18.42 21.63 17.4 3,911 4,562 16.6
Direct sale...................... 2.89 2.84 (1.8) 3,536 4,206 18.9
Wholesale........................ 6.20 5.85 (5.7) 3,426 4,050 18.2
Diesel ............................. 61.10 67.93 11.2 3,215 3,767 17.2
Retail sale...................... 30.00 36.90 23.0 3,351 3,885 15.9
Direct sale...................... 15.12 15.91 5.2 3,211 3,786 17.9
Wholesale........................ 15.98 15.12 (5.4) 2,963 3,458 16.7
Kerosene including jet fuel......... 5.62 5.96 5.9 2,923 3,710 26.9
Fuel Oil............................ 9.69 13.33 37.7 1,793 2,374 32.4
|
In 2005, the segment's operating expenses were RMB 453.4 billion, representing an increase of 36.7% compared with 2004. The increase was mainly due to the increase in purchase expenses, of which, purchase expenses for gasoline and diesel were RMB 355.5 billion, up by 36.3% over 2004, accounting for 78.4% of the segment's operating expenses. In 2005, average purchase prices of gasoline and diesel increased by 27.3% and 20.9%, respectively, to RMB 3,844 per tonne and RMB 3,518 per tonne compared with 2004. The purchase volume of gasoline and diesel increased by 10.2% and 11.2%, respectively, compared with 2004 to 30.32 million tonnes and 67.93 million tonnes.
In 2005, the segment's operating profit was RMB 10.4 billion, representing a decrease of 29.7% compared with 2004.
Chemicals Segment
Our chemicals segment consists of operations related to purchasing chemical feedstock from our refining segment, producing, marketing and distribution of petrochemical products.
Year Ended December 31, 2006 Compared with Year Ended December 31, 2005
In 2006, the segment's operating revenues were RMB 228.1 billion, representing an increase of 27.6% compared with 2005, which was primarily due to the increases in prices and sales volume of major chemical products.
In 2006, the sales revenues of the Company's six major categories of chemical products (namely, basic organic chemicals, monomers and polymers for synthetic fiber, synthetic resin, synthetic fiber, synthetic rubber and chemical fertilizer) totaled approximately RMB 215.7 billion, representing an increase of 35.3% compared with 2005, accounting for 94.6% of the total operating revenues of this segment.
The following table sets forth the sales volume, average realized price and the respective rate of changes for each of these six categories of chemical products of this segment from 2005 to 2006.
Average
Sales Volumes Realized Prices
------------- Rate of Change --------------- Rate of Change
2005 2006 from 2005 to 2006 2005 2006 from 2005 to 2006
---- ---- ----------------- ----- ---- -----------------
(million tonnes) (%) (RMB per tonne) (%)
Basic organic chemicals......... 9.51 12.75 34.1 4,828 5,609 16.2
Synthetic resins................ 6.37 7.89 24.0 9,007 9,870 9.6
Synthetic rubber................ 0.70 0.83 18.4 13,000 13,885 6.8
Synthetic fiber................. 1.59 1.61 1.8 11,123 11,390 2.4
Synthetic fiber monomers
and polymers.............. 3.00 3.80 26.6 8,872 8,839 (0.4)
Chemical fertilizer............. 1.82 1.65 (9.3) 1,539 1,660 7.9
|
In 2006, the operating expenses of the segment were RMB 210.9 billion, representing an increase of 28.2% compared with 2005. The increase was primarily due to the price increases of various raw materials, the increased consumption of various raw materials and auxiliary materials, the increased utilities expenses and other variable expenses and fixed costs, all associated with the increased production of the chemical products. In particular, the costs for raw materials increased by RMB 44.9 billion compared with 2005 as a result of increased consumption of raw materials and their average emit price, and the costs for fuel and other utilities increased by RMB 1.7 billion compared with 2005 as a result of increased production of chemical products.
In 2006, the segment's operating profit was RMB 17.2 billion, representing an increase by 20.3% compared with 2005.
Year Ended December 31, 2005 Compared with Year Ended December 31, 2004
In 2005, the segment's operating revenues were RMB 178.8 billion, representing an increase of 23.6% compared with 2004, which was primarily due to the increases in prices and sales volume of major chemical products.
In 2005, the sales revenues of the Company's six major categories of chemical products (i.e. basic organic chemicals, monomers and polymers for synthetic fiber, synthetic resin, synthetic fiber, synthetic rubber and chemical
fertilizer) totaled approximately RMB 159.5 billion, representing an increase of 27.9% compared with 2004, accounting for 89.2% of the total operating revenues of this segment.
The following table sets forth the sales volume, average realized price and the respective rate of changes for each of these six categories of chemical products of this segment from 2004 to 2005.
Average
Sales Volumes Realized Prices
------------- Rate of Change --------------- Rate of Change
2004 2005 from 2004 to 2005 2004 2005 from 2004 to 2005
---- ---- ----------------- ----- ---- -----------------
(million tonnes) (%) (RMB per tonne) (%)
Basic organic chemicals.......... 7.38 9.51 28.8 4,292 4,828 12.5
Synthetic resins................. 5.40 6.37 18.0 7,986 9,007 12.8
Synthetic rubber................. 0.56 0.70 24.9 10,247 13,000 26.9
Synthetic fiber.................. 1.74 1.59 (8.6) 10,818 11,123 2.8
Synthetic fiber monomers
and polymers............... 2.70 3.00 11.1 8,022 8,872 10.6
Chemical fertilizer.............. 2.66 1.82 (31.4) 1,355 1,539 13.6
|
In 2005, the operating expenses of the segment were RMB 164.5 billion, representing an increase of 30.6% compared with 2004. The increase was primarily due to the price increases of various raw materials, the increased consumption of various raw materials and auxiliary materials, the increased utilities expenses and other variable expenses and fixed costs, all associated with the increased production of the chemical products. Among others:
o Affected by the increase in the consumption of raw materials and their unit prices, the costs for raw materials increased by RMB 37.6 billion compared with 2004. Consumption of naphata and other cracking materials increased by 2.43 million tones over 2004, and unit price of raw materials was RMB 3,704 per tonne, up by RMB 1,160 per tonne over 2004.
o Due to increased sales volume of chemical products, selling expenses, such as transportation costs, increased by RMB 700 million compared with 2004.
In 2005, the segment's operating profit was RMB 14.3 billion, representing a decrease of RMB 4.4 billion compared with 2004.
Corporate and others
The business activities of corporate and others mainly consist of the import and export businesses of the subsidiaries, research and development activities of us and managerial activities of our headquarters.
Year Ended December 31, 2006 Compared with Year Ended December 31, 2005
In 2006, the operating revenues of corporate and others derived from international trade were RMB 260.4 billion, and the associated operating expenses were RMB 259.4 billion, resulting an operating income of RMB 1.0 billion for our international trade activities. In 2006, operating expenses related to our research institutes and headquarter administration were RMB 2.5 billion.
The segment's operating losses were RMB 1.5 billion, representing an increase of RMB 300 million in operating losses compared with 2005.
Year Ended December 31, 2005 Compared with Year Ended December 31, 2004
In 2005, the operating revenues of corporate and others were RMB 121.9 billion, representing an increase of 48.3% compared with 2004. The increase was due to the fact that China Petrochemical International Co., Ltd. and its subsidiaries increased their trading volume in importing and exporting crude oil and petrochemical products and other business transactions.
In 2005, the segment's operating expenses were RMB 123.1 billion, representing an increase of 46.3% compared with 2004. The increase was primarily due to the increased purchase expenses of China Petrochemical International Co., Ltd. and its subsidiaries associated with the increase in their revenues.
The segment's operating losses were RMB 1.2 billion, representing a decrease of RMB 0.7 billion in operating losses as compared with 2004.
D. LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of funding have been cash provided by operating activities and short-term and long-term borrowings and our primary uses of funds have been for working capital, capital expenditures and repayment of short-term and long-term borrowings.
As of December 31, 2006, our short-term debts (including short-term loans from Sinopec Group Company and its affiliates) were RMB 58.8 billion and accounted for 35.0% of our total short-term and long-term debts (long-term debts include interest free subordinated loan from Sinopec Group Company in the amount of RMB 35.6 billion due in 2020). As of December 31, 2006, cash and cash equivalents were RMB 8.1 billion as compared to RMB 14.1 billion as of December 31, 2005.
Our future debt level is dependent primarily on results of operations, the capital expenditure plan and cash that may be generated from assets disposals. We believe that we have substantial borrowing capacity to meet unanticipated cash requirements.
The following table sets forth a condensed summary of the statements of cash flows for the periods indicated and selected balance sheet items at the end of the periods indicated.
For the Years Ended December 31,
---------------------------------------
2004 2005 2006
------------ -------------- -----------
RMB RMB RMB
(in billion)
Net cash from operating activities:
Net cash provided by operations(1).............................. 104.0 106.9 124.5
Changes in working capital and other
assets and liabilities(2)..................................... (13.0) (1.2) (0.7)
Net interest and tax paid(3).................................... (22.1) (27.5) (28.0)
------------ -------------- -----------
Total.................................................... 68.9 78.2 95.8
------------ -------------- -----------
Cash flows from investing activities:
Capital expenditure including capital expenditure of jointly
controlled entities and exploratory wells expenditure........ (75.3) (72.3) (79.0)
Purchase of investments net of proceeds from disposal of
investments................................................... (1.1) (2.4) (2.9)
Net redemption of in time deposits less maturity of
time deposits................................................. 0.3 0.9 0.5
Acquisition of minority interests in subsidiaries............... - (4.3) (22.0)
Proceeds from disposal of property, plant and equipment ........ 0.3 0.6 0.4
------------ -------------- -----------
Total.................................................... (75.8) (77.5) (103.0)
------------ -------------- -----------
Cash flows from financing activities:
Proceeds from bank and other loans including those of jointly
controlled entities, net of repayments........................ 17.4 0.4 10.6
Proceeds from issuance of corporate bonds, net of repayment..... 3.5 9.9 1.7
Contribution from minority interest, net of distributions to
minority interests............................................ 0.2 (1.6) 0.4
Dividend paid................................................... (8.7) (10.4) (11.3)
Distributions to Sinopec Group Company.......................... (3.7) (3.2) (0.2)
------------ -------------- -----------
Total.................................................... 8.7 (4.9) 1.2
------------ -------------- -----------
Net increase/(decrease) in cash and cash equivalents............... 1.8 (4.2) (6.0)
Cash and cash equivalents at beginning of year..................... 16.5 18.3 14.1
------------ -------------- -----------
Cash and cash equivalents at end of year........................... 18.3 14.1 8.1
============ ============== ===========
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(2) Represents decreases/(increases) in current assets, increases/(decreases) in current liabilities and increases in other assets, net of other liabilities.
(3) Represents interest received, interest paid, investment income received, and income tax paid.
Net Cash from Operating Activities
Net cash provided by operations increased from RMB 106.9 billion in 2005 to RMB 124.6 billion in 2006. The increase was primarily due to the increased income before income tax reflecting our better operating results in 2006.
Cash Flows from Investing Activities
Our cash outflows for capital expenditure projects, including expenditure on exploratory wells, amounted to RMB 69.3 billion, RMB 69.8 billion and RMB 78.6 billion in 2004, 2005 and 2006, respectively. In addition, we had RMB 6.0 billion, RMB 2.5 billion and RMB 0.4 billion in 2004, 2005 and 2006, respectively, of capital expenditure in our jointly controlled entities. In addition, we paid RMB 22.0 billion for acquisition of minority interests in a number of listed subsidiaries, including Qilu Petrochemical Co., Ltd., Yangtze Petrohemical Co., Ltd., Zhongyuan Petroleum Co., Ltd., Shengli Oil Field Dynamic Co., Ltd., and Zhenhai Refining and Petrochemical Co., Ltd. in 2006.
Cash Flows from Financing Activities
Net cash from financing activities was RMB 1.2 billion in 2006. We received net proceeds of RMB 22.7 billion from issuance of corporate bonds including a six-month corporate bond in the principal amount of RMB 10.0 billion issued in May 2006 and another six-month corporate bond in the principal amount of RMB 10.0 billion issued in November 2006, and repaid RMB 21.0 billion of corporate bonds in 2006. In 2006, we had a net drawdown of RMB 10.6 billion in bank loans and we paid a dividend of RMB 11.3 billion to our Shareholders.
Contractual Obligations and Commercial Commitments
The following table sets forth our obligations and commitments to make future payments under contracts and under contingent commitments as of December 31, 2006.
As of December 31, 2006
-----------------------------------------------------
Payment due by period
-----------------------------------------------------
less than After 5
Total 1 year 1-3 years 4-5 years years
---------- ------------- ------------ ------------- ------------
(RMB millions)
Contractual obligations(1)
Short-term debts......................... 44,173 44,173 - - -
Long-term debts.......................... 139,263 21,109 52,921 18,382 46,851
---------- ------------- ------------ ------------- ------------
Total contractual obligations............ 183,436 65,282 52,921 18,382 46,851
========== ============= ============ ============= ============
Other commercial commitments(2)
Operating lease commitment............... 145,171 4,711 9,099 8,955 122,406
Capital commitment....................... 115,070 110,044 5,026 - -
Exploration and production licenses...... 663 156 214 67 226
Guarantees((3)).......................... 160 160 - - -
---------- ------------- ------------ ------------- ------------
Total commercial commitments............. 261,064 115,071 14,339 9,022 122,632
========== ============= ============ ============= ============
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(1) Contractual obligations include the contractual obligations relating to
interest payments. See Note 31 to our audited consolidated financial
statements for the contractual obligations relating to post employment
benefit plans.
(2) Other commercial commitments represent off-balance sheet contingent
liabilities, and other potential cash outflows (as of the balance sheet
date) which may result from contingent events.
(3) Guarantee is not limited by time, therefore specific payment due period
is not applicable. As of December 31, 2006, we have not entered into
any off-balance sheet arrangements other than guarantees given to banks
in respect of banking facilities granted to certain parties. As of
December 31, 2006,
the maximum amount of potential future payments under the guarantees was RMB 160 million. We monitor the conditions that are subject to the guarantees to identify whether a loss is probable, and will recognize any such loss under guarantees when those losses are estimable. As of December 31, 2006, it was not probable that we would be required to make payments under these guarantees. See Note 28 to the consolidated financial statements for further information of the guarantees.
Historical and Planned Capital Expenditure
The following table sets forth our capital expenditure by segment for each of the years ended December 31, 2004, 2005 and 2006 and the capital expenditure in each segment as a percentage of our total capital expenditure for such year.
2004 2005 2006 Total
------------------- --------------------- -------------------- ---------------------
RMB Percent RMB Percent RMB Percent RMB Percent
-------- ---------- ---------- ---------- --------- ---------- --------- -----------
(in billions, except percentage data)
Exploration and production . 21.2 32 23.0 36 31.7 40 75.9 38
Refining................... 15.3 23 19.1 30 22.0 27 56.4 26
Marketing and distribution. 16.7 26 11.0 17 11.3 14 39.0 18
Chemicals.................. 11.0 17 9.4 15 12.6 16 33.0 16
Corporate.................. 1.6 2 1.2 2 2.2 3 5.0 2
Total................. 65.8 100 63.7 100 79.8 100 209.3 100
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In 2006, our total capital expenditure was RMB 79.8 billion.
o The capital expenditure for our exploration and production segment was RMB 31.7 billion. The oil and gas exploration in Northeast Sichuan and the preparations for "Sichuan-to-East China Gas Project" were fully commenced, and the construction of new oil and gas production capacity in Tahe Oil Field in the west, Shengli Chengbei Offshore Oil Field in the east and Daniudi Gas Field progressed smoothly. The newly built crude oil and natural gas production capacity were 6.5 million tones per annum and 1.9 billion cubic meters per annum, respectively.
o The capital expenditure for our refining segment was RMB 22.0 billion. The newly added comprehensive crude oil processing capacity was 14.7 million tonnes per annum. The newly built and revamped projects such as Hainan Refinery and Guangzhou Refinery have been completed and put into operations. Yanshan Refinery Upgrading Project has also been completed, and Cezi Island Wharf and Yizhang-Changling Crude Oil Pipeline projects have been put into operation. Construction of Qingdao Refinery is going smoothly.
o The capital expenditure for our marketing and distribution segment was RMB 11.3 billion. We have further improved our refined pertoleum products sales network through construction, acquisition and renovation of service stations. In 2006, we had a11 self-operated service stations newly added to our network.
o The capital expenditure for our chemicals segment was RMB 12.6 billion. The newly added production capacity of ethylene, PTA and styrene-butadiene rubber was 0.7 million tonnes, 0.45 million tones and 0.1 million tonnes per annum, respectively. Maoming ethylene revamping project has been completed and put into operation, and the chemical fertilizer revamping projects in Anqing, Hubei, and Baling were completed and successfully commissioned. The Fujian Integration Project, Tianjin Ethylene and Zhenhai Ethylene are progressing on schedule.
o The capital expenditure for corporate and others was RMB 2.2 billion and used for the upgrading of IT system and construction of R&D infrastructures.
In addition, in 2006, the three oil production plants we acquired at the end of 2006 incurred the capital expenditure of RMB 3.4 billion and our jointly controlled entities incurred the capital expenditure of RMB 260 million.
In 2007, our planned capital expenditure is RMB 110.1 billion. The projected capital expenditure for our exploration and production segment is RMB 53.1 billion which is planned to speed up the construction process of "Sichuan-to-East China Gas Project" and strengthen the oil and gas exploration and production in Northeast Sichuan, Ordos and Taihe Oil Field and South Tianshan Mountain. The projected expenditure for our refining segment is RMB 22.7 billion which is primarily planned for Qingdao Oil Refinery Project, Bohai Bay crude oil terminal, expansion and revamping of Gaoqiao, Yanshan Refining Project. The projected capital expenditure for our chemicals segment is RMB 19.5 billion which is planned for Fujian, Tianjin and Zhenhai's ethylene projects and to promote the expansion, revamping and auxiliary facilities construction for synthetic fiber monomers and organic materials in Yangzi, Shanghai and Jingling Petrochemical. The projected capital expenditure for our marketing and distribution segment is RMB 12 billion which is planned to optimize and improve the marketing and distribution network of refined petroleum products and accelerate the construction of the pipelines and oil storage for the refined petroleum products. The projected expenditure for corporate and others is RMB 2.8 billion.
We plan to fund our capital expenditures and working capital requirements principally through cash provided by operating activities and short- and long-term debts from domestic as well as overseas sources. We believe our working capital is sufficient for our present requirements. Our capital expenditure plans are subject to a number of risks and uncertainties, and our actual capital expenditures may vary significantly from these planned amounts due to various factors.
Consumer Price Index
According to the data provided by the National Bureau of Statistics, the consumer price index in the PRC increased by 1.5% in 2006, compared with 1.8% in 2005 and 3.9% in 2004. Inflation in the PRC has not had a significant impact on our results of operations in recent years.
US GAAP Reconciliation
Our consolidated financial statements are prepared in accordance with IFRS which differs in certain material respects from US GAAP. These differences, as they apply to our consolidated financial statements, relate primarily to:
o the US GAAP requirement that investments accounted for by the equity method while the investee has activities in progress necessary to commence its planned operations are considered as qualifying assets for which interest is capitalized, whereas under IFRS, such investments are not considered as qualifying assets for which interest is capitalized;
o the US GAAP requirement that foreign exchange differences on funds borrowed for property, plant and equipment be expensed, rather than capitalized as is allowed under IFRS;
o the US GAAP requirement that property, plant and equipment be carried at historical costs less accumulated depreciation (depreciation expense is based on the historical costs), whereas under IFRS revalued property, plant and equipment can be carried in the consolidated financial statements at the revalued amount less accumulated depreciation (depreciation expense is based on the revalued amount); and
o the US GAAP requirement that an impairment loss be recognized on an asset when the sum of the expected undiscounted future cash flows resulting from the use of the asset and its eventual disposition is less than the carrying amount of the asset and the requirement that such impairment loss cannot be reversed, rather than the IFRS standard which involves the asset's discounted future expected cash flows and which permits, in some circumstances, the reversal of amounts previously written down.
o the US GAAP requirement that minority interests at the balance sheet date be presented in the consolidated balance sheet either as liabilities or separately from liabilities and equity, whereas under IFRS, minority interest at the balance sheet date be presented in the consolidated balance sheet within equity, separately from the equity attributable to the equity shareholders of the Company.
o the US GAAP requirement that minority interests in the results of the Group for the period be separately presented in the consolidated statement of income as deduction before arriving at the net income, whereas under IFRS, minority interests in the results of the Group for the period be presented on the face of the consolidated statement of income as an allocation of the total net income for the period between the minority interests and the equity shareholders of the Company.
See Note 37 to the consolidated financial statements for further information.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Directors
The table and discussion below set forth certain information concerning our directors. The current term for our directors is three years, which will expire in May 2009.
Name Age Positions with Sinopec Corp.
---- --- ----------------------------
Chen Tonghai 58 Chairman of the Board of Directors
Zhou Yuan 59 Vice Chairman of the Board of Directors
Wang Tianpu 44 Director, President
Zhang Jianhua 42 Director, Senior Vice President
Wang Zhigang 49 Director, Senior Vice President
Dai Houliang 43 Director, Senior Vice President, Chief
Financial Officer
Liu Zhongli 72 Independent Non-executive Director
Shi Wanpeng 69 Independent Non-executive Director
Li Deshui 62 Independent Non-executive Director
Yao Zhongmin 54 Director
Fan Yifei 43 Director
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Chen Tonghai, 58, Chairman of the Board of Directors of Sinopec Corp. and President of Sinopec Group Company. Mr. Chen graduated from Northeast Petroleum Institute in September 1976 specializing in petroleum production engineering. Mr. Chen is a professor level senior economist. He has extensive experience in petrochemical industry administration and macro-economic management. From July 1983 to December 1986, Mr. Chen was Vice Party Secretary and the Party Secretary of Zhenhai Petroleum and Petrochemical Plant under the former Sinopec Group Company. From December 1986 to July 1989, Mr. Chen served as Managing Deputy Mayor of Ningbo City, Zhejiang Province. From July 1989 to June 1991, Mr. Chen served as Managing Deputy Director of the Planning and Economic Committee of Zhejiang Province. From June 1991 to February 1992, Mr. Chen served as Acting Mayor of Ningbo City. From February 1992 to January 1994, Mr. Chen served as Mayor of Ningbo City. From January 1994 to April 1998, Mr. Chen served as Vice Minister of the State Planning Commission. Mr. Chen served as Vice President of Sinopec Group Company from April 1998 to March 2003. Mr. Chen has been President of Sinopec Group Company since March 2003. Mr. Chen served as Director and Vice Chairman of the First Session of the Board of Directors of Sinopec Corp. from February 2000 to April 2003. Mr. Chen served as Director and Chairman of the Second Session of the Board of Directors of Sinopec Corp. from April 2003 to May 2006; he was elected as Director and Chairman of the Third Session of the Board of Directors of Sinopec Corp. in May 2006.
Zhou Yuan, 59, Vice Chairman of the Board of Directors of Sinopec Corp. and Vice President of the Sinopec Group Company. Mr. Zhou graduated from East China Petroleum Institute specializing in petroleum geology in September 1975. He is a senior Economist. He has extensive experience in the management of petroleum and petrochemical and government entities. From April 1986 to March 1989, he was the Deputy Secretary of the Party Committee of Xinjiang Petroleum Administration Bureau (Kelamayi City) as well as the Secretary of the Party Committee of South Xinjiang Petroleum Exploration Company. From March 1989 to August 1990, he was the Vice Commander, Deputy Secretary of the Party Committee and Secretary of the Disciplinary Committee of Talimu Exploration and Development Headquarter. From August 1990 to January 1992, he was the Deputy Secretary of the Party Committee of Xinjiang Petroleum Administration Bureau
(Kelamayi City) and the Secretary of Politics & Law Committee. From January 1992 to December 1993, he served as Vice Minister of Organization Department of the Party Committee of Xinjiang Autonomous Region. From December 1993 to January 1998, he served as a member of the Standing Committee of Discipline Committee and the Deputy Minister of the Party Committee of the Organisation Department of Xinjiang Autonomous Region. From January 1998 to August 1999, he was a member of the Standing Committee of the Disciplinary Committee of the Xinjiang Autonomous Region and the Secretary of the Party Committee of Yili Autonomous District. From August 1999 to November 1999, he was a member of the Standing Committee of the Party Committee of the Xinjiang Autonomous Region and the Secretary of the Party Committee of Yili Autonomous District. From November 1999 to July 2004, he was a member of Standing Committee of the Party Committee of Xinjiang Autonomous Region and Minister of the Organization Department of the Party Committee of Xinjiang Autonomous Region. Since July 2004, he has been the Vice President of Sinopec Group Company; Mr. Zhou was elected as Director and Vice Chairman of the Third Session of the Board of Directors of Sinopec Corp. in May 2006.
Wang Tianpu, 44, Director of the Board of Directors and President of Sinopec Corp.. Mr. Wang graduated from Qingdao Chemical Institute in July 1985 majoring in basic organic chemistry. He obtained his MBA degree in Dalian University of Science & Technology in July 1996 and Ph.D. degree in Zhejiang University in August 2003 majoring in chemical engineering. He is a professor level senior engineer and well-experienced in the production and management in petrochemical industry. From March 1999 to February 2000, Mr. Wang was Vice President of Qilu Petrochemical Company of Sinopec Group. From February 2000 to September 2000, he was Vice President of Sinopec Corp. Qilu Company. From September 2000 to August 2001, he was President of Sinopec Corp. Qilu Company. Mr. Wang was Vice President of Sinopec Corp. from August 2001 to April 2003 and was Senior Vice President of Sinopec Corp. from April 2003 to March 2005. Mr. Wang has been President of Sinopec Corp. since March 2005; Mr. Wang was elected as Director of the Third Session of the Board of Directors of Sinopec Corp. in May 2006 and he is President of Sinopec Corp..
Zhang Jianhua, 42, Director of the Board of Directors and Senior Vice President of Sinopec Corp.. Mr. Zhang graduated from East China Chemical Institute in July 1986 majoring in petroleum refining, and obtained a master's degree from East China University of Science and Technology in December 2000 majoring in chemical engineering. He is a professor level senior engineer. From April 1999 to February 2000, Mr. Zhang was Vice President of Shanghai Gaoqiao Petrochemical Company of Sinopec Group. From February 2000 to September 2000, he was Vice President of Sinopec Corp. Shanghai Gaoqiao Company. He was President of Sinopec Corp. Shanghai Gaoqiao Company from September 2000 to June 2003. Mr. Zhang served as Vice President of Sinopec Corp. from April 2003 to March 2005. He was also the Director General of Sinopec Production & Operation Management Dept. from November 2003 to November 2005. He has been Senior Vice President of Sinopec Corp. since March 2005; Mr. Zhang was elected as Director of the Third Session of the Board of Directors of Sinopec Corp. in May 2006 and has been Senior Vice President of Sinopec Corp..
Wang Zhigang, 49, Director of the Board of Directors of Sinopec Corp. and Senior Vice President of Sinopec Corp.. Mr. Wang graduated from East China Petroleum Institute in January 1982, majoring in oil production, and then obtained a master's degree from University of Petroleum in June 2000, majoring in oil and gas development engineering. He obtained a Ph.D. degree from Geology and Geo-physics Research Institute of the China Academy of Sciences in September 2003 majoring in geology. He is a professor level senior engineer. From February 2000 to June 2000, he was Vice President of Sinopec Shengli Oilfield Company Limited. From June 2000 to December 2001, Mr. Wang served as Director and President of Sinopec Shengli Oilfield Company Limited. He was appointed as honorary Deputy Director-General of the Economic and Trade Committee of Ningxia Hui Autonomous Region from November 2001 to May 2003. He was Vice President of Sinopec Corp. from April 2003 to March 2005. He was also the Director General of Sinopec Exploration and Production Dept. since June 2003 to November 2005. He has been Senior Vice President of Sinopec Corp. since March 2005; Mr. Wang was elected as Director of the Third Session of the Board of Directors of Sinopec Corp. in May 2006 and has been Senior Vice President of Sinopec Corp..
Dai Houliang, 43, Director of the Board of Directors of Sinopec Corp., Senior Vice President and Chief Finance Officer of Sinopec Corp.. Mr. Dai graduated from Jiangsu Chemical Institute in July 1985, specializing in organic chemical engineering. From September 1997 to July 1999, he participated in the MBA training program in Nanjing University. He is a professor level senior engineer. He was Deputy Manager of Sinopec Yangzi Petrochemical Company from December 1997 to April 1998. He served as Director and Deputy General Manager of Sinopec Yangzi Petrochemical Co., Ltd. from April 1998 to July 2002. He was Vice Chairman and General Manager of Sinopec Yangzi Petrochemical Co., Ltd. and Director of Sinopec Yangzi Petrochemical Company from July 2002 to December 2003. He was Chairman and President of Sinopec Yangzi Petrochemical
Co., Ltd. and Chairman of Sinopec Yangzi Petrochemical Company from December 2003 to September 2005. He also served as Chairman of BASF-YPC Company Limited from December 2004 to October 2006. He has been the Deputy CFO of Sinopec Corp. from September 2005 to May 2006. Mr. Dai has been Vice President of Sinopec Corp. from November 2005 to May 2006. In May 2006, he was elected as Director of the Third Session of the Board of Directors, Senior Vice President and CFO of Sinopec Corp..
Liu Zhongli, 72, Independent Non-Executive Director of Sinopec Corp.. He graduated from the training course of the Training Department of Central Communist Party School (undergraduate course) in July 1982. He is a senior economist engaging in treasury finance administration and government work for a long time, and has extensive experience in macro-economics, financial and treasury administration. He was working in Commerce Bureau of Heilongjiang Province in 1952 and in Planning Commission of Heilongjiang Provincial Government in 1963. He had served as Deputy Division Director of the General Affairs Office of Planning Commission of Heilongjiang Provincial Government and Deputy Secretary General of Planning Commission of Heilongjiang Provincial Government since September 1973. He was Deputy Director General of Planning Commission of Heilongjiang Provincial Government and a member of Party Committee of Planning Commission of Heilongjiang Provincial Government from July 1982 to May 1983. From May 1983 to May 1985, he was Director General of Planning Commission (Planning & Economics Department) of Heilongjiang Provincial Government and Secretary of Party Committee of Planning Commission (Planning & Economics Department) of Heilongjiang Provincial Government. He served as Deputy Governor of Heilongjiang Province from May 1985 to January 1988. He was Vice Minister of the Ministry of Finance and Deputy Secretary of Party Committee of the Ministry of Finance from February 1988 to July 1990. He served as Deputy Secretary General of the State Council and Deputy Secretary of Party Committee of the State Council from July 1990 to September 1992. From September 1992 to March 1998, he was Minister of the Ministry of Finance and Secretary of Party Committee of the Ministry of Finance and, from February 1994, concurrently Director-General of State Administration of Taxation. From March 1998 to November 2000, he was Head of Economic System Reform Office of the State Council and Secretary of Party Committee of the Economic System Reform Office of the State Council. From August 2000 to March 2003, he was Chairman of National Council for Social Security Fund and Secretary of Party Committee of the National Council for Social Security Fund. He has been a member of the Standing Committee of the Tenth Session of the Chinese People's Political Consultative Conference (CPPCC) and Director-General of the Economics Committee of CPPCC since March 2003. Since October 2004, he has concurrently been Chairman of the Chinese Institute of Certified Public Accountants. Mr. Liu was elected as Independent Non-Executive Director of the Third Session of the Board of Directors of Sinopec Corp. in May 2006.
Shi Wanpeng, 69, Independent Non-Executive Director of Sinopec Corp., a member of the Standing Committee of the National Committee of the Tenth session of the Chinese People's Political Consultative Conference and Deputy Director of its Economic Committee. Mr. Shi graduated from Northern Jiaotong University in August 1960 specializing in railway transportation administration. He is a professor level senior engineer. He has long been engaged in economic management work, and has extensive experience in macro-economic management. From January 1983 to January 1987, he served as Deputy Director of the Transport Bureau of the State Economic Commission. From January 1987 to May 1988, he was the Director of the Economic and Technical Co-operation Bureau of the State Economic Commission. From May 1988 to July 1991, he was Director of the Production and Dispatch Bureau of the State Planning Commission. From July 1991 to July 1992, he served as Deputy Secretary General of the Production Office of the State Council. From July 1992 to April 1993, he served as Deputy Director of the Economic and Trade Office of the State Council. From April 1993 to July 1997, he was Vice Minister of the State Economic and Trade Commission. From July 1997 to March 1998, he was Chairman (minister level) of the China Textiles Association. From March 1998 to February 2002, he served as Vice Minister of the State Economic and Trade Commission. Since January 2003, he has been Chairman of China Packaging Federation. He has been a member of the Standing Committee of the National Committee of the Tenth session of the Chinese People's Political Consultative Conference and Deputy Director of its Economic Committee since March 2003. Mr. Shi was elected as Independent Non-executive Director of the Second Session of the Board of Directors of Sinopec Corp. from April 2003 to May 2006; he was elected as Independent Non-Executive Director of the Third Session of the Board of Directors of Sinopec Corp. in May 2006.
Li Deshui, 62, Independent Non-Executive Director of Sinopec Corp.. Mr. Li graduated from university in 1967. He is a senior engineer, researcher, part-time professor of the Economics School of Peking University and the Economics School of Renmin University of China. After graduating from university, he was assigned to work at Maanshan Steel Company and has acted as Workshop Section Head and Dispatch Head. In 1977 he worked at the Planning Institute of the Metallurgy Department. In 1984 he worked at the Raw Materials Bureau
of the State Planning Commission. In 1988 he acted as Deputy Division Director of the First Industrial Planning Division of the Long-term Planning Department of the State Planning Commission. In 1989 he was Division Director of the First Industrial Planning Division of the Long-term Planning Department and Division Director of the First Industrial Planning Division of the Long-term Planning and Industrial Policy Department. In 1992 he acted as Deputy Director of the National Economy Comprehensive Department of the State Planning Commission. In May 1996 he was Director of the National Economy Comprehensive Department of the State Planning Commission. In November 1996, he acted as Vice Mayor of Chongqing in Sichuan Province. In March 1997 he acted as Vice Mayor of Chongqing Municipality. In November 1999 he worked as Deputy Director of the Research Office of the State Council and a member of the Party Committee. In April 2002, he served as Secretary of the Party Committee and Deputy General Manager of China International Engineering Consultancy Company. In March 2003 he served as Secretary of the Party Committee and Head of the State Statistics Bureau, a member of the Monetary Policy Committee of the People's Bank of China and Chairman of China Statistics Institute. In March 2005, he was elected as Vice Chairman of the Thirty-sixth Statistics Commission of the United Nations. In March 2005 he served as a member of the Tenth Session of the Chinese People's Political Consultative Conference. In April 2006 he acted as a member of the Economic Commission. In March 2006, he was the consultant of the State Statistics Bureau. Mr. Li was elected as Independent Non-Executive Director of the Third Session of the Board of Directors of Sinopec Corp. in May 2006.
Yao Zhongmin, 54, Director of Sinopec Corp.. Mr. Yao graduated from Dongbei University of Finance & Economics in September 1977 specializing in Infrastructure Finance & Credit and graduated as postgraduate from Zhongnan University of Finance & Economics in December 1996 specializing in Investment Economics with a master's degree. He is a senior Economist. Mr. Yao has worked for a long time in financial investment management related work and has extensive experience in finance investment management. From May 1985 to June 1989, he was a member of the Party Committee of China Construction Bank Henan Branch and its Vice-Chairman. From June 1989 to June 1992, he was leading the work of China Construction Bank Henan Branch, and was Deputy Secretary of the Party Committee and Vice Chairman of the bank. From June 1992 to April 1993, he served as Secretary of the Party Committee and Chairman of China Construction Bank Henan Branch. He served as Vice Governor of Henan Province from April 1993 to January 1994. From January 1994 to March 1998, he was a member of the Party Committee of China Development Bank and its Vice Chairman and Chairman of the Disciplinary Supervision Committee. From March 1998 to June 1998, he was Deputy Secretary of the Party Committee of China Development Bank and its Vice Chairman and Chairman of the Disciplinary and Investigation Committee. From June 1998, he was the Deputy Secretary of the Party Committee of China Development Bank and its Vice-Chairman. Mr. Yao was elected as Director of the Third Session of the Board of Directors of Sinopec Corp. in May 2006.
Fan Yifei, 43, Director of Sinopec Corp.. Mr. Fan graduated from the treasury and finance department of Renmin University of China in July 1993 and obtained a doctoral degree in economics; He obtained a master's degree in international economics from Columbia University in 2002. He is a senior accountant. From June 1993 to September 1994, he was the Assistant to the General Manager and Manager of the Planning and Finance Department of the Trust Investment Company of China Construction Bank successively. From September 1994 to July 1996, he served as Vice General Manager of the Capital Planning Department of China Construction Bank. He was the General Manager of the Finance and Accounting Department of China Construction Bank from July 1996 to January 1998. He was the General Manager of the Planning and Finance Department of China Construction Bank from January 1998 to February 2000. Mr. Fan served as the Assistant to the Governor of China Construction Bank from February 2000 to June 2005, during which he enriched his experience by participating in the Three Gorges project, and also acted as the Assistant to the General Manager of China Changjiang Power Co., Ltd. In June 2005, Mr. Fan was appointed as Deputy Governor of China Construction Bank. Mr. Fan acted as Director of the Second Session of the Board of Directors of Sinopec Corp. from April 2003 to May 2006; he was elected as Director of the Third Session of the Board of Directors of Sinopec Corp. in May 2006.
Supervisors
The table and discussion below set forth certain information concerning our supervisors. The current term of our supervisors is three years, which will expire in May 2009.
Name Age Position with the Company ---- --- ------------------------- Wang Zuoran 56 Chairman of the Board of Supervisors Zhang Youcai 65 Vice Chairman, Independent Supervisor Kang Xianzhang 58 Supervisor Zou Huiping 46 Supervisor Li Yonggui 66 Independent Supervisor Su Wensheng 50 Employee Representative Supervisor Zhang Jitian 59 Employee Representative Supervisor Cui Guoqi 53 Employee Representative Supervisor Li Zhonghua 55 Employee Representative Supervisor |
Wang Zuoran, 56, Chairman of the Supervisory Board of Sinopec Corp.. Mr. Wang graduated from Shandong Economic Administration Institute in September 1994 specializing in economic administration. Mr. Wang is a professor level senior economist and has extensive experience in the management of petroleum industry. From October 1994 to February 2000, Mr. Wang served as Deputy Director and Party Secretary of Shengli Petroleum Administration Bureau. From February 2000 to July 2001, Mr. Wang was the Assistant to the President of Sinopec Group Company. Mr. Wang has been Director of Disciplinary Supervision Committee of Sinopec Group Company since July 2001. Mr. Wang served as Supervisor of the First Session of the Supervisory Board of Sinopec Corp. from February 2000 to April 2003. From April 2003 to May 2006, Mr. Wang served as Supervisor and Chairman of the Second Session of the Supervisory Board of Sinopec Corp.; he was elected as Supervisor and Chairman of the Third Session of the Supervisory Board of Sinopec Corp. in May 2006.
Zhang Youcai, 65, Independent Supervisor and Vice Chairman of the Supervisory Board of Sinopec Corp.. Mr. Zhang graduated from Nanjing Industrial University in August 1965 majoring in inorganic chemistry. He is a professor and has long been engaged in business administration, financial management and government affairs, and has extensive experience in industrial, economic, financial and accounting management. From January 1968 to August 1980, he served as a technician, Vice-President, Deputy Secretary of the Party Committee and President of Nantong Chemical Fertilizer Plant. From August 1980 to January 1982, he was Deputy Director-General and member of the Party Committee of the Industrial Bureau of Nantong Region. From January 1982 to February 1983, he served as Deputy Director - General of Planning Commission of Nantong Region. From February 1983 to November 1989, he served as Deputy Mayor, Deputy Secretary of the Party Committee and Mayor of Nantong City. He was Vice Minister and member of the Party Committee of Ministry of Finance from December 1989 to July 2002 (from May 1994 to March 1998, he served concurrently as Director-General of State-owned Assets Administration Bureau). He has been Chairman of the Chinese Institute of Chief Accountants since November 2002. He has been a member of the Standing Committee of the Tenth National People's Congress (NPC) and Deputy Director of its Financial and Economic Committee of NPC from March 2003. Mr. Zhang served as an Independent Non-Executive Director of the Second Session of Board of Directors of Sinopec Corp. from April 2003 to May 2006; he was elected as Independent Supervisor and Vice Chairman of the Third Session of the Supervisory Board of Sinopec Corp. in May 2006.
Kang Xianzhang, 58, Supervisor of Sinopec Corp.. Mr. Kang graduated from the Correspondence Teaching Department of the Party School of the Beijing Municipal Party Committee in March 1988 specializing in ideology politics (undergraduate course). He also graduated from the Correspondence Teaching College of the Party School of the Central Committee of the Communist Party of China in December 1992 specializing in party and political affairs management (bachelor course). He is a senior political engineer. From June 1995 to August 1996, he was the Deputy Director of the Organization Department of the Communist Party Committee of the Tibet Autonomous Region. From August 1996 to May 1997, he was a senior researcher of the deputy director level in the Cadre Allocation Bureau of the Organization Department of the Central Committee of the Communist Party of China. He acted as the Deputy Secretary of the Communist Party Committee of the Coal Scientific Research Institute of the Ministry of Coal Industry from May 1997 to October 1998. From October 1998 to May 1999, he was Supervisor of the deputy director level in the Discipline Inspection Group and the Supervisory Bureau of Sinopec Group Company, and acted as a Deputy Director of the Supervisory Bureau of the same company from May 1999 to March 2001. He
was the Deputy Director of the Supervisory Department of Sinopec Corp. from February 2000 to March 2001. He has been a Deputy Head of the Discipline Inspection Group of the Leading Party Group and Director of the Supervisory Bureau of Sinopec Group Company, as well as Director of the Supervisory Department of Sinopec Corp. since March 2001. Mr. Kang served as Supervisor of the Second Session of the Supervisory Board of Sinopec Corp. from April 2003 to May 2006; he was elected as Supervisor of the Third Session of the Supervisory Board of Sinopec Corp. in May 2006.
Zou Huiping, 46, Supervisor of Sinopec Corp.. Mr. Zou graduated from Jiangxi Institute of Finance and Economics in July 1986 specializing in trade economics. He is a professor level senior accountant. From November 1998 to February 2000, he served as Chief Accountant of Sinopec Group Guangzhou Petrochemical Company. From February 2000 to December 2001, he was Deputy Director General of Financial Assets Department of Sinopec Group Company. From December 2001 to March 2006, he was Deputy Director General of Finance Planning Department of Sinopec Group Company. In March 2006, he was Director General of Financial Assets Department of Sinopec Assets Management Co.,Ltd.. Since March 2006, he has been Director General of Audit Department of Sinopec Corp.. Mr. Zou was elected as Supervisor of the Third Session of the Supervisory Board of Sinopec Corp. in May 2006.
Li Yonggui, 66, Independent Supervisor of Sinopec Corp.. Mr. Li graduated from Shandong Institute of Finance and Economics in July 1965, majoring in treasury finance. He is a senior economist and CPA, and has long been engaged in tax management with extensive management experience in taxation. From February 1985 to December 1988, he was Deputy Director-General of Taxation Bureau of Ministry of Finance. He served as Chief Economist of State Administration of Taxation from December 1988 to April 1991. From April 1991 to February 1995, he served as Deputy Director-General of State Administration of Taxation. He was Chief Economist of State Administration of Taxation from February 1995 to September 2001. Mr. Li has been Chairman of Chinese Association of Certified Public Taxation Experts since April 2000. Mr. Li served as Independent Supervisor of the Second Session of Supervisory Board of Sinopec Corp. from April 2003 to May 2006; he was elected as Independent Supervisor of the Third Session of Supervisory Board of Sinopec Corp. in May 2006.
Su Wensheng, 50, Employee Representative Supervisor of Sinopec Corp.. Mr. Su graduated from the General Section of Tsinghua University in December 1980 majoring in environmental engineering. He obtained a master's degree in management science and engineering from Petroleum University (Beijing) in June 2000. He is a senior engineer. From September 1986 to November 1996, he was Deputy Secretary of Party Committee and Secretary of Disciplinary Committee of Beijing Designing Institute of the former Sinopec Group Company. From November 1996 to December 1998, he was Secretary of Party Committee of Beijing Designing Institute. Mr. Su has been Director-General of Ideology & Politics Department and Deputy Secretary of the Affiliated Party Committee of Sinopec Group Company since December 1998. He has been Managing Deputy Secretary of the Party Working Committee of the Western New Region Exploration Headquarter of Sinopec Group since December 2001. Mr. Su served as an Employee Representative Supervisor of the Second Session of Supervisory Board of Sinopec Corp. from April 2003 to May 2006; he was elected as Employee Representative Supervisor of the Third Session of Supervisory Board of Sinopec Corp. in May 2006.
Zhang Jitian, 59, Employee Representative Supervisor of Sinopec Corp.. Mr. Zhang graduated from Hohhot Transportation Institute in July 1968 specializing in road and bridge construction, and he also graduated from Sinopec Management Institute in July 1986 specializing in enterprise management (undergraduate course). He is a senior political engineer. From August 1996 to December 1998, he was Deputy Director of Personnel and Educational Department of the former Sinopec Group Company; from December 1998 to September 2005, he was Deputy Director of Personnel and Educational Department of Sinopec Group Company; he has been Deputy Director (remunerate as Director) of Personnel Department of Sinopec Corp. since September 2005. Mr. Zhang was elected as Employee Representative Supervisor of the Third Session of Supervisory Board of Sinopec Corp. in May 2006.
Cui Guoqi, 53, Employee Representative Supervisor of Sinopec Corp.. Mr. Cui graduated from the Correspondence Teaching College of Renmin University of China in December 1985 majoring in industrial business management. In January 1997, he obtained a MBA degree from the Business Management School of Renmin University of China. He is a professor level senior political engineer. Mr. Cui has served as Director and Trade Union Chairman of Sinopec Yanshan Petrochemical Company since February 2000. He served as a member of the Executive Committee of All China Federation of Trade Unions in December 2000, and a member of the Standing Committee of the National Committee of the Union of Chinese Energy and Chemical Industries since December 2001. He was Deputy Secretary of Party Committee of Sinopec Yanshan Petrochemical Company from August 2005 to
November 2006. Mr. Cui has been the Deputy Secretary (remunerate as Secretary) of Party Committee of Sinopec Yanshan Petrochemical Company since November 2006. Mr. Cui served as Employee Representative Supervisor of the Second Session of Supervisory Board of Sinopec Corp. from April 2003 to May 2006; he was elected as Employee Representative Supervisor of the Third Session of Supervisory Board of Sinopec Corp. in May 2006.
Li Zhonghua, 55, Employee Representative Supervisor of Sinopec Corp.. Mr. Li graduated from the Correspondence Teaching Department of the Party School of Shengli Oilfield in June 1996 specializing in party and political affairs management (undergraduate course). He also graduated from the Correspondence Teaching College of the Party School of Shandong Provincial Party Committee in December 1998 specializing in economic management. He is a professor level senior political engineer. From March 1995 to January 2004, he had been Secretary of Party Committee and Vice General Manager of No. 2 Drilling Company of Shengli Petroleum Administration Bureau; Secretary of Party Committee, General Manager of Offshore Drilling Company of Shengli Petroleum Administration Bureau; and Deputy Party Secretary, General Manager of the Yellow River Drilling Company of Shengli Petroleum Administration Bureau successively. From January 2004 to November 2004, he was Deputy Chief Engineer, Deputy Secretary of Party Committee and General Manager of the Yellow River Drilling Company of Shengli Petroleum Administration Bureau; he has been member of the Standing Committee of Party Committee and Chairman of the Trade Union of Shengli Petroleum Administration Bureau since November 2004. He was Deputy Secretary of Party Committee of Shengli Petroleum Administration Bureau since April 2006. Mr. Li was elected as Employee Representative Supervisor of the Third Session of Supervisory Board of Sinopec Corp. in May 2006.
Other Executive Officers Name Age Positions with Sinopec Corp. ---- --- ---------------------------- Cai Xiyou 45 Senior Vice President Zhang Kehua 53 Vice President Zhang Haichao 49 Vice President Jiao Fangzheng 44 Vice President Chen Ge 44 Secretary of the Board of Directors |
Cai Xiyou, 45, Senior Vice President of Sinopec Corp.. Mr. Cai graduated from Fushun Petroleum Institute in August 1982 majoring in petroleum refining automation, and obtained a MBA degree from China Industry and Science Dalian Training Center in October 1990. He is a senior economist. From June 1995 to May 1996, he was Deputy General Manager of Jinzhou Petrochemical Company of the former Sinopec Group Company. From May 1996 to December 1998, he was Deputy General Manager of Dalian Western Pacific Petrochemical Co., Ltd (WEPEC). From December 1998 to June 2001, he was Deputy General Manager of Sinopec Sales Company, and from June 2001 to December 2001, he was Executive Deputy Manager of Sinopec Sales Company. He has been Director and General Manager of China International United Petrochemical Company Limited (UNIPEC) from December 2001 to December 2005. He was Vice President of Sinopec Corp. from April 2003 to November 2005. Mr. Cai has been Senior Vice President of Sinopec Corp. since November 2005.
Zhang Kehua, 53, Vice President of Sinopec Corp. Mr. Zhang graduated from Shanghai Chemical Engineering University in January 1980 majoring in chemical and mechanical engineering. He is a senior engineer and had his master's degree from University of Petroleum majoring in management science and engineering in December 2000. He was Deputy Manager of No. 3 Construction Company of the former Sinopec Group Company from February 1994 to April 1996. From April 1996 to December 1998, he was Deputy Director General (Deputy Manager of Sinopec Engineering Incorporation) of the Engineering Department of the former Sinopec Group Company. He was Deputy Director General of the former Engineering Department of Sinopec Group Company from December 1998 to December 2001 and was Deputy Director General of Engineering Department of Sinopec Group Company from December 2001 to September 2002. Mr. Zhang was Director General of Engineering Department of Sinopec Group Company from September 2002 to October 2004. Mr. Zhang has served as the Assistant to the President of Sinopec Group Company and Director General of Engineering Department since October 2004. Mr. Zhang has been Vice President of Sinopec Corp. since May 2006.
Zhang Haichao, 49, Vice President of Sinopec Corp.. Mr. Zhang graduated from Zhoushan Commercial and Technical School in December 1979, specializing
in oil storage and transportation. He also graduated from Jilin Petrochemical Institute in July 1985 specializing in recycling of lubricating oil. From January 2001 to June 2002, he participated in the business administration program at Macau Science & Technology University. He is an economist. He served as Deputy General Manager of Zhejiang Petroleum Company from March 1998 to September 1999. He served as General Manager of Zhejiang Petroleum Company from September 1999 to February 2000, and has served as Manager of Sinopec Zhejiang Petroleum Company from February 2000 to September 2005. He has been Chairman of Sinopec-BP Zhejiang Petroleum Sales Co., Ltd. since April 2004. He was Secretary of the Party Committee, Vice Chairman and Deputy General Manager of Sinopec Sales Co., Ltd. from October 2004 to November 2005. He was Secretary of Party Committee, Chairman and General Manager of Sinopec Sales Co., Ltd. from November 2005 to June 2006. He has been Chairman and General Manager of Sinopec Sales Co., Ltd. since June 2006. He served as Employee Representative Supervisor of the Second Session of the Supervisory Board of Sinopec Corp. from April 2003 to November 2005. Mr. Zhang has been Vice President of Sinopec Corp. since November 2005.
Jiao Fangzheng, 44, Vice President of Sinopec Corp.. Mr. Jiao won his bachelor's degree in petroleum exploration and won his doctoral degree in natural gas engineering from Southwest Petroleum Institute respectively in July 1983 and November 2000. Mr. Jiao is a professor level senior engineer. From January 1999 to February 2000, he was Chief Geologist of Zhongyuan Petroleum Exploration Bureau of Sinopec Group Company. He then served as Deputy Manager and Chief Geologist of Zhongyuan Oilfield Company of Sinopec Group Company from February 2000 to February 2001. He was Vice President of Sinopec Exploration and Production Research Institute from July 2000 to March 2001. He then served as Deputy Director General of Sinopec Oilfield E & P Department from March 2001 to June 2004. Since June 2004, he served as Manager of the Northwest Company of Sinopec Group Company. Mr. Jiao has served as Vice President of Sinopec Corp. since October 2006.
Chen Ge, 44, Secretary to the Board of Directors of Sinopec Corp.. Mr. Chen graduated from Daqing Petroleum Institute in July 1983 majoring in petroleum refining, and then obtained his MBA degree from Dalian University of Science and Technology in July 1996. He is a senior economist. From July 1983 to February 2000, he worked in Beijing Yanshan Petrochemical Company. From February 2000 to December 2001, he was Deputy Director General of the Board Secretariat of Sinopec Corp.. Mr. Chen has been Director General of the Board Secretariat since December 2001. Mr. Chen has been the Secretary to the Board of Directors of Sinopec Corp. since April 2003.
B. COMPENSATION
Salaries of Directors, Supervisors and Members of the Senior Management
Our directors and supervisors who hold working posts with us and other senior management members receive their remuneration in the form of basic salary and performance rewards.
The following table sets forth the compensation on individual basis for our directors, supervisors and executive officers who receive compensation from us in 2006.
Remuneration paid by
Name Position with the Company the Company in 2006
------------------------- ----------------------------- ----------------------
(RMB thousand)
Directors
---------
Chen Tonghai Chairman 0
Zhou Yuan Vice Chairman 0
Wang Tianpu Director, President 616
Zhang Jianhua Director, Senior Vice
President 576
Wang Zhigang Director, Senior Vice
President 576
Dai Houliang Director, Senior Vice
President, CFO 446
Liu Zhongli Independent Non-executive
Director 109
Shi Wanpeng Independent Non-executive
Director 121
63
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Li Deshui Independent Non-executive
Director 109
Yao Zhongmin Director 35
Fan Yifei Director 35
Wang Jiming Vice Chairman (till May
2006) 149
Mou Shuling Director (till May 2006) 115
Zhang Jiaren Director, CFO (till May
2006) 122
Cao Xianghong Director (till May 2006) 144
Liu Genyuan Director (till May 2006) 0
Gao Jian Director (till May 2006) 0
Chen Qingtai Independent Non-executive
Director (till May 2006) 12
Ho Tsu Kwok Charles Independent Non-executive
Director (till May 2006) 9
Zhang Youcai Independent Non-executive
Director (till May 2006) 9
Cao Yaofeng Employee Representative
Director (till May 2006) 113
Supervisors
-----------
Wang Zuoran Chairman of Supervisory
Committee 0
Zhang Youcai Vice Chairman,
Independent Supervisor 109
Kang Xianzhang Supervisor 0
Zou Huiping Supervisor 102
Li Yonggui Independent Supervisor 121
Su Wensheng Employee Representative
Supervisor 354
Zhang Jitian Employee Representative
Supervisor 102
Cui Guoqi Employee Representative
Supervisor 329
Li Zhonghua Employee Representative
Supervisor 94
Zhang Chongqing Supervisor (till May 2006) 0
Wang Peijun Supervisor (till May 2006) 0
Wang Xianwen Supervisor (till May 2006) 0
Zhang Baojian Supervisor (till May 2006) 0
Cui Jianmin Independent Supervisor
(till May 2006) 9
Zhang Xianglin Employee Representative
Supervisor (till May 2006) 239
Other Executive officers
------------------------
Cao Xiyou Senior Vice President 518
Zhang Kehua Vice President 123
Zhang Haichao Vice President 415
Jiao Fangzheng Vice President 35
64
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Chen Ge Secretary to the Board of
Directors 355
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C. BOARD PRACTICE
We have three special board committees, namely, an audit committee, a strategy committee and a remuneration and evaluation committee. The majority of the members of the strategy committee and the remuneration and evaluation committee, and all members of the audit committee, are independent directors. In addition, the audit committee shall have at least one independent director who is a financial expert.
The main responsibilities of the audit committee include:
o to propose the appointment or replacement of the external auditor;
o to oversee the internal auditing system and its implementation;
o to coordinate the communication between the internal auditing department and the external auditor;
o to examine and approve financial information and it disclosure; and
o to examine the internal control system.
The main responsibilities of the strategy committee are to conduct research and put forward proposals on the long-term development strategy and significant investments.
The main responsibilities of the remuneration and evaluation committee include:
o to research on evaluation criteria for directors and the president, to conduct their evaluations and make necessary suggestions; and
o to research on and review the policies and proposals in respect of the remuneration of directors, supervisors, president, vice-president, Chief Financial Officer and secretary of the board of directors.
The members of audit committee are Liu Zhongli, Shi Wanpeng and Li Deshui. The members of strategy committee are Wang Tianpu, Zhang Jianhua, Wang Zhigang, Li Deshui, Yao Zhongmin and Fan Yifei. The members of remuneration and evaluation committee are Liu Zhongli, Shi Wanpeng, Li Deshui and Dai Houliang.
D. EMPLOYEES
As of December 31, 2004, 2005 and 2006, we had approximately 389,451, 364,528 and 340,886 employees. The following table sets forth the number of our employees by our business segments, their scope of work and their education as of December 31, 2006.
By Segment Percentage of Total Number of
Number of Employees Employees (%)
------------------- -----------------------------
Exploration and Production ........ 112,702 33.1
Refining .......................... 81,352 23.8
Marketing and Distribution ........ 61,269 18.0
Chemicals ......................... 77,185 22.6
Corporate and Others .............. 8,378 2.5
Total.............................. 340,886 100.0
By Employee's Scope of Work Percentage of Total Number of
Number of Employees Employees (%)
------------------- -----------------------------
Production......................... 173,415 50.9
Sales.............................. 60,479 17.7
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Technical.......................... 44,525 13.1
Finance............................ 8,991 2.6
Administration..................... 27,270 8.0
Others............................. 26,206 7.7
Total.............................. 340,886 100.0
By Education Percentage of Total Number of
Number of Employees Employees (%)
------------------- -----------------------------
Master's degree and above......... 4,392 1.3
University ....................... 54,764 16.1
Tertiary education................ 72,728 21.3
Technical/polytechnic school...... 34,416 10.1
Secondary, technical/polytechnic
school or below................... 174,586 51.2
Total............................. 340,886 100.0
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We have trade unions that protect employee rights, organize educational programs, assist in the fulfillment of economic objectives, encourage employee participation in management decisions, and assist in mediating disputes between us and individual employees. We have not been subject to any strikes or other labor disturbances that have interfered with our operation, and we believe that our relations with our employees are good.
The total remuneration of our employees includes salary, performance bonuses and allowances. Employees also receive certain subsidies in housing, health services, education and other miscellaneous items.
We have implemented an employee reduction plan since 2001 by means of retirement, voluntary resignation and/or redundancy to enhance our efficiency and operating profit. In 2006, we recorded employee reduction expenses of approximately RMB 236 million relating to the reduction of 4,000 employees.
E. SHARE OWNERSHIP
Our directors, supervisors and senior officers do not have share ownership in us.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The following table sets forth information regarding our major shareholders as of April 6, 2007.
Number of
Shares Owned Percentage of
Shareholder (in millions) Ownership (%)
----------- --------------- ------------------
Sinopec Group Company.................... 65,758.04 75.84
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As of January 1, 2004, Sinopec Group Company held 55.06% of our total outstanding shares. In 2004 and 2005, China Development Bank ("CDB") and China Cinda Asset Management Corporation ("Cinda") transferred a total of approximately 8.1 billion and 5.9 billion state-owned shares of us to Sinopec Group Company, respectively. In 2006, China Orient Asset Management Corporation, Cinda and CBD transferred a total of approximately 4.8 billion state-owned shares of us to Sinopec Group Company. On September 25, 2006, pursuant to our reform plan to convert all non-tradable domestic shares into tradable domestic shares, our shareholders of non-tradable shares, including Sinopec Group Company, transferred a total of 784 million shares to our shareholders of tradable A-shares at no additional cost, and obtained the rights to list their shares for trading on Shanghai Stock Exchange with certain selling restrictions. As a result of the above share transfers and the reform, Sinopec Group Company held 75.84% of our total outstanding shares as of April 6, 2007.
As of March 30, 2007, we had 66,337,951,000 tradable shares with selling restrictions, 16,780,488,000 H shares and 3,584,000,000 A shares outstanding. As of March 30, 2007, 1,327,715,600 H shares were registered in the name of a nominee of Citibank, N.A., the depositary under our ADS deposit agreement.
Citibank, N.A. has advised us that, as of March 30, 2007, 13,277,156 ADSs, representing 1,327,715,600 H shares, were held of record by Cede & Co. and 62 other registered shareholders domiciled in and outside of the United States. We have no further information as to common shares held, or beneficially owned, by U.S. persons.
B. RELATED PARTY TRANSACTIONS
Sinopec Group Company owns 75.84% of our outstanding equity as of April 6, 2007. Sinopec Group Company will be able to exercise all the rights of a controlling shareholder, including the election of directors and voting in respect of amendments to our articles of association. Sinopec Group Company, as our controlling shareholder, will be subject to certain minority shareholder protection provisions under our articles of association.
We have engaged from time to time and will continue to engage in a variety of transactions with Sinopec Group Company, which provide a number of services to us, including ancillary supply, transport, educational and community services. The nature of our transactions with Sinopec Group Company is governed by a number of service and other contracts between Sinopec Group Company and us. A discussion of these agreements and arrangements is set forth under the heading "Item 7 - Major Shareholders and Related Party Transactions-Related Party Transactions" in our annual report on Form 20-F filed with the Securities and Exchange Commission on April 17, 2001.
On March 31, 2006, we entered into a supplemental agreement to amend the terms of the various related party transactions with Sinopec Group Company. The supplemental agreement is filed as an exhibit to this annual report on Form 20-F, and brief summary of major changes of the supplemental agreement is set forth below:
o the Product Agency Agreement shall be terminated immediately as of the date of the Supplemental Agreement;
o the term of the Agreement for Provision of Culture, Education, Hygiene and Community Services shall be extended to December 31, 2009 starting from January 1, 2007; and
o the term of the Agreement for Mutual Provision of Products and Ancillary Services shall be extended to December 31, 2009 starting from January 1, 2007.
In addition, we have amended the Land Use Rights Leasing Contract and Property Leasing Contract several times since 2000 to reflect the changes in rental areas due to our acquisitions of various assets from Sinopec Group Company as well as rent adjustments. On March 31, 2006, we entered into a memorandum on adjustment of the rent of land use rights with Sinopec Group Company. Pursuant to the memorandum, the parties confirmed that the aggregate areas of the Land Use Rights Leasing Contract were 426 million square meters, and agreed that the total annual rents shall be RMB 3.1 billion.
Our aggregate amount of connected transactions actually occurred during 2006 was RMB 228.8 billion, of which, incoming trade amounted to RMB 99.5 billion, and outgoing trade amounted to RMB 129.3 billion (including, RMB 129.2 billion of sales of products and services, RMB 52 million of interest earned, RMB 60 million of income from agency fee). All of these transactions satisfied the conditions of waiver granted by the Hong Kong Stock Exchange. In 2006, the products and services provided by Sinopec Group Company (procurement, storage, transportation, exploration and production services, production-related services) to us were RMB 87.8 billion, representing 8.9% of our operating expenses for year 2006, a decrease of 0.7 percentage points compared with those in 2005, which were within the cap of 18% for waiver. The auxiliary and community services provided by Sinopec Group Company to us were RMB 1.7 billion, representing 0.17% of the operating expenses, with a slight decrease compared with 0.23% in the preceding year, which were within the cap of 2% for waiver. In 2006, the product sales from us to Sinopec Group Company amounted to RMB 76.8 billion, representing 7.16% of our operating revenue, which were within the cap of 14% for waiver. With regard to the Leasing Agreement for Land Use Rights, the amount of rent paid by us as of December 31, 2006 was approximately RMB 3.2 billion. In 2006, we paid an insurance premium of approximately RMB 1.3 billion to Sinopec Group Company under the terms of its SPI Fund.
Please also see Note 30 to our consolidated financial statements included elsewhere in this annual report.
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See F-pages following Item 19.
Legal Proceedings
We are involved in certain judicial and arbitral proceedings before Chinese courts or arbitral bodies concerning matters arising in connection with the conduct of our businesses. We believe, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on our financial condition or results of operations.
Dividend Distribution Policy
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 are 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 HK dollars. The depositary will convert the HK dollar dividend payments and distribute them to holders of ADSs in US dollars, less expenses of conversion.
In addition to cash, dividends may be distributed in the form of shares. Any distribution of shares, however, must be approved by special resolution of the shareholders. 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.
Dividends may be paid only out of our distributable profits (less allocations to the statutory surplus reserve funds which are 10% of our net income determined in accordance with the PRC Accounting Rules and Regulations) and may be subject to PRC withholding tax. Our articles of association limit our distributable profits to the lower of the amount determined in accordance with the PRC Accounting Rules and Regulations and IFRS. Subject to the above, we currently expect that we will distribute as dividends up to 40% of our distributable profits.
In accordance with the board resolution adopted on April 6, 2007, our board has proposed a final dividend of RMB 0.15 per ordinary share for the year ended December 31, 2006, which is equivalent to RMB 15.0 per ADS. After deducting the interim dividends distribution of RMB 0.04 per ordinary share, the year end dividend is RMB 0.11 per ordinary share, which is equivalent to RMB 11 per ADS. The total dividend to be paid amounted to approximately RMB 9,537 million. The resolution is subject to the approval by the general shareholders' meeting.
B. SIGNIFICANT CHANGES
None
ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
Not applicable, except for Item 9A (4) and Item 9C.
Our H Shares have been listed on the Hong Kong Stock Exchange (Code:
0386), and our ADSs, each representing 100 H Shares, have been listed on the New
York Stock Exchange and the London Stock Exchange under the symbol "SNP", since
we completed our initial public offering on October 19, 2000. Prior to that
time, there was no public market for our H Shares. The Hong Kong Stock Exchange
is the principal non-U.S. trading market for our H Shares. Our publicly traded
domestic shares, or A hares, are listed on the Stock Exchange of Shanghai since
August 8, 2001 (Code: 600028).
The following table sets forth, for the periods indicated, the high and low closing prices per H Share, as reported on the Stock Exchange of Hong Kong, per ADS, as reported on the New York Stock Exchange and per A share, as reported on the Stock Exchange of Shanghai.
The Stock Exchange of The New York Stock The Shanghai Stock
Hong Kong Exchange Exchange
--------- -------- --------
Period High Low High Low High Low
Past 6 months (HK dollar per H share) (US dollar per ADS) (RMB per A share)
2007 April (up to 6.90 6.63 87.76 85.78 10.34 10.02
April 4)
March 6.65 6.57 86.22 72.92 9.97 8.56
February 6.78 6.25 86.27 79.25 9.89 8.37
January 7.32 6.30 92.23 80.92 11.20 9.20
December 7.20 6.23 92.64 80.58 9.15 7.55
November 6.32 5.39 80.89 69.05 8.20 6.49
2006 October 5.40 4.67 69.37 60.64 6.43 5.30
Quarterly Data
2007 First Quarter
2006 Fourth Quarter 7.20 4.67 92.64 60.64 9.15 5.30
Third Quarter 4.92 4.15 63.12 53.17 6.80 5.67
Second Quarter 5.50 3.775 71.94 47.40 7.24 5.09
First Quarter 5.00 3.875 63.73 50.29 5.39 4.58
2005 Fourth Quarter 3.90 3.075 50.58 39.80 4.66 3.78
Third Quarter 3.75 3.00 47.48 38.47 4.62 3.41
Second Quarter 3.225 2.75 41.08 35.55 4.38 3.25
First Quarter 3.575 2.950 45.42 38.26 4.52 3.89
Annual Data
2006 7.20 3.775 92.64 47.40 9.15 4.58
2005 3.90 2.75 50.58 35.55 4.66 3.25
2004 3.85 2.475 49.90 32.08 5.77 4.26
2003 3.475 1.24 44.41 17.30 5.06 2.94
2002 1.44 1.05 18.33 13.50 3.90 3.01
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ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
The following is a summary of certain provisions of our articles of association, as amended, the Company Law of the PRC (2006) and certain other applicable laws and regulations of the PRC. You and your advisors should refer to the text of our articles of association, as amended, and to the texts of applicable laws and regulations for further information.
Objects and Purposes
We are a joint stock limited company established in accordance with the Company Law and certain other laws and regulations of the PRC. We are registered with the PRC State Administration of Industry and Commerce with business license number 1000001003298. Article 12 of our articles of association provides that our scope of businesses includes, among other things, exploration, development and sales of petroleum and natural gas; pipeline transportation of petroleum and natural gas; petroleum refining; production, sales and storage of refined petroleum products, petrochemical products, chemical fiber products and other chemical products; wholesale, retailing and storage of refined petroleum products and other petroleum products; operation of convenience stores; power generation; manufacturing and installation of machinery; purchase and sales of raw materials, charcoal, equipment and its components; research, development, application of technology and information; import and export; and provision of technology services and labor services.
Directors
Our directors shall be elected at our shareholders' general meeting. Cumulative voting shall be adopted for the election of directors if a controlling shareholder controls 30% or more of our shares. Details of the cumulative voting mechanism are set forth in Article 57 of the Rules and Procedures for the Shareholders' General Meetings that is an appendix to, and forms an integral part of, our articles of association. Our directors shall be elected for a term of three years and may serve consecutive terms upon re-election, except that independent directors may only serve a maximum of two terms. Our directors are not required to hold any shares in us, and there is no age limit requirement for the retirement or non-retirement of our directors.
Where a director is materially interested, directly or indirectly, in a contract, transaction or arrangement (including any proposed contract, transaction or arrangement) with us, he or she shall declare the nature and extent of his or her interests to the board of directors at the earliest opportunity, whether or not such contract, transaction or arrangement is otherwise subject to the approval of the board. A director shall not vote, and shall not be counted in the quorum of the meeting, on any resolution concerning any contract, transaction or arrangement where the director owns material rights or interests therein. A director is deemed to be interested in a contract, transaction or arrangement in which his associate (as defined by the Listing Rule of the Hong Kong Stock Exchange) is interested.
Unless the interested director discloses his interests to the board and the contract, transaction or arrangement in which the director is materially interested is approved by the board at a meeting in which the director neither votes nor is not counted in the quorum, such contract, transaction or arrangement shall be voidable by us except with respect to a bona fide party thereto who does not have notice of the director's interests.
We are prohibited from making loans or providing guarantees to our directors and their associates except where such loan or guarantee is to meet expenditure requirement incurred or to be incurred by the director for the purposes of the company or for the purpose of enabling the director to perform his or her duties properly.
The board of directors shall examine and approve the amount of the long-term loans for the current year in accordance with the annual investment plan as approved by the shareholders' general meeting. The chairman of the board may make adjustments of not more than 10% of the total amount of the long-term loans for the current year as approved by the board of directors. The board of directors shall also approve the total amount of the working capital loans for
the current year. Within the total amount of the long-term or working capital loans as approved by the board of directors, the chairman of the board is authorized to approve and sign on behalf of the company any such loan contract with loan amount over RMB 1.0 billion, and the president of the company is authorized to approve and sign on behalf of the company any such loan contract with loan amount not exceeding RMB 1.0 billion.
Matters relating to the remuneration and liability insurance of our directors shall be determined by the shareholders' general meeting.
Dividends
A distribution of final dividends for any financial year is subject to shareholders' approval. Except otherwise decided by Shareholders' meeting, the board of directors may make decision on the distribution of interim dividends. Except otherwise provided by law and regulation, the sum of interim dividends shall not exceed 50 percents of the distributive profit as set out in the table for semi-year profit. Dividends may be distributed in the form of cash or shares. A distribution of shares, however, must be approved by special resolution of the shareholders.
Dividends may only be distributed after allowance has been made for:
o recovery of losses, if any;
o allocations to the statutory surplus reserve fund; and
o allocations to a discretionary surplus reserve fund if approved by
the shareholders.
The allocations to the statutory surplus reserve fund shall be 10% of our net income determined in accordance with PRC accounting rules and regulations.
The articles of association require us to appoint on behalf of the holders of H shares a receiving agent which is registered as a trust corporation under the Trustee Ordinance of Hong Kong to receive dividends declared by us in respect of the H shares on behalf of such shareholders. The articles of association require that cash dividends in respect of H shares be declared in Renminbi and paid by us in HK dollars. The depositary of our ADSs will convert such proceeds into U.S. dollars and will remit such converted proceeds to our holders of ADSs. If we record no profit for the year, we may not normally distribute dividends for the year.
Dividend payments may be subject to PRC withholding tax.
Voting Rights and Shareholders' Meetings
Our board of directors shall convene a shareholders' annual general meeting once every year and within six months from the end of the preceding financial year. Our board shall convene an extraordinary general meeting within two months of the occurrence of any one of the following events:
o where the number of directors is less than the number stipulated in
the PRC Company Law or two-thirds of the number specified in our
articles of association;
o where our unrecovered losses reach one-third of the total amount of
our share capital;
o where shareholder(s) holding 10% or more of our issued and
outstanding voting shares request(s) in writing the convening of an
extraordinary general meeting;
o whenever our board deems necessary or our board of supervisors so
requests; or
o circumstances provided in the articles of association.
Meetings of a special class of shareholders must be called in certain enumerated situations when the rights of the holders of such class of shares may be modified or adversely affected as discussed below. Resolutions proposed by the board of supervisors or shareholder(s) holding 5% or more of the total number of voting shares shall be included in the agenda for the relevant annual general meeting if they are matters which fall within the scope of the functions and powers of shareholders in general meeting.
All shareholders' meetings must be convened by our board by written notice given to shareholders not less than 45 days before the meeting. Based on the written replies received by us 20 days before a shareholders' meeting, we shall calculate the number of voting shares represented by shareholders who have indicated that they intend to attend the meeting. Where the number of voting
shares represented by those shareholders amount to more than one-half of our total voting shares, we may convene the shareholders' general meeting (regardless of the number of shareholders who actually attend). Otherwise, we shall, within five days, inform the shareholders again of the motions to be considered and the date and venue of the meeting by way of public announcement. After the announcement is made, the shareholders' meeting may be convened. The accidental omission by us to give notice of a meeting to, or the non-receipt of notice of a meeting by, a shareholder will not invalidate the proceedings at that shareholders' meeting.
Shareholders at meetings have the power, among other things, to approve or reject our profit distribution plans, annual budget, financial statements, increase or decrease in share capital, issuance of debentures, merger or liquidation and any amendment to our articles of association. In addition, the rights of a class of shareholders may not be modified or abrogated, unless approved by a special resolution of all shareholders at a general shareholders' meeting and by a special resolution of shareholders of that class of shares at a separate meeting. Our articles of association enumerate, without limitation, certain amendments which would be deemed to be a modification or abrogation of the rights of a class of shareholders, including increasing or decreasing the number of shares of a class disproportionate to increases or decreases of other classes of shares, removing or reducing rights to receive dividends in a particular currency or creating shares with voting or equity rights superior to shares of such class.
Cumulative voting is adopted for the election of directors. For all other matters, each share is entitled to one vote on all such matters submitted to a vote of our shareholders at all shareholders' meetings, except for meetings of a special class of shareholders where only holders of shares of the affected class are entitled to vote on the basis of one vote per share of the affected class.
Shareholders are entitled to attend and vote at meetings either in person or by proxy. Proxies must be in writing and deposited at our legal address, or such other place as is specified in the meeting notice, not less than 24 hours before the time for holding the meeting at which the proxy proposes to vote or the time appointed for the passing of the relevant resolution(s). When the instrument appointing a proxy is executed by the shareholder's attorney-in-fact, such proxy when deposited must be accompanied by a notary certified copy of the relevant power of attorney or other authority under which the proxy was executed.
Except for those actions discussed below which require supermajority votes ("special resolutions"), resolutions of the shareholders are passed by a simple majority of the voting shares held by shareholders who are present in person or by proxy. Special resolutions must be passed by or more than two-thirds of the voting rights represented held by shareholders who are present in person or by proxy.
The following decisions must be adopted by special resolution:
o an increase or reduction of our share capital or the issue of
shares, including stock distributions, of any class, warrants and
other similar securities;
o issuance of debentures;
o our division, merger, dissolution and liquidation; (Shareholders
who object to a proposed division or merger are entitled to demand
that either we or the shareholders who approved the merger purchase
their shares at a fair price.)
o repurchase of shares;
o amendments to our articles of association; and
o any other matters considered by the shareholders in a general
meeting and which they have resolved by way of an ordinary
resolution to be of a nature which may have a material impact on us
and should be adopted by special resolution.
All other actions taken by the shareholders, including the appointment and removal of our directors and supervisors and the declaration of cash dividend payments, will be decided by an ordinary resolution of the shareholders. The listing agreement between us and the Hong Kong Stock Exchange (the "Listing Agreement") provided that we may not permit amendments to certain sections of the articles of association which have been mandated by the Hong Kong Stock Exchange. These sections include provisions relating to:
o varying the rights of existing classes of shares;
o voting rights;
o our power to purchase our own shares;
o rights of minority shareholders; and
o procedure on liquidation.
In addition, certain amendments to the articles of association require the approval and consent of the relevant PRC authorities.
Any shareholder resolution which is in violation of any laws or regulations of the PRC or the articles of association will be null and void.
Liquidation Rights
In the event of our liquidation, the H shares will rank pari passu with the domestic ordinary shares, and payment of debts out of our remaining assets shall be made in the order of priority prescribed by applicable laws and regulations or, if no such standards exist, in accordance with such procedure as the liquidation committee which has been appointed either by us or the People's Court of the PRC may consider to be fair and reasonable. After payment of debts, we shall distribute the remaining property to shareholders according to the class and proportion of their shareholders.
Further Capital Call
Shareholders are not liable to make any further contribution to the share capital other than according to the terms, which were agreed by the subscriber of the relevant shares at the time of subscription.
Increases in Share Capital and Preemptive Rights
The articles of association require the approval by a special resolution of the shareholders and by special resolution of holders of domestic ordinary shares and H shares at separate shareholder class meetings be obtained prior to authorizing, allotting, issuing or granting shares, securities convertible into shares or options, warrants or similar rights to subscribe for any shares or such convertible securities. No such approval is required if, but only to the extent that:
o we issue domestic ordinary shares and/or H shares, either separately or concurrently, in numbers not exceeding 20% of the number of domestic ordinary shares and H shares then in issue, respectively, in any 12-month period, as approved by a special resolution of the shareholders; or
o if our plans for issuing domestic ordinary shares and H shares upon its establishment are implemented within fifteen months of the date of approval by the China Securities Regulatory Commission.
New issues of shares must also be approved by the relevant PRC authorities.
Reduction of Share Capital and Purchase by Us of Our Shares and General Mandate to Repurchase Shares
We may reduce our registered share capital only upon obtaining the approval of the shareholders by a special resolution and, in certain circumstances, of relevant PRC authorities. The number of H shares, which may be purchased is subject to the Hong Kong Takeovers and Share Repurchase Codes.
Restrictions on Large or Controlling Shareholders
Our articles of association provide that, in addition to any obligation imposed by laws and administration regulations or required by the listing rules of the stock exchanges on which our H shares are listed, a controlling shareholder shall not exercise his voting rights in a manner prejudicial to the interests of the shareholders generally or of some part of the shareholders:
o to relieve a director or supervisor from his or her duty to act honestly in our best interests;
o to approve the expropriation by a director or supervisor (for his or her own benefit or for the benefit of another person) of our assets in any way, including, without limitation, opportunities which may benefit us; or
o to approve the expropriation by a director or supervisor (for his or her own benefit or for the benefit of another person) of the individual rights of other shareholders, including, without limitation, rights to distributions and voting rights (save according to a restructuring of our company which has been submitted for approval by the shareholders in a general meeting in accordance with our articles of association).
A controlling shareholder, however, will not be precluded by our articles of association or any laws and administrative regulations or the listing rules of the stock exchanges on which our H shares are listed from voting on these matters.
When a controlling shareholder intends to put forward a new motion on profit distribution at an annual general meeting, the controlling shareholder shall, at not less than ten days before the date of the annual general meeting, submit the motion to the board of directors to enable it to make an announcement, failing which the shareholder is not entitled to put forward the motion at the annual general meeting.
A controlling shareholder is defined by our articles of association as any person who acting alone or in concert with others:
o is in a position to elect more than one-half of the board of
directors;
o has the power to exercise, or to control the exercise of, 30% or
more of our voting rights;
o holds 30% or more of our issued and outstanding shares; or
o has de facto control of us in any other way.
As of the date of this annual report, Sinopec Group Company is and will be our only controlling shareholder.
Disclosure
The Listing Agreement imposes a requirement on us to keep the Hong Kong Stock Exchange, our shareholders and other holders of our listed securities informed as soon as reasonably practicable of any information relating to us and our subsidiaries, including information on any major new developments which are not public knowledge, which:
o is necessary to enable them and the public to appraise the position
of us and our subsidiaries;
o is necessary to avoid the establishment of a false market in its
securities; and
o might be reasonably expected materially to affect market activity
in and the price of its securities.
There are also requirements under the Listing Rules for us to obtain prior shareholders' approval and/or to disclose to shareholders details of certain acquisitions or disposals of assets and other transactions (including transactions with controlling shareholders).
Sources of Shareholders' Rights
The PRC's legal system is based on written statutes and is a system in which decided legal cases have little precedent value. The PRC's legal system is similar to civil law systems in this regard. In 1979, the PRC began the process of developing its legal system by undertaking to promulgate a comprehensive system of laws. In December 1993, the Standing Committee of the 8th National People's Congress adopted the PRC Company Law. On October 27, 2005, the PRC Company law was amended by the Standing Committee of the 10th National People's Congress, and came into force on January 1, 2006. The amended PRC Company Law enhanced the protection of shareholders' rights primarily in the following regards:
o Shareholders holding 10 percent or more of the shares of the
company are entitled to petition the court to dissolve the company
if (i) the company is in serious operational difficulties; (ii) its
continuing existence will seriously prejudice the interests of the
shareholders; and (iii) such difficulties cannot be resolved
through any other means;
o Shareholders holding 1 percent or more of the shares of the company
for more than 180 consecutive days are entitled to request the
board of supervisors (in terms of directors and senior management)
or the board of directors (in terms of supervisors) to bring legal
proceedings, or bring legal proceedings in their own name on behalf
of the company where it is in emergency and the company will be
subject to irreparable loss if not to do so, against directors, supervisors or senior management who fail to comply with the laws and regulations or the company's articles of association in the course of performing their duties and cause loss to the company;
o Shareholders who oppose the company's decision on merger or separation are entitled to request the company to repurchase their shares; and
o Shareholders holding 10 percent or more of the voting rights of the company are entitled to convene a shareholders' meeting.
Currently, the primary sources of shareholder rights are our articles of association, as amended, the PRC Company Law and the Listing Rules of the Hong Kong Stock Exchange, which, among other things, impose certain standards of conduct, fairness and disclosure on us, our directors and our controlling shareholder, i.e., Sinopec Group Company. To facilitate the offering and listing of shares of PRC companies overseas, and to regulate the behavior of companies whose shares are listed overseas, the State Council Securities Committee and the State Commission for Restructuring the Economic System issued on August 27, 1994 the Mandatory Provisions for articles of association of Company Listing Overseas (the "Mandatory Provisions"). These Mandatory Provisions become entrenched in that, once they are incorporated into the articles of association of a PRC company, any amendment to those provisions will only become effective after approval by the State-owned Assets Supervision and Administration Commission of the State Council. The Listing Rules require a number of additional provisions to the Mandatory Provisions to be included in the articles of association of PRC companies listing H shares on the Hong Kong Stock Exchange (the "Additional Provisions"). The Mandatory Provisions and the Additional Provisions have been incorporated into our articles of association.
In addition, upon the listing of and for so long as the H shares are listed on the Hong Kong Stock Exchange, we will be subject to those relevant ordinances, rules and regulations applicable to companies listed on the Hong Kong Stock Exchange, including the Listing Rules of the Hong Kong Stock Exchange, the Securities (Disclosure of Interests) Ordinance (the "SDI Ordinance"), the Securities (Insider Dealing) Ordinance and the Hong Kong Codes on Takeovers and Mergers and Share Repurchases (the "Hong Kong Takeovers and Repurchase Codes").
Unless otherwise specified, all rights, obligations and protections discussed below derive from our articles of association and/or the PRC Company Law.
Enforceability of Shareholders' Rights
There has not been any public disclosure in relation to the enforcement by holders of H shares of their rights under constitutive documents of joint stock limited companies or the PRC Company Law or in the application or interpretation of the PRC or Hong Kong regulatory provisions applicable to PRC joint stock limited companies.
In most states of the United States, shareholders may sue a corporation "derivatively". A derivative suit involves the commencement by a shareholder of a corporate cause of action against persons (including corporate officers, directors or controlling shareholders) who have allegedly wronged the corporation, where the corporation itself has failed to enforce such claim against such persons directly. Such action is brought based upon a primary right of the corporation, but is asserted by a shareholder on behalf of the corporation. The PRC company law as amended in October 2005 and effective in January 2006 has also granted shareholders with the rights to bring such derivative suits.
Our articles of association provide that all differences or claims:
o between a holder of H shares and us;
o between a holder of H shares and any of our directors, supervisors,
general managers, deputy general managers or other senior officers;
or
o between a holder of H shares and a holder of domestic ordinary
shares, arising from any provision of our articles of association,
any right or obligation conferred or imposed by the PRC Company Law
or any other relevant law or administrative regulation which
concerns our affairs
must, with certain exceptions, be referred to arbitration at either the China International Economic and Trade Arbitration Commission in the PRC or the Hong Kong International Arbitration Center. Our articles of association provide that such arbitration will be final and conclusive. In June 1999, an arrangement was made between the People's Courts of the PRC and the courts of Hong Kong to mutually enforce arbitration rewards rendered in the PRC and Hong Kong according
to their respective laws. This new arrangement was approved by the Supreme
Court of the PRC and the Hong Kong Legislative Council and became effective on
February 1, 2000. We have provided an undertaking to the United States
Securities and Exchange Commission that, at such time, if any, as all
applicable laws and regulations of the PRC and (unless our H shares are no
longer listed on the Hong Kong Stock Exchange) all applicable regulations of
the Stock Exchange of Hong Kong Ltd. shall not prohibit, and to the extent
Section 14 under the United States Securities Act of 1933, as amended, so
requires, our board of directors shall propose an amendment to the articles of
association which would permit shareholders to adjudicate disputes arising
between our shareholders and us, our directors, supervisors or officers by
means of judicial proceedings.
The holders of H shares will not be able to bring actions on the basis of violations of the Listing Rules and must rely on the Hong Kong Stock Exchange to enforce its rules. The SDI Ordinance establishes certain obligations in relation to disclosure of shareholder interests in Hong Kong listed companies, the violation of which is subject to prosecution by the Securities and Futures Commission of Hong Kong. The Hong Kong Takeovers and Repurchase Codes do not have the force of law and are only standards of commercial conduct considered acceptable for takeover and merger transactions and share repurchases in Hong Kong as established by the Securities and Futures Commission and the securities and futures industry in Hong Kong.
We have appointed our subsidiary in the U.S., SINOPEC-USA Co., Ltd., 150 E. 52nd Street, 28th Floor, New York, NY 10022, USA, as our agent to receive service of process with respect to any action brought against us in certain courts in New York under the United States federal and New York State's securities laws. However, as the PRC does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts within the United States, the United Kingdom, Japan or most other the Organization for Economic Cooperation and Development countries, administrative actions brought by regulatory authorities, such as the Commission, and other actions which result in foreign court judgments, could (assuming such actions are not required by PRC law and the articles of association to be arbitrated) only be enforced in the PRC on a reciprocal basis or according to relevant international treaty to which China is a party if such judgments or rulings do not violate the basic principles of the law of the PRC or the sovereignty, security and public interest of the society of the PRC, as determined by a People's Court of the PRC which has the jurisdiction for recognition and enforcement of judgments. We have been advised by our PRC counsel, Haiwen & Partners, that there is certain doubt as to the enforceability in the PRC of actions to enforce judgments of United States courts arising out of or based on the ownership of H shares or ADSs, including judgments arising out of or based on the civil liability provisions of United States federal or state securities laws.
Restrictions on Transferability and the Share Register
According to PRC Company Law, our domestic ordinary shares held by Sinopec Group Company may not be transferred within three years of our establishment on February 25, 2000, except as permitted under the March 23, 2000 debt to equity swap agreement executed on March 23, 2000 between Sinopec Group Company and our other shareholders, whereby Sinopec Group Company may transfer our domestic ordinary shares to such other shareholders. H shares may be traded only among investors who are not PRC persons, and may not be sold to PRC investors. There are no restrictions on the ability of investors who are not PRC residents to hold H shares.
As provided in the articles of associations we may refuse to register a transfer of H shares unless:
o any relevant transfer fee is paid;
o the instrument of transfer is only related to H shares listed in
Hong Kong;
o the instrument of transfer is accompanied by the share certificates
to which it relates, or such other evidence is given as may be
reasonably necessary to show the right of the transferor to make
the transfer;
o the stamp duty which is chargeable on the instrument of transfer
has already been paid;
o if it is intended that the shares be transferred to joint owners,
the maximum number of joint owners shall not be more than four (4);
and
o the Company does not have any lien on the relevant shares.
We are required to keep a register of our shareholders which shall be comprised of various parts, including one part which is to be maintained in Hong Kong in relation to H shares to be listed on the Hong Kong Stock Exchange. Shareholders have the right to inspect and, for a nominal charge, to copy the share register. No transfers of ordinary shares shall be recorded in our share register within 30 days prior to the date of a shareholders' general meeting or
within 5 days prior to the record date established for the purpose of distributing a dividend.
We have appointed HKSCC Registrars Limited to act as the registrar of our H shares. This registrar maintains our register of holders of H shares at our offices in Hong Kong and enters transfers of shares in such register upon the presentation of the documents described above.
C. MATERIAL CONTRACTS
We have not entered into any material contracts other than in the ordinary course of business and other than those described in Item 4. Information on the Company, Item 7. Major Shareholders and Related Party Transactions - Related Party Transactions or elsewhere in this Form 20-F.
D. EXCHANGE CONTROLS
The existing foreign exchange regulations have significantly reduced government foreign exchange controls for transactions under the current account, including trade and service related foreign exchange transactions and payment of dividends. We may undertake current account foreign exchange transactions without prior approval from the State Administration of Foreign Exchange by producing commercial documents evidencing such transactions, provided that they are processed through Chinese banks licensed to engage in foreign exchange transactions. The PRC government has stated publicly that it intends to 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 to foreign currency.
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 the State Administration of Foreign Exchange. These limitations could affect our ability to obtain foreign exchange through debt or equity financing, or to obtain foreign exchange for capital expenditures.
The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China's political and economic conditions. The conversion of Renminbi into foreign currencies, including U.S. dollars, has historically been set by the People's Bank of China. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted to fluctuate within a band against a basket of certain foreign currencies. This change in policy resulted initially in an approximately 2.0% appreciation in the value of the Renminbi against the U.S. dollar. Since the adoption of this new policy, the value of Renminbi against the U.S. dollar has fluctuated on a daily basis within narrow ranges, but overall has further strengthened against the U.S. dollar. There remains significant international pressure on the PRC government to further liberalize its currency policy, which could result in a further and more significant appreciation in the value of the Renminbi against the U.S. dollar. As we import a significant portion of our crude oil requirement from the international market, fluctuations in the value of the Renminbi against the U.S. dollars and certain other foreign currencies may increase our crude oil costs. In addition, any significant revaluation of the Renminbi may have a material adverse effect on our revenues and financial condition, and the value of, and any dividends payable on, our ADSs in foreign currency terms.
E. TAXATION
PRC Taxation
The following discussion addresses the principal PRC tax consequences of investing in the H shares or ADSs.
Taxation of Dividends
Individual Investors
According to the current PRC tax regulations, dividends paid by PRC companies are ordinarily subject to a PRC withholding tax levied at a flat rate of 20%. However, such withholding tax is not applicable with respect to those
PRC companies which have their shares listed on an overseas stock exchange, such as H shares and ADSs, because of an exemption issued first in 1993 and then confirmed in 1994. The relevant tax authority has not collected withholding tax on dividend payments on H shares or ADSs.
In the event that the exemption is no longer available or is withdrawn, a 20% tax may be withheld on dividends in accordance with the PRC individual income tax law. Such withholding tax may be reduced under an applicable treaty on the avoidance of double taxation.
Foreign Enterprises
According to the current PRC tax regulations, dividends paid by PRC companies to foreign enterprises are ordinarily subject to a PRC withholding tax levied at a flat rate of 20%. However, foreign enterprises with no permanent establishment in China receiving dividends paid with respect to a PRC company's H shares or ADSs have been temporarily exempted from the 20% withholding tax.
In accordance with the New Corporate Income Tax Law that will become effective on January 1, 2008, dividends paid by PRC companies to foreign enterprises with no permanent establishment in China are generally subject to a PRC withholding tax levied at a flat rate of 20%. However, such withholding tax may be exempted or reduced by the State Council. As the State Council has not yet promulgated any regulations on exemption or reduction of the withholding tax as of the date of this annual report, it may become applicable to holders of H shares and ADSs as of January 1, 2008, unless exempted or reduced pursuant to an applicable double-taxation treaty or other exemptions.
Tax Treaties
Holders resident in countries which have entered into avoidance of double taxation treaties with the PRC may be entitled to a reduction of the withholding tax imposed on the payment of dividends. The PRC currently has avoidance of double taxation treaties with a number of other countries, which include Australia, Canada, France, Germany, Japan, Malaysia, the Netherlands, Singapore, the United Kingdom and the United States.
Under a tax treaty between United States and China, China may tax dividends paid by Sinopec Corp. to eligible US Holders up to a maximum of 10% of the gross amount of such dividend. Under the tax treaty, an eligible US Holder is a person who, by reason of domicile, residence, place of head office, place of incorporation or any other criterion of similar nature is liable to tax in the United States, subject to a detailed "treaty shopping" provision.
Taxation of Capital Gains
A PRC tax regulation provides that gains realized upon the sale of overseas shares by foreign enterprises and individuals are not subject to tax on capital gains. However, the Provision for Implementing of the Individual Income Tax Law of the PRC (the "Detailed Implementing Rules"), promulgated on January 28, 1994, imposes income tax of 20% on gains derived from the sale of equity shares by an individual. A notice issued in 1998 by the Ministry of Finance and State Administration of Tax states that no capital gains tax will be imposed on gains from the sale of shares by individuals from 1997. If such tax exemption relief is no longer available, individual holders of H shares or ADSs may be subject to a 20% capital gains tax unless such tax is reduced or eliminated by an applicable double taxation treaty. As the Amendments and the Detailed Implementing Rules only relate to individual income tax, the tax exemption for foreign enterprises under the PRC tax regulation should still be valid.
In accordance with the New Corporate Income Tax Law, capital gains realized by foreign enterprises with no permanent establishment in China upon the sale of oversea shares are generally subject to a PRC withholding tax levied at a flat rate of 20%. However, such withholding tax may be exempted or reduced by the State Council under the New Corporate Income Tax Law. As the State Council has not yet promulgated any regulations on exemption or reduction of the withholding tax as of the date of this annual report, it may become applicable to holders of H shares and ADSs as of January 1, 2008, unless exempted or reduced pursuant to an applicable double-taxation treaty or other exemptions.
PRC Stamp Tax Considerations
Under the current PRC tax regulation, the PRC stamp tax is not imposed on the transfer of H shares and ADSs of PRC companies publicly listed outside China.
United States Federal Income Tax Considerations
The following is a summary of United States federal income tax considerations that are anticipated to be material for US Holders (as defined below) who hold H shares or ADSs. This summary is based upon existing United States federal income tax law, which is subject to change, possibly with retroactive effect. This summary does not discuss all aspects of United States federal income taxation which may be important to particular investors in light of their individual investment circumstances, such as investors subject to special tax rules including: financial institutions, insurance companies, broker-dealers, tax-exempt organizations, non-US Holders, investors who own (directly, indirectly, or constructively) 10% or more of our voting stock, investors that will hold H shares or ADSs as part of a straddle, hedge, conversion, constructive sale, or other integrated transaction for United States federal income tax purposes, or US Holders that have a functional currency other than the United States dollar, all of whom may be subject to tax rules that differ significantly from those summarized below. In addition, this summary does not discuss any foreign, state, local or alternative minimum tax considerations. This summary only addresses investors that will hold their H shares or ADSs as "capital assets" (generally, property held for investment) under the United States Internal Revenue Code (the "Code"). Each holder is urged to consult its tax advisor regarding the United States federal, state, local, and foreign income and other tax considerations of the purchase, ownership, and disposition of H shares or ADSs.
For purposes of this summary, a US Holder is a beneficial owner of H shares or ADSs that is for United States federal income tax purposes:
o an individual who is a citizen or resident of the United States;
o a corporation created in or organized under the laws of, the United States or any State or political subdivision thereof;
o an estate the income of which is includible in gross income for United States federal income tax purposes regardless of its source;
o a trust the administration of which is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust; or
o a trust that has elected to be treated as a United States person under the Code.
If a partnership (including any entity treated as a partnership for United States federal income tax purposes) holds H shares or ADSs, the tax treatment of a partner in such partnership will depend upon the status of the partner and the activities of the partnership. Partners in a partnership holding our H shares or ADSs are urged to consult their tax advisors as to the particular United States federal income tax consequences applicable to them.
A foreign corporation will be treated as a "passive foreign investment company" (a "PFIC"), for United States federal income tax purposes, if 75% or more of its gross income consists of certain types of "passive" income or 50% or more of its assets are passive. Sinopec Corp. presently does not believe that it is a PFIC and does not anticipate becoming a PFIC. This is, however, a factual determination made on an annual basis and is subject to change. The following discussion is based on the belief that Sinopec Corp. will not be classified as a PFIC for United States federal income tax purposes. See the discussion below under the heading "PFIC Considerations" for a brief summary of the PFIC rules.
General
For United States federal income tax purposes, a US Holder of an ADS will be treated as the owner of the proportionate interest of the H shares held by the depositary that is represented by an ADS and evidenced by such ADS. Accordingly, no gain or loss will be recognized upon the exchange of an ADS for the holder's proportionate interest in the H shares. A US Holder's tax basis in the withdrawn H shares will be the same as the tax basis in the ADS surrendered
therefor, and the holding period in the withdrawn H shares will include the period during which the holder held the surrendered ADS.
Dividends
Any cash distributions paid by Sinopec Corp. out of earnings and profits, as determined under United States federal income tax principles, will be subject to tax as dividend income and will be includible in the gross income of a US Holder upon receipt. A non-corporate recipient of dividend income will generally be subject to tax on dividend income from a "qualified foreign corporation" at a maximum U.S. federal tax rate of 15% rather than the marginal tax rates generally applicable to ordinary income so long as certain holding period requirements are met. A non-U.S. corporation (other than a passive foreign investment company) generally will be considered to be a qualified foreign corporation (i) if it is eligible for the benefits of a comprehensive tax treaty with the United States which the Secretary of Treasury of the United States determines is satisfactory for purposes of this provision and which includes an exchange of information program or (ii) with respect to any dividend it pays on stock which is readily tradable on an established securities market in the United States. There is currently a tax treaty in effect between the United States and the People's Republic of China which the Secretary of Treasury of the United States determined is satisfactory for these purposes and Sinopec Group, presently believes that it is eligible for the benefits of such treaty. Additionally, our ADSs trade on the New York Stock Exchange, an established securities market in the United States. Cash distributions paid by Sinopec Corp. in excess of its earnings and profits will be treated as a tax-free return of capital to the extent of the US Holder's adjusted tax basis in its shares or ADSs, and after that as gain from the sale or exchange of a capital asset. Dividends paid in Hong Kong dollars will be includible in income in a United States dollar amount based on the United States dollar - Hong Kong dollar exchange rate prevailing at the time of receipt of such dividends by the depositary, in the case of ADSs, or by the US Holder, in the case of H shares held directly by such US Holder. Gain or loss, if any, recognized on a subsequent sale, conversion or other disposition of Hong Kong dollars generally will be U.S. source income or loss. Dividends received on H shares or ADSs will not be eligible for the dividends received deduction allowed to corporations.
Dividends received on H shares or ADSs will be treated, for United States federal income tax purposes, as foreign source income. A US Holder may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in respect of any foreign withholding taxes imposed on dividends received on H shares or ADSs. US Holders who do not elect to claim a foreign tax credit for foreign income tax withheld may instead claim a deduction, for United States federal income tax purposes, in respect of such withholdings, but only for a year in which the US Holder elects to do so for all creditable foreign income taxes.
A distribution of additional shares of Sinopec Corp.'s stock to US Holders with respect to their H shares or ADSs that is pro rata to all Sinopec Corp.'s shareholders may not be subject to United States federal income tax. The tax basis of such additional shares will be determined by allocating the US Holders' adjusted tax basis in the H shares or ADSs between the H shares or ADSs and the additional shares, based on their relative fair market values on the date of distribution.
Sale or Other Disposition of H shares or ADSs
A US Holder will recognize capital gain or loss upon the sale or other disposition of H shares or ADSs in an amount equal to the difference between the amount realized upon the disposition and the US Holder's adjusted tax basis in such H shares or ADSs, as each is determined in US dollars. Any capital gain or loss will be long-term if the H shares or ADSs have been held for more than one year and may be, under the income tax treaty between the People's Republic of China and the United States, foreign source gain or loss. The claim of a deduction in respect of a capital loss, for United States federal income tax purposes, may be subject to limitations.
PFIC Considerations
If Sinopec Corp. were to be classified as a PFIC in any taxable year, a U.S. Holder would be subject to special rules generally intended to reduce or eliminate any benefits from the deferral of United States federal income tax that a U.S. Holder could derive from investing in a foreign company that does not distribute all of its earnings on a current basis. In such event, a U.S. Holder of the H shares or ADSs may be subject to tax at ordinary income tax rates on (i) any gain recognized on the sale of the H shares or ADSs and (ii) any "excess distribution" paid on the H shares or ADSs (generally, a distribution in excess of 125% of the average annual distributions paid by
Sinopec Corp. in the three preceding taxable years). In addition, a U.S. Holder may be subject to an interest charge on such gain or excess distribution.
The above results may be eliminated if a "mark-to-market" election is available and a US Holder validly makes such an election. If the election is made, such holder generally will be required to take into account the difference, if any, between the fair market value and its adjusted tax basis in H shares or ADSs at the end of each taxable year as ordinary income or ordinary loss (to the extent of any net mark-to-market gain previously included in income). In addition, any gain from a sale or other disposition of H shares or ADSs will be treated as ordinary income, and any loss will be treated as ordinary loss (to the extent of any net mark-to-market gain previously included in income).
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENT BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
We filed with the Securities and Exchange Commission in Washington, D.C. a Registration Statement on Form F-1 (Registration No. 333-12502) under the Securities Act in connection with the ADSs offered in the global offering. The Registration Statement contains exhibits and schedules. Any statement in this annual report about any of our contracts or other documents is not necessarily complete. If the contract or document is filed as an exhibit to the Registration Statement, the contract or document is deemed to modify the description contained in this annual report. You must review the exhibits themselves for a complete description of the contract or documents.
You may inspect and copy our registration statements, including their exhibits and schedules, and the reports and other information we file with the Securities and Exchange Commission in accordance with the Exchange Act at the public reference facilities maintained by the Securities and Exchange Commission at Judiciary Plaza, 450 Fifth Street, Room 1024, N.W., Washington, D.C. 20549 and at the regional offices of the Securities and Exchange Commission located at 233 Broadway, New York, NY 10279 and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may also inspect the registration statements, including their exhibits and schedules, at the office of the New York Stock Exchange, Wall Street, New York, New York 10005. Copies of such material may also be obtained from the Public Reference Section of the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You may obtain information regarding the Washington D.C. Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330 or by contacting the Securities and Exchange Commission over the internet at its website at http://www.sec.gov.
I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposures are to fluctuations in oil and gas prices, exchange rates and interest rates.
Commodity Price Risk
We are exposed to fluctuations in prices of crude oil, refined products and petrochemicals whose prices are volatile. We purchase substantial volumes of crude oil from domestic and international suppliers and sell substantial volumes of refined products and petrochemicals to domestic buyers. Therefore, fluctuations of prices of crude oil, refined products and petrochemicals have a significant effect on our operating expenses and net profits.
Foreign Exchange Rate Risk
The Renminbi is not a freely convertible currency. With the authorization from the PRC government, the PBOC announced that the PRC government reformed the exchange rate regime by moving into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies on July 21, 2005. Actions taken by the PRC government could cause future exchange rates to vary significantly from current or historical exchange rates. Fluctuations in exchange rates may adversely affect the value, translated or converted into US dollars or Hong Kong dollars, of our net assets, earnings and any declared dividends. We cannot give any assurance that any future movements in the exchange rate of the Renminbi against the US dollar and other foreign currencies will not adversely affect our results of operations and financial condition. However, we believe that significant depreciation in the Renminbi against major foreign currencies may have a material adverse impact on our capital expenditure program.
The following presents various market risk information regarding market-sensitive financial instruments that we held or issued as of December 31, 2006 and 2005. We conduct our business primarily in Renminbi, which is also our functional and reporting currency.
The following tables provide information regarding instruments that are sensitive to foreign exchange rates as of December 31, 2006 and 2005. For debt obligations, the table presents cash flows and related weighted average rates by expected maturity dates.
As of December 31, 2006:
Expected maturity
------------------------------------------------------------------
2007 2008 2009 2010 2011 thereafter Total Fair value
---- ---- ---- ---- ---- ---------- ----- ----------
(RMB equivalent in millions, except interest rates)
---------------------------------------------------
Assets
Cash and cash equivalents
In United States dollar 761 - - - - - 761 761
In Hong Kong dollar 27 - - - - - 27 27
In Japanese yen 17 - - - - - 17 17
In Euro 23 - - - - - 23 23
Liabilities
Debts in United States dollar
< Fixed rate 4,236 220 196 195 113 521 5,481 5,362
Average interest rate 5.3% 3.3% 3.1% 2.7% 2.2% 2.0%
Variable rate 3,902 527 537 546 561 1,305 7,378 7,378
Average interest rate (1) 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
Debts in Japanese yen
Fixed rate 165 95 95 95 68 775 1,293 1,479
Average interest rate 2.8% 2.6% 2.6% 2.6% 2.6% 2.6%
Variable rate 361 260 256 180 180 183 1,420 1,420
Average interest rate (1) 3.2% 3.2% 3.1% 3.0% 3.0% 2.1%
Debts in Hong Kong dollar
Fixed rate 50 - - - - - 50 50
Average interest rate 4.7% - - - - -
Variable rate 8,213 - - - - - 8,213 8,213
Average interest rate (1) 4.5% - - - - -
Debts in Euro
Fixed rate 25 25 25 26 - - 101 106
Average interest rate 6.7% 6.7% 6.7% 6.7% - -
(1) The average interest rates for variable rate loans are calculated based
on the rates reported as of December 31,2006.
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As of December 31, 2005:
Expected maturity
---------------------------------------------------------------
2006 2007 2008 2009 2010 thereafter Total Fair value
---- ---- ---- ---- ---- ---------- ----- ----------
(RMB equivalent in millions, except interest rates)
---------------------------------------------------
Assets
Cash and cash equivalents
In United States dollar 617 - - - - - 617 617
In Hong Kong dollar 66 - - - - - 66 66
In Japanese yen 19 - - - - - 19 19
In Euro 21 - - - - - 21 21
Liabilities
Debts in United States dollar
Fixed rate 2,471 304 250 203 192 616 4,036 3,982
Average interest rate 4.4% 3.6% 3.2% 2.9% 2.3% 1.4%
Variable rate 8,506 1,521 354 356 356 2,930 14,023 14,023
Average interest rate (1) 5.2% 5.2% 5.2% 5.2% 5.2% 5.2%
Debts in Japanese yen
Fixed rate 246 172 101 101 94 883 1,597 1,888
Average interest rate 3.0% 2.8% 2.6% 2.6% 2.6% 2.6%
Variable rate 370 355 262 269 178 363 1,797 1,797
Average interest rate (1) 2.6% 2.6% 2.8% 2.8% 3.0% 3.0%
Debts in Hong Kong dollar
Fixed rate 788 - - - - - 788 788
Average interest rate 4.1% - - - - -
Variable rate 196 12 - - - - 208 208
Average interest rate (1) 4.9% 4.8% - - - -
Debts in Euro
Fixed rate 24 23 23 24 23 - 117 125
Average interest rate 6.7% 6.7% 6.7% 6.7% 6.7% -
(1) The average interest rates for variable rate loans are calculated based on the rates reported as of December 31, 2005.
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Interest Rate Risk
We are exposed to interest rate risk resulting from fluctuations in interest rates on our short- and long-term debts. Upward fluctuations in interest rates increase the cost of new debt and the interest cost of outstanding floating rate borrowings.
Our debts consist of fixed and variable rate debt obligations with original maturities ranging from 1 to 25 years. Fluctuations in interest rates can lead to significant fluctuations in the fair values of our debt obligations.
The following tables present principal cash flows and related weighted average interest rates by expected maturity dates of our interest rate sensitive financial instruments as of December 31, 2006 and 2005.
As of December 31, 2006:
Expected maturity
----------------------------------------------------
2007 2008 2009 2010 2011 thereafter Total Fair value
---- ---- ---- ---- ---- ---------- ----- ----------
(RMB equivalent in millions, except interest rates)
---------------------------------------------------
Assets
Cash and cash equivalents
In Renminbi 7,260 - - - - - 7,260 7,260
In United States dollar 761 - - - - - 761 761
In Hong Kong dollar 27 - - - - - 27 27
In Japanese yen 17 - - - - - 17 17
In Euro 23 - - - - - 23 23
Time deposits with financial institutions
In Renminbi 635 - - - - - 635 635
Liabilities
Debts in Renminbi
Fixed rate 40,293 24,125 8,057 2,477 258 41,031 116,241 115,767(1)
Average interest rate 4.7% 5.2% 5.0% 4.8% 4.7% 0.6%
Variable rate 1,515 1,277 10,895 7,315 4,130 2,516 27,648 27,648
Average interest rate (2) 5.6% 5.6% 5.6% 5.8% 5.9% 6.1%
Debts in United States dollar
Fixed rate 4,236 220 196 195 113 521 5,481 5,362
Average interest rate 5.3% 3.3% 3.1% 2.7% 2.2% 2.0%
Variable rate 3,902 527 537 546 561 1,305 7,378 7,378
Average interest rate (2) 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
Debts in Japanese yen
Fixed rate 165 95 95 95 68 775 1,293 1,479
Average interest rate 2.8% 2.6% 2.6% 2.6% 2.6% 2.6%
Variable rate 361 260 256 180 180 183 1,420 1,420
Average interest rate (2) 3.2% 3.2% 3.1% 3.0% 3.0% 2.1%
Debts in Hong Kong dollar
Fixed rate 50 - - - - - 50 50
Average interest rate 4.7% - - - - -
Variable rate 8,213 - - - - - 8,213 8,213
Average interest rate (2) 4.5% - - - - -
Debts in Euro
Fixed rate 25 25 25 26 - - 101 106
Average interest rate 6.7% 6.7% 6.7% 6.7% - -
(1) Carrying amounts are used for loans from Sinopec Group Company and its affiliates as it is not
practicable to estimate their fair values because the cost of obtaining discount and borrowing
rates for comparable borrowings would be excessive.
(2) The average interest rates for variable rate loans are calculated based on the rates reported as
of December 31, 2006.
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As of December 31, 2005:
Expected maturity
--------------------------------------------------------------------
2006 2007 2008 2009 2010 thereafter Total Fair value
---- ---- ---- ---- ---- ---------- ----- ----------
(RMB equivalent in millions, except interest rates)
Assets
Cash and cash equivalents
In Renminbi 13,346 - - - - - 13,346 13,346
In United States dollar 617 - - - - - 617 617
In Hong Kong dollar 66 - - - - - 66 66
In Japanese yen 19 - - - - - 19 19
In Euro 21 - - - - - 21 21
Time deposits with financial institutions
In Renminbi 1,002 - - - - - 1,002 1,002
Liabilities
Debts in Renminbi
Fixed rate 29,198 16,233 24,508 5,787 5,517 41,586 122,829 122,588(1)
Average interest rate 4.5% 5.1% 5.1% 5.0% 5.0% 0.7%
Variable rate 1,418 1,167 420 1,158 3,265 2,685 10,113 10,113
Average interest rate (2) 5.3% 5.4% 5.4% 5.4% 5.4% 5.5%
Debts in United States dollar
Fixed rate 2,471 304 250 203 192 616 4,036 3,982
Average interest rate 4.4% 3.6% 3.2% 2.9% 2.3% 1.4%
Variable rate 8,506 1,521 354 356 356 2,930 14,023 14,023
Average interest rate (2) 5.2% 5.2% 5.2% 5.2% 5.2% 5.2%
Debts in Japanese yen
Fixed rate 246 172 101 101 94 883 1,597 1,888
Average interest rate 3.0% 2.8% 2.6% 2.6% 2.6% 2.6%
Variable rate 370 355 262 269 178 363 1,797 1,797
Average interest rate (2) 2.6% 2.6% 2.8% 2.8% 3.0% 3.0%
Debts in Hong Kong dollar
Fixed rate 788 - - - - - 788 788
Average interest rate 4.1% - - - - -
Variable rate 196 12 - - - - 208 208
Average interest rate (2) 4.9% 4.8%
- - - -
Debts in Euro
Fixed rate 24 23 23 24 23 - 117 125
Average interest rate 6.7% 6.7% 6.7% 6.7% 6.7% -
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(1) Carrying amounts are used for loans from Sinopec Group Company and its affiliates as it is not practicable to estimate their fair values because the cost of obtaining discount and borrowing rates for comparable borrowings would be excessive.
(2) The average interest rates for variable rate loans are calculated based on the rates reported as of December 31, 2005.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
USE OF PROCEEDS
A. MATERIAL MODIFICATIONS TO THE RIGHTS TO SECURITIES HOLDERS
None
B. USE OF PROCEEDS
Not applicable
ITEM 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chairman, President and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) of the Securities Exchange Act of 1934) as of the end of the fiscal year covered by this annual report. Based on this evaluation, our Chairman, President and Chief Financial Officer have concluded that, as of the end of the fiscal year covered by this annual report, our disclosure controls and procedures were adequate and effective to ensure that material information relating to our company, including our consolidated subsidiaries, was made know to them by others within our company and our consolidated subsidiaries.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) of the Securities Exchange Act of 1934). The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards and generally accepted accounting principles in the United States of America.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting based upon the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission as of December 31, 2006. Based on that evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2006 based on the these criteria.
KPMG, an independent registered public accounting firm, has audited the consolidated financial statements included in this annual report on Form 20-F and, as part of the audit, has issued a report, included herein, on our
management's assessment of the effectiveness of our internal control over financial reporting and the effectiveness of our internal control over financial reporting.
Attestation Report of the Registered Public Accounting Firm
The Board of Directors and Shareholders of China Petroleum & Chemical Corporation:
We have audited management's assessment, included in the accompanying Management's Report on Internal Control over Financial Reporting, that China Petroleum & Chemical Corporation and subsidiaries (the "Group") maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Group's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Group's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Group maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control--Integrated Framework issued by COSO. Also, in our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control--Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Group as of December 31, 2005 and 2006, and the related consolidated statements of income, cash flows and equity for each of the years in the three-year period ended December 31, 2006, and our report dated April 6, 2007 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG Hong Kong, China April 6, 2007 |
Changes in Internal Control over Financial Reporting
During the year ended December 31, 2006, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16. RESERVED
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
The board of directors has determined that Mr. Liu Zhongli qualifies as an audit committee financial expert in accordance with the terms of Item 16A of Form 20-F. Mr. Liu was appointed as an independent non-executive director and a member of the audit committee of the third board of our company in May 2006. For Mr. Liu's biographical information, see "Item 6 Directors, Senior Management and Employees - A. Directors, members of the supervisory committee and senior management."
ITEM 16B. CODE OF ETHICS
As of the date of this annual report, we do not have, in form, a code of ethics that applies to our principal executive officer, principal financial officer and principal accounting officer. Our principal executive officers, Mr. Chen Tonghai (Chairman) and Mr. Wang Tianpu (President), and our principal financial officer, Mr. Dai Houliang (CFO), currently also serve as our directors and are thus subject to the director service contracts that they have with us. Under the director service contracts, each of them agrees that he owes a fiduciary and diligence obligation to our company and that he shall not engage in any activities in competition with our business or carry out any activities detrimental to the interests of our company. Each of them also agrees to perform his respective duties as a director and senior officer in accordance with the Company Law of the PRC, relevant rules and regulations promulgated by China Securities Regulatory Commission and the Mandatory Provisions of Articles of Association of Overseas Listed Companies.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate audit fees, audit-related fees, tax fees of our principal accountants and all other fees billed for products and services provided by our principal accountants other than the audit fees, audit-related fees and tax fees for each of the fiscal years 2005 and 2006:
Audit Fees Audit-Related Fees Tax Fees Other Fees
---------- ------------------ -------- ----------
2005 RMB 72 million -- -- --
2006 RMB 81 million -- -- --
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Before our principal accountants were engaged by our company or our subsidiaries to render audit or non-audit services, the engagement has been approved by our audit committee.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASERS OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
None.
PART III
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
See F-pages following Item 19.
ITEM 19. EXHIBITS
1* Articles of Association of the Registrant, amended and adopted by the
shareholders' meeting on May 24, 2006 (English translation).
4.1* Forms of Director Service Contracts dated May 24, 2006 (English
translation).
4.2* Forms of Supervisor Service Contracts dated May 24, 2006 (English
translation).
4.3** Reorganization Agreement between China Petrochemical Corporation and
China Petroleum & Chemical Corporation dated June 3, 2000 (including
English translation), incorporated by reference to Exhibit 10.1 to our
Registration Statement on Form F-1 filed with the Securities and
Exchange Commission on October 10, 2000 (File Number: 333-12502).
4.4** Agreement for Mutual Provision of Products and Ancillary Services
between China Petrochemical Corporation and China Petroleum & Chemical
Corporation dated June 3, 2000 (including English translation),
incorporated by reference to Exhibit 10.3 to our Registration
Statement on Form F-1 filed with the Securities and Exchange
Commission on October 10, 2000 (File Number: 333-12502).
4.5** Agreement for Provision of Cultural, Educational, Hygiene and
Community Services between China Petrochemical Corporation and China
Petroleum & Chemical Corporation dated June 3, 2000 (including English
translation), incorporated by reference to Exhibit 10.4 to our
Registration Statement on Form F-1 filed with the Securities and
Exchange Commission on October 10, 2000 (File Number: 333-12502).
4.6** Trademark License Agreement between China Petrochemical Corporation
and China Petroleum & Chemical Corporation dated June 3, 2000
(including English translation), incorporated by reference to Exhibit
10.6 to our Registration Statement on Form F-1 filed with the
Securities and Exchange Commission on October 10, 2000 (File Number:
333-12502).
4.7** Patents and Proprietary Technology License Contract between China
Petrochemical Corporation and China Petroleum & Chemical Corporation
dated June 3, 2000 (including English translation), incorporated by
reference to Exhibit 10.7 to our Registration Statement on Form F-1
filed with the Securities and Exchange Commission on October 10, 2000
(File Number: 333-12502).
4.8** Computer Software License Contract between China Petrochemical
Corporation and China Petroleum & Chemical Corporation dated June 3,
2000 (including English translation), incorporated by reference to
Exhibit 10.8 to our Registration Statement on Form F-1 filed with the
Securities and Exchange Commission on October 10, 2000 (File Number:
333-12502).
4.9** Assets Swap Contract between China Petrochemical Corporation and China
Petroleum & Chemical Corporation dated June 3, 2000 (including English
translation), incorporated by reference to Exhibit 10.9 to our
Registration Statement on Form F-1 filed with the Securities and
Exchange Commission on October 10, 2000 (File Number: 333-12502).
4.10** Land Use Rights Leasing Contract between China Petrochemical
Corporation and China Petroleum & Chemical Corporation dated June 3,
2000 (including English translation), incorporated by reference to
Exhibit 10.10 to our Registration Statement on Form F-1 filed with the
Securities and Exchange Commission on October 10, 2000 (File Number:
333-12502).
4.12** Property Leasing Contract between China Petrochemical Corporation and
China Petroleum & Chemical Corporation dated June 3, 2000 (including
English translation), incorporated by reference to Exhibit 10.11 to
our Registration Statement on Form F-1 filed with the Securities and
Exchange Commission on October 10, 2000 (File Number: 333-12502).
4.13** Accounts Collectable Contract between China Petrochemical Corporation
and China Petroleum & Chemical Corporation dated August 16, 2000
(including English translation), incorporated by reference to Exhibit
10.17 to our Registration Statement on Form F-1 filed with the
Securities and Exchange Commission on October 10, 2000 (File Number:
333-12502).
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4.14** Loan Transfer and Adjustment Contract between China Petrochemical
Corporation and China Petroleum & Chemical Corporation dated August 16,
2000 (including English translation), incorporated by reference to
Exhibit 10.18 to our Registration Statement on Form F-1 filed with the
Securities and Exchange Commission on October 10, 2000 (File Number:
333-12502).
4.15* Agreement on Adjustment to Related Party Transactions between China
Petrochemical Corporation and China Petroleum & Chemical Corporation
dated June 11, 2001 (English translation).
4.16* Land Use Right Leasing Agreement between China Petrochemical
Corporation and China Petroleum & Chemical Corporation dated August
22, 2003 (English translation).
4.17* 2004 Agreement on Adjustment to Related Party Transactions between
China Petrochemical Corporation and China Petroleum & Chemical
Corporation dated October 31, 2004 (English translation).
4.18* Memorandum on Adjustment of Rent of Land Use Rights between China
Petrochemical Corporation and China Petroleum & Chemical Corporation
dated March 31, 2006 (English translation).
4.19* Supplementaral Agreement on Related Party Transactions between China
Petrochemical Corporation and China Petroleum & Chemical Corporation
dated March 31, 2006 (English translation).
8* A list of the Registrant's subsidiaries.
12.1* Certification of Chairman pursuant to Rule 13a-14(a).
12.2* Certification of President pursuant to Rule 13a-14(a).
12.3* Certification of CFO pursuant to Rule 13a-14(a).
13* Certification of CEO and CFO pursuant to 18 U.S.C. ss.1350, and Rule
13a-14(b).
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* Filed as part of this annual report
** Incorporated by reference.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of independent registered public accounting firm ....................F-2
Consolidated statements of income for the years ended
December 31, 2004, 2005 and 2006 ...........................................F-3
Consolidated balance sheets as of December 31, 2005 and 2006................F-4
Consolidated statements of cash flows for the years ended
December 31, 2004, 2005 and 2006............................................F-5
Consolidated statements of equity for the years ended December 31, 2004,
2005 and 2006...............................................................F-7
Notes to consolidated financial statements..................................F-8
Supplemental information on oil and gas producing activities (unaudited)....F-71
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of China Petroleum & Chemical Corporation:
We have audited the accompanying consolidated balance sheets of China Petroleum & Chemical Corporation and subsidiaries (the "Group") as of December 31, 2005 and 2006, and the related consolidated statements of income, cash flows and equity for each of the years in the three-year period ended December 31, 2006, all expressed in Renminbi. These consolidated financial statements are the responsibility of the Group's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Group as of December 31, 2005 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with International Financial Reporting Standards promulgated by the International Accounting Standards Board.
International Financial Reporting Standards vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 37 to the consolidated financial statements.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Group's internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated April 6, 2007 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting.
/s/ KPMG Hong Kong, China April 6, 2007 |
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(Amounts in millions, except per share data)
Years ended December 31,
--------------------------------
Note 2004 2005 2006
---- ----------- ----------- ---------
RMB RMB RMB
Operating revenues
Sales of goods....................................... 597,318 799,259 1,044,652
Other operating revenues............................. 3 22,597 24,013 26,750
----------- ----------- ---------
619,915 823,272 1,071,402
Other income 4 - 9,415 5,000
Operating expenses
Purchased crude oil, products and operating supplies
and expenses...................................... (442,503) (651,201) (861,437)
Selling, general and administrative expenses......... (32,969) (33,880) (37,758)
Depreciation, depletion and amortization............. (32,493) (31,618) (34,235)
Exploration expenses, including dry holes............ (6,396) (6,411) (7,983)
Personnel expenses................................... 5 (18,719) (18,649) (19,857)
Employee reduction expenses.......................... 6 (919) (369) (236)
Taxes other than income tax.......................... 7 (16,347) (17,185) (28,639)
Other operating expenses, net........................ 8 (6,678) (5,128) (2,437)
----------- ----------- ---------
Total operating expenses........................ (557,024) (764,441) (992,582)
----------- ----------- ---------
Operating income.......................................... 62,891 68,246 83,820
----------- ----------- ---------
Finance costs
Interest expense..................................... 9 (4,583) (5,926) (7,437)
Interest income...................................... 378 384 555
Foreign exchange losses.............................. (223) (79) (153)
Foreign exchange gains............................... 61 996 935
----------- ----------- ---------
Net finance costs............................... (4,367) (4,625) (6,100)
Investment income......................................... 121 178 256
Income from associates.................................... 797 857 947
----------- ----------- ---------
Income before income tax.................................. 59,442 64,656 78,923
Income tax................................................ 10 (18,091) (19,880) (23,515)
----------- ----------- ---------
Net income ............................................. 41,351 44,776 55,408
=========== ========== ==========
Attributable to:
Equity shareholders of the Company............... 35,335 41,455 53,912
Minority interests............................... 6,016 3,321 1,496
----------- ----------- ---------
Net income ............................................. 41,351 44,776 55,408
=========== ========== ==========
Basic and diluted earnings per share...................... 11 0.41 0.48 0.62
=========== ========== ==========
Weighted average number of shares......................... 11 86,702 86,702 86,702
=========== ========== ==========
See accompanying notes to consolidated financial statements.
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CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2005 AND 2006
(Amounts in millions)
December 31,
------------
Note 2005 2006
----- -----
RMB RMB
ASSETS
Current assets
Cash and cash equivalents................................. 14,069 8,088
Time deposits with financial institutions................. 1,002 635
Trade accounts receivable, net............................ 12 14,646 15,590
Bills receivable.......................................... 7,167 8,757
Inventories............................................... 13 89,519 93,436
Prepaid expenses and other current assets................. 14 20,654 18,961
-------- --------
Total current assets................................. 147,057 145,467
-------- --------
Non-current assets
Property, plant and equipment, net........................ 15 317,382 366,475
Construction in progress.................................. 16 54,380 53,180
Goodwill.................................................. 17 2,203 14,325
Investments............................................... 18 3,151 2,582
Interest in associates.................................... 19 9,267 11,617
Deferred tax assets....................................... 21 6,072 7,158
Lease prepayments......................................... 2,407 2,937
Long-term prepayments and other assets.................... 22 7,121 8,049
-------- --------
Total non-current assets............................. 401,983 466,323
-------- --------
Total assets......................................... 549,040 611,790
======== ========
LIABILITIES AND EQUITY
Current liabilities
Short-term debts.......................................... 23 40,411 53,359
Loans from Sinopec Group Company and its affiliates....... 23 2,805 5,401
Trade accounts payable.................................... 24 53,817 52,125
Bills payable............................................. 23,243 21,685
Accrued expenses and other payables....................... 25 49,523 69,056
Income tax payable........................................ 5,212 9,176
-------- --------
Total current liabilities............................ 175,011 210,802
-------- --------
Non-current liabilities
Long-term debts........................................... 23 72,359 69,970
Loans from Sinopec Group Company and its affiliates....... 23 39,933 39,095
Deferred tax liabilities.................................. 21 5,975 6,339
Other liabilities......................................... 782 795
-------- --------
Total non-current liabilities........................ 119,049 116,199
-------- --------
Total liabilities.................................... 294,060 327,001
-------- --------
Equity
Share capital............................................. 26 86,702 86,702
Reserves.................................................. 27 137,599 176,143
-------- --------
Total equity attributable to equity shareholders of the
Company 224,301 262,845
Minority interests........................................ 30,679 21,944
-------- --------
Total equity......................................... 254,980 284,789
-------- --------
Total liabilities and equity......................... 549,040 611,790
======== ========
See accompanying notes to consolidated financial statements.
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CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(Amounts in millions)
Years ended December 31,
-----------------------
Note 2004 2005 2006
---- ---- ----
RMB RMB RMB
Net cash generated from operating activities...................... (a) 68,941 78,214 95,875
--------- ------------ ------
Cash flows from investing activities
Capital expenditure.......................................... (64,313) (63,993) (70,604)
Exploratory wells expenditure................................ (4,959) (5,810) (7,985)
Capital expenditure of jointly controlled entities........... (6,035) (2,474) (382)
Purchase of investments, investments in associates and
subsidiaries, net of cash acquired........................ (1,305) (3,650) (3,571)
Proceeds from disposal of investments and investments in
associates................................................ 186 1,264 717
Proceeds from disposal of property, plant and equipment...... 322 567 406
Acquisition of minority interests in subsidiaries............ -- (4,324) (21,971)
Purchase of time deposits with financial institutions........ (1,932) (565) (916)
Maturity of time deposits with financial institutions........ 2,217 1,462 1,283
--------- ------------ ------
Net cash used in investing activities................... (75,819) (77,523) (103,023)
--------- ------------ ------
Cash flows from financing activities
Proceeds from bank and other loans........................... 403,201 554,187 764,659
Proceeds from bank and other loans of jointly controlled
entities.................................................. 3,014 3,954 87
Proceeds from issuance of corporate bonds................... 3,472 9,875 22,689
Repayments of bank and other loans........................... (388,811) (557,692) (754,159)
Repayment of corporate bonds................................. -- -- (21,000)
Distributions to minority interests.......................... (823) (1,682) (852)
Contributions from minority interests........................ 1,008 129 1,255
Dividend paid............................................... (8,670) (10,404) (11,271)
Distributions to Sinopec Group Company...................... (3,741) (3,218) (216)
--------- ------------ ------
Net cash generated from/(used in) financing activities 8,650 (4,851) 1,192
--------- ------------ ------
Net increase/(decrease) in cash and cash equivalents.............. 1,772 (4,160) (5,956)
Effect of foreign exchange rate changes........................... 1 (22) (25)
Cash and cash equivalents at January 1............................ 16,478 18,251 14,069
--------- ------------ ------
Cash and cash equivalents at December 31.......................... 18,251 14,069 8,088
========= ============ ======
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See accompanying notes to consolidated financial statements.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(Amounts in millions)
(a) Reconciliation of income before income tax to net cash generated from operating activities
The reconciliation of income before income tax to net cash generated from operating activities is as follows:
Years ended December 31,
-------------------------
2004 2005 2006
------ ------ -----
RMB RMB RMB
Operating activities
Income before income tax.......................................... 59,442 64,656 78,923
Adjustment for:
Depreciation, depletion and amortization..................... 32,493 31,618 34,235
Dry hole cost................................................ 2,976 2,992 3,960
Income from associates....................................... (797) (857) (947)
Investment income............................................ (121) (178) (256)
Interest income.............................................. (378) (384) (555)
Interest expense............................................. 4,583 5,926 7,437
Unrealized foreign exchange losses/(gains)................... 150 (852) (689)
Loss on disposal of property, plant and equipment, net....... 1,697 2,098 1,646
Impairment losses on long-lived assets....................... 3,919 1,851 825
------- ------- -------
Operating income before changes in working capital................ 103,964 106,870 124,579
Increase in trade accounts receivable........................ (521) (4,759) (737)
(Increase)/decrease in bills receivable...................... (1,495) 652 (1,570)
Increase in inventories...................................... (16,526) (25,037) (3,112)
Decrease in prepaid expenses and other current assets........ 2,930 1,786 371
Decrease/(increase) in lease prepayments..................... 187 (1,071) (559)
Increase in long-term prepayments and other assets........... (4,321) (2,222) (1,123)
Increase/(decrease) in trade accounts payable................ 850 29,142 (1,901)
Increase/(decrease) in bills payable......................... 6,521 (7,554) (1,613)
(Decrease)/increase in accrued expenses and other payables... (289) 8,154 9,531
(Decrease)/increase in other liabilities..................... (334) (227) 13
------- ------- -------
Cash generated from operations ................................... 90,966 105,734 123,879
Interest received............................................ 378 388 558
Interest paid................................................ (5,450) (6,967) (8,861)
Investment and dividend income received...................... 330 668 619
Income tax paid.............................................. (17,283) (21,609) (20,320)
------- ------- -------
Net cash generated from operating activities...................... 68,941 78,214 95,875
======= ======= =======
|
See accompanying notes to consolidated financial statements.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(Amounts in millions)
Total equity
attributable
to equity
shareholders
Share Capital Share Revaluation Other Retained of the Minority Total
capital reserve premium reserve reserves earnings Company interests equity
----------------------------------------------------------------------------------------
RMB RMB RMB RMB RMB RMB RMB RMB RMB
Balance at January 1, 2004, as
previously reported................86,702 (18,960) 18,072 30,341 23,528 31,832 171,515 26,051 197,566
Adjusted for the acquisition of the
Acquired Group..................... -- -- -- -- 984 -- 984 665 1,649
------ ------- ------- -------- ------- ------ -------- -------- -------
Balance at January 1, 2004, as adjusted 86,702 (18,960) 18,072 30,341 24,512 31,832 172,499 26,716 199,215
Net income / (loss) recognized directly
in equity:
Revaluation surplus of
Petrochemical and Catalyst Assets.. -- (257) -- 257 257 -- 257 -- 257
Impairment losses on revalued assets
(Note 8) .......................... -- -- -- (709) -- -- (709) -- (709)
------ ------- ------- -------- ------- ------ -------- -------- -------
-- (257) -- (452) 257 -- (452) -- (452)
Net income.............................. -- -- -- -- -- 35,335 35,335 6,016 41,351
------ ------- ------- -------- ------- ------ -------- -------- -------
Total recognized income for the year.... -- (257) -- (452) 257 35,335 34,883 6,016 40,899
Final dividend for 2004 ................ -- -- -- -- -- (5,202) (5,202) -- (5,202)
Interim dividend for 2004............... -- -- -- -- -- (3,468) (3,468) -- (3,468)
Appropriations (Note 27 (c) and (d)).... -- -- -- -- 6,456 (6,456) -- -- --
Revaluation surplus realized............ -- -- -- (1,891) -- 1,891 -- -- --
Realization of deferred tax on land use
rights............................. -- -- -- -- (5) 5 -- -- --
Transfer from retained earnings to
other reserves..................... -- -- -- -- 815 (815) -- -- --
Net assets distributed to Sinopec Grou
Company (Note 27(g))............... -- -- -- -- (2,244) -- (2,244) -- (2,244)
Consideration for Acquisition of
Petrochemical and Catalyst Assets
(Note 30).......................... -- -- -- -- (3,128) -- (3,128) -- (3,128)
Distributions to minority interests net
of contribution.................... -- -- -- -- -- -- -- (777) (777)
------ ------- ------- -------- ------- ------ -------- -------- -------
Balance at December 31, 2004 86,702 (19,217) 18,072 27,998 26,663 53,122 193,340 31,955 225,295
Net income / total recognized income
for the year....................... -- -- -- -- -- 41,455 41,455 3,321 44,776
Final dividend for 2004 ................ -- -- -- -- -- (6,936) (6,936) -- (6,936)
Interim dividend for 2005............... -- -- -- -- -- (3,468) (3,468) -- (3,468)
Appropriation (Note 27 (c) and (d))..... -- -- -- -- 7,912 (7,912) -- -- --
Revaluation surplus realized............ -- -- -- (1,656) -- 1,656 -- -- --
Realization of deferred tax on land use
rights............................. -- -- -- -- (5) 5 -- -- --
Transfer from retained earnings to
other reserves..................... -- -- -- -- 535 (535) -- -- --
Distribution to Sinopec Group Company
(Note 27(g))....................... -- -- -- -- (90) -- (90) -- (90)
Acquisitions of minority interests in
subsidiaries ...................... -- -- -- -- -- -- -- (2,957) (2,957)
Distributions to minority interests net
of contribution.................... -- -- -- -- -- -- -- (1,640) (1,640)
------ ------- ------- -------- ------- ------ -------- -------- -------
Balance at December 31, 2005............86,702 (19,217) 18,072 26,342 35,015 77,387 224,301 30,679 254,980
F-7
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CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY - (Continued)
(Amounts in millions)
Total equity
attributable
to equity
shareholders
Share Capital Share Revaluation Other Retained of the Minority Total
capital reserve premium reserve reserves earnings Company interests equity
----------------------------------------------------------------------------------------
RMB RMB RMB RMB RMB RMB RMB RMB RMB
Balance at December 31, 2005............86,702 (19,217) 18,072 26,342 35,015 77,387 224,301 30,679 254,980
Net income recognized directly in equity:
Change in fair value of
available-for-sale securities,
net of deferred tax -- -- -- -- 34 -- 34 -- 34
Net income.............................. -- -- -- -- -- 53,912 54,226 1,496 55,408
------ ------- ------- -------- ------- ------ -------- -------- -------
Total recognized income for the year -- -- -- -- 34 53,912 53,946 1,496 55,442
Final dividend for 2005................. -- -- -- -- -- (7,803) (7,803) -- (7,803)
Interim dividend for 2006............... -- -- -- -- -- (3,468) (3,468) -- (3,468)
Appropriation (Note 27(c) and (e))...... -- -- -- -- 25,066 (25,066) -- -- --
Revaluation surplus realized ........... -- -- -- (1,590) -- 1,590 -- -- --
Realization of deferred tax on land use
rights............................. -- -- -- -- (7) 7 -- -- --
Transfer from retained earnings to
other reserves..................... -- -- -- -- 1,013 (1,013) -- -- --
Transfer from capital reserve to other
reserves........................... -- (2,373) -- -- 2,373 -- -- -- --
Distribution to Sinopec Group Company
(Note 27(g))....................... -- -- -- -- (631) -- (631) -- (631)
Consideration for the Acquisition of
Oil Production Plants (Note 1)..... -- -- -- -- (3,500) -- (3,500) -- (3,500)
Acquisitions of minority interests in
subsidiaries....................... -- -- -- -- -- -- -- (9,730) (9,730)
Contributions from minority interests
net of distributions............. -- -- -- -- -- -- -- 242 242
Disposal of a subsidiary (Note 33)..... -- -- -- -- -- -- -- (743) (743)
------ ------- ------- -------- ------- ------ -------- -------- -------
Balance at December 31, 2006............86,702 (21,590) 18,072 24,752 59,363 95,546 262,845 21,944 284,789
====== ======= ======= ======== ======= ====== ======== ======== =======
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CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data and except otherwise stated)
1 PRINCIPAL ACTIVITIES, ORGANIZATION AND BASIS OF PRESENTATION
Principal activities
China Petroleum & Chemical Corporation (the "Company") is an energy and chemical company that, through its subsidiaries (hereinafter collectively referred to as the "Group"), engages in fully integrated oil and gas and chemical operations in the People's Republic of China (the "PRC"). Oil and gas operations consist of exploring for, developing and producing crude oil and natural gas; transporting crude oil, natural gas and products by pipelines; refining crude oil into finished petroleum products; and marketing crude oil, natural gas and refined petroleum products. Chemical operations include the manufacture and marketing of a wide range of chemicals for industrial uses.
Organization
The Company was established in the PRC on February 25, 2000 as a joint stock limited company as part of the reorganization (the "Reorganization") of China Petrochemical Corporation ("Sinopec Group Company"), the ultimate holding company of the Group and a ministry-level enterprise under the direct supervision of the State Council of the PRC. Prior to the incorporation of the Company, the oil and gas and chemical operations of the Group were carried on by oil administration bureau, petrochemical and refining production enterprises and sales and marketing companies of Sinopec Group Company.
As part of the Reorganization, certain of Sinopec Group Company's core oil and gas and chemical operations and businesses together with the related assets and liabilities were transferred to the Company. On February 25, 2000, in consideration for Sinopec Group Company transferring such oil and gas and chemical operations and businesses and the related assets and liabilities to the Company, the Company issued 68.8 billion domestic state-owned ordinary shares with a par value of RMB 1.00 each to Sinopec Group Company. The shares issued to Sinopec Group Company on February 25, 2000 represented the entire registered and issued share capital of the Company at that date. The oil and gas and chemical operations and businesses transferred to the Company related to (i) the exploration, development and production of crude oil and natural gas, (ii) the refining, transportation, storage and marketing of crude oil and petroleum products, and (iii) the production and sale of chemicals (collectively the "Predecessor Operations").
Basis of presentation
Pursuant to the resolution passed at the Directors' meeting on October 10, 2006, the Group acquired equity interests in Sinopec Hainan Refining and Chemical Company Limited ("Sinopec Hainan") for cash of RMB 2,990 (hereinafter referred to as the "Acquisition of Sinopec Hainan"). Sinopec Hainan was previously wholly owned by Sinopec Group Company.
Pursuant to the resolution passed at the Directors' meeting on December 6, 2006, the Group acquired the equity interests in certain oil and gas production companies ("Oil Production Plants") from Sinopec Group Company, for a total consideration of RMB 3,500 payable in 2007 (hereinafter referred to as the "Acquisition of Oil Production Plants").
As the Group, Sinopec Hainan and Oil Production Plants are under the common control of Sinopec Group Company, the Acquisitions of Sinopec Hainan and Oil Production Plants are considered as "combination of entities under common control" which are accounted in a manner similar to a pooling-of-interests ("as-if pooling-of-interests accounting"). Accordingly, the assets and liabilities acquired from Sinopec Hainan and Oil Production Plants have been accounted for at historical cost. In connection with these acquisitions, certain assets, primarily property, plant and equipment and construction in progress, were retained by Sinopec Group Company. The assets retained by Sinopec Group Company and the considerations paid by the Company for these acquisitions were treated as equity transactions.
The financial condition and results of operation previously reported by the Group as of December 31, 2005 and for the years ended December 31, 2004 and 2005 have been restated to include the financial condition and results of operation of Sinopec Hainan and Oil Production Plants (collectively the "Acquired Group") as set out below.
The
The Group without the Acquired
Acquired Group Group Combined
-------------- ----- --------
RMB RMB RMB
2004
Results of operation:
Operating revenue..................................... 619,783 132 619,915
Net income attributable to the equity shareholders of
the Company....................................... 36,019 (684) 35,335
Basic and diluted earnings per share.................. 0.42 (0.01) 0.41
2005
Results of operation:
Operating revenue..................................... 823,117 155 823,272
Net income attributable to the equity shareholders of
the Company....................................... 40,920 535 41,455
Basic and diluted earnings per share.................. 0.47 0.01 0.48
Financial condition:
Current assets........................................ 145,291 1,766 147,057
Total assets.......................................... 537,321 11,719 549,040
Current liabilities................................... 170,649 4,362 175,011
Total liabilities..................................... 284,325 9,735 294,060
Total equity attributable to equity shareholders
of the Company.................................... 223,556 745 224,301
|
For the years presented, all significant balances and transactions between the Group and the Acquired Group have been eliminated.
The accompanying consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") promulgated by the International Accounting Standards Board ("IASB"). IFRS includes International Accounting Standards ("IAS") and related interpretations. A summary of the principal accounting policies adopted by the Group is set out in Note 2. These accounting policies have been consistently applied by the Group. Information relating to the nature and effect of the significant differences between IFRS and accounting principles generally accepted in the United States of America ("US GAAP") are set forth in Note 37.
The accompanying consolidated financial statements are prepared on the historical cost basis as modified by the revaluation of certain property, plant and equipment (Note 15).
The preparation of the financial statements requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
Key assumptions and estimation made by management in the application of IFRS that have significant effect on the financial statements and have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities in the following year are disclosed in Note 35.
2. PRINCIPAL ACCOUNTING POLICIES
(a) Basis of consolidation
The consolidated financial statements comprise the Company and its subsidiaries, and the Group's interest in associates and jointly controlled entities.
(i) Subsidiaries
Subsidiaries are those entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
The financial statements of subsidiaries are included in the consolidated financial statements from the date that control effectively commences until the date that control effectively ceases.
Minority interests at the balance sheet date, being the portion of the net assets of subsidiaries attributable to equity interests that are not owned by the Company, whether directly or indirectly through subsidiaries, are presented in the consolidated balance sheet and consolidated statements of equity within equity, separately from equity attributable to the equity shareholders of the Company. Minority interests in the results of the Group are presented on the face of the consolidated statements of income as an allocation of the total net income or loss for the year between minority interests and the equity shareholders of the Company.
The particulars of the Group's principal subsidiaries are set out in Note 33.
(ii) Interests in associates
An associate is an entity, not being a subsidiary, in which the Group exercises significant influence over its management. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.
Investments in associates are accounted for in the consolidated financial statements using the equity method from the date that significant influence commences until the date that significant influence ceases.
(iii)Jointly controlled entities
A jointly controlled entity is an entity over which the Group can exercise joint control with other venturers. Joint control is the contractually agreed sharing of control over an economic activity.
Investments in jointly controlled entities are accounted for in the consolidated financial statements on a proportionate consolidation basis. Under this method, the Group combines its proportionate share of the jointly controlled entity's turnover and expenses with each major turnover and expense caption of the Group's consolidated statements of income and combines its proportionate share of the jointly controlled entity's assets and liabilities with each major asset and liability caption of the Group's consolidated balance sheet, from the date that joint control commences until the date that joint control ceases.
(iv) Transactions eliminated on consolidation
Inter-company balances and transactions and any unrealized gains arising from inter-company transactions are eliminated on consolidation. Unrealized gains arising from transactions with associates and jointly controlled entities are eliminated to the extent of the Group's interest in the entity. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.
(b) Translation of foreign currencies
The presentation currency of the Group is Renminbi. Foreign currency transactions during the year are translated into Renminbi at the applicable rates of exchange quoted by the People's Bank of China ("PBOC rates") prevailing on the transaction dates. Foreign currency monetary assets and liabilities are translated into Renminbi at the applicable PBOC rates at the balance sheet date.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
Exchange differences, other than those capitalized as construction in progress, are recognized as income or expenses in the consolidated statements of income. There were no exchange differences capitalized for the years ended December 31, 2004, 2005 and 2006.
(c) Cash and cash equivalents
Cash equivalents consist of time deposits with financial institutions with an initial term of less than three months when purchased. Cash equivalents are stated at cost, which approximates fair value.
(d) Trade accounts and other receivables
Trade accounts and other receivables are initially recognized at fair value and thereafter stated at amortized cost less impairment losses for bad and doubtful debts (Note 2(l)).
(e) Inventories
Inventories, other than spare parts and consumables, are stated at the lower of cost and net realizable value. Cost includes the cost of purchase computed using the weighted average method and, in the case of work in progress and finished goods, direct labor and an appropriate proportion of production overheads. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale.
Spare parts and consumables are stated at cost less any provision for obsolescence.
(f) Property, plant and equipment
An item of property, plant and equipment is initially recorded at cost, less accumulated depreciation and impairment losses (Note 2(l)). The cost of an asset comprises its purchase price, any directly attributable costs of bringing the asset to working condition and location for its intended use. Subsequent to the revaluation (Note 15), which was based on depreciated replacement costs, property, plant and equipment are carried at revalued amount, being the fair value at the date of the revaluation less any subsequent accumulated depreciation and impairment losses. Revaluations are performed periodically to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the balance sheet date. The Group recognizes in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the Group and the cost of the item can be measured reliably. All other expenditure is recognized as an expense in the consolidated statements of income in the year in which it is incurred.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
Gains or losses arising from the retirement or disposal of an item of property, plant and equipment, other than oil and gas properties, are determined as the difference between the net disposal proceeds and the carrying amount of the item and are recognized as income or expense in the consolidated statements of income on the date of retirement or disposal. On disposal of a revalued asset, the related revaluation surplus is transferred from the revaluation reserve to retained earnings.
Depreciation is provided to write off the cost/revalued amount of items of property, plant and equipment, other than oil and gas properties, over its estimated useful life on a straight-line basis, after taking into account its estimated residual value, as follows:
Buildings 15 to 45 years Plant, machinery, equipment, oil depots, storage tanks and others 4 to 18 years Service stations 25 years |
Where parts of an item of property, plant and equipment have different useful lives, the cost or valuation of the item is allocated on a reasonable basis between the parts and each part is depreciated separately. Both the useful life of an asset and its residual value, if any, are reassessed annually.
(g) Oil and gas properties
The Group uses the successful efforts method of accounting for its oil and gas producing activities. Under this method, costs of development wells and the related support equipment are capitalized. The cost of exploratory wells is initially capitalized as construction in progress pending determination of whether the well has found proved reserves. The impairment of exploratory well costs occurs upon the determination that the well has not found proved reserves. Exploratory wells that find oil and gas reserves in any area requiring major capital expenditure are expensed unless the well has found a sufficient quantity of reserves to justify its completion as a producing well if the required capital expenditure is made, and drilling of the additional exploratory wells is under way or firmly planned for the near future. However, in the absence of a determination of the discovery of proved reserves, exploratory well costs are not carried as an asset for more than one year following completion of drilling. If, after one year has passed, a determination of the discovery of proved reserves cannot be made, the exploratory well costs are impaired and charged to expense. All other exploration costs, including geological and geophysical costs, other dry hole costs and annual lease rentals, are expensed as incurred. Capitalized costs relating to proved properties are amortized at the field level on a unit-of-production method. The amortization rates are determined based on oil and gas reserves estimated to be recoverable from existing facilities over the shorter of the economic lives of crude oil and natural gas reservoirs and the terms of the relevant production licenses.
Gains and losses on the disposal of proved oil and gas properties are not recognized unless the disposal encompasses an entire property. The proceeds on such disposals are credited to the carrying amounts of oil and gas properties.
(h) Lease prepayments
Lease prepayments represent land use rights paid to the relevant government authorities. Land use rights are carried at cost less accumulated amortization and impairment losses (Note 2(l)). Amortization is provided to write off the cost of lease prepayments on a straight-line basis over the respective periods of the rights.
(i) Construction in progress
Construction in progress represents buildings, oil and gas properties, various plant and equipment under construction and pending installation, and is stated at cost less impairment losses (Note 2(l)). Cost of an item comprises direct costs of construction as well as interest charges, and foreign exchange differences on related borrowed funds to the extent that they are regarded as an adjustment to interest charges, during the periods of construction.
Construction in progress is transferred to property, plant and equipment when the asset is substantially ready for its intended use.
No depreciation is provided in respect of construction in progress.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
(j) Goodwill
Goodwill represents amounts arising on acquisition of subsidiaries, associates or jointly controlled entities. Goodwill represents the difference between the cost of acquisition and the fair value of the net identifiable assets acquired.
Goodwill is stated at cost less accumulated impairment losses. Goodwill is
allocated to cash-generating units and is tested annually for impairment (Note
2(l)). In respect of associates, the carrying amount of goodwill is included in
the carrying amount of the interest in associates.
(k) Investments
Investment in available-for-sale equity securities are carried at fair value with any change in fair value, other than impairment losses (Note2(l)), recognized directly in equity. When these investments are derecognized or impaired, the cumulative gain or loss previously recognized directly in equity is recognized in the consolidated statements of income. Investments in equity securities, other than investments in associates, that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are recognized in the balance sheet at cost less impairment losses (Note 2(l)).
(l) Impairment of assets
(i) Impairment of trade accounts receivable, other receivables and investment in equity securities other than investments in associates are accounted as follows:
Trade accounts receivable, other receivables and investment in equity securities other than investments in associates are reviewed at each balance sheet date to determine whether there is objective evidence of impairment. If any such evidence exists, an impairment loss is determined and recognized. The impairment loss is measured as the difference between the asset's carrying amount and the estimated future cash flows, discounted at the current market rate of return for a similar financial asset where the effect of discounting is material, and is recognized as an expense in the consolidated statements of income. Impairment losses for trade and other receivables are reversed through the consolidated statements of income if in a subsequent period the amount of the impairment losses decreases. Impairment losses for equity securities are not reversed.
(ii) Impairment of other long-lived assets is accounted for as follows:
The carrying amounts of other long-lived assets, including property, plant and equipment, construction in progress, lease prepayment and investments in associates, are reviewed periodically in order to assess whether the recoverable amounts have declined below the carrying amounts. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to the recoverable amount. For goodwill, the recoverable amount is estimated at each balance sheet date.
The recoverable amount is the greater of the fair value less costs to sell and the value in use. In determining the value in use, expected future cash flows generated by the asset are discounted to their present value using a pre-tax discount rate that reflects current market assessments of time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit).
The amount of the reduction is recognized as an expense in the consolidated statements of income unless the asset is carried at revalued amount for which an impairment loss is recognized directly against any related revaluation reserve to the extent that the impairment loss does not exceed the amount held in the revaluation reserve for that same asset. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit and then, to reduce the carrying amount of the other assets in the unit on a pro rata basis, except that the carrying value of an asset will not be reduced below its individual fair value less costs to sell, or value in use, if determinable.
The Group assesses at each balance sheet date whether there is any indication that an impairment loss recognized for an asset, except in the case of goodwill, in prior years may no longer exist. An impairment loss is reversed if there has been a favorable change in the estimates used to determine the recoverable amount. A
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
subsequent increase in the recoverable amount of an asset, when the circumstances and events that led to the write-down or write-off cease to exist, is recognized as income unless the asset is carried at revalued amount. Reversal of an impairment loss on a revalued asset is credited to the revaluation reserve except for impairment loss which was previously recognized as an expense in the consolidated statements of income; a reversal of such impairment loss is recognized as an income. The reversal is reduced by the amount that would have been recognized as depreciation had the write-down or write-off not occurred. An impairment loss in respect of goodwill is not reversed.
(m) Trade accounts and other payables
Trade accounts and other payables are initially recognized at fair value and thereafter stated at amortized cost unless the effect of discounting would be immaterial, in which case they are stated at cost.
(n) Interest-bearing borrowings
Interest bearing borrowings are recognized initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortized cost with any difference between cost and redemption value being recognized in the consolidated statements of income over the period of borrowings using the effective interest method.
(o) Provisions and contingent liability
A provision is recognized for liability of uncertain timing or amount when the Group has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made.
When it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.
(p) Revenue recognition
Revenues associated with the sale of crude oil, natural gas, petroleum and chemical products and ancillary materials are recorded when the customer accepts the goods and the significant risks and rewards of ownership and title have been transferred to the buyer. Revenue from the rendering of services is recognized in the consolidated statements of income upon performance of the services. No revenue is recognized if there are significant uncertainties regarding recovery of the consideration due, the possible return of goods, or when the amount of revenue and the costs incurred or to be incurred in respect of the transaction cannot be measured reliably.
Interest income is recognized on a time apportioned basis that takes into account the effective yield on the asset.
Government grants relating to the purchase of assets used for technology improvements are initially recorded as long-term liabilities when there is reasonable assurance that they will be received and thereafter offset against the cost of the related assets upon the transfer of these assets to property, plant and equipment. The grants are recognized as income over the useful life of these property, plant and equipment by way of reduced depreciation.
A government grant that becomes receivable as compensation for expenses or losses already incurred with no future related costs is recognized as income in the period in which it becomes receivable.
(q) Borrowing costs
Borrowing costs are expensed in the consolidated statements of income in the year in which they are incurred, except to the extent that they are capitalized as being attributable to the construction of an asset which necessarily takes a period of time to get ready for its intended use.
(r) Repairs and maintenance expenditure
Repairs and maintenance expenditure is expensed as incurred.
(s) Environmental expenditures
Environmental expenditures that relate to current ongoing operations or to conditions caused by past operations are expensed as incurred.
Liabilities related to future remediation costs are recorded when environmental assessments and/or cleanups are probable and the costs can be reasonably estimated. As facts concerning environmental contingencies become known to the Group, the Group reassesses its position both with respect to accrued liabilities and other potential exposures.
(t) Research and development costs
Research and development costs are recognized as expenses in the year in which they are incurred. Research and development costs amounted to RMB 1,541, RMB 2,244 and RMB 2,902 for the years ended December 31, 2004, 2005 and 2006, respectively.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
(u) Operating leases
Operating lease payments are charged to the consolidated statements of income on a straight-line basis over the period of the respective leases. Operating lease charges amounted to RMB 4,288, RMB 5,516 and RMB 6,128 for the years ended December 31, 2004, 2005 and 2006, respectively.
(v) Retirement benefits
The contributions payable under the Group's retirement plans are recognized as expenses in the consolidated statements of income as incurred and according to the contribution determined by the plans. Further information is set out in Note 31.
(w) Income tax
Income tax comprises current and deferred tax. Current tax is calculated on taxable income by applying the applicable tax rates. Deferred tax is provided using the balance sheet liability method on all temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is calculated on the basis of the enacted tax rates that are expected to apply in the period when the asset is realized or the liability is settled.
The tax value of losses expected to be available for utilization against future taxable income is set off against the deferred tax liability within the same legal tax unit and jurisdiction to the extent appropriate, and is not available for set-off against the taxable profit of another legal tax unit. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
(x) Dividends
Dividends are recognized as a liability in the period in which they are declared.
(y) Segmental reporting
A business segment is a distinguishable component of the Group that is engaged in providing products or services and is subject to risks and rewards that are different from those of other segments.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
3. OTHER OPERATING REVENUES
Other operating revenues represent:
Years ended December 31,
-------------------------
2004 2005 2006
------ ------ ------
RMB RMB RMB
Sale of materials, service and others.........22,224 23,619 26,366
Rental income................................. 373 394 384
------ ------ ------
22,597 24,013 26,750
====== ====== ======
|
4. OTHER INCOME
During the years ended December 31, 2005 and 2006, the Group received cash government grants from the Ministry of Finance of the PRC of RMB 9,415 and RMB 5,000, respectively, as a compensation of loss incurred due to the distortion of the correlation of domestic refined petroleum product prices and the crude oil prices. There are no unfilled conditions and other contingencies attached to the receipt of the government grant. There is no assurance that the Group will continue to receive such grant in the future.
5. PERSONNEL EXPENSES
Personnel expenses represent:
Years ended December 31,
-------------------------
2004 2005 2006
------ ------ ------
RMB RMB RMB
Wages and salaries............................13,660 13,742 14,840
Staff welfare..................................1,782 1,808 1,927
Contributions to retirement schemes............2,245 2,273 2,270
Social security contributions..................1,032 826 820
------ ------ ------
18,719 18,649 19,857
====== ====== ======
|
6. EMPLOYEE REDUCTION EXPENSES
During the year ended December 31, 2004, in accordance with the Group's voluntary employee reduction plan, and in connection with the Acquisition of Petrochemical and Catalyst Assets from and Disposal of Downhole Assets to Sinopec Group Company, the Group recorded employee reduction expenses of RMB 919 relating to reduction of approximately 24,000 employees.
During the year ended December 31, 2005, in accordance with the Group's voluntary employee reduction plan, the Group recorded employee reduction expenses of RMB 369 in respect of the voluntary termination of approximately 7,000 employees.
During the year ended December 31, 2006, in accordance with the Group's voluntary employee reduction plan, the Group recorded employee reduction expenses of RMB 236 in respect of the voluntary termination of approximately 4,000 employees.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
7. TAXES OTHER THAN INCOME TAX
Taxes other than income tax represent:
Years ended December 31,
-------------------------
2004 2005 2006
------ ------ ------
RMB RMB RMB
Consumption tax...............................11,920 12,430 14,121
Special oil income levy....................... - - 8,747
City construction tax......................... 2,544 2,589 3,038
Education surcharge........................... 1,260 1,311 1,615
Resources tax................................. 458 642 854
Business tax.................................. 165 213 264
------ ------ ------
16,347 17,185 28,639
====== ====== ======
|
Consumption tax is levied on producers of gasoline, diesel, naphtha, fuel oil, jet fuel, lubricant oil and solvent oil based on a tariff rate applied to the volume of sales. Effective March 26, 2006, a special oil income levy has been levied on oil exploration and production entities based on the progressive rates ranging from 20% to 40% on the portion of the monthly weighted average sales price of the crude oil produced in the PRC exceeding USD 40 per barrel. City construction tax is levied on an entity based on its total amount of value-added tax, consumption tax and business tax.
8. OTHER OPERATING EXPENSES, NET
Other operating expenses, net represent:
Years ended December 31,
-------------------------
2004 2005 2006
------ ------ ------
RMB RMB RMB
Fines, penalties and compensations....................... 277 155 65
Donations................................................ 291 203 98
Loss on disposal of property, plant and equipment, net... 1,697 2,098 1,646
Impairment losses on long-lived assets (i)............... 3,919 1,851 825
Gain from debt extinguishment (ii)....................... - - (486)
Others................................................... 494 821 289
------ ------ ------
6,678 5,128 2,437
====== ====== ======
|
(i) Impairment losses recognized on long-lived assets of the refining segment were RMB 14, RMB nil and RMB nil for the years ended December 31, 2004, 2005 and 2006, respectively. Impairment losses recognized on long-lived assets of the chemicals segment were RMB 2,747, RMB 1,425 and RMB 250 for the years ended December 31, 2004, 2005 and 2006, respectively. These impairment losses relate to certain refining and chemical production facilities that are held for use. The carrying values of these facilities were written down to their recoverable amount that were based either on the asset held for use model using the present value of estimated future cash flows or on the appraised values of the production facilities. Amounts of RMB 2,052, RMB 1,425 and RMB 250 for the years ended December 31, 2004, 2005 and 2006, respectively, were charged to the consolidated statements of income. An amount of RMB 709 for the year ended December 31, 2004 was charged directly against the related revaluation reserve in respect of those assets that were carried at revalued amount. The primary factor resulting in the impairment losses on long-lived assets of the refining and chemicals segments was due to higher operating and production costs caused by the increase in the prices of raw materials that are not expected to be recovered through an increase in selling price.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
Impairment losses recognized on long-lived assets of the marketing and distribution segment of RMB 1,769, RMB 366 and RMB 23 respectively, for the years ended December 31, 2004, 2005 and 2006 primarily relate to certain service stations that were closed during the year. In measuring the amounts of impairment charges, the carrying amounts of these assets were compared to the present value of the expected future cash flows of the assets, as well as information about sales and purchases of similar properties in the same geographic area.
The factors resulting in the exploration and production ("E&P") segment impairment losses of RMB 98, RMB 60 and RMB 552 for the years ended December 31, 2004, 2005 and 2006, respectively, were unsuccessful development drilling and high operating and development costs for certain small oil fields. The carrying values of these E&P properties were written down to a recoverable amount which was determined based on the present values of the expected future cash flows of the assets. The oil and gas pricing was a factor used in the determination of the present values of the expected future cash flows of the assets and had an impact on the recognition of the asset impairment.
(ii) During the year ended December 31, 2006, a subsidiary of the Group reached an agreement with a bank to waive loan principal balance and related interest payable totaling RMB 486.
9. INTEREST EXPENSE
Interest expense represents:
Years ended December 31,
--------------------------------------------
2004 2005 2006
--------- --------- ---------
RMB RMB RMB
Interest expense incurred...................................... 5,493 7,311 8,931
Less: Interest expense capitalized*............................ (910) (1,385) (1,494)
--------- --------- ---------
4,583 5,926 7,437
========= ========= =========
* Interest rates per annum at which borrowing costs were
capitalized for construction in progress.................... 3.1% to 6.0% 3.3% to 6.6% 3.6% to 6.1%
============= ============ ============
|
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
10. INCOME TAX
Income tax in the consolidated statements of income represents:
Years ended December 31,
-------------------------
2004 2005 2006
------ ------ ------
RMB RMB RMB
Current tax
- Provision for the year.............. 18,458 20,646 23,981
- Under-provision in prior years...... 340 477 260
Deferred taxation (Note 21)................ (707) (1,243) (726)
------ ------ ------
18,091 19,880 23,515
======= ====== ======
|
A reconciliation between actual tax expense and accounting profit at applicable tax rates is as follows:
Years ended December 31,
------------------------
2004 2005 2006
-------- -------- --------
RMB RMB RMB
Income before income tax................................................. 59,453 64,656 78,923
======== ======== ========
Expected PRC income tax expense at a statutory tax rate of 33%........... 19,620 21,336 26,045
Tax effect of non-deductible expenses.................................... 821 461 516
Tax effect of non-taxable income......................................... (216) (567) (648)
Tax effect of differential tax rate on subsidiaries' income (Note)....... (2,091) (2,010) (2,867)
Tax effect of tax losses not recognized for deferred tax, net............ 409 391 258
Under-provision in prior years........................................... 94 477 260
Tax credit for domestic equipment purchases.............................. (546) (208) (49)
-------- -------- --------
Actual tax expense ...................................................... 18,091 19,880 23,515
======== ======== ========
|
Substantially all income before income tax and related tax expense is from PRC sources.
Note: The provision for PRC current income tax is based on a statutory rate of 33% of the assessable income of the Group as determined in accordance with the relevant income tax rules and regulations of the PRC, except for certain entities of the Group, which are taxed at a preferential rate of 15%.
11. BASIC AND DILUTED EARNINGS PER SHARE
The calculation of basic and diluted earnings per share are based on the net income attributable to the equity shareholders of the Company of RMB 35,335, RMB 41,455 and RMB 53,912 divided by the weighted average number of shares in issue during the year of 86,702,439,000 for each of the years in the three-year period ended December 31, 2006.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
12. TRADE ACCOUNTS RECEIVABLE, NET
Trade accounts receivable are analyzed as follows:
December 31,
------------
2005 2006
---- ----
RMB RMB
Amounts due from third parties.................................. 13,564 14,601
Amounts due from Sinopec Group Company and its affiliates....... 3,145 3,396
Amounts due from associates..................................... 572 380
Amounts due from jointly controlled entities.................... 505 547
------ ------
17,786 18,924
Less: Impairment losses for bad and doubtful debts.............. (3,140) (3,334)
------ ------
14,646 15,590
====== ======
|
The impairment losses for bad and doubtful debts are analyzed as follows:
Years ended December 31,
------------------------
2004 2005 2006
-------- -------- --------
RMB RMB RMB
At beginning of year................................................... 3,350 3,671 3,140
Impairment losses recognized for the year.............................. 935 328 438
Written-off/reversal of impairment losses.............................. (454) (859) (244)
Less: Amount distributed to Sinopec Group Company in connection with
the Acquisition of Petrochemical and Catalyst Assets........... (160) -- --
-------- -------- --------
At end of year......................................................... 3,671 3,140 3,334
======== ======== =========
|
Sales are generally on a cash term. Credit is generally only available for major customers with well-established trading records. Amounts due from Sinopec Group Company and its affiliates are repayable under the same terms.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
13. INVENTORIES
Inventories represent:
December 31,
------------
2005 2006
---- ----
RMB RMB
Crude oil and other raw materials.........................53,360 54,227
Work in progress.......................................... 9,422 9,828
Finished goods............................................23,173 25,762
Spare parts and consumables............................... 4,456 4,485
------ ------
90,411 94,302
Less: Allowance for diminution in value of inventories.... (892) (866)
------ ------
89,519 93,436
====== =======
|
The allowance for diminution in value of inventories is analyzed as follows:
Years ended December 31,
------------------------
2004 2005 2006
-------- -------- --------
RMB RMB RMB
At beginning of year................................................... 601 906 892
Provision for the year................................................. 648 262 419
Written back on sales.................................................. (261) (276) (445)
Less: Amount distributed to Sinopec Group Company in connection with
the Acquisition of Petrochemical and Catalyst Assets............ (82) -- --
-------- -------- --------
At end of year......................................................... 906 892 866
======== ======== =========
|
The cost of inventories recognized as an expense in the consolidated statements of income amounted to RMB 474,104, RMB 682,288 and RMB 895,290 for the years ended December 31, 2004, 2005 and 2006, respectively.
14. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets represent:
December 31,
------------
2005 2006
---- ----
RMB RMB
Advances to third parties..................................................1,776 1,732
Amounts due from Sinopec Group Company and its affiliates..................2,965 2,020
Other receivables..........................................................1,977 2,298
Purchase deposits..........................................................2,496 3,106
Prepayments in connection with construction work and equipment purchases...6,613 4,658
Prepaid value-added tax and customs duty...................................4,288 4,815
Amounts due from associates................................................ 539 332
----- -----
20,654 18,961
===== ======
|
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
15. PROPERTY, PLANT AND EQUIPMENT, NET
By segment:
Exploration Marketing Corporate
and and and
production Refining distribution Chemicals others Total
---------- -------- ----------- --------- ------ -----
RMB RMB RMB RMB RMB RMB
Cost/valuation:
Balance at January 1, 2005 194,466 116,923 65,345 163,222 4,092 544,048
Additions 412 129 382 271 150 1,344
Transferred from construction in progress 23,451 8,121 14,017 18,457 381 64,427
Proportionate share of a jointly
controlled entity -- -- -- 1,028 -- 1,028
Reclassification (157) (432) 204 289 96 --
Disposals (3,131) (2,859) (2,927) (3,164) (245) (12,326)
---------- -------- ----------- ------- ------ --------
Balance at December 31, 2005 215,041 121,882 77,021 180,103 4,474 598,521
---------- -------- ----------- ------- ------ --------
Balance at January 1, 2006 215,041 121,882 77,021 180,103 4,474 598,521
Additions 1,175 145 1,280 280 456 3,336
Transferred from construction in progress 28,695 26,994 10,087 15,461 161 81,398
Acquisition of a subsidiary 2,071 -- -- -- -- 2,071
Reclassification (56) (600) -- 725 (69) --
Disposals (5,562) (1,522) (2,280) (4,302) (153) (13,819)
---------- -------- ----------- ------- ------ --------
Balance at December 31, 2006 241,364 146,899 86,108 192,267 4,869 671,507
---------- -------- ----------- ------- ------ --------
Accumulated depreciation:
Balance at January 1, 2005 94,977 56,581 13,465 92,042 1,407 258,472
Depreciation charge for the year 11,090 6,974 3,013 9,392 282 30,751
Impairment losses for the year 60 -- 366 1,425 -- 1,851
Reclassification (78) (214) 78 160 54 --
Written back on disposals (2,706) (2,206) (2,110) (2,719) (194) (9,935)
---------- -------- ----------- ------- ------ --------
Balance at December 31, 2005 103,343 61,135 14,812 100,300 1,549 281,139
---------- -------- ----------- ------- ------ --------
Balance at January 1, 2006 103,343 61,135 14,812 100,300 1,549 281,139
Depreciation charge for the year 12,839 7,671 3,422 9,391 401 33,724
Acquisition of a subsidiary 592 -- -- -- -- 592
Impairment losses for the year 552 -- 23 250 -- 825
Reclassification (23) (392) -- 420 (5) --
Written back on disposals (5,253) (1,314) (1,103) (3,470) (108) (11,248)
---------- -------- ----------- ------- ------ --------
Balance at December 31, 2006 112,050 67,100 17,154 106,891 1,837 305,032
---------- -------- ----------- ------- ------ --------
Net book value:
At January 1, 2005 99,489 60,342 51,880 71,180 2,685 285,576
========== ======== =========== ======= ====== ========
At December 31, 2005 111,698 60,747 62,209 79,803 2,925 317,382
========== ======== =========== ======= ====== ========
At December 31, 2006 129,314 79,799 68,954 85,376 3,032 366,475
========== ======== =========== ======= ====== ========
|
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
By asset class:
Oil depots,
storage Plant,
tanks machinery,
Oil and gas and service equipment
Buildings properties stations and others Total
--------- ---------- -------- ---------- -----
RMB RMB RMB RMB RMB
Cost/valuation:
Balance at January 1, 2005 45,119 175,522 60,533 262,874 544,048
Additions 108 253 228 755 1,344
Transferred from construction in progress 2,535 22,235 13,851 25,806 64,427
Proportionate share of a jointly controlled entity 182 -- -- 846 1,028
Reclassification (406) (802) 650 558 --
Disposals (1,034) (1,928) (2,145) (7,219) (12,326)
--------- ---------- -------- ---------- -------
Balance at December 31, 2005 46,504 195,280 73,117 283,620 598,521
--------- ---------- -------- ---------- -------
Balance at January 1, 2006 46,504 195,280 73,117 283,620 598,521
Additions 748 777 1,071 740 3,336
Transferred from construction in progress 2,777 26,579 14,549 37,493 81,398
Acquisition of a subsidiary 519 1,313 -- 239 2,071
Reclassification (1,569) 10 3,170 (1,611) --
Disposals (749) (5,266) (1,658) (6,146) (13,819)
--------- ---------- -------- ---------- -------
Balance at December 31, 2006 48,230 218,693 90,249 314,335 671,507
--------- ---------- -------- ---------- -------
Accumulated depreciation:
Balance at January 1, 2005 20,334 85,996 11,781 140,361 258,472
Depreciation charge for the year 1,724 10,431 2,914 15,682 30,751
Impairment losses for the year 79 60 261 1,451 1,851
Reclassification (98) (430) 153 375 --
Written back on disposals (598) (1,683) (1,379) (6,275) (9,935)
--------- ---------- -------- ---------- -------
Balance at December 31, 2005 21,441 94,374 13,730 151,594 281,139
--------- ---------- -------- ---------- -------
Balance at January 1, 2006 21,441 94,374 13,730 151,594 281,139
Depreciation charge for the year 1,787 12,126 3,728 16,083 33,724
Acquisition of a subsidiary 49 468 -- 75 592
Impairment losses for the year 118 532 23 152 825
Reclassification (352) (45) 1,221 (824) --
Written back on disposals (437) (5,073) (834) (4,904) (11,248)
--------- ---------- -------- ---------- -------
Balance at December 31, 2006 22,606 102,382 17,868 162,176 305,032
--------- ---------- -------- ---------- -------
Net book value:
At January 1, 2005 24,785 89,526 48,752 122,513 285,576
========= ========== ======== ========== =======
At December 31, 2005 25,063 100,906 59,387 132,026 317,382
========= ========== ======== ========== =======
At December 31, 2006 25,624 116,311 72,381 152,159 366,475
========= ========== ======== ========== =======
|
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
As required by the relevant PRC regulations with respect to the Reorganization, the property, plant and equipment of the Group as of September 30, 1999 were valued for each asset class by China United Assets Appraisal Corporation, Beijing Zhong Zheng Appraisal Company, CIECC Assets Appraisal Corporation and Zhong Fa International Properties Valuation Corporation, independent valuers registered in the PRC, on a depreciated replacement cost basis. The value of property, plant and equipment was determined at RMB 159,788. The surplus on revaluation of RMB 32,320, net of amounts allocated to minority interests, was incorporated in the financial statements of the Group at December 31, 1999.
In connection with the acquisitions of certain entities and related operations from Sinopec Group Company in prior years, the related property, plant and equipment were revalued by independent valuers in accordance with PRC relevant rules and regulations. The surplus on these revaluations of RMB 1,409, net of amounts allocated to minority interests, was credited to revaluation reserve.
In connection with the Acquisition of Oil Production Plants, the property, plant and equipment of the Oil Production Plants were revalued at June 30, 2006, by a firm of independent valuers in accordance with the PRC relevant rules and regulations. The value of property, plant and equipment of the Oil Production Plants pursuant to the valuation, based on depreciated replacement costs, was determined at RMB 2,303, which approximated the net historical carrying value of the assets.
In accordance with IAS 16, subsequent to these revaluations, which was based on depreciated replacement costs, property, plant and equipment are carried at revalued amount, being the fair value at the date of the revaluation less any subsequent accumulated depreciation and impairment losses. Revaluation is performed periodically to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the balance sheet date. Based on a revaluation performed as of December 31, 2004, which was based on depreciated replacement costs, the carrying value of property, plant and equipment did not differ materially from their fair value.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
16. CONSTRUCTION IN PROGRESS
Exploration Marketing Corporate
and and and
production Refining distribution Chemicals others Total
------------ -------- ------------ --------- ------- ------
RMB RMB RMB RMB RMB RMB
Balance at January 1, 2005..................... 9,387 9,483 13,781 13,170 1,513 47,334
Additions...................................... 27,245 18,971 10,572 9,115 1,014 66,917
Additions by jointly controlled entities....... 814 -- -- 1,830 -- 2,644
Proportionate share of a jointly controlled
entity......................................... -- -- -- 5,461 -- 5,461
Dry hole costs written off..................... (2,992) -- -- -- -- (2,992)
Transferred to property, plant and equipment and
other assets............................. (23,451) (8,121) (14,017) (19,014) (381) (64,984)
-------- ------ -------- --------- ------ -------
Balance at December 31, 2005................... 11,003 20,333 10,336 10,562 2,146 54,380
======== ====== ======== ========= ====== =======
Balance at January 1, 2006..................... 11,003 20,333 10,336 10,562 2,146 54,380
Additions...................................... 37,892 21,824 10,039 12,361 1,714 83,830
Additions by jointly controlled entities....... 91 -- -- 148 -- 239
Acquisition of a subsidiary.................... 89 -- -- -- -- 89
Dry hole costs written off..................... (3,960) -- -- -- -- (3,960)
Transferred to property, plant and equipment... (28,695) (26,994) (10,087) (15,461) (161) (81,398)
-------- ------ -------- --------- ------ -------
Balance at December 31, 2006................... 16,420 15,163 10,288 7,610 3,699 53,180
======== ====== ======== ========= ====== =======
|
The Group's proportionate share of the jointly controlled entities' construction in progress in the E&P and the chemicals segments reflected in the above table were RMB 2,888 and RMB 504, respectively, as of December 31, 2005, and RMB 2,979 and RMB 603, respectively, as of December 31, 2006.
Net changes in capitalized cost of exploratory wells included in the Group's construction in progress in the E&P segment are analyzed as follows:
Years ended December 31,
------------------------
2004 2005 2006
---- ---- ----
RMB RMB RMB
At beginning of year................................................... 2,438 2,898 3,573
Additions, net of amount that were capitalized and subsequently
expensed in the same year, pending the determination of proved
reserves.......................................................... 2,031 2,554 3,241
Transferred to oil and gas properties based on the determination of
proved reserves................................................... (382) (671) (305)
Dry hole costs written off............................................. (1,189) (1,208) (1,738)
------- ------- -------
At end of year......................................................... 2,898 3,573 4,771
======= ======= =======
|
Aging of capitalized exploratory well costs based on the date the drilling was completed are analyzed as follows:
December 31,
------------------------
2004 2005 2006
---- ---- ----
RMB RMB RMB
One year or less....................................................... 2,711 3,277 4,393
Over one year.......................................................... 187 296 378
------- ------- -------
2,898 3,573 4,771
======= ======= =======
|
Capitalized exploratory wells costs aged over one year are related to wells for which the drilling results are being further evaluated or the development plans are being formulated.
The geological and geophysical costs paid during the years ended December 31, 2004, 2005 and 2006 amounted to RMB 3,235, RMB 3,200 and RMB 3,878, respectively.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
17 Goodwill
2005 2006
------ ------
RMB RMB
Cost:
Balance at January 1.............................. 383 2,203
Additions......................................... 1,820 12,122
------ ------
Balance at December 31............................ 2,203 14,325
====== ======
Accumulated impairment losses:
Balance at January 1 and December 31.............. - -
------ ------
Net book value....................................
Balance at January 1.............................. 383 2,203
====== ======
Balance at December 31............................ 2,203 14,325
====== ======
|
Impairment tests for cash-generating units containing goodwill
Goodwill is allocated to the following Group's cash-generating units:
December 31,
------------
2005 2006
----- -----
RMB RMB
Sinopec Beijing Yanshan Branch ("Sinopec Yanshan").......................... 1,157 1,157
Sinopec Zhenhai Refining and Chemical Company Limited ("Sinopec Zhenhai")... - 3,952
Sinopec Qilu Petrochemical Company Limited ("Sinopec Qilu")................. - 2,159
Sinopec Yangzi Petrochemical Company Limited ("Sinopec Yangzi")............. - 2,737
Sinopec Zhongyuan Petroleum Company Limited ("Sinopec Zhongyuan")........... - 1,391
Shengli Oil Field Dynamic Company Limited ("Dynamic")....................... - 1,361
Multiple units without significant goodwill................................. 1,046 1,568
----- ------
2,203 14,325
===== ======
|
During the year ended December 31, 2005, the Group acquired the entire 1,012,000,000 H shares, representing approximately 29.99% of the issued share capital of Sinopec Beijing Yanshan Petrochemical Company Limited from minority interests shareholders at HK$ 3.80 per share. The total consideration paid by the Group was approximately RMB 4,088 which was settled in cash. The excess of the cost of purchase over the fair value of the underlying assets and liabilities (on a proportionate share) was RMB 1,157.
During the year ended December 31, 2006, the Group acquired additional equity interests in Sinopec Zhenhai, Sinopec Qilu, Sinopec Yangzi, Sinopec Zhongyuan and Dynamic of 28.7%, 17.7%, 14.8%, 28.5% and 71.4%, respectively. The Company acquired these additional equity interests to reduce management layers and improve the efficiency of the production, management and sales of the Group as a whole. The total consideration paid by the Group was approximately RMB 21,971 which was settled in cash. The excess of the cost of purchase over the fair value of the underlying assets and liabilities (on a proportionate share) in Sinopec Zhenhai, Sinopec Qilu, Sinopec Yangzi, Sinopec Zhongyuan and Dynamic were RMB 3,952, RMB 2,159, RMB 2,737, RMB 1,391 and RMB 1,361, respectively.
Management of the Company considers the acquisitions of additional equity interests in these companies can reduce management layers and improve the efficiency of the production, management and sales of the Group as a whole.
As of December 31, 2006, the goodwill allocated to the E&P, refining, chemicals, and marketing and distribution segments were RMB 2,774, RMB 4,346, RMB, 6,053 and 1,152, respectively. As of December 31, 2005, the goodwill allocated to the refining, chemicals, and marketing and distribution segments were RMB 394, RMB 1,157 and 652, respectively.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
The recoverable amounts of the Sinopec Yanshan, Sinopec Zhenhai, Sinopec Yangzi, Sinopec Qilu, Sinopec Zhongyuan and Dynamic are determined based on value in use calculations. These calculations use cash flow projections based on financial budgets approved by management covering a one-year period and pre-tax discount rates primarily ranging from 14.2% to 17.2%. Cash flows beyond the one-year period are maintained constant. Management believes any reasonably possible change in the key assumptions on which these entities' recoverable amounts are based would not cause these entities' carrying amounts to exceed their recoverable amounts.
Key assumptions used for the value in use calculations for these entities are the gross margin and sales volume. Management determined the budgeted gross margin based on the gross margin achieved in the period immediately before the budget period and its expectation for the development of international crude oil prices. The sales volume was based on the production capacity and the sales volume in the period immediately before the budget period.
18. INVESTMENTS
December 31,
-------------
2005 2006
---- ----
RMB RMB
Available-for-sale securities.................... 119 157
Other unlisted investments, at cost.............. 3,359 2,741
----- -----
3,478 2,898
Less: Impairment losses.......................... (327) (316)
----- -----
3,151 2,582
===== =====
|
Unlisted investments represent the Group's interests in PRC domiciled enterprises which are mainly engaged in non-oil and gas activities and operations. The Group has no significant investments in marketable securities.
The impairment losses relating to investments for the years ended December 31, 2004, 2005 and 2006 were RMB 96, RMB 77 and RMB 48, respectively.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
19. INTEREST IN ASSOCIATES
December 31,
-------------
2005 2006
----- ------
RMB RMB
Share of net assets................................. 9,267 11,617
===== ======
|
The Group's investments in associates are with companies primarily engaged in the oil and gas and chemical operations in the PRC. These investments are individually and in the aggregate not material to the Group's financial condition or results of operations for all periods presented. The share of associates' taxation amounted to RMB 340, RMB 420 and RMB 439 for the years ended December 31, 2004, 2005 and 2006, respectively. The principal investments in associates, all of which are incorporated in the PRC, are as follows:
Percentage
Percentage of of equity
Form of equities held by the
business Particulars of issued held by the Company's
Name of company structure and paid up capital Company subsidiaries Principal activities
--------------- --------- --------------------- ------- ------------ --------------------
% %
Sinopec Shandong Taishan Incorporated 480,793,320 ordinary 38.68 ___ Trading of petroleum
Petroleum Company shares of RMB 1.00 products and decoration of
Limited ("Taishan") each service gas stations
Sinopec Finance Company Incorporated Registered capital 49.00 ___ Provision of non-banking
Limited RMB 6,000,000,000 financial services
Shanghai Petroleum National Incorporated Registered capital 30.00 ___ Exploration and production
Gas Corporation RMB 900,000,000 of crude oil and natural gas
Shanghai Chemical Industry Incorporated Registered capital ___ 38.26 Planning, development and
Park Development Company RMB 2,372,439,000 operation of the Chemical
Limited Industry Park in Shanghai,
the PRC
China Shipping & Sinopec Incorporated Registered capital ___ 50.00 Transportation of
Suppliers Company Limited RMB 876,660,000 petroleum products
China Aviation Oil Supply Incorporated Registered capital ___ 29.00 Marketing and distribution
Company Limited RMB 3,800,000,000 of refined petroleum
products
|
During the year ended December 31, 2006, the Group acquired 71.4% equity interests in Dynamic, which was previously an associate of the Group, and thereafter, Dynamic became a subsidiary of the Company (Note 17 and 33).
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
20. INTEREST IN JOINTLY CONTROLLED ENTITIES
The Group's investments in jointly controlled entities are primarily engaged in the oil and gas and chemical operations in the PRC as follows:
Percentage
Percentage of of equity
Form of equities held by the
business Particulars of issued held by the Company's
Name of company structure and paid up capital Company subsidiaries Principal activities
--------------- --------- --------------------- ------- ------------ --------------------
% %
Shanghai Secco Petrochemical Incorporated Registered capital 30.00 20.00 Manufacturing and
Company Limited USD 901,440,964 distribution of
petrochemical products
BASF-YPC Company Limited Incorporated Registered capital 30.00 10.00 Manufacturing and
RMB 8,793,000,000 distribution of
petrochemical products
Yueyang Sinopec and Shell Coal Incorporated Registered capital 50.00 -- Manufacturing and
Gasification Company Limited USD 45,588,700 distribution of industrial
gas
Block A Oil Field in the Unincorporated -- -- 43.00 Exploration and production
Western Area Chengdao in of crude oil and natural
Bohai Bay gas
|
Included in the consolidated financial statements are the following items that represent the Group's proportionate share of the jointly controlled entities' results of operation, financial condition and cash flows.
Years ended December 31,
--------------------------
2004 2005 2006
---- ---- ----
RMB RMB RMB
Results of operation:
Operating revenue..................... 313 10,082 17,913
Expenses.............................. (450) (9,773) (15,180)
----- --------- --------
Net (loss) / income................... (137) 309 2,733
===== ========= ========
|
December 31,
------------
2005 2006
---- -----
RMB RMB
Financial condition:
Current assets.................................................. 2,631 4,966
Non-current assets, primarily property, plant and equipment and construction in
progress with net book value of RMB 14,259 (2005: RMB 15,287) and RMB 3,582
(2005: RMB 3,392), respectively.............................. 19,522 18,635
Current liabilities............................................. (2,543) (2,736)
Non-current liabilities, primarily long-term bank loans, excluding current portion,
of RMB 8,267 (2005: RMB 10,006) ............................. (10,177) (8,643)
-------- -------
Net assets...................................................... 9,433 12,222
======== =======
|
Years ended December 31,
------------------------
2004 2005 2006
---- ---- ----
RMB RMB RMB
Cash flows:
Net cash generated from / (used in) operating activities........ 233 (1,434) 2,452
Net cash used in investing activities........................... (6,035) (2,474) (382)
Net cash generated from / (used in) financing activities....... 5,909 4,011 (939)
|
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
21. DEFERRED TAX ASSETS AND LIABILITIES
Deferred tax assets and deferred tax liabilities are attributable to the items detailed in the table below:
Assets Liabilities Net balance
December 31, December 31, December 31,
------------- -------------- ----------------
2005 2006 2005 2006 2005 2006
-------- ------ ------ ------ ------ ------
RMB RMB RMB RMB RMB RMB
Current
Receivables and inventories..................... 3,448 3,531 -- -- 3,448 3,531
Accruals........................................ 456 865 -- -- 456 865
Non-current
Property, plant and equipment................... 1,642 2,295 (1,619) (1,678) 23 617
Accelerated depreciation........................ -- -- (4,290) (4,657) (4,290) (4,657)
Tax value of losses carried forward, net of
valuation allowances........................ 128 53 -- -- 128 53
Lease prepayments .............................. 359 351 -- -- 359 351
Others.......................................... 39 63 (66) (4) (27) 59
-------- ------ ------ ------ ------ ------
Deferred tax assets/(liabilities) .............. 6,072 7,158 (5,975) (6,339) 97 819
======== ====== ====== ====== ====== ======
|
As of December 31, 2006, certain subsidiaries of the Company provided valuation allowance against tax value of losses carried forward for PRC income tax purpose of RMB 4,382 which are available to offset their future PRC taxable income, if any. Tax value of losses carried forward of RMB 215, RMB 341, RMB 720 RMB 1,185 and RMB 1,921 will expire in 2007, 2008, 2009, 2010, and 2011, respectively.
A valuation allowance on deferred tax assets is recorded if it is probable that some portion or all of the deferred tax assets will not be realized through the recovery of taxes previously paid and/or future taxable income. The allowance is subject to ongoing adjustments based on changes in circumstances that affect the Group's assessment on the realizability of the deferred tax assets. The Group has reviewed its deferred tax assets as of December 31, 2004, 2005 and 2006. Based on this review, net valuation allowances of RMB 409, RMB 391 and RMB 258 were provided for the years ended December 31, 2004, 2005 and 2006, respectively. The Group determined the valuation allowance based on management's assessment of the probability that taxable profits will be available over the period which the deferred tax assets can be realized or utilized. In assessing the probability, both positive and negative evidence was considered, including whether it is probable that the operations will have future taxable profits over the periods which the deferred tax assets are deductible or utilized and whether the tax losses result from identifiable causes which are unlikely to recur. Based on this assessment, a valuation allowance was provided to reduce the deferred tax asset to the amount that is probable to be realized.
The valuation allowance is analyzed as follows:
Years ended December 31,
-------------------------
2004 2005 2006
------ ------ -----
RMB RMB RMB
At beginning of year.................... 641 1,050 1,354
Allowance during the year, net.......... 409 391 258
Written-off............................. -- (87) (166)
------ ------ ------
At end of year ......................... 1,050 1,354 1,446
====== ====== ======
|
Movements in temporary differences between calculations of certain items for accounting and for taxation purposes can be specified as follows:
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
Recognized in
Balance at consolidated Recognized in Balance at
January 1, statements of other December 31,
2004 income reserve 2004
---- ------ ------- ----
RMB RMB RMB RMB
Current
Receivables and inventories........................... 1,446 814 ___ 2,260
Accruals.............................................. 23 245 ___ 268
Non-current
Property, plant and equipment.......................... (709) 571 ___ (138)
Accelerated depreciation............................... (3,673) (327) ___ (4,000)
Tax value of losses carried forward, net of valuation
allowance (Note i)................................. 923 (591) (266) 66
Lease prepayments...................................... 373 (7) ___ 366
Others................................................ 30 2 ___ 32
------- ------- --------- --------
Net deferred tax (liabilities)/assets.................. (1,587) 707 (266) (1,146)
======= ======= ========= ========
(Note 10)
|
Recognized in
Balance at consolidated Recognized in Balance at
January 1, statements of other December 31,
2004 income reserve 2004
---- ------ ------- ----
RMB RMB RMB RMB
Current
Receivables and inventories........................... 2,260 1,188 ___ 3,448
Accruals.............................................. 268 188 ___ 456
Non-current
Property, plant and equipment.......................... (138) 161 ___ 23
Accelerated depreciation............................... (4,000) (290) ___ (4,290)
Tax value of losses carried forward, net of valuation 66 62 ___ 128
allowance..........................................
Lease prepayments ..................................... 366 (7) ___ 359
Others................................................. 32 (59) ___ (27)
------- ------- --------- --------
Net deferred tax (liabilities)/assets.................. (1,146) 1,243 ___ 97
======= ======== ========= ========
(Note 10)
|
Recognized in
Balance at consolidated Recognized in Balance at
January 1, statements of other December 31,
2004 income reserve 2004
---- ------ ------- ----
RMB RMB RMB RMB
Current
Receivables and inventories............................ 3,448 83 ___ 3,531
Accruals............................................... 456 409 ___ 865
Non-current
Property, plant and equipment.......................... 23 594 ___ 617
Accelerated depreciation............................... (4,290) (367) ___ (4,657)
Tax value of losses carried forward, net of valuation 128 (75) ___ 53
allowance..........................................
Lease prepayments...................................... 359 (8) ___ 351
Others (Note ii)....................................... (27) 90 (4) 59
------- ------- --------- --------
Net deferred tax assets................................ 97 726 (4) 819
======= ======== ========= ========
(Note 10)
|
Note:
(i) As of December 31, 2004, deferred tax assets of RMB 266 were distributed to Sinopec Group Company in connection with the Acquisition of Petrochemical and Catalyst Assets.
(ii) The amount recognized in equity represents the tax effect of change in fair value of available-for-sale securities, which was recognized directly in equity.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
22. LONG-TERM PREPAYMENTS AND OTHER ASSETS
Long-term prepayments and other assets primarily represent prepaid rental expenses over one year, computer software and catalysts.
23. SHORT-TERM AND LONG-TERM DEBTS AND LOANS FROM SINOPEC GROUP COMPANY AND ITS AFFILIATES
Short-term debt represent:
December 31,
------------
2005 2006
------ ------
RMB RMB
Third parties' debt
Short-term bank loans............................................................. 15,392 25,666
------ ------
Current portion of long-term bank loans........................................... 14,879 15,291
Current portion of long-term other loans.......................................... 26 27
Current portion of long-term bank loans of jointly controlled entities ........... 193 490
------ ------
15,098 15,808
------ ------
Corporate bonds (a)............................................................... 9,921 11,885
------ ------
40,411 53,359
------ ------
Loans from Sinopec Group Company and its affiliates
Short-term loans.................................................................. 2,705 4,849
Current portion of long-term loans................................................ 100 552
------ ------
2,805 5,401
------ ------
43,216 58,760
====== ======
|
The Group's weighted average interest rates on short-term loans were 4.0% and 5.2% as of December 31, 2005 and 2006, respectively.
As of December 31, 2005, the Company had standby credit facilities with several PRC financial institutions which allowed the Company to borrow up to RMB 130,000 on an unsecured basis, at 4.698%. As of December 31, 2005, the Company's outstanding borrowings under these facilities were RMB 2,000 and were included in short-term bank loans. These facilities expire at various dates in 2006 and contain no financial covenants.
As of December 31, 2006, the Company had standby credit facilities with several PRC financial institutions which allowed the Company to borrow up to RMB 130,000 on an unsecured basis, at 5.020%. As of December 31, 2006, the Company's outstanding borrowings under these facilities were RMB 4,420 and were included in short-term bank loans. These facilities expire at various dates in 2007 and contain no financial covenants.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
Long-term debt comprise:
Interest rate and final maturity December 31,
-------------------------------- -----------------
2005 2006
------ -------
RMB RMB
Third parties' debt
Long-term bank loans
Renminbi denominated Interest rates ranging from interest free to
6.9% per annum as of December 31, 2006 with
maturities through 2016 65,069 65,484
Japanese Yen denominated Interest rates ranging
from 2.6% to 5.8% per annum as of
December 31, 2006 with maturities
through 2024 3,394 2,713
US Dollar denominated Interest rates ranging
from interest free to 7.4% per annum as
of December 31, 2006 with
maturities through 2031 5,056 2,081
Euro denominated Fixed interest rate at 6.7% per annum as of
December 31, 2006 with maturities through 2010 117 101
Hong Kong Dollar denominated Floating rate at Hong Kong Prime Rate plus
0.8% to 1.1% per annum as of December 31,
2005 with maturities through 2007; Paid off
as of December 31, 2006 94 ___
--------- ---------
73,730 70,379
Long-term other loans
Renminbi denominated Interest rates ranging from interest free to
5.2% per annum as of December 31, 2006 with
maturities through 2009 170 3,098
US Dollar denominated Interest rates ranging from interest free to
2.0% per annum as of December 31, 2006 with
maturities through 2015 51 44
--------- --------
221 3,142
--------- --------
Total long-term banks and other loans carried forward 73,951 73,521
F-36
|
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
Long-term debt comprise:
Interest rate and final maturity December 31,
-------------------------------- -----------------
2005 2006
------ -------
RMB RMB
Total long-term banks and other loans brought forward 73,951 73,521
Corporate bonds
Renminbi denominated Fixed interest rate at 4.61% per annum as of December
31, 2006 with maturity in February 2014 (b) 3,500 3,500
------ ------
Long-term bank loans of jointly controlled entities
Renminbi denominated Floating rate at 90% of PBOC's
base lending rate per annum as of December
31, 2006 with maturities
through 2021 5,710 5,019
US Dollar denominated Floating rate at London
Interbank Offer Rate plus 0.4% to 0.7% per
annum as of December 31, 2006
with maturities through 2021 4,296 3,738
------- -------
10,006 8,757
------- -------
Total third parties' long-term debts 87,457 85,778
Less: Current portion (15,098) (15,808)
-------- --------
72,359 69,970
------- -------
Long-term loans from Sinopec Group Company and its affiliates
Renminbi denominated Interest rates ranging from interest free to 5.7%
per annum as of December 31, 2006 with maturities
through 2020 39,962 39,572
Long-term loans of jointly controlled entities from Sinopec Group
Company and its affiliates
Renminbi denominated Floating rate at 90% of PBOC's base lending rate
applicable to three-year tenor loan per annum as
of December 31, 2006 with maturities through 2021 71 75
Less: Current portion (100) (552)
------- -------
39,933 39,095
------- -------
112,292 109,065
======== ========
|
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
(a) The Company issued six-month corporate bonds of face value at RMB 10,000 to corporate investors in PRC debenture market on October 24, 2005, at a discounted value of RMB 98.75 per RMB 100 par value, with an effective yield at 2.54% per annum. The Company redeemed the corporate bonds in April 2006.
A subsidiary of the Company issued 270-day corporate bonds of face value at RMB 1,000 to corporate investors in PRC debenture market on February 23, 2006, at a discounted value of RMB 97.78 per RMB 100 par value with an effective yield of 3.07% per annum. The Company redeemed the corporate bonds in November 2006.
The Company issued 183-day corporate bonds of face value at RMB 10,000 to corporate investors in PRC debenture market on May 16, 2006, at a discounted value of RMB 98.68 per RMB 100 par value, with an effective yield of 2.67% per annum. The Company redeemed the corporate bonds in November 2006.
The Company issued 182-day corporate bonds of face value at RMB 10,000 to corporate investors in PRC debenture market on November 13, 2006, at a discounted value of RMB 98.43 per RMB 100 par value, with an effective yield of 3.20% per annum. The bonds mature in May 2007.
A subsidiary of the Company issued 365-day corporate bonds of face value at RMB 2,000 to corporate investors in the PRC debenture market on December 11, 2006 at par value, with an effective yield 3.83% per annum. The bonds mature in December 2007.
(b) The Company issued ten-year corporate bonds of RMB 3,500 to PRC citizens as well as PRC legal and non-legal persons on February 24, 2004, with a fixed interest rate at 4.61% per annum.
Third parties' loans of RMB 35 and RMB 171 as of December 31, 2005 and 2006, respectively, were secured by certain of the Group's property, plant and equipment. The net book value of property, plant and equipment of the Group pledged as security amounted to RMB 83 and RMB 288 as of December 31, 2005 and 2006, respectively.
The aggregate maturities of long-term debts and loans from Sinopec Group Company and its affiliates subsequent to December 31, 2006 are as follows:
RMB
2007............................................................. 16,360
2008............................................................. 26,529
2009............................................................. 20,061
2010............................................................. 10,834
2011............................................................. 5,310
Thereafter....................................................... 46,331
--------
125,425
========
|
Included in short-term and long-term debts and loans from Sinopec Group Company and its affiliates of the Group are the following amounts denominated in a currency other than the functional currency of the entity to which they relate:
December 31,
----------------
2005 2006
--------- --------
US Dollars................................. USD 2,158 USD 985
Japanese Yen............................... JPY 50,507 JPY 41,350
Euro ..................................... EUR 12 EUR 10
Hong Kong Dollars.......................... HKD 128 HKD 7,789
============= ===============
|
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
24. TRADE ACCOUNTS PAYABLE
Trade accounts payable are analyzed as follows:
December 31,
------------------
2005 2006
-------- -------
RMB RMB
Amounts due to third parties................................. 50,353 49,177
Amounts due to Sinopec Group Company and its affiliates...... 2,763 2,194
Amounts due to jointly controlled entities................... 650 750
Amounts due to associates.................................... 51 4
--------- --------
53,817 52,125
========= ========
|
Amounts due to Sinopec Group Company and its affiliates are repayable in accordance with normal commercial terms.
25. ACCRUED EXPENSES AND OTHER PAYABLES
Accrued expenses and other payables represent:
December 31,
------------------
2005 2006
-------- -------
RMB RMB
Amounts due to Sinopec Group Company and its affiliates.... 8,133 12,670
Accrued expenditures....................................... 19,660 23,266
Taxes other than income tax................................ 3,092 6,313
Receipts in advance........................................ 12,375 18,513
Advances from third parties................................ 1,226 1,356
Others..................................................... 5,037 6,938
------ -------
49,523 69,056
====== =======
|
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
26. SHARE CAPITAL
December 31,
------------------
2005 2006
-------- -------
RMB RMB
Registered, issued and fully paid
69,921,951,000 domestic listed A shares of RMB 1.00 each...... ___ 69,922
16,780,488,000 overseas listed H shares of RMB 1.00 each...... 16,780 16,780
67,121,951,000 domestic state-owned A shares of RMB 1.00 each. 67,122 ___
2,800,000,000 domestic listed A shares of RMB 1.00 each....... 2,800 ___
-------- -------
86,702 86,702
======== =======
|
The Company was established on February 25, 2000 with a registered capital of 68.8 billion domestic state-owned shares with a par value of RMB 1.00 each. Such shares were issued to Sinopec Group Company in consideration for the assets and liabilities of the Predecessor Operations transferred to the Company (Note 1).
Pursuant to the resolutions passed at an Extraordinary General Meeting held on July 25, 2000 and approvals from relevant government authorities, the Company is authorized to increase its share capital to a maximum of 88.3 billion shares with a par value of RMB 1.00 each and offer not more than 19.5 billion shares with a par value of RMB 1.00 each to investors outside the PRC. Sinopec Group Company is authorized to offer not more than 3.5 billion shares of its shareholdings in the Company to investors outside the PRC. The shares sold by Sinopec Group Company to investors outside the PRC would be converted into H shares.
In October 2000, the Company issued 15,102,439,000 H shares with a par value of RMB 1.00 each, representing 12,521,864,000 H shares and 25,805,750 American Depositary Shares ("ADSs", each representing 100 H shares), at prices of HK$ 1.59 per H share and US$ 20.645 per ADS, respectively, by way of a global initial public offering to Hong Kong and overseas investors. As part of the global initial public offering, 1,678,049,000 domestic state-owned ordinary shares of RMB 1.00 each owned by Sinopec Group Company were converted into H shares and sold to Hong Kong and overseas investors.
In July 2001, the Company issued 2.8 billion domestic listed A shares with a par value of RMB 1.00 each at RMB 4.22 by way of a public offering to natural persons and institutional investors in the PRC.
On September 25, 2006, the shareholders of listed A shares accepted the proposal offered by the shareholders of state-owned A shares whereby the shareholders of state-owned A shares agreed to transfer 2.8 state-owned A shares to shareholders of listed A shares for every 10 listed A shares they held, in exchange for the approval for the listing of all state-owned A shares. In October 2006, the 67,121,951,000 domestic state-owned A shares became listed A shares.
All A shares and H shares rank pari passu in all material aspects.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
27. RESERVES
2005 2006
--------- ---------
RMB RMB
Capital reserve (Note (a))
At January 1..................................................................... (19,217) (19,217)
Transfer from capital reserve to other reserves.................................. -- (2,373)
--------- --------
December 31...................................................................... (19,217) (21,590)
--------- --------
Share premium (Note (b))
At January 1 and December 31..................................................... 18,072 18,072
--------- --------
Revaluation reserve
At January 1..................................................................... 27,998 26,342
Revaluation surplus realized..................................................... (1,656) (1,590)
--------- --------
At December 31................................................................... 26,342 24,752
--------- --------
Statutory surplus reserve (Note (c))
At January 1..................................................................... 9,558 13,514
Appropriation.................................................................... 3,956 5,066
Statutory public welfare fund transferred to statutory surplus reserve........... -- 13,514
--------- --------
At December 31................................................................... 13,514 32,094
--------- --------
Statutory public welfare fund (Note (d))
At January 1..................................................................... 9,558 13,514
Appropriation.................................................................... 3,956 --
Statutory public welfare fund transferred to statutory surplus reserve........... -- (13,514)
--------- --------
At December 31................................................................... 13,514 --
--------- --------
Discretionary surplus reserve (Note (e))
At January 1 .................................................................... 7,000 7,000
Appropriation.................................................................... -- 20,000
--------- --------
At December 31................................................................... 7,000 27,000
--------- --------
Other reserves
At January 1, as adjusted........................................................ 547 987
Change in fair value of available-for-sale securities, net of deferred tax -- 34
Realization of deferred tax on land use rights (Note (f))........................ (5) (7)
Transfer from retained earnings to other reserves................................ 535 1,013
Transfer from capital reserve to other reserves.................................. -- 2,373
Distribution to Sinopec Group Company (Note (g))................................. (90) (631)
Consideration for Acquisition of Oil Production Plants (Note 1).................. -- (3,500)
--------- --------
At December 31................................................................... 987 269
--------- --------
F-41
|
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
2005 2006
--------- --------
RMB RMB
Retained earnings (Note (h))
At January 1..................................................................... 53,122 77,387
Net income attributable to equity shareholders of the Company.................... 41,455 53,912
Final dividend in respect of the previous financial years, approved and paid
during the year (Note (i)).................................................... (6,936) (7,803)
Interim dividend (Note (j))...................................................... (3,468) (3,468)
Appropriation.................................................................... (7,912) (25,066)
Revaluation surplus realized..................................................... 1,656 1,590
Realization of deferred tax on land use rights................................... 5 7
Transfer from retained earnings to other reserves................................ (535) (1,013)
--------- --------
At December 31................................................................... 77,387 95,546
--------- --------
137,599 176,143
========= ========
|
Notes:
(a) The capital reserve represents (i) the difference between the total amount of the par value of shares issued and the amount of the net assets transferred from Sinopec Group Company in connection with the Reorganization and (ii) the difference between the considerations paid over the amount of the net assets of certain entities and related operations acquired from Sinopec Group Company.
(b) The application of the share premium account is governed by Sections 168 and 169 of the PRC Company Law.
(c) According to the Company's Articles of Association, the Company is required to transfer 10% of its net income, as determined in accordance with the PRC Accounting Rules and Regulations, to statutory surplus reserve until the reserve balance reaches 50% of the registered capital. The transfer to this reserve must be made before distribution of a dividend to shareholders.
Statutory surplus reserve can be used to make good previous years' losses, if any, and may be converted into share capital by the issue of new shares to shareholders in proportion to their existing shareholdings or by increasing the par value of the shares currently held by them, provided that the balance after such issue is not less than 25% of the registered capital. During the years ended December 31, 2005 and 2006, the Company transferred RMB 3,956 and RMB 5,066, respectively, being 10% of the current year's net income determined in accordance with the PRC Accounting Rules and Regulations, to this reserve.
(d) Before January 1, 2006, according to the Company's Articles of Association, the Company was required to transfer 5% to 10% of its net income, as determined in accordance with the PRC Accounting Rules and Regulations, to the statutory public welfare fund. This fund could only be utilized on capital items for the collective benefits of the Company's employees such as the construction of dormitories, canteen and other staff welfare facilities. The transfer to this fund must be made before distribution of a dividend to shareholders.
Pursuant to the Company's Articles of Associations and a resolution passed at the Directors' meeting on August 26, 2005, the directors authorized to transfer RMB 1,804 for the six-month period ended June 30, 2005, being 10% of the net income for the six-month period ended June 30, 2005 determined in accordance with the PRC Accounting Rules and Regulations, to this fund.
The directors authorized the transfer of RMB 2,152, being 10% of the net income for the six-month period ended December 31, 2005 determined in accordance with the PRC Accounting Rules and Regulations, which was approved by the shareholders at the Annual General Meeting on May 24, 2006, to this fund.
According to the Company Law of the PRC which was revised on October 27, 2005, the Company is no longer required to make appropriation to the statutory public welfare fund commencing from January 1, 2006. Pursuant to the notice "Cai Qi [2006] No. 67" issued by the Ministry of Finance on March 15, 2006, the balance of this fund as of December 31, 2005 was transferred to the statutory surplus reserve.
(e) The directors authorized the transfer of RMB 20,000 for the year ended December 31, 2006, subject to the shareholders' approval at the Annual General Meeting, to the discretionary surplus reserve. There was no
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
transfer to this fund for the year ended December 31, 2005. The usage of the discretionary surplus reserve is similar to that of statutory surplus reserve.
(f) Effective January 1, 2002, land use rights which are included in lease prepayments are carried at historical cost. Accordingly, the surplus on the revaluation of land use rights credited to revaluation reserve previously, net of minority interests, was eliminated during the year. The effect of this change did not have a material impact on the Group's financial condition and results of operations in the periods prior to the change. As a result of the tax deductibility of the revaluation surplus, a deferred tax asset, net of minority interests, is created with a corresponding increase in other reserves.
(g) These represent net assets distributed to Sinopec Group Company for no monetary consideration. The net assets distributed to Sinopec Group Company during the year ended December 31, 2004 represent certain net assets retained, including certain property, plant and equipment with net book value of RMB 1,840 and certain construction in progress with net book value of RMB 232, by Sinopec Group Company in connection with the Acquisition of Petrochemical and Catalyst Assets. These transactions were recorded at historical cost and were reflected as changes in other reserves in the year the transaction occurred.
(h) According to the Company's Articles of Association, the amount of retained earnings available for distribution to equity shareholders of the Company is the lower of the amount determined in accordance with the PRC Accounting Rules and Regulations and the amount determined in accordance with IFRS. As of December 31, 2005 and 2006, the amounts of retained earnings available for distribution were RMB 20,591 and RMB 42,156, respectively, being the amount determined in accordance with IFRS. Pursuant to a resolution passed at the Directors' meeting on April 6, 2007, a final dividend in respect of the year ended December 31, 2006 of RMB 0.11 per share totaling RMB 9,537 was proposed for shareholders' approval at the Annual General Meeting. Final dividend of RMB 9,537 in respect of the year ended December 31, 2006 has not been not recognized as a liability as of the balance sheet date.
Subject to the relevant provisions of the PRC Company Law and the Company's Articles of Association, Sinopec Group Company may seek to influence the Company's determination of dividends with a view to satisfying Sinopec Group Company's cash flow requirements.
(i) Pursuant to the shareholders' approval at the Annual General Meeting on May 18, 2005, a final dividend of RMB 0.08 per share totaling RMB 6,936 in respect of the year ended December 31, 2004 was declared and paid on June 27, 2005.
Pursuant to the shareholders' approval at the Annual General Meeting on May 24, 2006, a final dividend of RMB 0.09 per share totaling RMB 7,803 in respect of the year ended December 31, 2005 was declared and paid on June 30, 2006.
(j) Pursuant to the Company's Articles of Association and a resolution passed at the Director's meeting on August 26, 2005, the directors authorized to declare an interim dividend for the year ended December 31, 2005 of RMB 0.04 per share totaling RMB 3,468, which was paid on September 30, 2005.
Pursuant to the Company's Articles of Association and a resolution passed at the Director's meeting on August 25, 2006, the directors authorized to declare an interim dividend for the year ended December 31, 2006 of RMB 0.04 per share totaling RMB 3,468, which was paid on September 28, 2006.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
28. COMMITMENTS AND CONTINGENT LIABILITIES
Operating lease commitments
The Group leases service stations and other equipment through non-cancellable operating leases. These operating leases do not contain provisions for contingent lease rentals. None of the rental agreements contain escalation provisions that may require higher future rental payments.
As of December 31, 2006, the future minimum lease payments under operating leases are as follows:
RMB
2007............................................ 4,711
2008............................................ 4,568
2009............................................ 4,531
2010............................................ 4,505
2011............................................ 4,450
Thereafter...................................... 122,406
---------
Total minimum lease payments.................... 145,171
=========
|
The Group's leasing arrangement impose no restrictions on dividends, additional debt and/or further leasing.
Capital commitments
As of December 31, 2006, the Group had capital commitments as follows:
RMB
The Group
Authorized and contracted for................... 113,192
Authorized but not contracted for............... 165,967
-------
279,159
=======
Jointly controlled entities
Authorized and contracted for................... 1,878
Authorized but not contracted for............... 5
-------
1,883
=======
|
These capital commitments relate to oil and gas exploration and development, refining and petrochemical production capacity expansion projects, the construction of service stations and oil depots, and capital contributions to the Group's investments and interest in associates.
Exploration and production licenses
Exploration licenses for exploration activities are registered with the Ministry of Land and Resources. The maximum term of the Group's exploration licenses is 7 years, and may be renewed twice within 30 days prior to expiration of the original term with each renewal being for a two-year term. The Group is obligated to make progressive annual minimum exploration investment relating to the exploration blocks in respect of which the license is issued. The Ministry of Land and Resources also issues production licenses to the Group on the basis of the reserve reports approved by relevant authorities. The maximum term of a full production license is 30 years unless a special dispensation was given by the State Council. The maximum term of production licenses issued to the Group is 55 years as a special dispensation was given to the Group by the State Council. The Group's production license is renewable upon application by the Group 30 days prior to expiration.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
The Group is required to make payments of exploration license fees and production right usage fees to the Ministry of Land and Resources annually which are expensed as incurred. Payments incurred were approximately RMB 189, RMB 208 and RMB 236 for the years ended December 31, 2004, 2005 and 2006, respectively.
Estimated future annual payments as of December 31, 2006 are as follows:
RMB
2007........................................... 156
2008........................................... 147
2009........................................... 67
2010........................................... 57
2011........................................... 10
Thereafter..................................... 226
------
Total payments................................. 663
======
|
Contingent liabilities
(a) The Company has been advised by its PRC lawyers that, except for liabilities constituting or arising out of or relating to the business assumed by the Company in the Reorganization, no other liabilities were assumed by the Company, and the Company is not jointly and severally liable for other debts and obligations incurred by Sinopec Group Company prior to the Reorganization.
(b) As of December 31, 2006, guarantees given to banks in respect of banking facilities granted to the parties below were as follows:
The Group monitors the conditions that are subject to the guarantees to identify whether it is probable that a loss has occurred, and recognize any such losses under guarantees when those losses are estimable. As of December 31, 2006, it is not probable that the Group will be required to make payments under the guarantees. Thus no liability has been accrued for a loss related to the Group's obligation under these guarantee arrangements.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
Environmental contingencies
To date, the Group has not incurred any significant expenditures for environmental remediation, is currently not involved in any environmental remediation, and has not accrued any amounts for environmental remediation relating to its operations. Under existing legislation, management believes that there are no probable liabilities that will have a material adverse effect on the financial position or operating results of the Group. The PRC government, however, has moved, and may move further towards more rigorous enforcement of applicable laws, and towards the adoption of more stringent environmental standards. Environmental liabilities are subject to considerable uncertainties which affect the Group's ability to estimate the ultimate cost of remediation efforts. These uncertainties include i) the exact nature and extent of the contamination at various sites including, but not limited to refineries, oil fields, service stations, terminals and land development areas, whether operating, closed or sold, ii) the extent of required cleanup efforts, iii) varying costs of alternative remediation strategies, iv) changes in environmental remediation requirements, and v) the identification of new remediation sites. The amount of such future cost is indeterminable due to such factors as the unknown magnitude of possible contamination and the unknown timing and extent of the corrective actions that may be required. Accordingly, the outcome of environmental liabilities under proposed or future environmental legislation cannot reasonably be estimated at present, and could be material. The Group paid normal routine pollutant discharge fees of approximately RMB 248, RMB 493 and RMB 1,637 for the years ended December 31, 2004, 2005 and 2006, respectively.
Legal contingencies
The Group is a defendant in certain lawsuits as well as the named party in other proceedings arising in the ordinary course of business. While the outcomes of such contingencies, lawsuits or other proceedings cannot be determined at present, management believes that any resulting liabilities will not have a material adverse effect on the financial position or operating results of the Group.
29. CONCENTRATION OF RISKS
Credit risk
The carrying amounts of cash and cash equivalents, time deposits with financial institutions, trade accounts and bills receivables, and other current assets, except for prepayments and deposits, represent the Group's maximum exposure to credit risk in relation to financial assets.
The majority of the Group's trade accounts receivable relate to sales of petroleum and chemical products to related parties and third parties operating in the petroleum and chemical industries. The Group performs ongoing credit evaluations of its customers' financial condition and generally does not require collateral on trade accounts receivable. The Group maintains an impairment loss for bad and doubtful debts and actual losses have been within management's expectations. No single customer accounted for greater than 10% of total revenues during the years ended December 31, 2004, 2005 and 2006.
No other financial assets carry a significant exposure to credit risk.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
Concentration of economic risk
The Group's operations may be adversely affected by significant political, economic, and social uncertainties in the PRC. In addition, the ability to negotiate and implement specific projects in a timely and favorable manner may be impacted by political considerations unrelated to or beyond the control of the Group. Although the PRC government has been pursuing economic reform policies for the past two decades, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered. There is also no guarantee that the PRC government's pursuit of economic reforms will be consistent or effective and as a result, changes in the rate or method of taxation, reduction in tariff protection and other import restrictions, and changes in state policies affecting the industries to which the Group sells its products, may have a negative effect on its operating results and financial conditions.
Currency risk
Substantially all of the revenue-generating operations of the Group are transacted in Renminbi, which is not fully convertible into foreign currencies. On January 1, 1994, the PRC government abolished the dual rate system and introduced a single rate of exchange as quoted by the People's Bank of China. However, the unification of the exchange rate does not imply convertibility of Renminbi into United States dollars or other foreign currencies. All foreign exchange transactions continue to take place either through the People's Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People's Bank of China. Approval of foreign currency payments by the People's Bank of China or other institutions requires submitting a payment application form together with suppliers' invoices, shipping documents and signed contracts.
With the authorization from the PRC government, the People's Bank of China announced that the PRC government reformed the exchange rate regime by moving into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies on July 21, 2005.
Other than the amounts as disclosed in Note 23, the amounts of other financial assets and liabilities of the Group are substantially denominated in the functional currency of respective entity of the Group.
Business risk
The Group conducts its principal operations in China and accordingly is subject to special considerations and significant risks not typically associated with investments in equity securities of the United States and Western European companies. These include risks associated with, among others, the political, economic and legal environment, influence of the State Council over substantially all aspects of its operations and competition in the oil and gas industry.
Interest rate risk
The interest rates and terms of repayment of short-term and long-term debt of the Group are disclosed in Note 23.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
30. RELATED PARTY TRANSACTIONS
Parties are considered to be related to the Group if the Group has the ability, directly or indirectly, to control or jointly control the party or exercise significant influence over the party in making financial and operating decisions, or vice versa, or where the Group and the party are subject to common control or common significant influence. Related parties may be individuals (being members of key management personnel, significant shareholders and/or their close family members) or other entities and include entities which are under the significant influence of related parties of the Group where those parties are individuals, and post-employment benefit plans which are for the benefit of employees of the Group or of any entity that is a related party of the Group.
(a) Transactions with Sinopec Group Company and its affiliates, associates and jointly controlled entities
The Group is part of a larger group of companies under Sinopec Group Company, which is owned by the PRC government, and has significant transactions and relationships with Sinopec Group Company and its affiliates. Because of these relationships, it is possible that the terms of these transactions are not the same as those that would result from transactions among unrelated parties.
The principal related party transactions with Sinopec Group Company and its affiliates, associates and jointly controlled entities, which were carried out in the ordinary course of business, are as follows:
Years ended December 31,
-------------------------
Note 2004 2005 2006
-------- -------- ------
RMB RMB RMB
Sales of goods........................................................... (i) 63,507 95,043 132,345
Purchases................................................................ (ii) 35,402 45,923 57,005
Transportation and storage............................................... (iii) 2,003 1,959 1,582
Exploration and development services..................................... (iv) 14,446 17,001 22,000
Production related services.............................................. (v) 9,036 10,653 12,340
Ancillary and social services............................................ (vi) 1,740 1,790 1,737
Operating lease charges.................................................. (vii) 3,297 3,213 3,826
Agency commission income................................................. (viii) 41 48 60
Intellectual property licence fee paid................................... (ix) 10 9 -
Interest received........................................................ (x) 59 52 52
Interest paid............................................................ (xi) 623 1,036 1,039
Net deposits placed with/ (withdrawn from) related parties............... (xii) 340 (67) (3,910)
Net loans obtained from/ (repaid to) related parties..................... (xiii) 3,548 (4,714) 1,758
|
The amounts set out in the table above in respect of each of the years in the three-year period ended December 31, 2006 represent the relevant costs to the Group as determined by the corresponding contracts with the related parties.
There were no guarantees given to banks by the Group in respect of banking facilities to Sinopec Group Company and its affiliates as of December 31, 2005 and 2006. Guarantees given to banks by the Group in respect of banking facilities to associates are disclosed in Note 28.
The directors of the Company are of the opinion that the above transactions with related parties were conducted in the ordinary course of business and on normal commercial terms or in accordance with the agreements governing such transactions, and this has been confirmed by the independent non-executive directors.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
Notes:
(i) Sales of goods represent the sale of crude oil, intermediate petrochemical products, petroleum products and ancillary materials.
(ii) Purchases represent the purchase of materials and utility supplies directly related to the Group's operations such as the procurement of raw and ancillary materials and related services, supply of water, electricity and gas.
(iii) Transportation and storage represent the cost for the use of railway, road and marine transportation services, pipelines, loading, unloading and storage facilities.
(iv) Exploration and development services comprise direct costs incurred in the exploration and development such as geophysical, drilling, well testing and well measurement services.
(v) Production related services represent ancillary services rendered in relation to the Group's operations such as equipment repair and general maintenance, insurance premium, technical research, communications, fire fighting, security, product quality testing and analysis, information technology, design and engineering, construction which includes the construction of oilfield ground facilities, refineries and chemical plants, manufacture of replacement parts and machinery, installation, project management and environmental protection.
(vi) Ancillary and social services represent expenditures for social welfare and support services such as educational facilities, media communication services, sanitation, accommodation, canteens, property maintenance and management services.
(vii) Operating lease charges represent the rental paid to Sinopec Group Company for operating leases in respect of land, buildings and equipment.
(viii) Agency commission income represents commission earned for acting as an agent in respect of sales of products and purchase of materials for certain entities owned by Sinopec Group Company.
(ix) Intellectual property license fee represents reimbursement paid to Sinopec Group Company for fees required to maintain the validity of certain licenses for trademarks, patents, technology and computer software.
(x) Interest received represents interest received from deposits placed with Sinopec Finance Company Limited, a finance company controlled by Sinopec Group Company. The applicable interest rate is determined in accordance with the prevailing saving deposit rate. The balance of deposits as of December 31, 2005 and 2006 were RMB 4,599 and RMB 689, respectively.
(xi) Interest paid represents interest charges on the loans and advances obtained from Sinopec Group Company and Sinopec Finance Company Limited.
(xii) Deposits were placed with / withdrawn from Sinopec Finance Company Limited.
(xiii) The Group obtained loans from / repaid loans to Sinopec Group Company and Sinopec Finance Company Limited.
In connection with the Reorganization, the Company and Sinopec Group Company entered into a number of agreements under which 1) Sinopec Group Company will provide goods and products and a range of ancillary, social and supporting services to the Group and 2) the Group will sell certain goods to Sinopec Group Company. The terms of these agreements are summarized as follows:
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
(a) The Company has entered into a non-exclusive Agreement for Mutual Provision of Products and Ancillary Services ("Mutual Provision Agreement") with Sinopec Group Company effective from January 1, 2000 in which Sinopec Group Company has agreed to provide the Group with certain ancillary production services, construction services, information advisory services, supply services and other services and products. While each of Sinopec Group Company and the Company is permitted to terminate the Mutual Provision Agreement upon at least six months notice, Sinopec Group Company has agreed not to terminate the agreement if the Group is unable to obtain comparable services from a third party. The pricing policy for these services and products provided by Sinopec Group Company to the Group is as follows:
o the government-prescribed price;
o where there is no government-prescribed price, the government-guidance price;
o where there is neither a government-prescribed price nor a government-guidance price, the market price; or
o where none of the above is applicable, the price to be agreed between the parties, which shall be based on a reasonable cost incurred in providing such services plus a profit margin not exceeding 6%.
(b) The Company has entered into a non-exclusive Agreement for Provision of Cultural and Educational, Health Care and Community Services with Sinopec Group Company effective from January 1, 2000 in which Sinopec Group Company has agreed to provide the Group with certain cultural, educational, health care and community services on the same pricing terms and termination conditions as agreed to in the above Mutual Provision Agreement.
(c) The Company has entered into a series of lease agreements with Sinopec Group Company to lease certain land and buildings at a rental of approximately RMB 3,241 and RMB 568, respectively, per annum. The Company and Sinopec Group Company can renegotiate the rental amount every three years for land and every year for buildings, however such amount cannot exceed the market price as determined by an independent third party. The Group has the option to terminate these leases upon six months notice to Sinopec Group Company.
(d) The Company has entered into agreements with Sinopec Group Company effective from January 1, 2000 under which the Group has been granted the right to use certain trademarks, patents, technology and computer software developed by Sinopec Group Company. The Group will reimburse Sinopec Group Company for fees required to maintain the validity of these licenses.
(e) The Company has entered into a service stations franchise agreement with Sinopec Group Company effective from January 1, 2000 under which its service stations and retail stores would exclusively sell the refined products supplied by the Group.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
During the year ended December 31, 2004, the Group acquired the equity interest of Sinopec Group Tianjin Petrochemical Company, Sinopec Group Luoyang Petrochemical General Plant, Zhongyuan Petrochemical Company Limited, Sinopec Group Guangzhou Petrochemical General Plant and certain catalyst plants from Sinopec Group Company for a total consideration of RMB 3,128 which was fully paid in 2005 (the "Acquisition of Petrochemical and Catalyst Assets"). In addition, the Group acquired certain individual assets and liabilities from Sinopec Group Company, including certain property, plant and equipment with net book value of RMB 1,883, for a total consideration payable of RMB 2,232. In connection with these acquisitions, the Group disposed of certain property, plant and equipment, with net book value of RMB 1,857, and certain other assets and liabilities, related to its oilfield downhole operation (the "Downhole Assets") to Sinopec Group Company for a consideration receivable of RMB 1,712, which approximated the net carrying value of the assets and liabilities, resulting in a net cash consideration of RMB 3,648 payable to Sinopec Group Company. This consideration was fully paid during the year ended December 31, 2005.
As discussed in Note 1, pursuant to the resolution passed at the Directors' meeting on October 10, 2006, the Group acquired equity interests in Sinopec Hainan for cash of RMB 2,990. Sinopec Hainan was previously wholly owned by Sinopec Group Company.
As discussed in Note 1, pursuant to the resolution passed at the Directors' meeting on December 6, 2006, the Group acquired the equity interests in Oil Production Plants from Sinopec Group Company, for a total consideration of RMB 3,500 payable in 2007.
Amounts due from / to Sinopec Group Company and its affiliates, associates and jointly controlled entities included in respective accounts caption are summarized as follows:
December 31,
--------------
2005 2006
----- -----
RMB RMB
Trade accounts receivable.................................................... 4,222 4,323
Prepaid expenses and other current assets...................................... 3,504 2,352
------- ------
Total amounts due from Sinopec Group Company and its affiliates, associates
and jointly controlled entities.............................................. 7,726 6,675
======= ======
Trade accounts payable......................................................... 3,464 2,948
Accrued expenses and other payables............................................ 8,133 12,670
Short-term loans and current portion of long-term loans from Sinopec Group
Company and its affiliates................................................... 2,805 5,401
Long-term loans excluding current portion from Sinopec Group Company and its
affiliates................................................................... 39,933 39,095
------- ------
Total amounts due to Sinopec Group Company and its affiliates, associates and
jointly controlled entities.................................................. 54,335 60,114
======= ======
|
Amounts due from / to Sinopec Group Company and its affiliates, associates and jointly controlled entities, other than short-term loans and long-term loans, bear no interest, are unsecured and are repayable in accordance with normal commercial terms. The terms and conditions associated with short-term loans and long-term loans payable to Sinopec Group Company and its affiliates are set out in Note 23.
As of and for the year ended December 31, 2006, no impairment losses for bad and doubtful debts were recorded in respect of amounts due from Sinopec Group Company and its affiliates, associates and jointly controlled entities.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
(b) Key management personnel emoluments
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly, including directors and supervisors of the Group. The key management personnel compensations are as follows:
Years ended December 31,
--------------------------
2004 2005 2006
---- ---- ----
RMB'000 RMB'000 RMB'000
Short-term employee benefits............ 3,997 2,868 4,562
Retirement scheme contributions......... 202 115 184
---- ---- ----
4,199 2,983 4,746
===== ===== =====
|
Total emoluments are included in "personnel expenses" as disclosed in Note 5.
(c) Contributions to defined contribution retirement plans
The Group participates in various defined contribution retirement plans organized by municipal and provincial governments for its staff. The details of the Group's employee benefits plan are disclosed in Note 31. As of December 31, 2006, there was no material outstanding contribution to post-employment benefit plans.
(d) Transactions with other state-controlled entities in the PRC
The Group is a state-controlled energy and chemical enterprise and operates in an economic regime currently dominated by entities directly or indirectly controlled by the PRC government through its government authorities, agencies, affiliations and other organizations (collectively referred as "state-controlled entities").
Apart from transactions with Sinopec Group Company and its affiliates, the Group has transactions with other state-controlled entities include but not limited to the following:
o sales and purchase of goods and ancillary materials;
o rendering and receiving services;
o lease of assets;
o depositing and borrowing money; and
o use of public utilities.
These transactions are conducted in the ordinary course of the Group's business on terms comparable to those with other entities that are not state-controlled. The Group has established its procurement policies, pricing strategy and approval process for purchases and sales of products and services which do not depend on whether the counterparties are state-controlled entities or not.
Having considered the transactions potentially affected by related party relationships, the entity's pricing strategy, procurement policies and approval processes, and the information that would be necessary for an understanding of the potential effect of the related party relationship on the financial statements, the directors are of the opinion that the following related party transactions require disclosure of numeric details:
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
(i) Transactions with other state-controlled energy and chemical companies
The Group's major domestic suppliers of crude oil and refined petroleum products are China National Petroleum Corporation and its subsidiaries ("CNPC Group") and China National Offshore Oil Corporation and its subsidiaries ("CNOOC Group"), which are state-controlled entities.
During the years ended December 31, 2004, 2005 and 2006, the aggregate amount of crude oil purchased by refining segment from CNPC and CNOOC Group and refined petroleum purchased by marketing and distribution segment from CNPC Group was RMB 41,652, RMB 58,957 and RMB 60,863, respectively.
The aggregate amounts due from / to CNPC Group and CNOOC Group are summarized as follows:
December 31,
-----------------
2005 2006
----- -----
RMB RMB
Trade accounts receivable................................. 213 111
Prepaid expenses and other current assets................. 120 115
----- -----
Total amounts due from CNPC Group and CNOOC Group......... 333 226
===== =====
Trade accounts payable....................................1,237 1,231
Accrued expenses and other payables....................... 127 7
----- -----
Total amounts due to CNPC Group and CNOOC Group...........1,364 1,238
===== =====
|
(ii) Transactions with state-controlled banks
The Group deposits its cash with several state-controlled banks in the PRC. The Group also obtains short-term and long-term loans from these banks in the ordinary course of business. The interest rates of the bank deposits and loans are regulated by the PBOC. The Group's interest income from and interest expense to these state-controlled banks in the PRC are as follows:
Years ended December 31,
---------------------------
2004 2005 2006
---- ---- ----
RMB RMB RMB
Interest income................ 315 323 458
====== ====== ======
Interest expense............... 3,786 4,878 6,163
====== ====== ======
|
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
The amounts of cash deposited at and loans from state-controlled banks in the PRC are summarized as follows:
December 31,
------------------
2005 2006
---- ----
RMB RMB
Cash and cash equivalents............................................ 9,418 7,366
Time deposits with financial institutions............................ 964 615
------ ------
Total deposits at state-controlled banks in the PRC.................. 10,382 7,981
====== ======
Short-term loans and current portion of long-term loans.............. 27,891 34,803
Long-term loans excluding current portion of long-term loans......... 67,641 62,346
------ ------
Total loans from state-controlled banks in the PRC................... 95,532 97,149
====== ======
|
31. EMPLOYEE BENEFITS PLAN
As stipulated by the regulations of the PRC, the Group participates in various defined contribution retirement plans organized by municipal and provincial governments for its staff. The Group is required to make contributions to the retirement plans at rates ranging from 17.0% to 30.0% of the salaries, bonuses and certain allowances of its staff. A member of the plan is entitled to a pension equal to a fixed proportion of the salary prevailing at his or her retirement date. The Group has no other material obligation for the payment of pension benefits associated with these plans beyond the annual contributions described above. The Group's contributions for the years ended December 31, 2004, 2005 and 2006 were RMB 2,245, RMB 2,273 and RMB 2,270, respectively.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
32. SEGMENTAL REPORTING
The Group has five operating segments as follows:
(i) Exploration and production, which explores and develops oil fields, produces crude oil and natural gas and sells such products to the refining segment of the Group and external customers.
(ii) Refining, which processes and purifies crude oil, that is sourced from the exploration and production segment of the Group and external suppliers, and manufactures and sells petroleum products to the chemicals and marketing and distribution segments of the Group and external customers.
(iii) Marketing and distribution, which owns and operates oil depots and service stations in the PRC, and distributes and sells refined petroleum products (mainly gasoline and diesel) in the PRC through wholesale and retail sales networks.
(iv) Chemicals, which manufactures and sells petrochemical products, derivative petrochemical products and other chemical products mainly to external customers.
(v) Corporate and others, which largely comprise the trading activities of the import and export companies of the Group and research and development undertaken by other subsidiaries.
The segments were determined primarily because the Group manages its exploration and production; refining; marketing and distribution; chemicals; and corporate and others businesses separately. The reportable segments are each managed separately because they manufacture and/or distribute distinct products with different production processes and due to their distinct operating and gross margin characteristics. In view of the fact that the Company and its subsidiaries operate mainly in the PRC, no geographical segment information is presented.
The Group evaluates the performance and allocates resources to its operating segments on an operating income basis, without considering the effects of finance costs or investment income. The accounting policies of the Group's segments are the same as those described in the principal accounting policies (see Note 2). Corporate administrative costs and assets are not allocated to the operating segments; instead, operating segments are billed for direct corporate services. Inter-segment transfer pricing is based on cost plus an appropriate margin, as specified by the Group's policy.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
Reportable information on the Group's business segments is as follows:
Years ended December 31,
--------------------------
2004 2005 2006
-------- --------- ---------
RMB RMB RMB
Sales of goods
Exploration and production
External sales..................... 16,091 20,006 23,355
Inter-segment sales................ 60,053 84,423 105,656
-------- --------- ---------
76,144 104,429 129,011
Refining
External sales..................... 63,388 82,810 99,201
Inter-segment sales................ 289,699 386,456 471,571
-------- --------- ---------
353,087 469,266 570,772
Marketing and distribution
External sales..................... 342,840 459,292 588,270
Inter-segment sales................ 2,831 3,172 4,601
-------- --------- ---------
345,671 462,464 592,871
Chemicals
External sales..................... 126,013 160,783 209,135
Inter-segment sales................ 12,510 12,199 12,299
-------- --------- ---------
138,523 172,982 221,432
Corporate and others
External sales..................... 48,986 76,368 124,693
Inter-segment sales................ 32,046 44,897 136,775
-------- --------- ---------
81,032 121,265 261,468
Elimination of inter-segment sales...... (397,139) (531,147) (730,902)
-------- --------- ---------
Total sales of goods.................... 597,318 799,259 1,044,652
-------- --------- ---------
Other operating revenues
Exploration and production.............. 9,294 10,756 14,155
Refining................................ 5,186 5,421 4,590
Marketing and distribution.............. 755 1,358 687
Chemicals............................... 6,170 5,841 6,661
Corporate and others.................... 1,192 637 657
-------- --------- ---------
Total other operating revenues.......... 22,597 24,013 26,750
-------- --------- ---------
Other income
Refining................................ -- 9,415 5,000
-------- --------- ---------
Total other income...................... -- 9,415 5,000
-------- --------- ---------
619,915 832,687 1,076,402
======== ========= =========
|
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
Years ended December 31,
--------------------------
2004 2005 2006
-------- --------- ---------
RMB RMB RMB
Operating income by segment
- Exploration and production............ 26,397 48,334 63,182
- Refining.............................. 4,982 (3,536) (25,298)
- Marketing and distribution............ 14,716 10,350 30,234
- Chemicals............................. 18,721 14,296 17,234
- Corporate and others.................. (1,925) (1,198) (1,532)
-------- --------- ---------
Total operating income..................... 62,891 68,246 83,820
-------- --------- ---------
Income/(loss) from associates
- Exploration and production............ 447 326 233
- Refining.............................. 58 23 58
- Marketing and distribution............ 302 241 404
- Chemicals............................. (164) 1 20
- Corporate and others.................. 154 266 232
-------- --------- ---------
Aggregate income from associates .......... 797 857 947
-------- --------- ---------
Finance costs
Interest expense...................... (4,583) (5,926) (7,437)
Interest income....................... 378 384 555
Foreign exchange losses............... (223) (79) (153)
Foreign exchange gains............... 61 996 935
-------- --------- ---------
Net finance costs.......................... (4,367) (4,625) (6,100)
Investment income.......................... 121 178 256
-------- --------- ---------
Income before income tax................... 59,442 64,656 78,923
Income tax.................................(18,091) (19,880) (23,515)
-------- --------- ---------
Net income................................. 41,351 44,776 55,408
======== ========= =========
|
Assets and liabilities dedicated to a particular segment's operations are included in that segment's total assets and liabilities. Assets which benefit more than one segment or are considered to be corporate assets are not allocated. "Unallocated assets" consists primarily of cash and cash equivalents, time deposits with financial institutions, investments and deferred tax assets. "Unallocated liabilities" consists primarily of short-term and long-term debts, loans from Sinopec Group Company and its affiliates, income tax payable, deferred tax liabilities and other liabilities.
Interest in and income from associates are included in the segments in which the associates operate. Information on associates is included in Note 19. Additions to long-lived assets by operating segment are included in Notes 15 and 16.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
Years ended December 31,
--------------------------
2004 2005 2006
-------- --------- ---------
RMB RMB RMB
Assets
Segment assets
- Exploration and production.............112,720 127,471 155,043
- Refining...............................112,963 142,776 163,898
- Marketing and distribution............. 93,722 102,935 108,053
- Chemicals..............................105,032 115,942 125,051
- Corporate and others................... 17,574 20,570 22,641
-------- --------- ---------
Total segment assets........................442,011 509,694 574,686
-------- --------- ---------
Interest in associates
- Exploration and production............. 1,396 1,494 1,063
- Refining............................... 319 571 1,117
- Marketing and distribution............. 2,410 4,298 4,692
- Chemicals.............................. 4,315 1,092 1,245
- Corporate and others................... 1,787 1,812 3,500
-------- --------- ---------
Aggregate interest in associates............ 10,227 9,267 11,617
-------- --------- ---------
Unallocated assets.......................... 28,600 30,079 25,487
-------- --------- ---------
Total assets................................480,838 549,040 611,790
======== ========= =========
Liabilities
Segment liabilities
- Exploration and production............. 17,158 20,262 30,082
- Refining............................... 28,170 27,311 30,162
- Marketing and distribution............. 23,419 23,713 27,090
- Chemicals.............................. 16,528 19,442 19,619
- Corporate and others................... 15,547 35,855 35,913
-------- --------- ---------
Total segment liabilities...................100,822 126,583 142,866
-------- --------- ---------
Unallocated liabilities.....................154,721 167,477 184,135
-------- --------- ---------
Total liabilities...........................255,543 294,060 327,001
======== ========= =========
|
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
Segment capital expenditure is the total cost incurred during the year to acquire segment assets that are expected to be used for more than one year.
Years ended December 31,
--------------------------
2004 2005 2006
-------- --------- ---------
RMB RMB RMB
Capital expenditure
Exploration and production............................................ 21,234 23,095 31,734
Refining.............................................................. 15,319 19,100 21,969
Marketing and distribution............................................ 16,678 10,954 11,319
Chemicals............................................................. 11,025 9,386 12,629
Corporate and others.................................................. 1,550 1,164 2,170
-------- --------- ---------
65,806 63,699 79,821
======== ========= =========
Capital expenditure of Oil Production Plants
Exploration and production.............................. 642 1,612 3,362
======== ========= =========
Capital expenditure of jointly controlled entities
Exploration and production............................................ 1,323 772 102
Chemicals............................................................. 5,178 1,830 160
-------- --------- ---------
6,501 2,602 262
======== ========= =========
Depreciation, depletion and amortization
Exploration and production............................................ 12,217 11,118 12,945
Refining.............................................................. 7,730 7,055 7,733
Marketing and distribution............................................ 2,759 3,026 3,452
Chemicals............................................................. 9,325 9,697 9,697
Corporate and others.................................................. 462 722 408
-------- --------- ---------
32,493 31,618 34,235
======== ========= =========
Impairment losses on long-lived assets recognized
in consolidated statements of income
Exploration and production............................................ 98 60 552
Refining.............................................................. 14 ___ ___
Marketing and distribution............................................ 1,769 366 23
Chemicals............................................................. 2,038 1,425 250
-------- --------- ---------
3,919 1,851 825
======== ========= =========
Impairment losses on revalued long-lived assets recognized in equity
attributable to equity shareholders of the Company
Chemicals............................................................. 709 -- --
======== ========= =========
|
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
33. PRINCIPAL SUBSIDIARIES
Percentage
Percentage of of equity
equities held by the
Particulars of issued Type of held by the Company's
Name of company and paid up capital Legal Entity Company subsidiaries Principal activities
--------------- --------------------- ------------ ------- ------------ --------------------
% %
China Petrochemical International RMB 1,663 Limited 100.00 __ Trading of crude oil and
Company Limited company petrochemical products
Sinopec Sales Company Limited RMB 1,700 Limited 100.00 __ Marketing and distribution
company of refined petroleum
products
Sinopec Zhenhai Refining and Chemical RMB 2,524 Limited 100.00 __ Manufacturing of
Company Limited (Note 17) company intermediate
petrochemical products
and petroleum products
Sinopec Qilu Petrochemical Company RMB 1,950 Limited 99.76 __ Manufacturing of
intermediate petrochemical
products and petroleum
products
Sinopec Yangzi Petrochemical Company RMB 2,330 Limited 99.81 __ Manufacturing of
intermediate petrochemical
products and petroleum
products
Sinopec Zhongyuan Petroleum Company RMB 875 Limited 99.35 __ Exploration and production
Limited (Note 17) company of crude oil and natural
gas
Shengli Oil Field Dynamic Company RMB 364 Limited 97.71 __ Exploration and production
Limited (Note 17) company of crude oil and
distribution of
petrochemical products
Sinopec Fujian Petrochemical Company RMB 2,253 Limited 50.00 __ Manufacturing of plastics,
Limited (i) company intermediate petrochemical
products and petroleum
products
Sinopec Shanghai Petrochemical RMB 7,200 Limited 55.56 __ Manufacturing of synthetic
Company Limited company fibres, resin and plastics,
intermediate petrochemical
products and petroleum
products
Sinopec Shijiazhuang Refining- RMB 1,154 Limited 79.73 __ Manufacturing of
Chemical Company Limited company intermediate petrochemical
products and petroleum
products
Sinopec Kantons Holdings Limited HK$ 104 Limited __ 72.40 Trading of crude oil and
company petroleum products
Sinopec Wuhan Petroleum Group RMB 147 Limited 46.25 __ Marketing and distribution
Company Limited (i) company of refined petroleum
products
Sinopec Yizheng Chemical Fibre RMB 4,000 Limited 42.00 __ Production and sale of
Company Limited (i) company polyester chips and
polyester fibres
Sinopec Zhongyuan Petrochemical RMB 2,400 Limited 93.51 __ Manufacturing of chemical
Company Limited company products
Sinopec Shell (Jiangsu) Petroleum RMB 830 Limited 60.00 __ Marketing and distribution
Marketing Company Limited company of refined petroleum
products
BP Sinopec (Zhejiang) Petroleum RMB 800 Limited 60.00 __ Marketing and distribution
Company Limited company of refined petroleum
products
Sinopec Qingdao Refining and Chemical RMB 800 Limited 85.00 __ Manufacturing of
Company Limited company intermediate petrochemical
products and petroleum
products
Sinopec Hainan Refining and Chemical RMB 3,986 Limited 75.00 __ Manufacturing of
Company Limited company intermediate petrochemical
products and petroleum
products
|
Except for Sinopec Kantons Holdings Limited, which is incorporated in Bermuda, all of the above principal subsidiaries are incorporated in the PRC.
(i) The Group consolidated the results of the entity because the Group controlled the board of this entity and had the power to govern its financial and operating policies.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
(ii) During the year ended December 31, 2006, the Company disposed the 211,423,651 A shares, representing approximately 40.72% of the issued share capital, in Sinopec Wuhan Phoenix Company Limited pursuant to an agreement entered into with a third party. No significant disposal gain or loss was recorded from this transaction.
34. FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial assets of the Group include cash and cash equivalents, time deposits with financial institutions, investments, trade accounts receivable, bills receivable, amounts due from Sinopec Group Company and its affiliates, advances to third parties, amounts due from associates, and other receivables. Financial liabilities of the Group include bank and other loans, loans from Sinopec Group Company and its affiliates, trade accounts payable, bills payable, amounts due to Sinopec Group Company and its affiliates, receipts in advance, and advances from third parties. The Group has no derivative instruments that are designated and qualified as hedging instruments as of December 31, 2005 and 2006.
The disclosures of the fair value estimates, methods and assumptions, set forth below for the Group's financial instruments, are made to comply with the requirements of IAS 32 and IAS 39 and should be read in conjunction with the Group's consolidated financial statements and related notes. The estimated fair value amounts have been determined by the Group using market information and valuation methodologies considered appropriate. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Group could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The Group has not developed an internal valuation model necessary to make the estimate of the fair value of loans from Sinopec Group Company and its affiliates as it is not considered practicable to estimate their fair value because the cost of obtaining discount and borrowing rates for comparable borrowings would be excessive based on the Reorganization of the Group, its existing capital structure and the terms of the borrowings.
The following table presents the carrying amount and fair value of the Group's long-term indebtedness other than loans from Sinopec Group Company and its affiliates as of December 31, 2005 and 2006:
December 31,
------------
2005 2006
---- ----
RMB RMB
Carrying amount......................... 87,457 85,778
Fair value.............................. 87,461 85,376
|
The fair value of long-term indebtedness is estimated by discounting future cash flows thereon using current market interest rates offered to the Group for debts with substantially the same characteristics and maturities.
Unquoted equity securities are individually and in the aggregate not material to the Group's financial condition or results of operations for all periods presented. There are no listed market prices for such interests in the PRC and, accordingly, a reasonable estimate of fair value could not be made without incurring excessive costs.
The fair values of all other financial instruments approximate their carrying amounts due to the nature or short-term maturity of these instruments.
35. ACCOUNTING ESTIMATES AND JUDGEMENTS
The Group's financial condition and results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of the financial statements. The Group bases the assumptions and estimates on historical experience and on various other assumptions that the Group believes to be reasonable
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
and which form the basis for making judgments about matters that are not readily apparent from other sources. On an on-going basis, management evaluates its estimates. Actual results may differ from those estimates as facts, circumstances and conditions change.
The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing the financial statements. The principal accounting policies are set forth in Note 2. The Group believes the following critical accounting policies involve the most significant judgments and estimates used in the preparation of the financial statements.
Oil and gas properties and reserves
The accounting for the exploration and production's oil and gas activities is subject to accounting rules that are unique to the oil and gas business. There are two methods to account for oil and gas business activities, the successful efforts method and the full cost method. The Group has elected to use the successful efforts method. The successful efforts method reflects the volatility that is inherent in exploring for mineral resources in that costs of unsuccessful exploratory efforts are charged to expense as they are incurred. These costs primarily include dry hole costs, seismic costs and other exploratory costs. Under the full cost method, these costs are capitalized and written-off or depreciated over time.
Engineering estimates of the Group's oil and gas reserves are inherently imprecise and represent only approximate amounts because of the subjective judgments involved in developing such information. There are authoritative guidelines regarding the engineering criteria that have to be met before estimated oil and gas reserves can be designated as "proved". Proved and proved developed reserves estimates are updated at least annually and take into account recent production and technical information about each field. In addition, as prices and cost levels change from year to year, the estimate of proved and proved developed reserves also changes. This change is considered a change in estimate for accounting purposes and is reflected on a prospective basis in related depreciation rates.
Despite the inherent imprecision in these engineering estimates, these estimates are used in determining depreciation expense and impairment expense. Depreciation rates are determined based on estimated proved developed reserve quantities (the denominator) and capitalized costs of producing properties (the numerator). Producing properties' capitalized costs are amortized based on the units of oil or gas produced.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
Impairment for long lived assets
If circumstances indicate that the net book value of a long-lived asset may not be recoverable, the asset may be considered "impaired", and an impairment loss may be recognized in accordance with IAS 36 "Impairment of Assets". The carrying amounts of long-lived assets are reviewed periodically in order to assess whether the recoverable amounts have declined below the carrying amounts. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to recoverable amount. For goodwill, the recoverable amount is estimated annually. The recoverable amount is the greater of the net selling price and the value in use. It is difficult to precisely estimate selling price because quoted market prices for the Group's assets or cash-generating units are not readily available. In determining the value in use, expected cash flows generated by the asset or the cash-generating unit are discounted to their present value, which requires significant judgment relating to level of sale volume, selling price and amount of operating costs. The Group uses all readily available information in determining an amount that is a reasonable approximation of recoverable amount, including estimates based on reasonable and supportable assumptions and projections of sale volume, selling price and amount of operating costs.
Depreciation
Property, plant and equipment, other than oil and gas properties, are depreciated on a straight-line basis over the estimated useful lives of the assets, after taking into account the estimated residual value. The Group reviews the estimated useful lives of the assets regularly in order to determine the amount of depreciation expense to be recorded during any reporting period. The useful lives are based on the Group's historical experience with similar assets and taking into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates.
Impairment for bad and doubtful debts
The Group estimates impairment losses for bad and doubtful debts resulting from the inability of the customers to make the required payments. The Group bases the estimates on the aging of the accounts receivable balance, customer credit-worthiness, and historical write-off experience. If the financial condition of the customers were to deteriorate, actual write-offs would be higher than estimated.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
36. POSSIBLE IMPACT OF AMENDMENTS, NEW STANDARDS AND INTERPRETATIONS ISSUED BUT NOT YET EFFECTIVE FOR THE ANNUAL ACCOUNTING PERIOD ENDED DECEMBER 31, 2006
Up to the date of issue of these financial statements, the IASB has issued the following amendments, new standards and interpretations which are not yet effective for the annual accounting period ended December 31, 2006 and which have not been adopted in these financial statements:
Effective for accounting
period beginning on or after
IFRS 7, Financial instruments: disclosures January 1, 2007
IFRS 8, Operating Segments January 1, 2009
IFRIC 7, Applying the restatement approach under IAS 29, Financial March 1, 2006
reporting in hyperinflationary economies
IFRIC 8, Scope of IFRS 2 May 1, 2006
IFRIC 9, Reassessment of Embedded Derivatives June 1, 2006
IFRIC 10, Interim financial reporting and impairment November 1, 2006
IFRIC 11, IFRS 2 - Group and treasury share transaction March 1, 2007
IFRIC 12, Service concession arrangements January 1, 2008
Amendment to IAS 1, Presentation of financial statements: capital
disclosures January 1, 2007
|
The Group is in the process of making an assessment of what the impact of these amendments, new standards and new interpretations is expected to be in the period of initial application. Up to the date of issuance of these financial statements, the Group believes that the adoption of IFRIC 7, IFRIC 8, IFRIC 9, IFRIC 10, IFRIC 11, IFRIC 12 and the amendment to IAS 1 are not applicable to any of the Group's operations and that the adoption of the remainder of the above new standards and new interpretations is unlikely to have a significant impact on the Group's results of operations and financial position.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
37. SIGNIFICANT DIFFERENCES BETWEEN IFRS AND US GAAP
The Group's accounting policies conform with IFRS which differ in certain significant respects from accounting principles generally accepted in the United States of America ("US GAAP"). Information relating to the nature and effect of such differences are set out below.
(a) Foreign exchange gains and losses
In accordance with IFRS, foreign exchange differences on funds borrowed for construction are capitalized as property, plant and equipment to the extent that they are regarded as an adjustment to interest costs during the construction period. Under US GAAP, all foreign exchange gains and losses on foreign currency debt are included in current earnings. For the years presented herein, the US GAAP adjustments represent the amortization effect of such originating adjustments described above. Accordingly, the carrying amount of property, plant and equipment under IFRS was higher than the amount under US GAAP by RMB 241 and RMB 195 as of December 31, 2005 and 2006, respectively.
(b) Capitalization of property, plant and equipment
In the years prior to those presented herein, certain adjustments arose between IFRS and US GAAP with regard to the capitalization of interest and pre-production results under IFRS that were reversed and expensed under US GAAP. For the years presented herein, there were no further additions related to the capitalization of interest and pre-production results under IFRS and the US GAAP adjustments represent the amortization effect of such originating adjustments described above. The amounts were fully amortized as of December 31, 2004. Accordingly, there was no difference in the carrying amount of property, plant and equipment under IFRS and US GAAP as of December 31, 2005 and 2006, respectively.
(c) Revaluation of property, plant and equipment
As required by the relevant PRC regulations with respect to the Reorganization, the property, plant and equipment of the Group were revalued at September 30, 1999. In addition, the property, plant and equipment of Sinopec National Star, Sinopec Maoming, Refining Assets, Petrochemical and Catalyst Assets and Oil Production Plants were revalued at December 31, 2000, June 30, 2003, October 31, 2003, June 30, 2004 and June 30, 2006, respectively, in connection with the acquisitions of Sinopec National Star, Sinopec Maoming, Refining Assets, Petrochemical and Catalyst Assets and Oil Production Plants. Under IFRS, such revaluations result in an increase in equity with respect to the increase in carrying amount of certain property, plant and equipment above their historical cost bases and a charge to income with respect to the reduction in carrying amount of certain property, plant and equipment below their historical cost bases.
Under US GAAP, property, plant and equipment are stated at their historical cost less accumulated depreciation. However, as a result of the tax deductibility of the net revaluation surplus, a deferred tax asset related to the reversal of the revaluation surplus is created under US GAAP with a corresponding increase in equity.
In addition, under IFRS, on disposal of a revalued asset, the related revaluation surplus is transferred from the revaluation reserve to retained earnings. Under US GAAP, the gain and loss on disposal of an asset is determined with reference to the asset's historical carrying amount and included in current earnings.
Accordingly, the carrying amount of property, plant and equipment under IFRS was higher than the amount under US GAAP by RMB 1,838 and RMB 86 as of December 31, 2005 and 2006, respectively.
(d) Exchange of assets
During 2002, the Company and Sinopec Group Company entered into an asset swap transaction. Under IFRS, the cost of property, plant and equipment acquired in an exchange for a dissimilar item of property, plant and equipment is measured at fair value. Under US GAAP, as the exchange of assets was between entities under common control, the assets received from Sinopec Group Company are measured at historical cost. The
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
difference between the historical cost of the net assets transferred and the net assets received is accounted for as an equity transaction. For the years presented herein, the US GAAP adjustments represent the amortization effect of such originating adjustments described above. Accordingly, the carrying amount of property, plant and equipment under IFRS was higher than the amount under US GAAP by RMB 509 and RMB 486 as of December 31, 2005 and 2006, respectively.
(e) Reversal of impairment of long-lived assets
Under IFRS, impairment charges are recognized when a long-lived asset's carrying amount exceeds the higher of an asset's fair value less costs to sell and value in use, which incorporates discounting the asset's estimated future cash flows.
Under US GAAP, determination of the recoverability of a long-lived asset held for use is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the sum of the expected future cash flows is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of an impairment loss for a long-lived asset is based on the difference between the asset's carrying value and the fair value of the asset.
In addition, under IFRS, a subsequent increase in the recoverable amount of an asset is reversed to the consolidated statements of income to the extent that an impairment loss on the same asset was previously recognized as an expense when the circumstances and events that led to the write-down or write-off cease to exist. The reversal is reduced by the amount that would have been recognized as depreciation had the write-off not occurred. Under US GAAP, an impairment loss establishes a new cost basis for the impaired asset and the new cost basis should not be adjusted subsequently other than for further impairment losses.
For the years presented herein, the US GAAP adjustment represents the effect of reversing the recovery of previous impairment charges recorded under IFRS. Accordingly, the carrying amount of property, plant and equipment under IFRS was higher than the amount under US GAAP by RMB 456 and RMB 418 as of December 31, 2005 and 2006, respectively.
(f) Capitalized interest on investment in associates
Under IFRS, an investment accounted for by the equity method is not considered a qualifying asset for which interest is capitalized. Under US GAAP, an investment accounted for by the equity method while the investee has activities in progress necessary to commence its planned principal operations, provided that the investee's activities include the use of funds to acquire qualifying assets for its operations, is a qualifying asset for which interest is initially capitalized and subsequently amortized when the operation of the qualifying assets begin. Accordingly, the carrying amount of the investment in associates under IFRS was lower than the amount under US GAAP by RMB 486 and RMB 446 as of December 31, 2005 and 2006, respectively.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
(g) Goodwill
Under IFRS, with reference to IFRS 3, "Business Combination", goodwill arising from a business combination for which the purchase agreement date is on or after March 31, 2004 is not amortized, or goodwill arising from a business combination for which the purchase agreement date was before March 31, 2004 is no longer amortized from the first annual reporting period beginning on or after March 31, 2004. Instead, goodwill is tested for impairment annually.
Under US GAAP, with reference to Statement of Financial Accounting Standards No.142, "Goodwill and Other Intangible Assets" ("SFAS No.142"), goodwill is no longer amortized beginning January 1, 2002. Instead, goodwill is reviewed for impairment at least annually.
As a result, there is no difference in respect of goodwill amortization effective January 1, 2005. Accordingly, the carrying amount of the goodwill under IFRS was lower than the amount under US GAAP by RMB 43 and RMB 43 as of December 31, 2005 and 2006, respectively, due to the continued amortization of goodwill under IFRS until the end of 2004.
(h) Presentation of minority interests
Under IFRS, minority interests at the balance sheet date are presented in the consolidated balance sheet within equity, separately from the equity attributable to the equity shareholders of the Company, and minority interests in the results of the Group for the year are presented on the face of the consolidated statements of income as an allocation of the total net income for the year between the minority interests and the equity shareholders of the Company. Under US GAAP, minority interests at the balance sheet date are presented in the consolidated balance sheet either as liabilities or separately from liabilities and equity. Minority interests in the results of the Group for the year are also separately presented in the consolidated statements of income as a component of net income.
(i) Companies included in consolidation
Under IFRS, the Group consolidates less than majority owned entities in which the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities, and proportionately consolidates jointly controlled entities in which the Group has joint control with other venturers. However, US GAAP requires that any entity of which the Group owns 20% to 50% of total outstanding voting stock not be consolidated nor proportionately consolidated, but rather be accounted for under the equity method. Accordingly, certain of the Group's subsidiaries, of which the Group owns between 40.72% to 50% of the outstanding voting stock, and the Group's jointly controlled entities are not consolidated nor proportionately consolidated under US GAAP and instead accounted for under the equity method. This exclusion does not affect the income attributable to equity shareholders of the Company or the total equity attributable to the equity shareholders of the Company reconciliations between IFRS and US GAAP.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
Presented below is summarized financial information prepared in accordance with US GAAP of such subsidiaries and jointly controlled entities.
Years ended December 31,
-------------------------
2004 2005 2006
---- ----- ----
RMB RMB RMB
Sales of goods................. 28,004 53,768 75,184
Income before income tax....... 1,373 286 6,119
Net income / (loss)............ 969 (204) 5,672
At December 31,
----------------
2005 2006
----- ----
RMB RMB
Current assets................. 12,101 19,417
Total assets................... 64,560 68,458
Current liabilities............ 8,901 12,231
Total liabilities.............. 31,727 31,448
Total equity................... 32,833 37,010
(j) Recently issued accounting standards
|
SFAS No. 157
In September 2006, the FASB issued SFAS No. 157 "Fair Value Measurements" which defines fair value, provides a framework for measuring fair value, and expands the disclosures required for fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require fair value measurements and does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. Currently, the Group does not expect the adoption of SFAS No. 157 will have a material impact on its consolidated financial statements.
FIN No. 48
In June 2006, the FASB issued FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes - an interpretation of SFAS No. 109" ("FIN48"), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109. FIN 48 requires that the Group recognizes in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. FIN 48 will be effective for the first fiscal year beginning after December 15, 2006. Currently, the Group does not expect the adoption of this Interpretation will have a material effect on its consolidated financial statements.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
Reconciliation to US GAAP
The effect on net income attributable to equity shareholders of the Company of significant differences between IFRS and US GAAP is as follows:
Reference
in note Years ended December 31,
above 2004 2005 2006
----- ---- ---- ----
RMB RMB RMB
Net income attributable to equity shareholders of the
Company under IFRS.................................... 35,335 41,455 53,912
US GAAP adjustments:
Foreign exchange gains and losses..................... (a) 60 54 46
Capitalization of property, plant and equipment....... (b) 22 - -
Depreciation on revalued property, plant and equipment. (c) 4,301 4,016 1,340
Disposal of property, plant and equipment............. (c) 2,099 1,838 57
Exchange of assets.................................... (d) 23 23 23
Depreciation effect of reversal of impairment of
long-lived assets................................. (e) 29 76 38
Capitalized interest on investments in associates, net
of amortization effect............................ (f) 205 (40) (40)
Goodwill amortization for the year.................... (g) 13 - -
Deferred tax effect of US GAAP adjustments............ (2,277) (1,786) (421)
Minority interests.................................... (h) (519) (489) (93)
--------- --------- ========
Net income attributable to equity shareholders of the
Company under US GAAP................................. 39,291 45,147 54,862
======== ======== ========
Basic and diluted earnings per share under US GAAP......... 0.45 0.52 0.63
======== ======== ========
Basic and diluted earnings per ADS under US GAAP*.......... 45.31 52.07 63.28
======== ======== ========
|
*Basic and diluted earnings per ADS is calculated on the basis that one ADS is equivalent to 100 H shares.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
The effect on the total equity attributable to equity shareholders of the Company of significant differences between IFRS and US GAAP is as follows:
Reference
in note Years ended December 31,
above 2005 2006
----- ---- ----
RMB RMB
Total equity attributable to equity shareholders of the
Company under IFRS...................................... 224,301 262,845
US GAAP adjustments:
Foreign exchange gains and losses....................... (a) (241) (195)
Revaluation of property, plant and equipment............ (c) (1,838) (441)
Exchange of assets...................................... (d) (509) (486)
Reversal of impairment of long-lived assets............. (e) (456) (418)
Capitalized interest on investments in associates....... (f) 486 446
Goodwill................................................ (g) 43 43
Effect of US GAAP adjustments on deferred tax assets.... 921 487
Effect of US GAAP adjustments on deferred tax
liabilities......................................... (134) (121)
Minority interests...................................... (h) 230 137
-------- --------
Total equity attributable to equity shareholders of the 222,803 262,297
======== ========
Company under US GAAP...................................
|
38. SUBSEQUENT EVENT
On December 6, 2006, the Group announced its proposal to issue US$ 1,500 convertible bonds, which are convertible into H shares of the Company. This proposal was subsequently approved by the shareholders of the Company at the Extraordinary General Meeting held on January 22, 2007.
On March 16, 2007, the Fifth Plenary Session of the Tenth National People's Congress passed the Corporate Income Tax Law of the People's Republic of China ("new tax law"), which will take effect on January 1, 2008. According to the new tax law, the corporate income tax rate for entities other than certain high-tech enterprises and small-scale enterprises, as defined in the new tax law will be revised to 25%. In addition, entities that are currently taxed at preferential rates will be subject to a five-year transition period during which the tax rates will gradually be increased to the unified rate of 25% from January 1, 2008. As a result of the new tax law, it is expected that the income tax rate applicable to the Company and certain of its subsidiaries will be reduced from 33% to 25% from January 1, 2008. However, since the detailed implementation rules as to how the existing preferential rates will gradually be increased to the unified rate of 25% over the five-year transition period have not been formulated and promulgated, management is not yet in a position to estimate the impact of the new tax law on the deferred tax assets and liabilities of certain entities which are being taxed at preferential rates. The financial effect of the new tax law, if any, will be reflected in the Group's 2007 financial statements. The enactment of the new tax law is not expected to have any financial effect on the amounts accrued in the balance sheet in respect of current tax payable.
39. PARENT AND ULTIMATE HOLDING COMPANY
The directors consider the parent and ultimate holding company of the Group as of December 31, 2006 is Sinopec Group Company, a state-owned enterprise established in the PRC. This entity does not produce financial statements available for public use.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
In accordance with the United States Statement of Financial Accounting Standards No. 69, "Disclosures about Oil and Gas Producing Activities" ("SFAS No. 69"), this section provides supplemental information on oil and gas exploration and producing activities of the Group at December 31, 2004, 2005 and 2006, and for each of the years then ended in the following six separate tables. Tables I through III provide historical cost information under US GAAP pertaining to capitalized costs related to oil and gas producing activities; costs incurred in exploration and development; and results of operations related to oil and gas producing activities. Tables IV through VI present information on the Group's estimated net proved reserve quantities; standardized measure of discounted future net cash flows; and changes in the standardized measure of discounted future net cash flows.
Table I: Capitalized costs related to oil and gas producing activities
Years ended December 31,
--------------------------
2004 2005 2006
RMB RMB RMB
Property cost......................................................... ___ ___ ___
Wells and related equipment and facilities............................ 160,380 180,138 203,551
Supporting equipment and facilities................................... 12,756 13,573 16,483
Uncompleted wells, equipment and facilities........................... 9,387 11,003 16,420
--------- --------- --------
Total capitalized costs............................................... 182,523 204,714 236,454
Accumulated depreciation, depletion, amortization and impairment
allowances......................................................... (80,491) (88,274) (96,485)
--------- --------- --------
Net capitalized costs................................................. 102,032 116,440 139,969
========= ========= =========
|
Table II: Cost incurred in exploration and development
Years ended December 31,
--------------------------
2004 2005 2006
RMB RMB RMB
Exploration...................................................... 8,481 9,086 11,127
Development...................................................... 21,113 22,804 32,054
------ ------ ------
Total cost incurred.............................................. 29,594 31,890 43,181
====== ====== ======
|
Table III: Results of operations for oil and gas producing activities
Years ended December 31,
--------------------------
2004 2005 2006
RMB RMB RMB
Revenues
Sales....................................................... 13,380 16,796 21,683
Transfers................................................... 60,053 84,423 105,656
------- -------- -------
73,433 101,219 127,339
Production costs excluding taxes................................. (17,606) (21,722) (24,040)
Exploration expenses............................................. (6,396) (6,411) (7,983)
Depreciation, depletion, amortization and impairment provisions.. (11,707) (10,595) (13,001)
Taxes other than income tax...................................... (1,167) (1,687) (10,784)
------- --------- --------
Income before income tax......................................... 36,557 60,804 71,531
Income tax expense............................................... (12,064) (20,065) (23,605)
-------- -------- --------
Results of operations from producing activities................... 24,493 40,739 47,926
======= ====== ======
|
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
The results of operations for producing activities for the years ended December 31, 2004, 2005 and 2006 are shown above. Revenues include sales to unaffiliated parties and transfers (essentially at third-party sales prices) to other segments of the Group. All revenues reported in this table do not include royalties to others as there were none. In accordance with SFAS No. 69, income taxes are based on statutory tax rates, reflecting allowable deductions and tax credits. General corporate overhead and interest income and expense are excluded from the results of operations.
Table IV: Reserve quantities information
The Group's estimated net proved underground oil and gas reserves and changes thereto for the years ended December 31, 2004, 2005 and 2006 are shown in the following table.
Proved oil and gas reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions. Due to the inherent uncertainties and the limited nature of reservoir data, estimates of underground reserves are subject to change as additional information becomes available.
Proved reserves do not include additional quantities recoverable beyond the term of the relevant production licenses, or that may result from extensions of currently proved areas, or from application of improved recovery processes not yet tested and determined to be economical. The Group's estimated proved reserves do not include any quantities that are recoverable through application of tertiary recovery techniques.
Proved developed reserves are the quantities expected to be recovered through existing wells with existing equipment and operating methods.
"Net" reserves exclude royalties and interests owned by others and reflect contractual arrangements in effect at the time of the estimate.
Years ended December 31,
-----------------------------
2004 2005 2006
Proved developed and undeveloped reserves (oil) (million barrels)
Beginning of year................................................ 3,257 3,267 3,294
Revisions of previous estimates.................................. 23 26 (10)
Improved recovery................................................ 127 142 146
Extensions and discoveries....................................... 134 138 148
Production....................................................... (274) (279) (285)
------- ------- -------
End of year...................................................... 3,267 3,294 3,293
======= ======= =======
Proved developed reserves
Beginning of year................................................ 2,786 2,808 2,870
======= ======= =======
End of year...................................................... 2,808 2,870 2,903
======= ======= =======
Proved developed and undeveloped reserves (gas) (billion cubic feet)
Beginning of year................................................ 2,888 3,033 2,952
Revisions of previous estimates.................................. (42) (9)
(95)
Extensions and discoveries....................................... 447 183 170
Production....................................................... (207) (222) (257)
------- ------- -------
End of year...................................................... 3,033 2,952 2,856
======= ======= =======
Proved developed reserves
Beginning of year................................................ 1,249 1,398 1,557
======= ======= =======
End of year...................................................... 1,398 1,557 1,472
======= ======= =======
|
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
Table V: Standardized measure of discounted future net cash flows
The standardized measure of discounted future net cash flows, related to the above proved oil and gas reserves, is calculated in accordance with the requirements of SFAS No. 69. Estimated future cash inflows from production are computed by applying year-end prices for oil and gas to year-end quantities of estimated net proved reserves. Future price changes are limited to those provided by contractual arrangements in existence at the end of each reporting year. Future development and production costs are those estimated future expenditures necessary to develop and produce year-end estimated proved reserves based on year-end cost indices, assuming continuation of year-end economic conditions. Estimated future income taxes are calculated by applying appropriate year-end statutory tax rates to estimated future pre-tax net cash flows, less the tax basis of related assets. Discounted future net cash flows are calculated using 10% midperiod discount factors. This discounting requires a year-by-year estimate of when the future expenditure will be incurred and when the reserves will be produced.
The information provided does not represent management's estimate of the Group's expected future cash flows or value of proved oil and gas reserves. Estimates of proved reserve quantities are imprecise and change over time as new information becomes available. Moreover, probable and possible reserves, which may become proved in the future, are excluded from the calculations. The arbitrary valuation prescribed under SFAS No. 69 requires assumptions as to the timing and amount of future development and production costs. The calculations are made for the years ended December 31, 2004, 2005 and 2006 and should not be relied upon as an indication of the Group's future cash flows or value of its oil and gas reserves.
Years ended December 31,
-------------------------------
2004 2005 2006
Future cash flows..............................................1,003,511 1,401,283 1,235,524
Future production costs........................................ (350,012) (440,743) (487,895)
Future development costs....................................... (25,577) (26,994) (33,523)
Future income tax expenses..................................... (174,060) (270,607) (189,465)
---------- ---------- ---------
Undiscounted future net cash flows............................. 453,862 662,939 524,641
10% annual discount for estimated timing of cash flows......... (204,183) (304,893) (241,180)
---------- ------------ ---------
Standardized measure of discounted future net cash flows....... 249,679 358,046 283,461
========== ============ =========
|
Table VI: Changes in the standardized measure of discounted future net cash flows
Years ended December 31,
-----------------------------
2004 2005 2006
RMB RMB RMB
Sales and transfers of oil and gas produced, net of production costs (46,145) (61,346) (92,849)
Net changes in prices and production costs 69,305 130,221 (114,796)
Net change due to extensions, discoveries and improved recoveries 36,209 56,131 51,445
Revisions of previous quantity estimates 2,204 3,964 (1,207)
Previously estimated development costs incurred during the year 7,148 8,134 8,516
Accretion of discount 16,176 21,352 30,190
Net change in income taxes (22,733) (50,397) 43,784
Others 213 308 332
---------- -------- -------
Net change for the year 62,377 108,367 (74,585)
========== ======== =======
|
SIGNATURE
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 its behalf.
China Petroleum & Chemical Corporation
By /s/ Chen Ge
---------------
Name: Chen Ge
Title: Secretary to the Board of Directors
Date: April 6, 2007
|
Exhibit 1
Articles of Association
Of
China Petroleum & Chemical Corporation
Amended and adopted at the Annual General Meeting for the Year 2005 on 24 May 2006 Approved by the SASAC on 25 July 2006
CHAPTER 1 GENERAL PROVISIONS
Article 1 These Articles of Association are drawn up in accordance with the "Company Law of the People's Republic of China" (the "Company Law"), "Special regulations of the State Council regarding the issue of shares overseas and the listing of shares overseas by companies limited by share" (the "Special Regulations"), "Mandatory provisions for the Articles of Association of the Company to be Listed Overseas" ("Mandatory Provisions"), "Guidelines for Articles of Association of Listed Companies", "Standards for the Governance of Listed Companies" and other relevant laws and regulations to maintain the legitimate interests of China Petroleum & Chemical Corporation (the "Company") and its shareholders and creditors, and to regulate the organization and conducts of the Company.
Article 2 These Articles of Association of the Company are effective on
the date of incorporation of the Company. Any amendment to
these Articles of Association involving the Mandatory
Provisions shall be effective upon being passed by the
shareholders in a general meeting and examined and approved by
the company authorized by the State Council.
From the date on which the Company's Articles of Association
come into effect, the Company's Articles of Association shall
constitute a legally binding document regulating the Company's
organization and activities, and the rights and obligations
between the Company and its shareholders and among the
shareholders inter se.
Article 3 These Articles of Association are binding on the Company, its shareholders and directors, supervisors, president, vice-president, Chief Financial Officer and secretary of the board of directors; all of whom are entitled, according to these Articles of Association, to make claims concerning the affairs of the Company. A shareholder may take action against the Company and the Company may take action against a shareholder or a director, a supervisor, the president, the vice-president, the Chief Financial Officer or the secretary of the board of directors pursuant to these Articles of Association. A shareholder may also take action against another shareholder or directors, supervisors, president, vice-president, Chief Financial Officer and the secretary of the board of directors of the Company pursuant to these Articles of Association. The actions referred to in the preceding paragraph include court proceedings and arbitration proceedings.
Article 4 The Company is a joint stock limited company established in accordance with the Company Law, the Special Regulations and other relevant laws and administrative regulations of the State. The Company was established by way of promotion with the approval of the State Economic and Trade Commission of the People's Republic of China ("PRC"), as evidenced by approval document Guo Jing Mao Qi Gai [2000] No. 154. It is registered with and has obtained a business license from China's State Administration Bureau of Industry and Commerce on 25 February 2000. The Company's business license number is: 1000001003298. The promoter of the Company is: China Petrochemical Corporation.
Article 5 The registered name of the Company:
In Chinese: [Chinese characters omitted]
Abbreviation: [Chinese characters omitted]
In English: China Petroleum & Chemical Corporation
Abbreviation: SINOPEC Corp.
Article 6 The address A6, Huixindong Street,
of the Company: Chaoyang District, Beijing, China.
Zip: 100029
Tel: (010) 64999295
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Fax: (010) 64999294
Website: www.sinopec.com.cn
Article 7 The Company's legal representative is the Chairman of the board of directors of the Company.
Article 8 The Company is a joint stock limited company which has perpetual existence.
The capital of the Company is divided into shares of equal value. The rights and responsibilities of the Company's shareholders shall only be limited to the proportion of the shares as held by them; the Company shall be responsible for the Company's debts by all of its assets.
The Company is an independent legal person, subject to the jurisdiction and under the protection of the laws and administrative rules of the PRC.
Article 9 The Company may set up wholly-owned or holding branch organizations such as subsidiaries, branches, representative offices and offices according to its business development needs. The wholly-owned or holding subsidiary may be named with China Petroleum & Chemical Corporation's abbreviation "SINOPEC". The branches, representative offices and offices are non-legal person branch organizations and shall be named with the full name of China Petroleum & Chemical Corporation.
The Company may set up branch organizations (whether or not wholly-owned) outside the PRC and in the Hong Kong SAR, Macau SAR and Taiwan according to its business development needs and upon the approval of the relevant government body.
Article 10 The Company may invest in other limited liability companies or joint stock limited companies. The Company's liabilities to an invested company shall be limited to the amount of its capital contribution to the invested company.
The Company shall not become the unlimited liability shareholder of other profit-making organizations.
Upon approval of the companies approving department authorized by the State Council, the Company may, according to its operating and management needs, operate as a holding company as prescribed in Article 12(2) of the Company Law.
CHAPTER 2 THE COMPANY'S OBJECTIVES AND SCOPE OF BUSINESS
Article 11 The operation objectives of the Company are: maximization of the Company's profits, maximization of shareholders' return.
Article 12 The Company's scope of business shall be consistent with and subject to the scope of business approved by the authority responsible for the registration of the Company.
The Company's scope of business includes: the exploration, exploitation and sales of oil and natural gas; pipeline transportation of oil and natural gas; oil refining; the production, sales and storage of oil, petrochemical products, chemical fiber products and other chemical products; wholesaling, retailing and storage of oil and other oil products; operation of 24-hour stores; power generation; manufacturing and installation of machinery; purchase and sales of raw materials, charcoal, equipment and parts; supervision of manufacturing of equipment; research, development and application of technology and information; import and export; and provision of technology and labour.
CHAPTER 3 SHARES AND REGISTERED CAPITAL
Article 13 There must, at all times, be ordinary shares in the Company, which include the "domestic-invested shares" and the "foreign-invested shares". Subject to the approval of the companies approving department authorized by the State Council, the Company may, according to its requirements, create different classes of shares.
Article 14 The shares issued by the Company shall each have a par value of Renminbi one yuan.
"Renminbi" as mentioned above means the legal currency of the PRC.
Article 15 Shares of the Company are in the form of share certificates.
Subject to the approval of the securities authority of the State
Council, the Company may issue shares to Domestic Investors and
Foreign Investors. The issue of shares by the Company shall
adhere to the principle of openness and fairness. "Foreign
Investors" means those investors who subscribe for the Company's
shares and who are located in foreign countries and in the
regions of Hong Kong, Macau and Taiwan. "Domestic Investors"
means those investors who subscribe for the Company's shares and
who are located within the territory of the PRC (except the
areas referred to above).
Article 16 Shares which the Company issues to domestic investors for
subscription in Renminbi are called "Domestic-Invested Shares".
Domestic-invested shares listed domestically are called
"Domestic-Listed Domestic-Invested shares" whilst other kinds of
domestic-invested shares are called "Non-Listed
Domestic-Invested Shares".
Shares which the Company issues to foreign investors for
subscription in foreign currencies are called "Foreign-Invested
Shares". Foreign-invested shares which are listed overseas are
called "Overseas-Listed Foreign-Invested Shares".
"Foreign currencies" means the legal currencies of countries or
districts outside the PRC which are recognized by the foreign
exchange authority of the State and which can be used to pay the
share price to the Company.
The shareholders of "Domestic-Invested Shares" and the
shareholders of "Overseas-Listed Foreign-Invested Shares" shall
be shareholders of ordinary shares, possessing the same rights
and undertaking the same obligations.
Article 17 Foreign-Invested Shares issued by the Company and which are
listed in Hong Kong shall be referred to as "H Shares". "H
Shares" means the shares which have been admitted for listing
on The Stock Exchange of Hong Kong Limited (the "Stock
Exchange"), the par value of which is denominated in Renminbi
and which are subscribed for and traded in Hong Kong dollars.
Article 18 The Company's domestic-invested shares are held on trust by the
Shanghai branch of the China Securities Registration and
Clearing Company Limited. The Company's H shares are mainly held
by the Hong Kong Securities Clearing Company Limited.
Article 19 The Company has at the time of its establishment issued to the
promoter, China Petrochemical Corporation, 6,880,000 ordinary
shares, representing 100% of the issued ordinary shares of the
Company at that time.
Article 20 After the establishment of the Company and upon the approval of
the companies approving department authorized by the State
Council, the promoter, China Petrochemical Corporation,
transferred 19,379,390,000 domestic-invested shares to holders
of other non-listed domestic-invested shares; the Company issued
16,780,488,000 H shares (out of these, 15,102,439,000 shares are
new issue shares of the Company and 1,678,049,000 shares are
stock shares sold by the promoter, China Petrochemical
Corporation). Upon completion of the H share issuance, the
Company issued 2,800,000,000 domestic-listed domestic-invested
shares.
The existing structure of the Company's share capital is as
follows: the total number of issued ordinary shares of the
Company is 86,702,439,000 shares, out of these, 61,757,324,776
shares representing 71.23% of the total number of issued
ordinary shares of the Company are held by the promoter, China
Petrochemical Corporation; 5,364,626,224 shares representing
6.19% are held by other non-listed domestic-invested
shareholders; 2,800,000,000 shares representing 3.23% are held
by domestic-listed domestic-invested shareholders; and
16,780,488,000 shares representing 19.35% are held by
foreign-listed foreign-invested shareholders.
Article 21 The Company's board of directors may take all necessary
action for the respective issuance of the Overseas-Listed
Foreign-Invested Shares and Domestic-Invested Shares after the
proposals for issuance of the same have been approved by the
securities authority of the State Council.
The Company may implement its proposal to issue Overseas-Listed
Foreign-Invested Shares and Domestic-Invested Shares pursuant
to the preceding paragraph within fifteen (15) months from the
date of approval by the securities regulatory organ of the
State Council.
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Article 22 Where the total number of shares stated in the proposal for the issuance of shares include Overseas-Listed Foreign-Invested Shares and Domestic-Invested Shares, such shares should be fully subscribed for at their respective offerings. If the shares cannot be fully subscribed for all at once due to special circumstances, the shares may, subject to the approval of the securities regulatory organ of the State Council, be issued on separate occasions.
Article 23 The registered capital of the Company is RMB86,702,439,000.
Article 24 The Company may, based on its operating and development needs, authorize the increase of its capital pursuant to the Company's Articles of Association.
The Company may increase its capital in the following ways:
(1) by offering new shares for subscription by unspecified investors;
(2) by placing new shares to its existing shareholders;
(3) by allotting bonus shares to its existing shareholders;
(4) to increase the share capital with common reserve fund;
(5) by any other means which is permitted by the laws, administrative regulations and the competent department under the securities authority of the State Council.
After the Company's increase of share capital by means of the issuance of new shares has been approved in accordance with the provisions of the Company's Articles of Association, the issuance thereof should be made in accordance with the procedures set out in the relevant laws and administrative regulations of the State.
Article 25 Unless otherwise stipulated in the relevant laws or administrative regulations, shares in the Company shall be freely transferable and are not subject to any lien.
CHAPTER 4 REDUCTION OF CAPITAL AND REPURCHASE OF SHARES
Article 26 According to the provisions of the Company's Articles of Association, the Company may reduce its registered capital. In so doing, it shall act according to the Company Law, other relevant provisions and these Articles of Association.
Article 27 The Company must prepare a balance sheet and an inventory of assets when it reduces its registered capital.
The Company shall notify its creditors within ten (10) days of
the date of the Company's resolution for reduction of capital
and shall publish an announcement in a newspaper at least three
(3) times within thirty (30) days of the date of such
resolution. A creditor has the right within thirty (30) days of
receipt of the notice from the Company or, in the case of a
creditor who does not receive such notice, within ninety (90)
days of the date of the first public announcement, to require
the Company to repay its debts or to provide a corresponding
guarantee for such debt.
The Company's registered capital may not, after the reduction in capital, be less than the minimum amount prescribed by law.
Article 28 The Company may, in accordance with the procedures set out in the Company's Articles of Association and with the approval of the relevant governing authority of the State, repurchase its outstanding shares under the following circumstances:
(1) cancellation of shares for the purposes of reducing its capital;
(2) merging with another company that holds shares in the Company;
(3) other circumstances permitted by laws and administrative regulations.
The Company shall repurchase its outstanding shares in accordance with the stipulations of Article 29 to Article 32.
Article 29 The Company may repurchase shares in one of the following ways, with the approval of the relevant governing authority of the State:
(1) by making an offer for the repurchase of shares to all its shareholders on a pro rata basis;
(2) by repurchasing shares through public dealing on a stock exchange;
(3) by repurchasing shares outside of the stock exchange by means of an off-market agreement;
(4) by any other means which is permitted by the laws, administrative regulations and the securities regulatory organ of the State Council.
Article 30 The Company must obtain the prior approval of the shareholders in a general meeting in the manner stipulated in the Company's Articles of Association before it can repurchase shares outside the stock exchange by means of an off-market agreement. The Company may, by obtaining the prior approval of the shareholders in a general meeting (in the same manner), rescind or vary any contract which has been so entered into or waive any right thereof.
A contract for the repurchase of shares referred to in the preceding paragraph includes (without limitation) an agreement to become liable to repurchase shares or an agreement to have the right to repurchase shares.
The Company may not assign any contract for the repurchase of its shares or any right contained in such contract.
Article 31 Shares which have been legally repurchased by the Company shall be cancelled within 10 days of completion of the repurchase (or such other shorter period as required by law or administrative regulations), and the Company shall apply to the original companies registration authority for registration of the change in its registered capital.
The aggregate par value of the cancelled shares shall be deducted from the Company's registered share capital.
Article 32 Unless the Company is in the course of liquidation, it must comply with the following provisions in relation to repurchase of its outstanding shares:
(1) where the Company repurchases shares at par value, payment shall be made out of book surplus distributable profits of the Company or out of proceeds of a new issue of shares made for that purpose;
(2) where the Company repurchases shares of the Company at a premium to its par value, payment up to the par value may be made out of the book surplus of distributable profits of the Company or out of the proceeds of a new issue of shares made for that purpose. Payment of the portion in excess of the par value shall be effected as follows:
1. if the shares being repurchased were issued at par value, payment shall be made out of the book surplus of distributable profits of the Company;
2. if the shares being repurchased were issued at a premium to its par value, payment shall be made out of the book surplus of distributable profits of the Company or out of the proceeds of a new issue of shares made for that purpose, provided that the amount paid out of the proceeds of the new issue shall not exceed the aggregate amount of premiums received by the Company on the issue of the shares repurchased nor shall it exceed the book value of the Company's capital common reserve fund account (including the premiums on the new issue) at the time of the repurchase;
(3) the Company shall make the following payments out of the Company's distributable profits:
1. payment for the acquisition of the right to repurchase its own shares;
2. payment for variation of any contract for the repurchase of its shares;
3. payment for the release of its obligation(s) under any contract for the repurchase of shares;
(4) after the Company's registered capital has been reduced by the aggregate par value of the cancelled shares in accordance with the relevant provisions, the amount deducted from the distributable profits of the Company for payment of the par value of shares which have been repurchased shall be transferred to the Company's capital common reserve fund account.
CHAPTER 5 FINANCIAL ASSISTANCE FOR ACQUISITION OF SHARES
Article 33 The Company and its subsidiaries shall not, at any time, provide any form of financial assistance to a person who is acquiring or is proposing to acquire shares in the Company. This includes any person who directly or indirectly incurs any obligations as a result of the acquisition of shares in the Company. The Company and its subsidiaries shall not, at any time, provide any form of financial assistance to the Obligor for the purposes of reducing or discharging the obligations assumed by such person. This Article shall not apply to the circumstances specified in Article 35 of this Chapter.
Article 34 For the purposes of this Chapter, "financial assistance" includes (without limitation) the following:
(1) gift;
(2) guarantee (including the assumption of liability by the guarantor or the provision of assets by the guarantor to secure the performance of obligations by the Obligor), compensation (other than compensation in respect of the Company's own default) or release or waiver of any rights;
(3) provision of loan or the making of any other agreement under which the obligations of the Company are to be fulfilled before the obligations of another party, or the change in parties to, or the assignment of rights under, such loan or contract;
(4) any other form of financial assistance given by the Company when the Company is insolvent or has no net assets or when its net assets would thereby be reduced to a material extent.
For the purposes of this Chapter, "assumption of obligations" includes the assumption of obligations by way of contract or by way of arrangement (irrespective of whether such contract or arrangement is enforceable or not and irrespective of whether such obligation is to be borne solely by the Obligor or jointly with other persons) or by any other means which results in a change in his financial position.
Article 35 The following acts shall not be deemed to be acts prohibited by Article 33 of this Chapter:
(1) the provision of financial assistance by the Company where the financial assistance is given in good faith in the interests of the Company, and the principal purpose of which is not for the acquisition of shares in the Company, or the giving of the financial assistance is an incidental part of a master plan of the Company;
(2) the lawful distribution of the Company's assets as dividend;
(3) the distribution of dividends in the form of shares;
(4) a reduction of registered capital, a repurchase of shares of the Company or a reorganization of the share holding structure of the Company effected in accordance with the Company's Articles of Association;
(5) the provision of loans by the Company within its scope of business and in the ordinary course of its business, where the provision of loans falls within part of the scope of business of the Company (provided that the net assets of the Company are not thereby reduced or that, to the extent that the assets are thereby reduced, the financial assistance is provided out of distributable profits);
(6) contributions made by the Company to the employee share ownership schemes (provided that the net assets of the Company are not thereby reduced or that, to the extent that the assets are thereby reduced, the financial assistance is provided out of distributable profits).
CHAPTER 6 SHARE CERTIFICATES AND REGISTER OF SHAREHOLDERS
Article 36 Share certificates of the Company shall be in registered form.
The shares of the Company shall bear the following main items:
(1) Name of the Company;
(2) Date of registration and establishment of the Company;
(3) Type of shares, par value and the number of shares it represents;
(4) Code of share certificates;
(5) Other matters as required by the Company Law, Special Regulations and the stock exchange on which the shares of the Company are listed.
Article 37 The shares of the Company may be transferred, donated, inherited and pledged in accordance with the relevant laws, administrative rules, regulations of the competent department(s) as well as these Articles of Association. The transfer of shares shall be registered with the share registration organization appointed by the Company.
Article 38 The Company does not accept the pledging of its shares.
Article 39 The directors, supervisors, president, vice-president, Chief Financial Officer and secretary of the board of directors of the Company shall, during their term of office, declare to the Company regularly the Company's shares held by them. During their term of office and within 6 months of their leaving, they may not transfer the Company's shares held by them.
Article 40 If a shareholder who holds 5% or above of voting shares sells his shares in the Company within 6 months of his purchase or purchases again within 6 months of the sale, the profits thus made shall belong to the Company.
The preceding provision shall apply to senior officers prescribed in the articles of association of a legal person shareholder holding 5% or above of the voting shares in the Company, including but without limitation to its directors, supervisors and the president.
Article 41 Share certificates of H-shares of the Company shall be signed by the Chairman of the Company's board of directors. Where the stock exchange(s) on which the Company's shares are listed require other directors and/or supervisors, president, vice-president, Chief Financial Officer and the secretary of the board of directors of the Company to sign on the share certificates, the share certificates shall also be signed by such officer(s). The share certificates shall take effect after being sealed or imprinted with the seal of the Company (or the Company chop for securities). The share certificate shall only be sealed with the Company's seal or securities chop under the authorization of the board of directors. The signatures of the Chairman of the board of directors or other officer(s) of the Company may be printed in printed form.
Article 42 The Company shall keep a register of shareholders which shall contain the following particulars:
(1) the name (title) and address (residence), the occupation or nature of each shareholder;
(2) the class and quantity of shares held by each shareholder;
(3) the amount paid-up on or agreed to be paid-up on the shares held by each shareholder;
(4) the share certificate number(s) of the shares held by each shareholder;
(5) the date on which each person was registered as a shareholder;
(6) the date on which any shareholder ceased to be a shareholder.
Unless there is evidence to the contrary, the register of shareholders shall be sufficient evidence of the shareholders' shareholdings in the Company.
Article 43 The Company may, in accordance with the mutual understanding and agreements made between the securities regulatory organ of the State Council and overseas securities regulatory organizations, maintain the register of shareholders of Overseas-Listed Foreign-Invested Shares overseas and appoint overseas agent(s) to manage such register of shareholders. The original register of shareholders for holders of H Shares shall be maintained in Hong Kong.
A duplicate register of shareholders for the holders of Overseas-Listed Foreign-Invested Shares shall be maintained at the Company's residence. The appointed overseas agent(s) shall ensure consistency between the original and the duplicate register of shareholders at all times.
If there is any inconsistency between the original and the duplicate register of shareholders for the holders of Overseas-Listed Foreign-Invested Shares, the original register of shareholders shall prevail.
Article 44 The Company shall have a complete register of shareholders which shall comprise the following parts:
(1) the register of shareholders which is maintained at the Company's residence (other than those share registers which are described in sub-paragraphs (2) and (3) of this Article);
(2) the register of shareholders in respect of the holders of Overseas-Listed Foreign-Invested Shares of the Company which is maintained in the same place as the overseas stock exchange on which the shares are listed; and
(3) the register of shareholders which is maintained in such other place as the board of directors may consider necessary for the purposes of the listing of the Company's shares.
Article 45 Different parts of the register of shareholders shall not overlap. No transfer of any shares registered in any part of the register shall, during the continuance of that registration, be registered in any other part of the register.
All Overseas-Listed Foreign-Invested Shares listed in Hong Kong which have been fully paid-up may be freely transferred in accordance with the Company's Articles of Association. However, unless such transfer complies with the following requirements, the board of directors may refuse to recognize any instrument of transfer and would not need to provide any reason therefor:
(1) a fee of HK$2.50 per instrument of transfer or such higher amount agreed by the Stock Exchange has been paid to the Company for registration of the instrument of transfer and other documents relating to or which will affect the right of ownership of the shares;
(2) the instrument of transfer only relates to Overseas-Listed Foreign-Invested Shares listed in Hong Kong;
(3) the stamp duty which is chargeable on the instrument of transfer has already been paid;
(4) the relevant share certificate(s) and any other evidence which the board of directors may reasonably require to show that the transferor has the right to transfer the shares have been provided;
(5) if it is intended that the shares be transferred to joint owners, the maximum number of joint owners shall not be more than four (4); and
(6) the Company does not have any lien on the relevant shares.
All Overseas-Listed Foreign-Invested Shares listed in Hong Kong shall be transferred by an instrument in writing in any usual or common form or any other form which the directors may approve. The instrument of transfer of any share may only be executed by hand without seal, or if the assignor or the assignee is the recognized clearing house or its nominee, the share transfer form may be executed by hand or in mechanically-printed form. All instruments of transfer must be placed at the legal address of the Company or in other places as the Board of Directors may be specified at any time.
Amendments or rectification of the register of shareholders shall be made in accordance with the laws of the place where the register of shareholders is maintained.
Article 46 No change may be made in the register of shareholders as a result of a transfer of shares within thirty (30) days prior to the date of a shareholders' general meeting or within five (5) days before the determination date for the Company's distribution of dividends.
Article 47 When the Company needs to convene a shareholders' meeting for the purposes of determination, dividend distribution, for liquidation or for any other purpose which need to determine shareholdings, the board of directors shall determine a record date for the determination of shareholdings. The shareholders of the Company shall be such persons who appear in the register of shareholders at the close of such record date.
Article 48 Any person who disputes the register of shareholders and asks for inclusion of his name in or removal of his name from the register of shareholders may apply to a court of competent jurisdiction for rectification of the register.
Article 49 For any person who is a registered shareholder or who claims to be entitled to have his name (title) entered in the register of shareholders in respect of shares in the Company may, if his share certificate (the "original certificate") relating to the shares is lost, he may apply to the Company for a replacement share certificate in respect of such shares (the "Relevant Shares").
Application by a holder of Domestic-Invested Shares, who has lost his share certificate, for a replacement share certificate shall be dealt with in accordance with Article 150 of the Company Law.
Application by a holder of Overseas-Listed Foreign-Invested Shares, who has lost his share certificate, for a replacement share certificate may be dealt with in accordance with the law of the place where the original register of shareholders of holders of Overseas-Listed Foreign-Invested Shares is maintained, the rules of the stock exchange or other relevant regulations.
The issue of a replacement share certificate to a holder of H Shares, who has lost his share certificate, shall comply with the following requirements:
(1) The applicant shall submit an application to the Company in a prescribed form accompanied by a notarial certificate or a statutory declaration, of which the contents shall include the grounds upon which the application is made and the circumstances and evidence of the loss, and the declaration showing that no other person is entitled to have his name entered in the register of shareholders in respect of the Relevant Shares.
(2) The Company has not received any declaration made by any person other than the applicant declaring that his name shall be entered in the register of shareholders in respect of such shares before it decides to issue a replacement share certificate to the applicant.
(3) The Company shall, if it intends to issue a replacement share certificate, publish a notice of its intention to do so at least once every thirty (30) days within a period of ninety (90) consecutive days in such newspapers as may be prescribed by the board of directors.
(4) The Company shall, prior to publication of its intention to issue a replacement share certificate, deliver to the stock exchange on which its shares are listed, a copy of the notice to be published and may publish the notice
upon receipt of confirmation from such stock exchange
that the notice has been exhibited in the premises of the
stock exchange. Such notice shall be exhibited in the
premises of the stock exchange for a period of ninety
(90) days.
In the case of an application which is made without the consent of the registered holder of the Relevant Shares, the Company shall deliver by mail to such registered shareholder a copy of the notice to be published.
(5) If, by the expiration of the 90-day period referred to in paragraphs (3) and (4) of this Article, the Company has not received any objection from any person in respect of the issuance of the replacement share certificate, it may issue a replacement share certificate to the applicant pursuant to his application.
(6) Where the Company issues a replacement share certificate pursuant to this Article, it shall forthwith cancel the original share certificate and document the cancellation of the original share certificate and issuance of a replacement share certificate in the register of shareholders accordingly.
(7) All expenses relating to the cancellation of an original share certificate and the issuance of a replacement share certificate shall be borne by the applicant and the Company is entitled to refuse to take any action until reasonable guarantee is provided by the applicant therefor.
Article 50 Where the Company issues a replacement share certificate pursuant to the Company's Articles of Association, as for a bona fide purchaser obtaining new share certificates referred to above or a shareholder registered as a owner of the shares (in case of a bona fide purchaser), his name (title) shall not be removed from the register of shareholders.
Article 51 The Company shall not be liable for any damages sustained by any person by reason of the cancellation of the original share certificate or the issuance of the replacement share certificate unless the claimant is able to prove that the Company has acted in a deceitful manner.
CHAPTER 7 SHAREHOLDERS' RIGHTS AND OBLIGATIONS
Article 52 A shareholder of the Company is a person who lawfully holds shares in the Company and whose name (title) is entered in the register of shareholders.
A shareholder shall enjoy rights and assume obligations according to the class and amount of shares held by him; shareholders who hold shares of the same class shall enjoy the same rights and assume the same obligations.
For the joint shareholders, if one of the joint shareholders has passed away, the surviving shareholder shall be deemed by the Company to have the ownership of the related shares, but the Board of Directors is entitled to ask for the provision of the suitable death certificate for the purpose of revision of the shareholders' register. For the joint shareholders, only the first named shareholder in the shareholders' register has the right to receive the share certificates of the related shares, receive the notice of the Company, attend the shareholders' general meeting and exercise his voting right; while, any notice delivered to the said shareholder shall be deemed as if the notice has been delivered to all of the joint shareholder of the related shares.
Article 53 The shareholders of ordinary shares of the Company shall enjoy the following rights:
(1) the right to receive dividends and other distributions in proportion to their shareholdings;
(2) the right to attend or appoint a proxy to attend shareholders' general meetings and to vote thereat according to their shareholdings;
(3) the right to supervise the Company's business operations, the right to present proposals or to raise queries;
(4) the right to transfer, donate and pledge shares in accordance with laws, administrative regulations and provisions of the Company's Articles of Association;
(5) subject to production of the relevant proofs of the type and quantity of shares that they are holding to the Company and verification of their identities of shareholders by the Company, the right to obtain relevant information in accordance with laws, administrative regulations and provisions of these Articles of Association, which information includes:
i. the right to obtain a copy of the Company's Articles of Association, subject to payment of costs;
ii. the right to inspect and copy, subject to payment of a reasonable fee:
(i) all parts of the register of shareholders;
(ii) personal particulars of each of the Company's directors, supervisors, president, vice-president, Chief Financial Officer and secretary of the board of directors, including:
(a) present and former name and alias;
(b) principal address (place of residence);
(c) nationality;
(d) primary and all other part-time occupations and duties;
(e) identification documents and the numbers thereof;
(iii) report on the state of the Company's share capital;
(iv) reports showing the aggregate par value, quantity, highest and lowest price paid in respect of each class of shares repurchased by the Company since the last accounting year and the aggregate amount paid by the Company for this purpose;
(v) minutes of shareholders' general meetings;
(vi) regular reports and interim reports of the Company.
(6) in the event of the termination or liquidation of the Company, the right to participate in the distribution of remaining assets of the Company in accordance with the number of shares held;
(7) in the event that the resolution of a shareholders' general meeting or board meeting is against the law or administrative rules and has infringed the legitimate interest of a shareholder, the shareholder shall have the right to commence legal proceedings to stop the illegal or infringing act and to ask the Company to bring a claim for compensation;
(8) other rights conferred by laws, administrative regulations and these Articles of Association.
Article 54 The shareholders of ordinary shares of the Company shall assume the following obligations:
(1) to comply with these Articles of Association;
(2) to pay subscription money according to the number of shares subscribed and the method of subscription;
(3) not to retire from being a shareholder unless required by law or administrative regulations;
(4) other obligations imposed by laws, administrative regulations and these Articles of Association.
Shareholders are not liable to make any further contribution to the share capital other than according to the terms which were agreed by the subscriber of the relevant shares at the time of subscription.
Article 55 In addition to the obligations imposed by laws and administrative regulations or required by the listing rules of the stock exchange on which the Company's shares are listed, a controlling shareholder shall not exercise his voting rights in respect of the following matters in a manner prejudicial to the interests of all or part of the shareholders of the Company:
(1) act honestly in the best interests of the Company in removing a director or supervisor;
(2) to approve the expropriation by a director or supervisor (for his own benefit or for the benefit of another person) of the Company's assets in any way, including (without limitation to) opportunities which are beneficial to the Company;
(3) to approve the expropriation by a director or supervisor (for his own benefit or for the benefit of another person) of the individual interest of other shareholders, including (but without limitation to) rights to distributions and voting rights (excluding a restructuring which has been submitted for approval by the shareholders in a general meeting in accordance with the Company's Articles of Association).
Article 56 For the purpose of the foregoing Article, a "controlling shareholder" means a person who satisfies any one of the following conditions:
(1) a person who, acting alone or in concert with others, has the power to elect more than half of the board of directors;
(2) a person who, acting alone or in concert with others, has the power to exercise 30% or more or has power to control the exercise of 30% or more of the voting rights in the Company;
(3) a person who, acting alone or in concert with others, holds 30% or more of the issued and outstanding shares of the Company;
(4) a person who, acting alone or in concert with others, has de facto control of the Company in any other way.
"Acting in concert" referred to above means the acting of two or more persons by agreement (whether verbal or in writing) so as to gain or strengthen the control of the Company through the acquisition of voting rights in the Company by either of them.
CHAPTER 8 SHAREHOLDERS' GENERAL MEETINGS
Article 57 The shareholders' general meeting is the organ of authority of the Company and shall exercise its functions and powers in accordance with law.
The Company shall draw up "Rules and Procedures for the Shareholders' General Meetings" for implementation after being approved by the shareholders in a general meeting. The Rules and Procedures for the Shareholders' General Meetings shall include the followings:
(1) functions and powers of the shareholders general meetings;
(2) authorities given by the shareholders' general meetings to the board of directors;
(3) procedures for the convening of a shareholders' general meeting, which include the putting forward, collection and approval of motions and notices of meetings and any change thereto, registration of the meeting, convening of, voting and resolutions made in the meeting, adjournments, past-session matters and announcements, etc.;
(4) other matters deemed necessary by the shareholders' general meeting.
The Rules and Procedures for the Shareholders' General Meetings is an integral part of and has the same legal effect as these Articles of Association.
Article 58 The shareholders' general meeting shall have the following functions and powers:
(1) to decide on the Company's operational policies and investment plans;
(2) to elect and replace directors and to decide on matters relating to the remuneration and liability insurance of directors;
(3) to elect and replace supervisors who are shareholder representatives and to decide on matters relating to the remuneration and liability insurance of supervisors;
(4) to examine and approve the board of directors' reports;
(5) to examine and approve the supervisory committee's reports;
(6) to examine and approve the Company's profit distribution plans and loss recovery plans;
(7) to examine and approve the Company's proposed annual preliminary and final financial budgets;
(8) to pass resolutions on the increase or reduction of the Company's registered capital;
(9) to pass resolutions on matters such as merger, division, dissolution and liquidation of the Company;
(10) to pass resolutions on the issue of debentures by the Company;
(11) to pass resolutions on the appointment, dismissal and non-reappointment of the accountants of the Company;
(12) to amend the Company's Articles of Association and its appendices (including the Rules and Procedures for the Shareholders' General Meetings, Rules and Procedures for the Board of Directors' Meetings and Rules and Procedures for the Supervisors' Meetings);
(13) to consider motions raised by the supervisory committee or shareholders who represent 5% or more of the total number of voting shares of the Company at annual general meetings;
(14) to decide on other matters which, according to laws, administrative regulations, regulations of the competent department(s) or these Articles of Association, need to be approved by shareholders in general meetings;
Article 59 Matters which shall be determined by the shareholders in a general meeting according to the laws, administrative regulations, regulations of the competent departments or these Articles of Association must be discussed by the shareholders in a general meeting in order to protect the shareholders' right of decision on those matters. Where necessary and reasonable, the board of directors or its secretary may be appointed in a shareholders' general meeting to determine (if so authorized in the general meeting) specific matters which are related to the matters to be resolved and are not possible or not necessary to be determined in that general meeting. Please see the Rules and Procedures for the Shareholders' General Meetings for the form of authorization by shareholders to the board of directors in a shareholders' general meeting to determine major matters of the Company.
If the shareholders authorize the board of directors or its secretary in a general meeting to determine matters which shall be determined by ordinary resolutions, the matter should be resolved by more than one-half of the attending shareholders (including their proxy) who have voting rights; if the authorization relates to matters which shall be determined by special resolutions, the matter should be resolved by more than two-thirds of the attending shareholders (including their proxy) who have voting rights. The authorization should be clear and specific.
Article 60 Unless prior approval of shareholders in the form of a special resolution is obtained in a general meeting, the Company shall not enter into any contract with any person other than the directors, supervisors, president, vice-president, Chief Financial Officer and secretary of the board of directors of the Company pursuant to which such person shall be responsible for the management and administration of the whole or any substantial part of the Company's business.
Article 61 Shareholders' general meetings are divided into annual general meetings ("AGM") and extraordinary general meetings ("EGM"). Unless otherwise provided in these Articles of Association and the Rules and Procedures for the Shareholders' General Meetings, shareholders' general meetings shall be convened by the board of directors.
Article 62 AGMs are held once every year and within six (6) months from the end of the preceding accounting year. At least the following matters should be resolved in an AGM:
(1) examination of the board of directors' annual report;
(2) examination of the supervisory committee's annual report;
(3) examination of the Company's profit distribution proposal;
(4) examination of the Company's audited final budgets for the preceding year;
(5) engagement, removal or non-renewal of the appointment of the accounting firm by the Company and determination of the remuneration of the accounting firm so engaged.
Matters to be considered in an AGM including but without limitation to the above matters, and any matter that could be considered in a general meeting may be considered in an AGM.
In an AGM, the supervisory committee and shareholders who individually or jointly hold 5% or more of the Company's voting shares shall have the right to put forward provisional motions.
Article 63 The board of directors shall convene an EGM within two (2) months after the occurrence of any one of the following events:
(1) where the number of directors is less than the number stipulated in the Company Law or two-thirds of the number specified in the Company's Articles of Association;
(2) where the unrecovered losses of the Company amount to one-third of the total amount of its share capital;
(3) where shareholder(s) who individually or jointly hold 10% or more of the Company's issued and outstanding voting shares (not including voting by proxy) request(s) in writing for the convening of an EGM;
(4) whenever the board of directors deems necessary or the supervisory committee so requests;
(5) other circumstances provided by these Articles of Association.
The shareholdings referred to in item (3) above shall be calculated as at the date of written request of the shareholders.
Article 64 Any request for the board of directors to hold an AGM or class meeting made by the supervisory committee or shareholders who individually or jointly hold 10% of the Company's voting shares entitling them to vote in that proposed meeting shall be dealt with according to the provisions of the Rules and Procedures for the Shareholders' General Meetings.
If a meeting is convened by the shareholders themselves where the board of directors has not given the required consent under the Rules and Procedures for the Shareholders' General Meetings to the same, the reasonable expenses thus incurred shall be borne by the Company and paid out of the money payable by the Company to the negligent director(s).
Article 65 If the number of members of the board of directors falls short of the number prescribed by the Company Law or is less than two-thirds of the number prescribed in these Articles of Association, or if the Company's non-recovered loss has amounted to one third of the share capital and the board of directors has failed to call for an EGM in the prescribed time, shareholders may call for an EGM on their own according to the prescribed
procedures of the Rules and Procedures for the Shareholders' General Meetings.
Article 66 Any shareholders who individually or jointly hold 10% or more of the voting shares entitling them to vote in the proposed meeting have any dispute as to the board of directors' non-inclusion of their motion into the agenda may, according to the prescribed procedures of the Rules and Procedures for the Shareholders' General Meetings, ask for the convening of an EGM.
Article 67 A motion of a shareholders' general meeting is a discussion paper of a matter which should be discussed in a general meeting and shareholders should resolve on the specific motion in a general meeting. The contents, form and issuing procedures of a motion shall comply with the requirements of the Rules and Procedures for the Shareholders' General Meetings.
Article 68 When the Company convenes a shareholders' general meeting, written notice of the meeting shall be given forty-five (45) days (including the date of the meeting) before the date of the meeting to notify all of the shareholders whose names appear in the share register of the matters to be considered and the date and place of the meeting. The contents, form and issuing procedures of the notice shall comply with the requirements of the Rules and Procedures for the Shareholders' General Meetings.
Article 69 Any shareholder who is entitled to attend and vote at a
general meeting of the Company shall be entitled to appoint one
(1) or more persons (whether such person is a shareholder or
not) as his proxy or proxies to attend and vote on his behalf,
and a proxy so appointed shall be entitled to exercise the
following rights pursuant to the authorization from that
shareholder:
(1) the shareholders' right to speak at the meeting;
(2) the right to demand or join in demanding a poll;
(3) the right to vote by hand or on a poll, but a proxy of a shareholder who has appointed more than one (1) proxy may only vote on a poll.
If the said shareholder is a recognized clearing house as defined by Securities and Futures (Clearing House) Ordinance (Chapter 420 of Hong Kong Law) or the Securities and Futures Ordinance, the shareholder may authorize one or more suitable person to act as its representative at any shareholders' general meeting or any kinds of shareholders' general meeting; however, if more than one person are authorized, the power of attorney shall clearly indicate the number and types of the stocks involved by way of the said authorization. The persons after such authorization may represent the recognized clearing house (or its "proxy") to exercise the rights, as if they were the individual shareholders of the Company.
Article 70 The instrument appointing a proxy to attend the general meeting shall be in writing clearly indicating the number of shares of the appointor represented by the proxy and shall be under the hand of the appointor or his attorney duly authorized in writing, or if the appointor is a legal person, either under seal or under the hand of a director or a duly authorized attorney. If several proxies are appointed, such written instrument shall clearly indicate the number of shares of the appointor represented by each proxy. The remaining contents and form of the instrument shall comply with the requirements of the Rules and Procedures for the Shareholders' General Meetings.
Article 71 Any form given to a shareholder by the directors for use by such shareholder for the appointment of a proxy to attend and vote at meetings of the Company shall be such as to enable the shareholder to freely instruct the proxy to vote in favour of or against the motions, such instructions being given in respect of each individual matter to be voted on at the meeting. Such a form shall contain a statement that, in the absence of specific instructions from the shareholder, the proxy may vote as he thinks fit.
Article 72 A vote made in accordance with the terms of a proxy shall be valid notwithstanding the death or loss of capacity of the appointor or revocation of the proxy or the authority under which the proxy was executed, or the transfer of the shares in respect of which the proxy is given, provided that the Company did not receive any written notice in respect of such matters before the commencement of the relevant meeting.
Article 73 Apart from the independent directors, the Company's board of directors and shareholders who meet the relevant requirements may also collect from other shareholders of the Company the rights to vote in a shareholders' general meeting. The collection of voting rights shall be without consideration with
sufficient disclosure of information to the shareholders from whom voting rights are being collected.
Article 74 When a connected transaction is discussed in a shareholders' general meeting, the connected shareholders shall not take part in the voting and the number of voting shares represented by him will not be counted in. Announcements of resolutions made in the shareholders in a general meeting shall make full disclosure of the votes cast by non-connected shareholders.
If any shareholder are required to abstain from voting or may only vote for or against a matter according to the Rules Governing the Listing of Securities of the Hong Kong Stock Exchange Limited, any vote by such shareholder or his proxy in violation of the relevant rules or restrictions referred to above shall not be counted in the voting results.
Article 75 A shareholder (including a proxy), when voting at a shareholders' general meeting, may exercise such voting rights as are attached to the number of voting shares which he represents except when the accumulated voting system under Article 103 hereof regarding election of directors is adopted in which case one (1) vote is attached to each share. Please refer to the Rules and Procedures for the Shareholders' General Meetings for the implementation of the accumulated voting system.
Article 76 At any shareholders' general meeting, a resolution shall be decided on a show of hands unless a poll is demanded or otherwise required by the listing rules of the stock exchanges on which the Company's shares are listed:
(1) by the chairman of the meeting;
(2) by at least two (2) shareholders present in person or by proxy entitled to vote thereat;
(3) by one (1) or more shareholders present in person or by proxy and representing 10 % or more of all shares carrying the right to vote at the meeting singly or in aggregate, before or after a vote is carried out by a show of hands.
Unless a poll is demanded, a declaration by the chairman that a resolution has been passed on a show of hands and the record of such in the minutes of the meeting shall be conclusive evidence of the fact that such resolution has been passed. There is no need to provide evidence of the number or proportion of votes in favour of or against such resolution.
The demand for a poll may be withdrawn by the person who demands the same.
Article 77 A poll demanded on the election of the chairman of the meeting, or on a question of adjournment of the meeting, shall be taken forthwith. A poll demanded on any other question shall be taken at such time as the chairman of the meeting directs, and any business other than that upon which a poll has been demanded may be proceeded with, pending the taking of the poll. The result of the poll shall be deemed to be a resolution of the meeting at which the poll was demanded.
Article 78 On a poll taken at a meeting, a shareholder (including a proxy) entitled to two (2) or more votes need not cast all his votes in the same way.
Article 79 In the case of an equality of votes, whether on a show of hands or on a poll, the chairman of the meeting at which the show of hands takes place or at which the poll is demanded shall have a casting vote.
Article 80 Resolutions of shareholders' general meetings shall be divided into ordinary resolutions and special resolutions.
An ordinary resolution must be passed by votes representing more than one-half of the voting rights represented by the shareholders (including their proxy) present at the meeting.
A special resolution must be passed by votes representing more than two-thirds of the voting rights represented by the shareholders (including their proxy) present at the meeting.
The shareholders (including their proxy) attending the meeting shall clearly show approval or objection to every matter to be voted on. As for the unpolled vote or abstention, the Company
will not treat it as the vote with voting right when calculating the voting result of this matter.
Article 81 The following matters shall be resolved by an ordinary resolution at a shareholders' general meeting:
(1) work reports of the board of directors and the supervisory committee;
(2) profit distribution plans and loss recovery plans formulated by the board of directors;
(3) removal of members of the board of directors and members of the supervisory committee who are shareholders' representatives, their remuneration and manner of payment and their liability insurance;
(4) annual preliminary and final budgets, balance sheets and profit and loss accounts and other financial statements of the Company;
(5) matters other than those which are required by the laws and administrative regulations or by the Company's Articles of Association to be adopted by special resolution.
Article 82 The following matters shall be resolved by a special resolution at a shareholders' general meeting:
(1) the increase or reduction in share capital and the issue of shares of any class, warrants and other similar securities;
(2) the issue of debentures of the Company;
(3) the division, merger, dissolution and liquidation of the Company;
(4) amendment of the Company's Articles of Association;
(5) repurchase of the Company's shares;
(6) any other matters considered by the shareholders in general meeting, and resolved by way of an ordinary resolution, to be of a nature which may have a material impact on the Company and should be adopted by special resolutions.
Article 83 The chairman of the meeting shall be responsible for determining whether a resolution has been passed. His decision, which shall be final and conclusive, shall be announced at the meeting and recorded in the minutes.
Article 84 If the chairman of the meeting has any doubt as to the result of a resolution which has been put to vote at a shareholders' meeting, he may have the votes counted. If the chairman of the meeting has not counted the votes, any shareholder who is present in person or by proxy and who objects to the result announced by the chairman of the meeting may, immediately after the declaration of the result, demand that the votes be counted and the chairman of the meeting shall have the votes counted immediately.
Article 85 If votes are counted at a shareholders' general meeting, the result of the count shall be recorded in the minutes.
Article 86 Records of Meetings shall be prepared for shareholders' general meetings and signed by attending directors and the recording person. If there is no director attending in the general meeting, the records of meeting shall be signed by the shareholder or proxy of shareholder chairing the meeting and the recording person. The contents and form of the records of meeting shall comply with the requirements of the Rules and Procedures for the Shareholders' General Meetings.
The minutes of meeting shall be prepared for all resolutions adopted at shareholders' general meetings. The records and minutes of the meeting shall be made in Chinese. The minutes, together with the shareholders' attendance lists and proxy forms shall be treated as a Company file and kept by the secretary of the board of directors at the Company's place of residence.
Article 87 Copies of the minutes of proceedings of any shareholders' meeting shall, during business hours of the Company, be open for inspection by any shareholder without charge. If a shareholder requests for a copy of such minutes from the Company, the Company shall send a copy of such minutes to him within seven (7) days after receipt of reasonable fees therefor.
CHAPTER 9 SPECIAL PROCEDURES FOR VOTING BY A CLASS OF SHAREHOLDERS
Article 88 Those shareholders who hold different classes of shares are class shareholders.
Class shareholders shall enjoy rights and assume obligations in accordance with laws, administrative regulations and the Company's Articles of Association.
Article 89 Rights conferred on any class of shareholders ("class rights") may not be varied or abrogated save with the approval of a special resolution of shareholders in a general meeting and by holders of shares of that class at a separate meeting conducted in accordance with Articles 91 to 95 hereof.
Article 90 The following circumstances shall be deemed to be variation or abrogation of the rights attaching to a particular class of shares:
(1) to increase or decrease the number of shares of that class, or to increase or decrease the number of shares of a class having voting or equity rights or privileges distribution or superior to those of shares of that class;
(2) to exchange all or part of the shares of that class for shares of another class or to exchange or to create a right to exchange all or part of the shares of another class for shares of that class;
(3) to remove or reduce rights to accrued dividends or rights to cumulative dividends attached to shares of that class;
(4) to reduce or remove preferential rights attached to shares of that class to receive dividends or to the distribution of assets in the event that the Company is liquidated;
(5) to add, remove or reduce conversion privileges, options, voting rights, transfer or pre-emptive rights, or rights to acquire securities of the Company attached to shares of that class;
(6) to remove or reduce rights to receive payment payable by the Company in specific currencies attached to shares of that class;
(7) to create a new class of shares having voting or distribution rights or privileges equal or superior to those of the shares of that class;
(8) to restrict the transfer or ownership of shares of that class or to increase the types of restrictions attaching thereto;
(9) to issue rights to subscribe for, or to convert the existing shares into, shares in the Company of that class or another class;
(10) to increase the rights or privileges of shares of another class;
(11) to restructure the Company in such a way so as to result in the disproportionate distribution of obligations between the various classes of shareholders;
(12) to vary or abrogate the provisions of this Chapter.
Article 91 Affected class shareholders, whether or not otherwise having the right to vote at shareholders' general meetings, have the right to vote at class meetings in respect of matters concerning sub-paragraphs (2) to (8), (11) and (12) of Article 90 hereof, but interested shareholder(s) shall not be entitled to vote at such class meetings.
"(An) interested shareholder(s)", as such term is used in the preceding paragraph, means:
(1) in the case of a repurchase of shares by way of a general offer to all shareholders of the Company or by way of public dealing on a stock exchange pursuant to Article 29
hereof, an interested shareholder is a "controlling shareholder" within the meaning of Article 56 hereof;
(2) in the case of a repurchase of shares by an off-market agreement pursuant to Article 29 hereof, a holder of the shares to which the proposed agreement relates;
(3) in the case of a restructuring of the Company, a shareholder who assumes a relatively lower proportion of obligation than the obligations imposed on shareholders of that class under the proposed restructuring or who has an interest in the proposed restructuring different from the general interests of the shareholders of that class.
Article 92 Resolutions of a class of shareholders shall be passed by votes representing more than two-thirds of the voting rights of shareholders of that class represented at the relevant meeting who, according to Article 91, are entitled to vote thereat.
Article 93 A written notice of a class meeting shall be given to all shareholders who are registered as holders of that class in the register of shareholders forty-five (45) days before the date of the class meeting (not including the date of meeting). Such notice shall give such shareholders notice of the matters to be considered at such meeting, the date and the place of the class meeting. A shareholder who intends to attend the class meeting shall deliver his written reply in respect thereof to the Company twenty (20) days before the date of the class meeting.
If the shareholders who intend to attend such class meeting represent more than half of the total number of shares of that class which have the right to vote at such meeting, the Company may hold the class meeting; if not, the Company shall within five (5) days give the shareholders further notice of the matters to be considered, the date and the place of the class meeting by way of public announcement. The Company may then hold the class meeting after such public announcement has been made.
Article 94 Notice of class meetings need only be served on shareholders entitled to vote thereat.
Class meetings shall be conducted in a manner which is as similar as possible to that of shareholders' general meetings. The provisions of the Company's Articles of Association relating to the manner for the conduct of shareholders' general meetings are also applicable to class meetings.
Article 95 Apart from the holders of other classes of shares, the holders of the Domestic-Invested Shares and holders of Overseas-Listed Foreign-Invested Shares shall be deemed to be holders of different classes of shares.
The special procedures for approval by a class of shareholders shall not apply in the following circumstances:
(1) where the Company issues, upon the approval by special resolution of its shareholders in a general meeting, either separately or concurrently once every twelve (12) months, not more than 20% of each of its existing issued Domestic-Invested Shares and Overseas-Listed Foreign-Invested Shares; or
(2) where the Company's plan to issue Domestic-Invested
Shares and Overseas-Listed Foreign-Invested Shares at the
time of its establishment is carried out within fifteen
(15) months from the date of approval of the securities
regulatory organ of the State Council.
CHAPTER 10 BOARD OF DIRECTORS
Article 96 The Company shall have a board of directors which is accountable to shareholders.
The Company shall draw up Rules and Procedures for the Board of Directors' Meetings for implementation after being approved by the shareholders in a general meeting. The Rules and Procedures for the Board of Directors' Meetings shall include the following items:
(1) functions and powers and authorizations of the board of directors;
(2) establishment of the board of directors and its subordinated offices;
(3) secretary of the board of directors;
(4) discussion system of a board meeting;
(5) discussion procedures of a board meeting;
(6) disclosure of information of a board meeting;
(7) implementation and feedback of resolutions of a board meeting;
(8) other matters deemed necessary by the shareholders' general meeting.
The Rules and Procedures for the Board of Directors' Meetings is an integral part of and shall have the same legal effect as these Articles of Association.
Article 97 The board of directors shall consist of twelve (12) directors and there shall be one (1) Chairman and one (1) Vice-chairman.
Article 98 Directors of the Company shall be natural persons and they are not required to hold any shares in the Company.
Directors shall be elected at the shareholders' general meeting each for a term of three (3) years. The term of office of a director shall be calculated from the date of the passing of the resolution approving the appointment of such director at the shareholders' general meeting until the expiry of the term of the present session of the board of directors. At the expiry of the term of office of a director, the term is renewable upon re-election. A director may not be removed by the shareholders in a general meeting without any reason before his term of office expires. The term of office of any independent director may not be renewed for more than 6 years.
Article 99 The list of candidates for directors shall be submitted to the shareholders' general meeting in the form of motion for approval.
Candidates other than those for independent directors shall be nominated by the board of directors, the supervisory committee or shareholders who individually or jointly hold 5% or more of the Company's voting shares and be elected by the shareholders in a general meeting.
Candidates for independent directors of the Company shall be nominated by the Company's board of directors, the supervisory committee or shareholders who individually or jointly hold 1% or more of the Company's voting shares and be elected by the shareholders in a general meeting.
Article 100 Independent directors shall be elected in the following manner:
(1) the nominator of a candidate for independent director shall seek the consent of the nominee, find out the occupation, academic qualification, rank and detailed working experience including all part-time jobs of the nominee and provide written proofs of the same to the Company before making the nomination. The candidate shall give a written undertaking to the Company agreeing to be nominated, undertaking the truthfulness and completeness of his particulars disclosed and guaranteeing the performance of a director's duties after being elected.
(2) the nominator of an independent director shall give opinion on the qualification and independence of the nominee to act as an independent director. The nominee shall make an open announcement as to the absence of any relation between the Company and him which would affect his independent and objective judgment.
(3) if the nomination of candidates for independent directors is made before the Company's convening of a board meeting, the written proofs of the nominee referred to in sub-paragraphs (1) and (2) above shall be disclosed together with the board resolution.
(4) if the shareholders who individually or jointly hold 5% or more of the Company's voting shares or the supervisory committee puts forward a provisional motion in a general meeting of the Company according to law for election of independent directors, a written notice stating their
intention to nominate a candidate for directors and the nominee's consent to be nominated together with the written proofs and undertaking of the nominee referred to in sub-paragraphs (1) and (2) above shall be delivered to the Company not less than seven (7) days before the general meeting, and the period granted by the Company for lodging the above notice and documents by the relevant nominator (such period shall commence from the date after the issue of the notice of the general meeting) shall not be less than seven (7) days
(5) before the shareholders' general meeting for election of independent directors is convened, the Company shall submit the relevant information of all nominees to the securities regulatory authority of the State Council, the organ appointed by the securities regulatory authority of the State Council in the place of residence of the Company and the stock exchange on which the Company's shares are listed. The written opinions of the board of directors shall also be submitted in case the Company's board has any dispute as to the particulars of the nominee. If the securities regulatory authority of the State Council opposes to the nomination of any nominee, this nominee may not be included as a candidate for independent directors. In convening a general meeting to elect independent directors, the Company's board shall specify if the securities regulatory authority of the State Council has any dispute as to the candidates for independent directors.
Article 101 Non-independent directors shall be elected in the following manner:
(1) the nominator of a candidate for non-independent director shall seek the consent of the nominee, find out the occupation, academic qualification, rank and detailed working experience including all part-time jobs of the nominee and provide written proofs of the same to the Company before making the nomination. The candidate shall give a written undertaking to the Company agreeing to be nominated, undertaking the truthfulness and completeness of his particulars disclosed and guaranteeing the performance of a director's duties after being elected.
(2) if the nomination of candidates for non-independent directors is made before the Company's convening of a board meeting, the written proofs of the nominee referred to in sub-paragraph (1) above shall be disclosed together with the board resolution.
(3) if the shareholders who individually or jointly hold 5% or more of the Company's voting shares or the supervisory committee puts forward a provisional motion in a general meeting of the Company according to law for election of non-independent directors, a written notice stating their intention to nominate a candidate for directors and the nominee's consent to be nominated together with the written proofs and undertaking of the nominee referred to in sub-paragraph (1) above shall be delivered to the Company not less than seven (7) days before the general meeting, and the period granted by the Company for lodging the above notice and documents by the relevant nominator (such period shall commence from the date after the issue of the notice of the general meeting) shall not be less than seven (7) days".
Article 102 The following basic requirements shall be met in order to be an independent director:
(1) qualified to be a director of a listed company under the laws, administrative regulations and other relevant provisions;
(2) has the independence required by these Articles of Association;
(3) has basic knowledge of the operation of a listed company, familiar with the relevant laws, administrative rules, regulations and rules;
(4) has 5 years or more of legal or financial experience or other experience in performing the duties of an independent director;
(5) other requirements stipulated in these Articles of Association.
Article 103 If the controlling shareholders of the Company control 30% or more of the Company's shares, the accumulative voting system shall be adopted when voting on the election of directors in a shareholders' general meeting, that is, in electing two or more directors in a shareholders' general meeting, the number of votes attached to each share held by a participating shareholder shall be equal to the number of candidates, in which case the shareholder may cast his votes for one candidate or for several candidates. Please refer to the Rules and Procedures for the
Shareholders' General Meetings for details of implementation of the accumulative voting system.
Article 104 Provided that the relevant laws and administrative rules are observed, a director whose term of office has not yet been expired may be removed in a general meeting by way of ordinary resolution (but the right to lodge a claim under a contract is not affected).
If a director has failed to attend a board meeting personally nor appoint a proxy to attend on his behalf on two consecutive occasions, it shall be treated as a failure to discharge his duties. The board of directors shall propose in a shareholders' general meeting to remove and replace this director.
If an independent director has failed to attend a board meeting personally on three consecutive occasions, the board of directors shall propose in a shareholders' general meeting to remove and replace this director. Unless in the above circumstances and in circumstances as provided in the Company Law where a person is prohibited from acting as a director, no independent director may be removed before his term of office expires. In case of early removal, the Company shall disclose it by way of special disclosure. If the removed independent director considers that he is removed by the Company improperly, he may make an open declaration.
Article 105 A director may resign before his term of office expires. In resigning his duties, a director shall tender a resignation to the board in writing and in the case of an independent director, he shall also specify any matter which is related to his resignation or which he considers necessary to bring to the attention of the Company's shareholders and creditors.
Article 106 If the resignation of a director causes the board members of the Company to fall below the minimum number of members to form a quorum, the resignation of this director shall be effective only after the succeeding director has filled his vacancy. The board shall call an EGM as soon as possible to elect a director to fill the vacancy caused by his resignation. Before a resolution is made in a shareholders' general meeting in relation to the election of directors, the functions and powers of this resigning director and other remaining directors shall be subject to reasonable restrictions.
If the resignation of an independent director causes the proportion of independent directors in the board of the Company to fall below the minimum requirements of the relevant regulatory authorities, the resignation of this independent director shall be effective only after the succeeding independent director has filled his vacancy.
Article 107 The board of directors shall exercise the following functions and powers:
(1) to be responsible for the convening of the shareholders' general meeting and to report on its work to the shareholders in general meetings;
(2) to implement the resolutions passed by the shareholders in general meetings;
(3) to determine the Company's business plans and investment proposals;
(4) to formulate the Company's annual preliminary and final financial budgets;
(5) to formulate the Company's profit distribution proposal and loss recovery proposal;
(6) to formulate proposals for the credit and financial policies of the Company, the increase or reduction of the Company's registered capital and for the issue of any kind of securities of the Company's (including but without limitation to the Company's debentures) and proposals for listing and repurchase of the Company's shares;
(7) to draw up plans for significant acquisition or disposal proposals, the merger, division or dissolution of the Company;
(8) to determine the risks investments of the Company according to the authority given in the shareholders' general meeting;
(9) to determine external guarantees (including pledging of assets) of the Company according to the authority given in the shareholder's general meeting
(10) to decide on the Company's internal management structure;
(11) to appoint or remove the Company's president and to appoint or remove the vice-president and Chief Financial Officer of the Company according to the recommendations of the president; to appoint or remove the secretary of the board of directors and to decide on their remuneration;
(12) to appoint or replace the members of the board of directors and the supervisory committee of its wholly-owned subsidiary, appoint, replace or recommend the shareholders' proxies, directors (candidates) and supervisors (candidates) of its subsidiary(ies) which are controlled or invested by the Company;
(13) to determine the establishment of Company's branch offices;
(14) to formulate proposals for any amendment of the Company's Articles of Association and its appendices;
(15) to formulate the Company's basic management system;
(16) to manage the disclosure of information of the Company;
(17) to propose in a shareholders' general meeting to engage or replace the accounting firm which undertakes auditing work of the Company;
(18) to listen to the president's work report and check the president's work;
(19) to determine important matters and administrative matters of the Company other than those which should be determined by resolution of a shareholders' general meeting of the Company except for the matters as specified by law, administrative rules, regulations of the competent department(s) and these Articles of Association, and to sign other important agreements;
(20) to exercise any other powers stipulated by laws, administrative rules, regulations of the competent department(s) or these Articles of Association and conferred by the shareholders in a general meeting.
Other than the board of directors' resolutions in respect of the matters specified in sub-paragraphs (6), (7), (9) and (14) of this Article which shall be passed by the affirmative vote of more than two-thirds of all the directors, the board of directors' resolutions in respect of all other matters may be passed by the affirmative vote of a simple majority of the directors.
Article 108 The above functions and powers of board meetings may be authorized to one or more directors upon the agreement of all directors, but matters concerning material interests of the Company shall be determined by the board collectively. The authorization of the board shall be clear and specific.
Article 109 An independent director shall have the following special functions and powers in addition to those conferred by the Company Law, other relevant laws, administrative rules and these Articles of Association:
(1) material connected transactions (determined according to the standards issued from time to time by the relevant regulatory authorities in the place where the Company's shares are listed) which should be approved by the board of directors or the shareholders' general meeting according to law shall, upon the recognition of independent directors, be submitted to the board of directors for discussion. Any resolution made by the board of directors regarding the Company's connected transactions must only be effective after it has been signed by the independent directors. The independent directors may, before making a judgment, engage an intermediary to issue an independent financial report for them to rely upon in making the judgment;
(2) to propose to the board of directors to engage or remove an accounting firm;
(3) two or more than one-half of the independent directors may propose to the board of directors to convene an EGM;
(4) to propose the calling of a board meeting;
(5) to engage an external auditing or advisory organ independently;
(6) to collect voting rights from shareholders prior to the convening of a shareholders' general meeting;
(7) to report directly to the shareholders' general meetings, securities regulatory organ under the State Council and other relevant departments.
The independent directors shall seek the consent of more than half of the independent directors in exercising their functions and powers other than sub-paragraphs (1) and (3) above.
If the above proposal is not accepted or the above functions and powers are not exercised properly, the Company shall disclose the same.
Article 110 When the board of directors make the decisions in respect of market development, mergers and acquisitions and the investment in new areas etc., in case the investment amount or the asset value thus merged and acquired exceeds more than 10 (ten) percent of total assets of the Company, the board of directors shall invite the consulting organizations for their professional opinions, these opinions shall serve as the important basis for decision-making by the board of directors.
The board of directors shall lay down strict procedures to inspect and decide on risks investments. For major investment projects in excess of the approval limit of the board of directors, the board of directors shall organize the relevant experts and professional officers to conduct assessment for approval of the shareholders in a general meeting. Matters regarding risks investments have been provided explicitly in the Rules and Procedures for the Board of Directors' Meetings.
Article 111 The Chairman and the Vice-Chairman shall be directors of the Company and be appointed and removed by affirmative vote of a simple majority of all directors. The term of office of the Chairman or the Vice-Chairman shall be three (3) years which term is renewable upon re-election.
Article 112 The Chairman of the board of directors shall exercise the following functions and powers:
(1) to preside over shareholders' general meetings and to convene and preside over meetings of the board of directors;
(2) to co-ordinate and perform the responsibilities of the board of directors and review on the implementation of resolutions passed by the board of directors at directors' meetings;
(3) to sign the certificates of shares, debentures and other valuable securities issued by the Company;
(4) to sign important documents of the board and other documents which should be signed by the Company's legal representative;
(5) to exercise the functions and powers of a legal representative;
(6) where it is lawful and in the interest of the Company, to exercise the special right to deal with the Company's affairs during emergency such as the occurrence of natural disasters, and to report to the Company's board of directors and general meetings thereafter;
(7) to exercise other powers conferred by the board of directors.
Whenever the Chairman is unable to exercise his powers, such powers shall be exercised by the Vice-Chairman or other directors who have been designated by the Chairman to exercise such powers on his behalf.
Article 113 Board meetings shall be convened regularly at least four times a year. An EGM shall be called for on occurrence of any of the events set out in the Rules and Procedures for the Board of Directors' Meetings.
In convening a regular board meeting or an EGM, a notice shall be given to all directors 10 days before the meeting. The calling for a board meeting, and the contents and form of a notice of meeting shall comply with the requirements of the Rules and Procedures for the Board of Directors' Meetings.
Article 114 Meetings of the board of directors shall be held only if more than half of the directors (including any alternate director appointed) are present. Each director shall have one (1) vote. Where there is an equality of votes cast both for and against a resolution, the Chairman of the board of directors shall have an additional vote.
Article 115 Directors shall attend the meetings of the board of directors in person. Where a director is unable to attend a meeting for any reason, he may by a written power of attorney appoint another director to attend the meeting on his behalf. The power of attorney shall set out the scope of authorization.
A director appointed as a representative of another director to attend the meeting shall exercise the rights of a director within the scope of authority conferred by the appointing director. Where a director is unable to attend a meeting of the board of directors and has not appointed a representative to attend the meeting on his behalf, he shall be deemed to have waived his right to vote at the meeting.
All expenses incurred by the directors for attending the board meeting shall be borne by the Company, including the traffic expense from the place where the director is located to the place where the meeting is convened, as well as the board and lodging expenses during the term of meeting. The miscellaneous expenses such as the rental of meeting room and the local traffic expenses etc. shall also be borne by the Company.
Article 116 The board of directors may accept the preparation of a written resolution instead of convening a board meeting provided that the contents and form of the written resolution are in compliance with the Rules and Procedures for the Board of Directors' Meetings.
Article 117 Matters determined in a board meeting shall be recorded in Chinese in the form of Records of Meeting. The contents and form of Records of Board Meetings shall comply with the Rules and Procedures for the Board of Directors' Meetings.
Article 118 If a written motion of a board meeting is not prepared in accordance with the stipulated procedures, it will not have the effect of a board resolution even if each director has expressed his view thereto. Directors shall be liable for board resolutions. If a board resolution is against the law, administrative rules or these Articles of Association and thus causes the Company to suffer any loss, the directors who cast an affirmative vote for the motion shall assume direct liability (including the liability to compensate); directors who are proved to have cast a dissenting vote against the motion during the voting as recorded in the records of meeting shall be exempted from liability; directors who abstained from voting or failed to attend nor appoint a proxy to attend the board meeting shall not be exempted from liability; and directors who opposed to the motion but did not cast a dissenting vote against it in the voting shall not be exempted from liability either.
CHAPTER 11 SECRETARY OF THE BOARD OF DIRECTORS
Article 119 The Company shall have one (1) secretary of the board of directors. The secretary shall be a senior officer of the Company accountable to the Company. The Company shall formulate regulations in relation to the work of the Secretary of the Board to promote the management of the Company and make provisions for disclosure of information and investor relations.
The board of directors may establish its secretarial department when necessary.
Article 120 A director or the president, vice-president, Chief Financial Officer of the Company may concurrently act as the secretary of the Company's board of directors. No accountant of the accounting firm or solicitor of the solicitors' firm engaged by the Company may concurrently act as the secretary of the Company's board of directors.
The secretary of the Company's board of directors shall be a natural person who has the requisite professional knowledge and experience, and shall be nominated by the Chairman of the Board and appointed or removed by the board of directors. In the case of a director acting concurrently as the secretary of the board,
if an act has to be performed by a director and the secretary of the board respectively, this director acting concurrently as the secretary of the board may not act in both identities.
Article 121 The main duties of the secretary of the board of directors include:
(1) to assist directors to deal with the daily matters of the board of directors, continuously provide, remind and ensure directors and the president, etc. to be well informed of the laws, regulations, policies and requirements of both domestic and overseas regulatory organizations concerning the operation of the Company, and assist directors and managers to practically implement the domestic and foreign laws, regulations, Company's Articles of Association and other regulations when performing their duties and powers;
(2) to be responsible for the organization and preparation of the documents of the board of directors and shareholders' general meeting, well prepare the meeting record work, ensure the meeting policies in conformity with the legal procedures, and to keep abreast of the execution of the resolutions of the board of directors;
(3) to be responsible for the organization and coordination of information disclosure, to ensure of a timely, accurate, lawful, true and complete disclosure of information, coordination of the relationship with the investors, and enhancement of the transparency of the Company;
(4) to participate in and organize the financing in capital market;
(5) to deal with the relationships with the intermediary organs, regulatory authorities and the media, and maintain a good public relationship.
Article 122 The secretary of the board of directors shall discharge his duties diligently according to these Articles of Association.
The secretary of the board of directors shall assist the Company to comply with the relevant PRC law and regulations of the securities regulatory organ of the place where the Company's shares are listed.
CHAPTER 12 PRESIDENT
Article 123 The Company shall have a president who is accountable to the board of directors. The president shall be nominated by the Chairman of the board of directors and appointed or removed by the board of directors.
The Company shall have several vice-presidents, and one Chief Financial Officer who shall assist the president in work. The vice-presidents and the Chief Financial Officer shall be nominated by the president and appointed or removed by the board of directors.
A director may also be engaged to act concurrently as the president, vice-president, Chief Financial Officer or secretary of the board of directors, but the number of directors acting concurrently as the president, vice-president, Chief Financial Officer or secretary of the board of directors may not exceed one-half of the total number of directors of the Company.
Article 124 The president shall exercise the following duties and powers:
(1) to be in charge of the Company's production, operation and management, to co-ordinate the implementation of the resolutions of the board of directors and to report his work to the board of directors;
(2) to organize the implementation of the Company's annual business plan and investment proposal;
(3) to draft plans for the establishment of the Company's internal management structure;
(4) to draft plans for the establishment of the branch company of the Company;
(5) to draft the Company's basic management system;
(6) to formulate specific rules and regulations for the Company;
(7) to propose the appointment or dismissal of the Company's vice-president(s) and Chief Financial Officer;
(8) to appoint or dismiss management personnel other than those required to be appointed or dismissed by the board of directors;
(9) to determine the wages, fringe benefits, rewards and punishments of the Company's staff, to determine the appointment and dismissal of the Company's staff;
(10) to propose the convening of extraordinary meetings of directors;
(11) other powers conferred by the Company's Articles of Association and the board of directors.
Article 125 The president or vice-president who is not a director shall have the right to attend board meetings and to receive notices of meetings and other relevant documents but does not have any voting rights at board meetings.
Article 126 The president shall at the request of the board of directors or the supervisory committee make report of the signing and performance of major contracts, use of funds and profit and loss of the Company. The president must ensure the truthfulness of the report.
Article 127 The president shall seek the opinions of the staff members in determining matters which are closely related to staff members such as the wages, fringe benefits, safe production and work, labour insurance, dismissal (or discharge) of staff members of the Company.
Article 128 The president shall draw up "Work Regulations for the President" for implementation upon the approval of the board of directors.
The Work Regulations for the President shall include:
(1) requirements and procedures for the convening of a presidents' meeting and the officers attending;
(2) the president, vice-presidents and Chief Financial Officer shall divide their duties among themselves and perform their own duties;
(3) use of the Company's funds and assets, authority to sign major contracts and the system to report to the board of directors and to the supervisory committee at the request of the supervisory committee;
(4) other matters as the board of directors may consider necessary.
Article 129 In performing their functions and powers, the president, vice-presidents and the Chief Financial Officer shall act honestly and diligently and in accordance with laws, administrative regulations and these Articles of Association. They may not alter the resolutions of a shareholders' general meeting or of a board meeting nor act ultra vires.
Article 130 In retiring from their office, the president, vice-president or Chief Financial Officer shall, as required by the relevant labour contract between the above personnel and the Company, give prior notice to the Company and shall adhere to the relevant procedures and methods of resignation provided in the labour contract.
CHAPTER 13 SUPERVISORY COMMITTEE
Article 131 The Company shall have a supervisory committee which is accountable to the shareholders' general meetings.
The Company shall draw up "Rules and Procedures for the Supervisors' Meetings" for implementation upon being approved by
the shareholders in a general meeting. The Rules and Procedures for the Supervisors' Meetings shall include the followings:
(1) the formation and business system of the supervisory committee;
(2) the functions and powers of the supervisory committee;
(3) the system of discussion of the supervisors' meetings;
(4) the procedures of discussion of the supervisory committee;
(5) the disclosure of information of the supervisors' meetings;
(6) implementation and feedback of resolutions of the supervisory committee;
(7) other matters as the shareholders' general meetings may consider necessary.
The Rules and Procedures for the Supervisors' Meetings shall be an integral part of and have the same legal effect as these Articles of Association.
Article 132 The supervisory committee shall compose of ten (10) supervisors.
Of which, six (6) of them shall be shareholder representatives
(including those who are eligible to be external supervisors);
four (4) of them shall be representatives of workers and staff
of the Company.
Each supervisor shall serve for a term of three (3) years, which term is renewable upon re-election and re-appointment.
The supervisory committee shall have one (1) Chairman who shall be a supervisor. The election or removal of the Chairman of the supervisory committee shall be determined by two-thirds or more of the members of the supervisory committee.
The Chairman of the supervisory committee shall co-ordinate and exercise the duties and powers of the supervisory committee.
Article 133 If necessary, the supervisory committee may establish its offices responsible for daily affairs of the supervisory committee.
Article 134 A director, president, vice-president or Chief Financial Officer may not act concurrently as a supervisor.
Article 135 The list of candidates for the supervisors who are shareholder representatives shall be submitted to the shareholders' general meeting in the form of motion for approval.
Amongst the candidates for supervisors who are shareholder representatives, candidates other than those for independent supervisors shall be nominated by the Company's board of directors, the supervisory committee or shareholders who individually or jointly hold 5% or more of the Company's voting shares and be elected by the shareholders in a general meeting.
Amongst the candidates for supervisors who are shareholder representative, candidates for independent supervisors shall be nominated by the Company's board of directors, the supervisory committee or shareholders who individually or jointly hold 1% or more of the Company's voting shares and be elected by the shareholders in a general meeting.
Article 136 Independent directors shall be elected in the following manner:
(1) the nominator of a candidate for supervisor who is a shareholder representative shall seek the consent of the nominee, find out the occupation, academic qualification, rank and detailed working experience including all part-time jobs of the nominee and provide written proofs of the same to the Company before making the nomination. The candidate shall give a written undertaking to the Company agreeing to be nominated, undertaking the truthfulness and completeness of his particulars
disclosed and guaranteeing the performance of a director's duties after being elected.
(2) If the nomination of a candidate for supervisor who is a shareholder representative is made before the Company's convening of a board meeting, the written proofs of the nominee referred to in sub-paragraphs (1) above shall be disclosed together with the board resolution.
(3) If the shareholders who individually or jointly hold 5% or more of the Company's voting shares or the supervisory committee puts forward a provisional motion in an AGM of the Company for election of a supervisor who is a shareholder representative, a written notice stating their intention to nominate a candidate for a supervisor and the nominee's consent to be nominated together with the written proofs and undertaking of the nominee referred to in sub-paragraph (1) above shall be delivered to the Company seven (7) days before the AGM.
Article 137 Any supervisor who fails to attend a supervisors' meeting personally on two consecutive occasions shall be treated as a failure to discharge his duties. In that case he shall be removed and replaced in a shareholders' general meeting or staff representatives' meeting. A supervisor may resign before his term expires and Chapter 10 hereof regarding resignation of directors shall also be applicable to supervisors.
Article 138 Supervisors' meetings shall be convened regularly at least four times a year. An extraordinary supervisors' meeting shall be convened on occurrence of any of the events specified in the Rules and Procedures for the Supervisors' Meetings.
A 10 days' prior notice shall be given to all supervisors for the convening of a regular or extraordinary supervisors' meeting. The convening of a supervisors' meeting and the contents and form of the notice of meeting shall comply with the Rules and Procedures for the Supervisors' Meetings.
Article 139 The supervisory committee shall exercise the following functions and powers in accordance with law:
(1) to review the Company's financial position; to appoint another accounting firm in the name of the Company to review the Company's financial condition independently;
(2) to supervise the directors, president, vice-presidents, Chief Financial Officer and secretary of the board to ensure that they do not act in contravention of any law, regulation or these Articles of Association;
(3) to demand the directors, president, vice-presidents, Chief Financial Officer or secretary of the board to rectify their error or even to report it in a shareholders' general meeting or to the competent State organ if they have acted in a harmful manner to the Company's interest;
(4) to check and inspect the financial information such as the financial report, business report and plans for distribution of profits to be submitted by the board of directors to the shareholders' general meetings and to authorize, in the Company's name, publicly certified and practicing accountants to assist in the review on such information should any doubt arise in respect thereof;
(5) to make recommendations of accounting firms for engagement by the Company;
(6) to make provisional motions in an AGM;
(7) to propose to convene an EGM;
(8) to propose to convene an extraordinary board meeting;
(9) to represent the Company in negotiations with or in bringing actions against a director;
(10) other duties and powers as may be specified by law, administrative rules, regulations of the competent department and these Articles of Association and conferred by the general meeting.
Supervisors shall attend meetings of the board of directors.
Article 140 The supervisory committee may require the directors, president, vice-president, Chief Financial Officer, secretary of the board of directors of the Company, internal and external auditors to attend supervisors' meetings and answer any question that the supervisory committee may have regarding matter it cares about.
Article 141 Resolutions of the supervisory committee shall be passed by the affirmative vote of more than two-thirds of all of its members.
Article 142 Records shall be made for all supervisors' meetings and be signed by all attending supervisors and the recording person. Supervisors shall have the right to ask for the making of a descriptive record of what he speaks in the meeting. Records of supervisors' meetings shall be treated as the Company's files and kept permanently in the business system of the supervisory committee.
Article 143 All reasonable fees incurred in respect of the employment of professionals (such as, lawyers, certified public accountants or practicing auditors) which are required by the supervisory committee in the exercise of its functions and powers shall be borne by the Company.
Article 144 A supervisor shall carry out his duties faithfully and bona fide in accordance with laws, administrative regulations and the Company's Articles of Association.
CHAPTER 14 QUALIFICATIONS AND OBLIGATIONS OF THE DIRECTORS,
SUPERVISORS, PRESIDENT, VICE-PRESIDENT, CHIEF FINANCIAL
OFFICER AND SECRETARY OF THE BOARD OF DIRECTORS OF THE
COMPANY
Article 145 A person may not serve as a director, supervisor, president, vice-president, Chief Financial Officer and secretary of the board of directors of the Company if any of the following circumstances apply:
(1) a person who does not have or who has limited capacity for civil conduct;
(2) a person who has been found guilty of for corruption, bribery, infringement of property or misappropriation of property or other crimes which destroy the social economic order, and the sentence is enforced for less than five (5) years or a person who has been deprived of his political rights and not more than five (5) years have lapsed since the sentence was served;
(3) a person who is a former director, factory manager or president of a company or enterprise which has been dissolved or put into liquidation as a result of mismanagement and who was personally liable for the winding up of such company or enterprise, where less than three (3) years have elapsed since the date of completion of the insolvent liquidation of the company or enterprise;
(4) a person who is a former legal representative of a company or enterprise the business licence of which was revoked due to violation of law and who are personally liable therefor, where less than three (3) years have elapsed since the date of the cancellation of the business licence;
(5) a person who has a relatively large amount of debts which have become due and outstanding;
(6) a government servant of the country;
(7) a person who is currently under investigation by the judicial authorities for violation of criminal law;
(8) a person who, according to laws and administrative regulations, cannot act as a leader of an enterprise;
(9) a person other than a natural person;
(10) a person who has been adjudged by the competent authority for violation of relevant securities regulations and such conviction involves a finding that such person has acted fraudulently or dishonestly, where not more than five (5) years have lapsed from the date of such conviction;
(11) a person who has been prohibited by the securities regulatory authority of the State Council to participate in market activities and the prohibition has still not been uplifted.
Article 146 The chairman, vice-chairman and directors of the Company's controlling shareholder acting concurrently as the chairman, vice-chairman or director of the Company may not exceed two in number. Managers of the Company's controlling shareholder may not act concurrently as the Company's president, vice-president, Chief Financial Officer, sales supervisor or secretary of the board.
Article 147 The following people may not act as an independent director of the Company:
(1) persons employed by the Company or its subsidiaries and their immediate family members and major social connections (immediate family members shall mean spouse, parents and issues, etc. and major social connections shall mean siblings, parents-in-law, sons/daughters-in-law, spouse of siblings, siblings of spouse, etc.);
(2) natural person shareholders who directly or indirectly hold 1% or more of the Company's issued shares or who are top ten shareholders and their immediate family members;
(3) persons employed by the shareholder company which directly or indirectly holds 1% or more of the Company's issued shares or by the top five shareholder companies of the Company and their immediate family members;
(4) persons who once belonged to categories (1) to (3) above in the past 3 years;
(5) persons who provide financial or legal advice to the Company or its subsidiaries;
(6) any independent director who is already the director of five listed companies;
(7) other persons determined by the securities regulatory authority of the State Counsel.
Article 148 The validity of an act carried out by a director, a supervisor, the president, vice-president, Chief Financial Officer or secretary of the board of directors of the Company on its behalf shall, as against a bona fide third party, not be affected by any irregularity in his office, election or any defect in his qualification.
Article 149 Without the lawful authorization of these Articles of Association or the board of directors, a director of the Company may not act personally on behalf of the Company or the board of directors. If he acts personally, he shall declare his own position and identity in advance where the acting would cause a third party to believe reasonably that he is acting on behalf of the Company or the board of directors.
Article 150 In addition to the obligations imposed by laws, administrative regulations or the listing rules of the stock exchange on which shares of the Company are listed, each of the Company's directors, supervisors, president, vice-president, Chief Financial Officer and secretary of the board of directors owes a duty to each shareholder, in the exercise of the duties and powers of the Company entrusted to him:
(1) not to procure the Company to do anything ultra vires to the scope of business as stipulated in its business licence;
(2) to act honestly and in the best interests of the Company;
(3) not to expropriate the Company's property in any way, including (without limitation to) usurpation of opportunities which may benefit the Company;
(4) not to deprive of the individual interest of shareholders, including (without limitation to) rights to distribution and voting rights, save and except pursuant to a restructuring of the Company which has been submitted to the shareholders in general meeting for approval in accordance with the Company's Articles of Association.
Article 151 Each of the Company's directors, supervisors, president, vice-president, Chief Financial Officer and secretary of the board of directors owes a duty, in the exercise of his powers and in the discharge of his duties, to exercise the care,
diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
Article 152 Each of the Company's directors, supervisors, president, vice-president, Chief Financial Officer and secretary of the board of directors shall exercise his powers or perform his duties in accordance with the fiduciary principle, and shall not put himself in a position where his duty and his interest may conflict. This principle includes (without limitation to) discharging of the following obligations:
(1) to act bona fide in the best interests of the Company;
(2) to act within the scope of his powers and not to exceed such powers;
(3) to exercise the discretion vested in him personally and not to allow himself to act under the control of another and, unless and to the extent permitted by laws, administrative regulations or with the informed consent of shareholders given in a general meeting, not to transfer the exercise of his discretion;
(4) to treat shareholders of the same class equally and to treat shareholders of different classes fairly;
(5) unless otherwise provided for in the Company's Articles of Association or except with the informed consent of the shareholders given in a general meeting, not to enter into any contract, transaction or arrangement with the Company;
(6) not to use the Company's property for his own benefit, without the informed consent of the shareholders given in a general meeting;
(7) not to abuse his position to accept bribes or other illegal income or expropriate the Company's property in any way, including (without limitation to) opportunities which benefit the Company;
(8) not to accept commissions in connection with the Company's transactions, without the informed consent of the shareholders given in a general meeting;
(9) to comply with the Company's Articles of Association, to perform his official duties faithfully, to protect the Company's interests and not to exploit his position and power in the Company to advance his own interests;
(10) not to compete with the Company in any way, save with the informed consent of the shareholders given in a general meeting;
(11) not to misappropriate the Company's funds or to lend such funds to any other person, not to use the Company's assets to set up deposit accounts in his own name or in the any other name or to use such assets to guarantee the debts of a shareholder of the Company or any other personal liabilities;
(12) not to divulge any confidential information which he has obtained during his term of office, without the informed consent of the shareholders in a general meeting; nor shall he use such information otherwise than for the Company's benefit, unless disclosure of such information to the court or other governmental authorities is made in the following circumstances:
1. disclosure is required by law;
2. public interests so warrants;
3. the interests of the relevant director, supervisor, president, vice-president, Chief Financial Officer and secretary of the board of directors so requires.
Article 153 Each director, supervisor, president, vice-president, Chief Financial Officer and secretary of the board of directors of the Company shall not direct the following persons or institutions ("associates") to act in a manner which he is prohibited from so acting:
(1) the spouse or minor children of the director, supervisor, president, vice-president, Chief Financial Officer or secretary of the board of directors;
(2) the trustee of the director, supervisor, president, vice-president, Chief Financial Officer or secretary of the board of directors or of any person described in sub-paragraph (1) above;
(3) partners of directors, supervisors, president, vice-president, Chief Financial Officer or secretary of the board of directors of the Company or any person referred to in sub-paragraphs (1) and (2) of this Article;
(4) a company in which a director, supervisor, the president,
vice-president, Chief Financial Officer or secretary of
the board of directors, whether alone or jointly with one
(1) or more of the persons referred to in sub-paragraphs
(l), (2) and (3) of this Article and other directors,
supervisors, president, vice-president, Chief Financial
Officer and secretary of the board of directors, has de
facto controlling interest;
(5) the senior officers of a company which is being controlled in the manner set out in sub-paragraph (4) above, including but without limitation to directors, supervisors and president.
Article 154 On submission of a resignation or termination of the tenure of a director, supervisor, the president, vice-president, Chief Financial Officer or secretary of the board of directors of the Company, the fiduciary duties owed by this senior officer to the Company and its shareholders do not necessarily cease when his resignation has not yet been effective or within a reasonable period of the resignation and within a reasonable period of the termination of tenure. His duty of confidentiality in respect of trade secrets of the Company survives the termination of his tenure until the same has become open information. Other duties may continue for such period as the principle of fairness may require depending on the length of time which has lapsed between the termination and the act concerned and on the circumstances and the terms under which the relationship between the relevant director, supervisor, manager and the senior officer on the on hand and the Company on the other hand was terminated.
Article 155 Any serving director, supervisor, the president, vice-president, Chief Financial Officer or secretary of the board of directors of the Company who leaves his post without permission thereby causing loss to the Company shall be liable for compensation.
Article 156 A director, supervisor, the president, vice-president, Chief Financial Officer or secretary of the board of directors of the Company may be relieved of liability for specific breaches of his duty with the informed consent of the shareholders given at a general meeting, save under the circumstances of Article 55 hereof.
Article 157 Where a director, supervisor, the president, vice-president, Chief Financial Officer or secretary of the board of directors of the Company is in any way, directly or indirectly, materially interested in a contract, transaction or arrangement or proposed contract, transaction or arrangement with the Company, (other than his contract of service with the Company), he shall declare the nature and extent of his interests to the board of directors at the earliest opportunity, whether or not the contract, transaction or arrangement or proposal therefor is otherwise subject to the approval of the board of directors.
If a director or his associate (as defined in the Rules Governing the Listing of Securities of the Hong Kong Stock Exchange Limited) have a material interest in any contract, transaction, arrangement or other matters that requires the approval of the board of directors, the relevant director shall not vote for the relevant matter at the meeting of the board of directors, and shall not be listed in the quorum of the meeting.
Unless the interested director, supervisor, the president, vice-president, Chief Financial Officer or secretary of the board of directors discloses his interests in accordance with the preceding sub-paragraph of this Article and the contract, transaction or arrangement is approved by the board of directors at a meeting in which the director, supervisor, the president, vice-president, Chief Financial Officer or secretary of the board of directors is not counted as part of the quorum and refrains from voting, or from entering into a contract, transaction or arrangement in which that senior officer is materially interested is voidable at the instance of the Company except as against a bona fide party thereto who does not have notice of the breach of duty by the interested senior officer.
For the purposes of this Article, a director, supervisor, the president, vice-president, Chief Financial Officer or secretary of the board of directors of the Company is deemed to be
interested in a contract, transaction or arrangement in which his associate is interested.
Article 158 Where a director, supervisor, the president, vice-president, Chief Financial Officer or secretary of the board of directors of the Company gives to the board of directors a notice in writing stating that, by reason of the facts specified in the notice, he is interested in contracts, transactions or arrangements which may subsequently be made by the Company, that notice shall be deemed for the purposes of the preceding Article to be a sufficient disclosure of his interests, so far as the content stated in such notice is concerned, provided that such notice shall have been given before the date on which the question of entering into the relevant contract, transaction or arrangement is first taken into consideration by the Company.
Article 159 The Company shall not pay taxes for or on behalf of a director, supervisor, the president, vice-president, Chief Financial Officer or secretary of the board of directors in any manner.
Article 160 The Company shall not directly or indirectly make a loan to or provide any guarantee in connection with the making of a loan to a director, supervisor, the president, vice-president, Chief Financial Officer or secretary of the board of directors of the Company or a senior officer (including but without limitation to a director, supervisor and the president) of the holding company of the Company or any of their respective associates.
The foregoing prohibition shall not apply to the following circumstances:
(1) provision of a loan or guarantee for a loan by the Company to its subsidiary;
(2) the provision by the Company of a loan or a guarantee in connection with the making of a loan or any other funds available to its directors, supervisors, president, vice-president, Chief Financial Officer or the secretary of the board of directors to meet expenditure incurred or to be incurred by him for the purposes of the Company or for the purpose of enabling him to perform his duties properly, in accordance with the terms of a service contract approved by the shareholders in a general meeting;
(3) if the ordinary course of business of the Company includes the lending of money or the giving of guarantees, the Company may make a loan to or provide a guarantee in connection with the making of a loan to a director, supervisor, the president, vice-president, Chief Financial Officer or secretary of the board of directors or his associates in the ordinary course of its business on normal commercial terms.
Article 161 Any person who receives funds from a loan which has been made by the Company acting in breach of the preceding Article shall, irrespective of the terms of the loan, forthwith repay such funds.
Article 162 A guarantee for the repayment of a loan which has been provided by the Company acting in breach of Article 158(1) shall not be enforceable against the Company, save in respect of the following circumstances:
(1) the guarantee was provided in connection with a loan which was made to an associate of a director, supervisor, the president, vice-president, Chief Financial Officer or secretary of the board of directors of the Company or a senior officer (including but without limitation to a director, supervisor and the president) of the Company's holding company and the lender of such funds did not know of the relevant circumstances at the time of the making of the loan; or
(2) the collateral which has been provided by the Company has already been lawfully disposed of by the lender to a bona fide purchaser.
Article 163 For the purposes of the foregoing provisions of this Chapter, a "guarantee" includes an undertaking or property provided to secure the obligor's performance of his obligations.
Article 164 In addition to any rights and remedies provided by the laws and administrative regulations, where a director, supervisor, the president, vice-president, Chief Financial Officer or secretary of the board of directors of the Company breaches the duties which he owes to the Company, the Company has a right:
(1) to demand such a director, supervisor, the president, vice-president, Chief Financial Officer or secretary of the board of directors to compensate it for losses sustained by the Company as a result of such breach;
(2) to rescind any contract or transaction which has been entered into between the Company and such a director, supervisor, the president, vice-president, Chief Financial Officer or secretary of the board of directors or between the Company and a third party (where such third party knows or should have known that such a director, supervisor, the president, vice-president, Chief Financial Officer or secretary of the board of directors representing the Company has breached his duties owed to the Company);
(3) to demand such a director, supervisor, the president, vice-president, Chief Financial Officer or secretary of the board of directors to surrender the gains made as result of the breach of his obligations;
(4) to recover any monies which should have been received by the Company and which were received by such a director, supervisor, the president, vice-president, Chief Financial Officer or secretary of the board of directors instead, including (without limitation to) commissions; and
(5) to demand repayment of interest earned or which may have been earned by a director, supervisor, the president, vice-president, Chief Financial Officer or secretary of the board of directors officer on money that should have been paid to the Company.
Article 165 If a director, supervisor, the president, vice-president, Chief Financial Officer or secretary of the board of directors has violated the law, administrative rules or these Articles of Association in discharging his duties thereby causing damage to the Company, he shall be liable for compensation. Shareholders shall have the right to ask the Company to commence legal or arbitration proceedings to claim for compensation according to law.
Article 166 The Company shall make written contract with a director or supervisor in relation to the rights and duties of the Company and the director/supervisor, emoluments and term of office of the director/supervisor, liability of the director/supervisor for breach of law, regulations and these Articles of Association and compensation for early termination of the contract, etc. The emoluments shall be approved in advance by the shareholders in a general meeting. The aforesaid emoluments include:
(1) emoluments in respect of his service as director, supervisor, president, vice-president, Chief Financial Officer or secretary of the board of directors of the Company;
(2) emoluments in respect of his acting as a senior officer (including but without limitation to a director, supervisor and the president) of any subsidiary of the Company;
(3) emoluments in respect of the provision of other services in connection with the management of the affairs of the Company and any of its subsidiaries;
(4) payment by way of compensation for loss of office, or as consideration for or in connection with his retirement from office.
No proceedings may be brought by a director or supervisor against the Company for anything due to him in respect of the matters mentioned in this Article except pursuant to the contract mentioned above.
Article 167 The contract concerning the emoluments between the Company and its directors or supervisors should provide that in the event that the Company is acquired, the Company's directors and supervisors shall, subject to the prior approval of shareholders in a general meeting, have the right to receive compensation or other payment in respect of his loss of office or retirement. For the purposes of this paragraph, the acquisition of the Company includes any of the following:
(1) an offer made by any person to the general body of shareholders;
(2) an offer made by any person with a view to the offeror becoming a "controlling shareholder" within the meaning of Article 56 hereof.
If the relevant director or supervisor does not comply with this Article, any sum so received by him shall belong to those persons who have sold their shares as a result of such offer. The expenses incurred in distributing such sum on a pro rata basis amongst such persons shall be borne by the relevant director or supervisor and shall not be paid out of such sum.
CHAPTER 15 FINANCIAL AND ACCOUNTING SYSTEMS, PROFIT DISTRIBUTION AND
AUDITING
Article 168 The Company shall establish its financial and accounting systems in accordance with laws, administrative regulations and PRC accounting standards formulated by the finance regulatory department of the State Council.
Article 169 The accounting year of the Company shall adopt the
calendar year, i.e. starting from the 1 January of every
calendar year and to 31 December of every calendar year. The
Company shall adopt Renminbi as its denominated currency for
booking and accounting purposes , the account books shall be
recorded in Chinese.
At the end of each fiscal year, the Company shall prepare a
financial report which shall be examined and verified in a
manner prescribed by law.
Article 170 The board of directors of the Company shall place before the shareholders at every annual general meeting such financial reports which the relevant laws, administrative regulations and directives promulgated by competent regional and central governmental authorities require the Company to prepare. These reports shall be verified.
Article 171 The Company's financial reports shall be made available for shareholders' inspection at the Company twenty (20) days before the date of every shareholders' annual general meeting. Each shareholder shall be entitled to have a copy of the financial reports referred to in this Chapter. The Company shall deliver or send to each shareholder of Overseas-Listed Foreign-Invested Shares by prepaid mail at the address registered in the register of shareholders the said reports not later than twenty-one (21) days prior to the date of every annual general meeting of the shareholders.
Article 172 The financial statements of the Company shall, in addition to being prepared in accordance with PRC accounting standards and regulations, be prepared in accordance with either international accounting standards, or that of the place outside the PRC where the Company's shares are listed. If there is any material difference between the financial statements prepared respectively in accordance with the two accounting standards, such difference shall be stated in the financial statements. In distributing its profits after tax, the lower of the two amounts shown in the financial statements shall be adopted.
Article 173 Any interim results or financial information published or disclosed by the Company must also be prepared and presented in accordance with PRC accounting standards and regulations, and also in accordance with either international accounting standards or that of the place overseas where the Company's shares are listed.
Article 174 The Company shall publish its financial reports four times in
each fiscal year, that is, the report for the first quarter shall
be published within thirty (30) days after the expiration of the
first three (3) months of each fiscal year; the biannual
financial report shall be published within sixty (60) days after
the expiration of the first six (6) months of each fiscal year;
the report for the third quarter shall be published within thirty
(30) days after the expiration of the first nine (9) months of
each fiscal year; and the annual financial report shall be
published within one hundred and twenty (120) days after the
expiration of each fiscal year. Annual financial reports shall be
checked and verified as required by law.
Article 175 Annual financial reports and biannual financial reports which deal with biannual profit distribution shall include the followings:
(1) balance sheet;
(2) statement of profit;
(3) statement of profit distribution;
(4) cash flow statement;
(5) explanatory notes to accounting statements. If the Company does not make biannual profit distribution, the biannual financial report shall include the above accounting statements and explanatory notes save sub-paragraph (3).
Article 176 The Company shall not keep accounts other than those required by law. Assets of the Company will not be deposited into any account opened in the name of an individual.
Article 177 When allocating the after-tax profits of the current year, the Company shall allocate (10) ten percent of its profit to the statutory common reserve fund, and allocate (5) five percent to (10) ten percent of its profit to the statutory public welfare fund. In the event that the accumulated statutory common reserve fund of the Company has reached more than (50) fifty percent of the registered capital of the Company, no allocation is needed. In the event that the statutory common reserve fund of the Company is insufficient to make up the losses of the Company on the previous year, before allocating the statutory common reserve fund and the statutory public welfare fund in accordance with the stipulations of the previous paragraph, the Company shall first make up the losses by using the profits of the current year.
After allocating the statutory common reserve fund and public welfare fund from the after-tax profits of the Company, the Company can allocate the arbitrary common reserve fund according to the resolution of shareholders' general meeting. The remaining profits after making-up the losses, allocating the common reserve funds and the statutory public welfare fund shall be distributed in accordance with the proportion of shares held by the shareholders.
Article 178 Before making-up the losses, allocating the surplus common reserve funds and the statutory public welfare fund, the Company shall not allocate the dividends or carry out other allocations by way of bonus.
Article 179 Capital common reserve fund includes the following items:
(1) premium on shares issued at a premium price;
(2) any other income designated for the capital common reserve fund by the regulations of the finance regulatory department of the State Council.
Article 180 The common reserve fund of the Company shall be applied for compensating the losses or converting the common reserve fund into the capital of the Company.
When such conversion takes place upon the approval of shareholders in a general meeting, the Company shall distribute new shares in proportion to the existing shareholders' number of shares, provided, however, that when the statutory common reserve fund is converted to capital nature, the balance of the statutory common reserve fund may not fall below 25% of the registered capital.
Article 181 The Company's statutory public welfare fund is used for the collective welfare of the Company's employees.
Article 182 After the Company's shareholders have approved in a general meeting the proposal for profit distribution or for conversion of the common reserve fund into capital of the Company, the Company's board of directors shall complete the distribution or conversion of dividends (or shares) within two (2) months of the general meeting.
Article 183 The Company may distribute dividends in the form of:
(1) cash;
(2) shares.
Article 184 The Company shall calculate, declare and pay dividends and other amounts which are payable to holders of Domestic-Invested Shares in Renminbi. The Company shall calculate and declare dividends and other payments which are payable to holders of Overseas-Listed Foreign-Invested Shares in Renminbi, and shall pay such amounts in Hong Kong Dollars. As for the foreign currency needed by the Company for payment of cash dividends and other funds which are payable to the holders of the Overseas-Listed Foreign-Invested Shares, it shall be handled in accordance with any related national regulations on foreign exchange control.
Article 185 Unless otherwise provided by the relevant laws and administrative regulations, as regards dividends and other amounts payable in Hong Kong dollars, the applicable exchange rate shall be the average benchmark rate for the relevant foreign currency determined by the Peoples' Bank of China and announced by the State Administration of Foreign Exchange during the week prior to the announcement of payment of dividend and other amounts.
Article 185 Unless the shareholders have approved otherwise in a general meeting, the board of directors may determine to make half-yearly dividends distribution. Unless otherwise provided by the relevant laws and administrative regulations, the amount of the half-yearly dividends distribution shall not exceed 50% of the profits shown in the biannual statement of profit of the Company.
Article 187 In the event of allocating the dividends to shareholders of the Company, the payable taxes on the dividend incomes of the shareholders shall be withdrawn in accordance with the requirements of Taxation Law of China and in consideration of the allocated sum.
Article 187 The Company shall appoint receiving agents for holders of the Overseas-Listed Foreign-Invested Shares. Such receiving agents shall receive dividends which have been declared by the Company and all other amounts which the Company should pay to holders of Overseas-Listed Foreign-Invested Shares on such shareholders' behalf.
The receiving agents appointed by the Company shall meet the relevant requirements of the laws of the place at which the stock exchange on which the Company's shares are listed or the relevant regulations of such stock exchange.
The receiving agents appointed for holders of Overseas-Listed Foreign-Invested Shares listed in Hong Kong shall each be a company registered as a trust company under the Trustee Ordinance of Hong Kong.
Article 189 The Company adopts the system of internal auditing and hires professional auditors to undertake internal auditing of the Company's financial income and expenditure and economic activities.
Article 190 The Company's internal auditing system and duties of the auditors shall be implemented after they have been approved by the board of directors.
CHAPTER 16 APPOINTMENT OF ACCOUNTING FIRMS
Article 191 The Company shall appoint an independent firm of accountants which is qualified under the relevant regulations of the State to audit the Company's annual financial report and review other financial reports, to conduct verification of net asset value and other relevant consulting service business. Engagement of the firm of accountants shall be determined in a shareholders' general meeting.
Article 192 The auditors appointed by the Company shall hold office from the conclusion of the annual general meeting of shareholders at which they were appointed until the conclusion of the next annual general meeting of shareholders.
Article 193 The auditors appointed by the Company shall enjoy the following rights:
(1) a right to review to the books, records and vouchers of the Company at any time, the right to require the directors, supervisors, president, vice-president, Chief Financial Officer and secretary of the board of directors of the Company to supply relevant information and explanations;
(2) a right to require the Company to take all reasonable steps to obtain from its subsidiaries such information and explanation as are necessary for the discharge of its duties;
(3) a right to attend shareholders' general meetings and to receive all notices of, and other communications relating to, any shareholders' general meeting which any shareholder is entitled to receive, and to speak at any shareholders' general meeting in relation to matters concerning its role as the Company's accounting firm.
Article 194 If there is a vacancy in the position of the accounting firm, the board of directors may appoint an accounting firm to fill such vacancy before the convening of the shareholders' general meeting. Any other accounting firm which has been appointed by the Company may continue to act during the period during which a vacancy arises.
Article 195 The shareholders in a general meeting may by ordinary resolution remove the accounting firm before the expiration of its term of office, irrespective of the provisions in the contract between the Company and the accounting firm. However, the right of the accounting firm in claiming for damages which arise from its removal shall not be affected thereby.
Article 195 The remuneration of an accounting firm or the manner in which such firm is to be remunerated shall be determined by the shareholders in a general meeting. The remuneration of an accounting firm appointed by the board of directors which is to fill the vacancy shall be determined by the board of directors and approved by the shareholders' general meeting.
Article 195 The Company's appointment, removal or non-reappointment of an accounting firm shall be resolved by the shareholders in a general meeting and disclosed in the relevant newspapers and publications stating the reasons for removal, if necessary. Such resolution shall be filed with the securities authority of the State Council and The Chinese Institute of Certified Public Accountants.
Where a resolution at a general meeting of shareholders is passed to appoint an accounting firm other than an incumbent accounting firm, to fill a casual vacancy in the office of the accounting firm, to reappoint an accounting firm who was appointed by the board of directors to fill a casual vacancy or to remove an accounting firm before expiry of its term of office, the following provisions shall apply:
(1) A copy of the appointment or removal proposal shall be sent (before issue of the notice of meeting) to the firm proposed to be appointed or proposing to leave its post or the firm which has left its post in the relevant fiscal year. Reference as leaving herein includes leaving by removal, resignation and retirement.
(2) If the accounting firm leaving its post makes representations in writing and requests the Company to give the shareholders notice of such representations, the Company shall (unless the representations have been received too late) take the following measures:
(i) in any notice of the resolution given to shareholders, state the fact of the representations having been made by the accounting firm leaving its post; and
(ii) attach a copy of the representations to the notice and deliver it to the shareholders in the manner stipulated in the Company's Articles of Association.
(3) If the Company fails to circulate the accounting firm's representations in the manner set out in sub-paragraph (2) above, such accounting firm may (in addition to its right to be heard) require that the representations be read out at the meeting.
(4) An auditor which is retired from its office shall be entitled to attend the following shareholders' general meetings:
(i) the general meeting at which its term of office would otherwise have expired;
(ii) the general meeting at which it is proposed to fill the vacancy caused by its removal; and
(iii) the general meeting which convened as a result of its voluntary resignation:
The leaving accounting firm has the right to receive all notices of, and other communications relating to, any such meeting, and to speak at any such meeting which it attends on any part of the business of the meeting which concerns it as the former accounting firm of the Company.
Article 198 Prior notice should be given to the accounting firm 30 days in advance if the Company decides to remove such accounting firm or not to renew the appointment thereof. Such accounting firm shall be entitled to make representations at the shareholders' general meeting. Where the accounting firm considers that there is no proper reason for the removal or the non-renewal of appointment, it may appeal to the securities regulatory authority of the State Council and The Chinese Institute of Certified Public Accountants. Where the accounting firm resigns from its position as the Company's auditors, it shall make clear to the shareholders in a general meeting whether there has been any impropriety on the part of the Company.
An accounting firm may resign its office by depositing at the Company's domicile a resignation notice which shall become effective on the date of such deposit or on such later date as may be stipulated in such notice. Such notice shall contain the following statements:
(1) a statement to the effect that there are no circumstances connected with its resignation which it considers should be brought to the notice of the shareholders or creditors of the Company; or
(2) a statement of any such circumstances.
Where a notice is deposited under the preceding sub-paragraph, the Company shall within fourteen (14) days send a copy of the notice to the relevant governing authority. If the notice contains a statement under the preceding sub-paragraph (2), a copy of such statement shall be placed at the Company for shareholders' inspection. The Company should also send a copy of such statement by prepaid mail to every shareholder of Overseas-Listed Foreign Shares at the address registered in the register of shareholders.
Where the accounting firm's notice of resignation contains a statement in respect of the above, it may require the board of directors to convene a shareholders' extraordinary general meeting for the purpose of receiving an explanation of the circumstances connected with its resignation.
CHAPTER 17 MERGER AND DIVISION OF THE COMPANY
Article 199 The Company may carry out mergers or division in accordance with law. In the event of merger or division of the Company, the following procedures shall be adopted:
(1) a proposal for merger or division be drawn up in a board meeting;
(2) a resolution be made in a shareholders' general meeting in accordance with these Articles of Association;
(3) a contract for merger or division be made by the relevant parties;
(4) the relevant procedures for approval be gone through according to law;
(5) disposal of credit rights and liabilities in the merger or division;
(6) registration of dissolution or modification.
In the case of merger or division of the Company, the board of directors of the Company shall take necessary measures to protect the legitimate interests of the shareholders who object to the plan of merger or division. A shareholder who objects to the plan of merger or division shall have the right to demand the Company or the shareholders who consent to the plan of merger or division to acquire such dissenting shareholders' shareholding at a fair price.
The contents of the resolution of merger or division of the Company shall constitute special documents which shall be available for inspection by the shareholders of the Company. Such special documents shall be sent by mail to holders of Overseas-Listed Foreign-Invested Shares.
Article 200 The merger of the Company may take the form of either merger by absorption or merger by the establishment of a new company.
In the event of a merger, the merging parties shall execute a
merger agreement and prepare a balance sheet and an inventory
of assets. The Company shall notify its creditors within ten
(10) days from the date of the Company's merger resolution
which is passed at a shareholders' general meeting and shall
publish a public notice in a newspaper at least three (3) times
within thirty (30) days of the date of the Company's merger
resolution.
Article 201 Where there is a division of the Company, its assets shall be divided up accordingly.
In the event of division of the Company, the parties to such division shall execute a division agreement and prepare a balance sheet and an inventory of assets. The Company shall notify its creditors within ten (10) days from the date of the Company's division resolution which is passed at a shareholders' general meeting and shall publish a public notice in a newspaper at least three (3) times within thirty (30) days of the date of the Company's division resolution.
Article 202 A creditor shall have the right either within 30 days of receipt of the notice if he has received a notice or within 90 days of the first announcement if he has not received a notice to require the Company to settle indebtedness or provide the relevant security. If the Company fails to settle the indebtedness or provide the relevant security, the merger or division shall not be proceeded with.
Article 203 Disposal of the assets, credit rights and liabilities of the parties to the merger or division shall be provided explicitly in a contract.
After the merger, the rights against debtors and the indebtedness of each of the parties to the merger shall be inherited by the company which survives the merger or the newly established company.
Debts of the Company prior to division shall be assumed by the companies which exist after the division in accordance with the agreement of the parties.
Article 204 The Company shall, in accordance with law, apply for change in its registration with the companies registration authority where a change in any item in its registration arises as a result of any merger or division. Where the Company is dissolved, the Company shall apply for cancellation of its registration in accordance with law. Where a new company is established, the Company shall apply for registration thereof in accordance with law.
CHAPTER 18 DISSOLUTION AND LIQUIDATION
Article 205 The Company shall be dissolved and liquidated upon the occurrence of any of the following events:
(1) a resolution regarding the dissolution is passed by shareholders at a general meeting;
(2) dissolution is necessary due to a merger or division of the Company;
(3) the Company is legally declared insolvent due to its failure to repay debts as they become due; and
(4) the Company is ordered to close down because of its violation of laws and administrative regulations.
Article 206 Where the Company is dissolved under sub-paragraph
(1) of the preceding paragraph, a liquidation committee shall
be set up within fifteen (15) days thereafter, and the
composition of the liquidation committee of the Company shall
be determined by an ordinary resolution of shareholders in a
general meeting. Where a liquidation committee is not
established according to schedule, the creditor may apply to
the People's Court to organize the relevant personnel to
establish a liquidation committee to proceed the liquidation.
Where the Company is dissolved under sub-paragraph (2) of the
preceding Article, the liquidation shall be conducted by the
parties to the merger or division in accordance with the
contract or agreement made at the time of merger or division.
Where the Company is dissolved under sub-paragraph (3) of the preceding Article, the People's Court shall in accordance with the provisions of relevant laws organize the shareholders, relevant organizations and relevant professional personnel to establish a liquidation committee to proceed the liquidation. Where the Company is dissolved under sub-paragraph (4) of the preceding Article, the relevant governing authorities shall organize the shareholders, relevant organizations and professional personnel to establish a liquidation committee to proceed with the liquidation.
Article 207 Where the board of directors proposes to liquidate the Company for any reason other than the Company's declaration of its own insolvency, the board shall include a statement in its notice convening a shareholders' general meeting to consider the proposal to the effect that, after making full inquiry into the affairs of the Company, the board of directors is of the opinion that the Company will be able to pay its debts in full within twelve (12) months from the commencement of the liquidation.
Upon the passing of the resolution by the shareholders in a general meeting in relation to the liquidation of the Company, all duties and powers of the board of directors and the president shall cease.
The liquidation committee shall act in accordance with the instructions of the shareholders' general meeting to make a report at least once every year to the shareholders' general meeting on the committee's income and expenses, the business of the Company and the progress of the liquidation; and to present a final report to the shareholders' general meeting on completion of the liquidation.
Article 208 The liquidation committee shall, within ten (10) days of its establishment, send notices to creditors and shall, within sixty (60) days of its establishment, publish a public announcement at least three (3) times in a newspaper published by the securities regulatory authority of the State Council. The liquidation committee shall register the creditors' rights.
Article 209 During the liquidation period, the liquidation committee shall exercise the following functions and powers:
(1) to categorise the Company's assets and prepare a balance sheet and an inventory of assets respectively;
(2) to notify the creditors or to publish public announcements;
(3) to dispose of and liquidate any unfinished businesses of the Company;
(4) to pay all outstanding taxes;
(5) to settle claims and debts;
(6) to deal with the surplus assets remaining after repayment by the Company of its debts;
(7) to represent the Company in any civil proceedings.
Article 210 After it has categories the Company's assets and after it has prepared the balance sheet and an inventory of assets, the liquidation committee shall formulate a liquidation plan and present it to a shareholders' general meeting or to the relevant governing authority for confirmation. After the initial payment of the settlement expense, the assets of the Company shall be liquidated in the following order:
(i) salary and labor insurance expenses of the staff members of the Company; (ii) outstanding taxes; (iii) bank loans, debentures and debts to other companies. Any surplus assets of the Company remaining after its debts have been repaid in accordance with the provisions of the preceding paragraph shall be distributed to its shareholders according to the class of shares and the proportion of shares held:
(1) In case of the preferred shares, the allocation shall be first given to the holders of the preferred shares in accordance with the face value of the preferred shares; if it is insufficient to repay the preferred shares, the allocation shall be carried out in accordance with the proportions of the preferred shares held by them respectively;
(2) The allocation shall be carried out in accordance with proportions of shares held by the holders of ordinary shares.
During the liquidation period, the Company shall not commence any new business activities.
Article 211 Upon completion of the categorization of the Company's assets and preparation a balance sheet and an inventory of assets in connection with the liquidation of the Company, the liquidation committee discovers that the Company's assets are insufficient to repay the Company's debts in full, the liquidation committee shall immediately apply to the People's Court for a declaration of insolvency. After a Company is declared insolvent by a ruling of the People's Court, the liquidation committee shall transfer all matters arising from the liquidation to the People's Court.
Article 212 Following the completion of the liquidation, the liquidation committee shall prepare a liquidation report, a statement of income and expenses received and made during the liquidation period and a financial report, which shall be verified by a Chinese registered accountant and submitted to the shareholders' general meeting or the relevant governing authority for confirmation.
The liquidation committee shall, within thirty (30) days after the confirmation of the liquidation report, submit the documents referred to in the preceding paragraph to the companies registration authority and apply for cancellation of registration of the Company, and publish a public announcement relating to the termination of the Company.
CHAPTER 19 PROCEDURES FOR AMENDMENT OF
THE COMPANY'S ARTICLES OF ASSOCIATION
Article 213 The Company may amend its Articles of Association in accordance with the requirements of laws, administrative regulations and the Company's Articles of Association.
Article 214 The Company shall amend these Articles of Association on the occurrence of any of the following events:
(1) the Company Law or the relevant laws or administrative regulations are amended and these Articles of Association are in conflict with the amended laws or administrative regulations;
(2) there is change to the Company which makes it not consistent with these Articles of Association;
(3) it has been approved by the shareholders in a general meeting to amend these Articles of Association.
Article 215 Any amendment of these Articles of Association shall be made in the following manner:
(1) The Board of Directors shall pass a resolution to draw up a proposal for amendment of the Company's Article of Association in accordance with these Articles of Association;
(2) The foregoing proposal shall be furnished to the shareholders in writing and a shareholders' meeting
shall be convened;
(3) The amendments shall be approved by a special resolution in a shareholders' general meeting. The board of directors shall amend these Articles of Association pursuant to the resolution of shareholders in a general meeting for amendment of these Articles of Association and the approval opinions of the competent authority.
Amendment of these Articles of Association involving the contents of the Mandatory Provisions shall become effective upon receipt of approvals from the companies approving department authorized by the State Council.
Article 216 If there is any change relating to the registered particulars of the Company, application shall be made for change in registration in accordance with law. If the amendment to the Articles of Association is a matter which is required by the relevant laws and regulations to be disclosed, an announcement shall be made in accordance with the provisions of those laws and regulations.
CHAPTER 20 NOTICE
Article 217 Notices of the Company shall be issued in the following manner: (1) by hand; (2) by post; (3) by public announcement; (4) any other manner as provided in these Articles of Association. If a notice of the Company is issued by public announcement, it shall be deemed received by the relevant officers once announced.
Unless otherwise provided in these Articles of Association, notices, information or written statement issued by the Company to holders of Overseas-Listed Foreign-Invested Shares shall be personally delivered to the registered address of each of such shareholders, or sent by pre-paid mail to each of such shareholders.
Article 218 If a notice of the Company is issued by hand, the date when the recipient signed or stamped to acknowledge receipt of the same shall be regarded as the date of service of the notice.
If a notice of the Company is issued by public announcement, the date of the first publication of the announcement shall be regarded as the date of service of the announcement.
All notices which are to be sent by mail shall be clearly addressed, postage pre-paid, and shall be put into envelopes before being posted by mail. Such letters of notice shall be deemed to have been received by shareholders on the third working day since it is left with the post office.
Article 219 If a notice of meeting is accidentally omitted to be sent to any person who is entitled to receive the same or that person has not received such a notice of meeting, it will not cause the meeting and any resolution made therein to be void.
CHAPTER 21 RESOLUTION OF DISPUTES
Article 220 The Company shall abide by the following principles for dispute resolution:
(1) Whenever any disputes or claims arise between: holders of the Overseas-Listed Foreign-Invested Shares and the Company; holders of the Overseas-Listed Foreign-Invested Shares and the Company's, directors, supervisors, president, vice-presidents, Chief Financial Officer or the secretary of the board of directors; or holders of the Overseas-Listed Foreign-Invested Shares and holders of Domestic-Invested Shares, in respect of any disputes or claims in relation to the affairs of the Company arising as a result of any rights or obligations arising from these Articles of Association, the Company Law or other relevant laws and administrative regulations, such disputes or claims shall be referred by the relevant parties to arbitration.
Where a dispute or claim of rights referred to in the preceding paragraph is referred to arbitration, the entire claim or dispute must be referred to arbitration, and all persons who have a cause of action based on the same facts giving rise to the dispute or claim or whose participation is necessary for the resolution of such dispute or claim, shall, where such person is the Company or the Company's shareholders,
directors, supervisors, president, vice-presidents, Chief Financial Officer or the secretary of the board of directors, comply with the decisions made in the arbitration. Disputes in respect of the definition of shareholders and disputes in relation to the register of shareholders need not be resolved by arbitration.
(2) A claimant may elect for arbitration to be carried out at either the China International Economic and Trade Arbitration Commission in accordance with its Rules or the Hong Kong International Arbitration Center in accordance with its Securities Arbitration Rules. Once a claimant refers a dispute or claim to arbitration, the other party must submit to the arbitral body elected by the claimant. If a claimant elects for arbitration to be carried out at Hong Kong International Arbitration Center, any party to the dispute or claim may apply for a hearing to take place in Shenzhen in accordance with the Securities Arbitration Rules of the Hong Kong International Arbitration Center.
(3) If any disputes or claims of rights are settled by way of arbitration in accordance with sub-paragraph (1) of this Article, the laws of the PRC shall apply, save as otherwise provided in the laws and administrative regulations.
(4) The judgement of an arbitral body shall be final and conclusive and binding on all parties.
CHAPTER 22 SUPPLEMENTARY
Article 221 These Articles of Association are written in Chinese and English. If there is any conflict between the two versions, the Chinese version shall prevail.
Article 222 The expressions of "above", "within" and "below" shall include the figures mentioned whilst the expressions of "short of" and "less than" shall not include the figures mentioned.
Article 223 The right to interpret these Articles of Association vests with the board of directors of the Company, and the right to revise these Articles of Association vests with shareholders' general meeting.
Article 224 If these Articles of Association are in conflict with the laws, administrative regulations or provisions of other regulatory documents promulgated from time to time, the laws, administrative regulations and provisions of other regulatory documents shall prevail.
Article 225 In these Articles of Association, references to "accounting firm" shall have the same meaning as "auditors". In these Articles of Association, references to "president" shall have the same meaning as "manager".
Appendix I
Rules and Procedures
for
Shareholders' General Meetings
of
China Petroleum & Chemical Corporation
CHAPTER 1 GENERAL PROVISIONS
Article 1 In order to safeguard the legitimate interests of China Petroleum & Chemical Corporation (the "Company") and its shareholders, to specify the duties, responsibilities and authority of the shareholders' general meetings, to ensure the proper, efficient and smooth operation of the shareholders' general meeting and to ensure the shareholders' general meeting exercises its functions and powers according to law, these Rules are formulated according to the "Company Law of the People's Republic of China" (the "Company Law"), "Mandatory Provisions for the Articles of Association of Companies to be Listed Overseas", "Guidelines for the Articles of Association of Listed Companies", "Standards for the Governance of Listed Companies" and "Regulatory Opinions Regarding General Meetings of Listed Companies" and other relevant laws and regulations regulating listed companies inside and outside the PRC and the Articles of Association of China Petroleum & Chemical Corporation ("Articles of Association").
Article 2 These Rules apply to the shareholders' general meetings of the Company and shall be binding on the Company, all shareholders, authorized proxies of the shareholders, directors, supervisors, president, vice-president, Chief Financial Officer, secretary of the board of directors and other relevant personnel present at the meeting.
Article 3 Shareholders' general meetings are divided into annual general meetings (hereinafter referred to as "AGM"), extraordinary general meetings; or all shareholders' general meetings or class shareholders' general meetings.
Article 4 AGMs are held once every year within six months from the end of the previous accounting year.
Article 5 For the shareholders' general meetings convened each year, all of them are extraordinary general meetings except the AGM. The extraordinary general meetings shall be arranged in the order of the year in which they are convened.
Article 6 Holders of different classes of shares are class shareholders. Except other class shareholders, holders of domestic shares and holders of H shares are deemed to be shareholders of different classes. If the Company intends to alter or annul the rights of class shareholders, it shall have such alteration or annulment approved by a special resolution at the shareholders' general meeting and shall convene a class shareholders' meeting in accordance with the provisions of the Articles of Association. Only class shareholders are entitled to attend class shareholders' meetings.
Article 7 The board of directors of the Company shall strictly comply with the provisions of the Company Law and other laws and regulations regarding the convening of shareholders' general meetings, and shall properly organize the shareholders' general meeting in a conscientious manner and on schedule. All directors of the Company are under a bona fide duty to ensure that the shareholders' general meeting is convened in order, and shall not obstruct the exercise of powers by the shareholders' general meeting according to law. The directors present at the meeting shall perform their duties in good faith, and shall ensure that the contents of the resolutions passed at the meeting are true, accurate and complete and shall not use any words and expressions that may easily cause ambiguity.
Article 8 Any shareholder who holds the shares of the Company legally and validly are entitled to attend or authorize a proxy to attend the shareholders' general meeting, and shall have the right to know the Company's affairs, the right to speak, the right to raise questions and the right to vote pursuant to law and these Rules. Shareholders and their proxies attending the shareholders' general meeting shall comply with the provisions of the relevant laws and regulations, Articles of Association and these Rules, and shall take the initiative to maintain the order of the meeting and shall not infringe the legitimate rights and interests of other shareholders.
Article 9 The Secretary to the board of directors of the Company shall be responsible for implementing the preparatory and organization work for convening a shareholders' general meeting. In convening a shareholders' general meeting, the principle of cost-saving and simplicity shall be adhered to.
Article 10 No extra benefits shall be given to the shareholders (or their proxies) present at the meeting.
CHAPTER 2 FUNCTIONS AND POWERS OF THE SHAREHOLDERS' GENERAL MEETING
Article 11 The shareholders' general meeting is the authority organ of the Company and shall exercise the following functions and powers according to law:
(1) to decide on the Company's operational policies and investment plans;
(2) to elect and replace directors and to decide on matters relating to the remuneration and liability insurance of directors;
(3) to elect and replace supervisors who are shareholder representatives and to decide on matters relating to the remuneration and liability insurance of supervisors;
(4) to examine and approve the board of directors' reports;
(5) to examine and approve the supervisory committee's reports;
(6) to examine and approve the Company's profit distribution plans and loss recovery plans;
(7) to examine and approve the Company's proposed annual preliminary and final financial budgets;
(8) to pass resolutions on the increase or reduction of the Company's registered capital;
(9) to pass resolutions on matters such as merger, division, dissolution and liquidation of the Company;
(10) to pass resolutions on the issue of debentures by the Company;
(11) to pass resolutions on the appointment, dismissal and non-reappointment of the accounting firm by the Company;
(12) to amend the Articles of Association and its appendices (including the Rules and Procedures for the Shareholders' General Meetings, Rules and Procedures for the Board of Directors' Meetings and Rules and Procedures for the Supervisors' Meetings);
(13) to consider motions raised by the supervisory committee or shareholders who represent 5% or more of the total number of voting shares of the Company at the annual general meetings;
(14) to decide on other matters which, according to laws, administrative regulations, rules of the competent authorities and the Articles of Association, shall be approved by the shareholders' general meetings.
The shareholders' general meetings shall exercise its powers within the scope stipulated by the Company Law and shall not interfere with the decision of shareholders regarding their own rights.
CHAPTER 3 AUTHORITY OF THE SHAREHOLDERS' GENERAL MEETINGS
Article 12 Matters which, in accordance with laws, administrative regulations, rules of the relevant government authorities and provisions of the Articles of Association, fall within the scope of the authority of the shareholders' general meeting must be examined at such meeting so as to protect the decision-making power of the shareholders of the Company on such matters.
Article 13 In order to ensure and increase the stability and efficiency of the daily operations of the Company, the shareholders' general meeting authorizes the board of directors of the Company, on a partial basis, to exercise the following powers on investment plans, asset disposals and external guarantees:
(1) Investment:
(i) The shareholders' general meetings shall examine and approve medium and long-term investment plans and annual investment plans of the Company. The board of directors is authorized to make adjustments of not more than 15% of the amount of the capital expenditure for the current year as approved at the shareholders' general meeting.
(ii) Individual project investments (including but not limited to exploration and development, fixed assets, external shareholdings) shall be approved by the shareholders' general meeting if the investment amounts are more than 5% of the latest audited net asset value of the Company. The board of directors is authorized to examine and approve projects if the investment amount is not more than 5% of the latest audited net asset value of the Company.
(iii) Where the Company uses its own assets to make risky investment in areas not related to the business of the Company (including but not limited to debentures, futures, shares), risky investments shall be approved by the shareholders' general meeting if the amount of investment is more than 1% of the latest audited net asset value of the Company. The board of directors is authorized to examine and approve projects if the investment amount is not more than 1% of the latest audited net asset value of the Company.
(2) Asset disposal:
(i) When the Company acquires or sells assets, it has to take into account of the following 4 testing indices: (1) total asset ratio: the total amount of the assets to be acquired or sold (according to the latest audited financial report, valuation report or capital verification report) divided by the latest audited total asset value of the Company; (2) net profit (loss) ratio of the acquisition: the absolute value of the net profit or loss relating to the assets to be acquired (according to the audited financial report of the preceding year) divided by the absolute value of the audited net profit or loss of the Company for the preceding year; (3) net profit (loss) ratio of the sale: the absolute value of the net profit or loss relating to the assets to be sold (according to the audited financial report of the preceding year) or the absolute value of the profit or loss arising from such transaction divided by the absolute value of the audited net profit or loss of the Company for the preceding year; (4) transaction amount ratio: the transaction amount (taking into account of the assumed liabilities and costs, etc) of the acquired assets divided by the total amount of the latest audited net asset value of the Company. The shareholders' general meeting shall examine and approve any of the above projects with a ratio of not less than 50%. The board of directors is authorized to examine and approve any of the above projects with a ratio of less than 50%.
(ii) In disposing of fixed assets, where the total value of the expected value of the fixed assets to be disposed of and the value of the fixed assets which have been disposed of in the four months prior to such proposed disposal exceeds 33% of the value of the fixed assets as shown in the latest balance sheet considered by the shareholders' general meeting, the shareholders' general meeting shall examine and approve such disposal, and the board of directors is authorized to examine and approve those fixed asset disposals of less than 33%.
The disposal of fixed assets referred to in this Article includes the transfer of certain asset interests but excludes the provision of guarantee by way of fixed assets.
The validity of the transactions for disposal of fixed assets by the Company shall not be affected by any breach of paragraph (2)(i) of this Article.
(iii) Regarding others (including but not limited to
the entering into, varying and termination of
important contracts relating to entrustment of
operation, entrusted operation, entrusted
financial management, contracting and leasing),
the relevant amount or the amount accumulated in
12 months shall be calculated according to one of
four testing indices referred to in paragraph
(2)(i) of this Article.
Any of the above projects with a ratio of more than 5% shall be examined and approved by the shareholders' general meeting. The board of directors is authorized to examine and approve any of the above projects with a ratio of not more than 5%.
(3) External guarantees
The Company shall not provide guarantees for its shareholders, controlling subsidiaries of its shareholders, subsidiary enterprises of shareholders or personal liability and shall not directly or indirectly provide liability guarantee for debtors with an asset to liability ratio exceeding 70%. If the Company provides guarantees to others, the guaranteed person shall provide counter-guarantee to the Company or take other necessary risk preventive measures. The total amount of external guarantees of the Company shall not exceed 50% of the net assets stated in the consolidating accounting statements of the latest accounting year of the Company."
If the guarantee amount exceeds 5% of the latest audited net asset value of the Company, such guarantees shall be examined and approved by the shareholders' general meeting. The board of directors is authorized to examine and approve guarantees of not more than 5% of the latest audited net asset value of the Company.
(4) If, when applying the relevant standards as set out above, the approving offices of any investment, asset disposal and external guarantee matters as referred to above include both shareholders' general meeting and the board of directors, such matters shall be submitted to the shareholders' general meeting for approval.
(5) If the above investment, asset disposal and external guarantee matters constitute connected transactions according to the regulatory stipulations of the places where the Company is listed, the relevant matters shall be dealt with according to the relevant stipulations.
Article 14 Under necessary and reasonable circumstances, as regards specific matters related to the matters to be resolved and those which cannot or are not required to be decided at the shareholders' general meeting, the shareholders' general meeting may authorize the board of directors or the secretary to the board of directors to decide within the scope of authority authorized by the shareholders' general meeting.
CHAPTER 4 PROCEDURES FOR CONVENING A SHAREHOLDERS'
GENERAL MEETING
Section 1 Putting Forward, Collecting and Examining Motions
Article 15 Motions put forward in a shareholders' general meeting shall be specific and shall relate to the matters which shall be discussed at a shareholders' general meeting.
Article 16 Motions at the shareholders' general meeting are usually put forward by the board of directors.
Article 17 Where two or more than half of the independent directors request the board of directors to convene an extraordinary general meeting, they shall be responsible for putting forward the motions to be examined at the meeting. If the board of directors disagrees with the convening of an extraordinary general meeting, it shall disclose the relevant details.
Article 18 Where the Company convenes an AGM, the supervisory committee or shareholders individually or jointly holding more than 5% of the total voting shares of the Company are entitled to put forward provisional motions. If the proposing shareholders have any objection to the decision of the board of directors of not including their motions in the agenda, they may request the convening of an extraordinary general meeting according to the provisions of these Rules.
Article 19 Where the supervisory committee proposes to convene a shareholders' general meeting, it shall be responsible for putting forward motions.
Article 20 Where shareholders individually or jointly holding more than 10% of the Company's voting shares propose to convene a shareholders' general meeting, the proposing shareholders shall be responsible for putting forward the motions, whether or not the meeting is convened by the board of directors.
Article 21 Before the Chairman of the board of directors issues a notice of the board meeting relating to the convening of a shareholders' general meeting, the secretary to the board of directors may collect motions from shareholders individually holding more than 5% of the Company's voting shares (at the time of proposing to convene an AGM) or shareholders individually holding more than 10% of the Company's voting shares (at the time of proposing to convene an extraordinary general meeting), supervisors and independent directors and submit the same to the board of directors for examination and approval and subsequently submit the same as motions to the shareholders' general meeting for examination.
Article 22 The following motions shall be put forward at the AGM for consideration:
(1) to examine the board of directors' annual reports, including the investment plans and operation strategy for the following year;
(2) to examine the supervisory committee's annual reports;
(3) to examine the Company's audited final budget proposal for the preceding year;
(4) to examine and approve the Company's profit distribution plans and loss recovery plans for the preceding year;
(5) to appoint, dismiss or not to reappoint the accounting firm.
Article 23 Shareholders individually or jointly holding more than 5% of the Company's voting shares are entitled to put forward provisional motions at an AGM. The board of directors shall examine and approve such shareholders' motions according to the following principles:
(1) Relevance. The board of directors shall conduct preliminary examination of a motion, that is, the motion should be submitted or delivered to the board of directors or chairman of the meeting in a written form, and the contents of the motion shall comply with laws, administrative regulations and the Articles of Association, shall fall within the scope of business of the Company and the duties of the shareholders' general meeting, and shall cover a specific subject for discussion with concrete matters to be resolved. If the motion complies with the above requirements, it shall be submitted to the AGM for discussion. Otherwise no such submission shall be effected. If the board of directors decides not to submit the shareholders' motion to the AGM for voting, it shall give an explanation and statement at the AGM.
(2) Procedures. The board of directors may decide on the procedural issues relating to the motion. Where a motion needs to be divided into different motions or merged with other motions to be voted on, consent of the person putting forward the original motion is required. If the person putting forward the original motion does not agree with any change, the chairman of the meeting may request the AGM to decide on
the procedural issues and conduct discussion according to the procedures decided by the AGM.
Article 24 Where the supervisory committee or shareholders individually or jointly holding more than 10% of the Company's voting shares propose to convene an extraordinary general meeting or class shareholders' general meeting, they may sign one or more written request(s) of identical form and contents stating the topics for discussion at the meeting, and at the same time submit motions complying with the above requirements of these Rules to the board of directors.
Article 25 Motions involving the following circumstances shall be deemed to lead to a change or abrogation of the rights of a class shareholder and the board of directors shall submit them to a class shareholders' general meeting for examination:
(1) to increase or decrease the number of shares of such class, or to increase or decrease the number of shares of a class having voting rights, distribution rights or other privileges equal or superior to those of the shares of such class;
(2) to change all or part of the shares of such class into shares of another class or to change all or part of the shares of another class into shares of that class or to grant such conversion right;
(3) to cancel or reduce rights to accrued dividends or cumulative dividends attached to shares of such class;
(4) to reduce or remove preferential rights attached to shares of such class to receive dividends or to the distribution of assets in the event that the Company is liquidated;
(5) to add, cancel or reduce share conversion rights, options, voting rights, transfer rights, pre-emptive placing rights, or rights to acquire securities of the Company attached to shares of such class;
(6) to cancel or reduce rights to receive payment payable by the Company in a particular currency attached to shares of such class;
(7) to create a new class of shares with voting rights, distribution rights or other privileges equal or superior to those of the shares of such class;
(8) to restrict the transfer or ownership of shares of such class or to impose additional restrictions;
(9) To issue rights to subscribe for, or to convert into, shares of such class or another class;
(10) To increase the rights or privileges of shares of another class;
(11) to restructure the Company in such a way so as to cause the shareholders of different classes to bear liability to different extents during the restructuring;
(12) to amend or abrogate the provisions of Chapter 9 of the Articles of Association "Special Procedures for Voting by a Class of Shareholders".
Section 2 Notice of Meeting and its Alterations
Article 26 The notice of a shareholders' general meeting shall be issued by the convenors of the meeting. Convenors of the meeting include the board of directors or shareholders individually or jointly holding more than 10% of the Company's voting shares.
Article 27 A written notice shall be issued 45 days (excluding the date of the meeting) prior to the meeting, informing all shareholders of the matters to be considered at the meeting, and the date and place of the meeting. The notice of a shareholders' general meeting shall be delivered to the shareholders (whether or not such shareholders are entitled to vote at the meeting) by hand or by pre-paid mail to the addresses of the shareholders as shown in the register of shareholders of the Company. For the holders of domestic shares, the notice of the
meeting may also be given by way of public announcement.
The public announcement referred to in the preceding paragraph shall be published in one or more newspapers designated by the securities regulatory authority of the State Council during the period between forty-five to fifty days before the date of the meeting. Once the announcement is made, the holders of domestic shares shall be deemed to have received the notice of the relevant shareholders' general meeting. Where the Company fails to issue a notice of meeting according to schedule thus resulting in the failure of the Company to convene an AGM within six months from the end of the preceding accounting year, it shall report the same immediately to the stock exchanges on which its shares are listed stating the reasons and shall make an announcement accordingly.
Article 28 The notice of a class shareholders' general meeting shall be delivered only to the shareholders who are entitled to vote at such meeting.
Article 29 The notice of a shareholders' general meeting shall satisfy the following requirements:
(1) in writing;
(2) specify the place, date and time of the meeting;
(3) set out the matters to be discussed at the meeting and fully disclose the contents of the motions. If it is required to alter matters involved in the resolutions of the previous shareholders' general meeting, the contents of the motion shall be complete and not only the contents of the changes are stated. Items included under "any other businesses" without specific contents shall not be deemed as a motion and the same shall not be voted at a shareholders' general meeting;
(4) provide the shareholders with such information and explanation as necessary to enable the shareholders to make an informed decision on the proposals put before them. Such principle includes (but not limited to) where a proposal is made to amalgamate the Company with another, to repurchase shares of the Company, to reorganize its share capital, or to restructure the Company in any other way, the terms of the proposed transaction must be provided in detail together with contracts (if any) and the cause and effect of such proposal must be properly explained;
(5) contain a disclosure of the nature and extent of the material interests of any director, supervisor, president, vice-president, Chief Financial Officer and secretary of the board of directors in the proposed transaction and the effect which the proposed transaction will have on them in their capacity as shareholders in so far as it is different from the effect on the interests of shareholders of the same class;
(6) contain the full text of any special resolution to be proposed at the meeting;
(7) contain a clear statement that a shareholder entitled to attend and vote at such meeting is entitled to appoint one or more proxies to attend and vote at such meeting on his behalf and that such proxy needs not be a shareholder;
(8) specify the shareholding registration date for the shareholders who are entitled to attend the shareholders' general meeting;
(9) specify the time and place for lodging proxy forms for the meeting;
(10) state names and telephone numbers of the contact persons for the meeting.
Article 30 The board of directors shall issue a notice to convene the shareholders' general meeting within fifteen days upon receipt of a written request for convening a shareholders' general meeting from the supervisory committee which is in compliance with the relevant requirements.
Article 31 After the board of directors has received a written request for convening an extraordinary general meeting in compliance with the relevant requirements from shareholders individually or jointly holding more than 10% of the Company's voting shares, it shall issue a notice to convene a shareholders' general meeting as soon as possible. Any alterations to the original motion shall have the consent of the proposing shareholders. After the issue of the notice, the board of directors shall not propose any new motions or change or defer the time for holding the shareholders' general meeting without the consent of the proposing shareholders.
Article 32 If the board of directors fails to issue a notice to convene a meeting within thirty days upon receipt of a written request from shareholders individually or jointly holding more than 10% of the Company's voting shares, the proposing shareholders may convene a shareholders' extraordinary general meeting themselves within four months after the board of directors has received such request. Where the proposing shareholders decide to convene such a meeting themselves, it shall notify the board of directors in writing, and shall issue a notice to convene the meeting after reporting to the branch of the securities regulatory authority of the State Council of the locality of the Company and the stock exchanges on which the Company's shares are listed. The notice of the meeting shall comply with the general requirements for notices of meetings and shall also satisfy the following requirements:
(1) new contents shall not be added to a motion, otherwise the proposing shareholders shall resubmit a request to convene a shareholders' general meeting to the board of directors;
(2) the meeting shall be held at the offices of the Company.
Article 33 After the issue of the notice of a meeting, the convenors of the meeting shall not put forward any new motion which is not set out in the notice. Where a shareholder who has the largest shareholding of the Company intends to put forward a new motion on profit distribution at an AGM, such shareholder shall, not less than ten days before the date of the AGM, submit the motion to the board of directors to enable it to make an announcement, failing which the shareholder is not entitled to put forward the motion at the AGM.
Article 34 Shareholders and authorized proxies intending to attend a shareholders' general meeting shall deliver to the Company their written replies concerning their attendance at such meeting twenty days before the date of the meeting.
The Company shall, based on the written replies which it receives from the shareholders twenty days before the date of the shareholders' general meeting, calculate the number of voting shares represented by the shareholders and the authorized proxies who intend to attend the meeting. If the number of voting shares represented by the shareholders who intend to attend the meeting amount to more than one-half of the Company's total voting shares, the Company may hold the shareholders' general meeting; if not, then the Company shall, within five days, notify the shareholders again by way of public announcement the matters to be considered at, and the place and date for, the meeting. The Company may then hold the shareholders' general meeting after publication of such announcement.
Article 35 After the convenors of a meeting have issued the notice of the shareholders' general meeting, the shareholders' general meeting shall not be convened at an earlier date, nor shall it be postponed without reasons. Where a shareholders' general meeting has to be postponed for special reasons, the convenors of the meeting shall publish a postponement notice at least five working days before the original date of the shareholders' general meeting. The convenors of the meeting shall state the relevant reasons and the date for convening the meeting after the postponement in the postponement notice.
Article 36 Where the Company postpones the shareholders' general meeting, it shall not change the shareholding registration date for the shareholders who are entitled to attend the shareholders' general meeting according to the original notice.
Article 37 The Company shall post all information relating to the shareholders' general meeting on the website of the Shanghai Stock Exchange at least five working days before the date of the meeting according to the requirements of the Shanghai Stock Exchange.
Section 3 Registration of a Meeting
Article 38 A shareholder may attend the shareholders' general meeting in person or appoint a proxy to attend and vote on his behalf. Directors, supervisors, secretary to the board of directors and the PRC lawyer(s) engaged by the Company shall attend the meeting. The president, vice-president, Chief Financial Officer of the Company and persons invited by the board of directors may also attend the meeting.
In order to ensure the solemnity and proper order of the shareholders' general meeting, the Company shall have the right to refuse persons other than those stated above to enter into the venue.
Article 39 The Company shall be responsible for preparing an attendance register, which will be signed by the personnel attending the meeting. The attendance register shall set out the names of persons present at the meeting (and/or names of units), identification document numbers, information confirming the identities of the shareholders (such as shareholder account numbers), the number of voting shares held or represented, names of the proxies (or names of the units) and so on.
Article 40 The contents of registration for the shareholders or proxies attending the shareholders' general meeting shall include:
(1) confirmation of the identity as a shareholder or proxy;
(2) request to speak and contents of the text (if any);
(3) collecting the voting slips according to the number of shares held/represented by the shareholders or proxies;
(4) registering new motions (if any).
Article 41 The instrument appointing a proxy of a shareholder shall be in writing. Such written instrument shall state the following:
(1) the name of the authorized proxy of the shareholder;
(2) the number of shares of the principal represented by the authorized proxy;
(3) whether or not the proxy has any voting right;
(4) an indication to vote for or against each and every matter included in the agenda;
(5) whether or not the proxy has voting rights in respect of the provisional motion which may be included in the agenda of the AGM; and, if this is the case, specific instructions as to the type of voting rights to be exercised;
(6) the date of issue and validity period of the proxy form;
(7) the signature (or seal) of the principal or its agent appointed in writing; if the principal is a legal person shareholder, the proxy form shall bear the seal of the legal person unit, or signed by its director or an agent duly appointed by it.
The proxy form shall state clearly that the proxy shall be entitled to vote at his discretion in the absence of specific instructions from the shareholder.
Article 42 The proxy form shall be lodged with the Company's premises or such other place as specified in the notice convening the meeting at least twenty-four hours prior to the relevant meeting for which the proxy is appointed to vote or twenty-four hours prior to the scheduled voting time. Where the proxy form is signed by a person authorized by the principal, the power of attorney or other authorization documents shall be notarized. The notarized power of attorney and other authorization documents, together with the proxy form, shall be lodged with the Company's premises or such other place as specified in the notice convening the meeting.
Article 43 Shareholders attending a shareholders' general meeting shall fulfil registration procedures. Shareholders shall produce the following documents for registration purposes:
(1) Natural person shareholders: an individual shareholder shall produce his identification documents and provide information enabling the Company to confirm his identity as a shareholder. Where a proxy is appointed to attend the meeting, the proxy shall produce his own identification documents and the proxy form, and provide the Company with information enabling the Company to confirm the identity of his principal as a shareholder.
(2) Legal person shareholders: if a legal representative is appointed to attend the meeting, the legal representative shall produce his identification documents and proof of his qualification as a legal representative, and he shall provide the Company with the information enabling the Company to confirm the identity of the legal person shareholder. Where a proxy is appointed to attend the meeting, the proxy shall produce his own identification documents, the proxy form issued by the legal representative of the legal person shareholder pursuant to law, or a notarized copy of a resolution on authorization adopted by the board of directors of the legal person shareholder or other decision-making organs, and shall provide information enabling the Company to confirm the identity of the principal as a legal person shareholder.
Article 44 Where a shareholder or a proxy requests to speak at the shareholders' general meeting, he shall register with the Company prior to the meeting. The number of speakers shall be limited to ten. If there are more than ten speakers, the first ten shareholders who have the largest shareholdings shall have the right to speak in an order according to their shareholdings.
Article 45 Where an AGM is convened, the supervisory committee and shareholders individually or jointly holding more than 5% of the Company's voting shares shall be entitled to propose new motions to the Company for registration. For the new motions put forward by the shareholders, it is for the chairman of the meeting to decide according to Article 23 of these Rules whether or not to include the same in the agenda.
Where an extraordinary general meeting is convened, no new motions are allowed to be registered with the Company, and the chairman shall not add such new motions to the agenda of the meeting. Convening a Meeting
Section 4
Article 46 A shareholders' general meeting shall be chaired by the Chairman of the board of directors, who shall act as the chairman of the meeting. If the Chairman is unable to attend the meeting, the Vice Chairman shall act as the chairman of the meeting.
If both the Chairman and Vice Chairman are unable to attend the meeting and the Chairman has not appointed another director to act as the chairman of the meeting, the board of directors may appoint a director of the Company to take the chair. If the board of directors fails to do so, the shareholders present at the meeting may choose a person to act as the chairman. If, for any reason, the shareholders cannot elect a chairman, the shareholder (including a proxy) holding the largest number of voting shares shall be the chairman of the meeting.
Article 47 Where shareholders individually or jointly holding more than 10% of the Company's voting shares of their own motion decide to convene an extraordinary general meeting, the board of directors and secretary to the board of directors shall earnestly perform their duties. Directors and supervisors shall attend the meeting, and the secretary to the board of directors must attend the meeting to ensure the meeting is held in proper order. The meeting shall be presided over by the Chairman, who shall also act as the chairman of the meeting. If the Chairman is unable to attend the meeting for any reason, the Vice Chairman shall act as the chairman of the meeting. If both the Chairman and Vice Chairman are unable to attend the meeting and the Chairman has not designated a person to act as chairman of the meeting, the board of directors may designate a director of the Company to so act. If the board of directors is unable to designate a director to chair the shareholders' general meeting, the proposing shareholder shall take the chair after filing a report with the branch of the securities regulatory authority of the State Council of the locality of the Company.
Article 48 The chairman shall declare that the meeting commences at the scheduled time after he has been informed that the participants are in compliance with legal requirements and new motions and speakers are registered. In any of the following circumstances, the meeting may be declared to commence later than the time scheduled:
(1) when any equipment of the venue is out of order so that the meeting cannot proceed as usual;
(2) when any matters of material importance take place affecting the proceeding of the meeting.
Article 49 After the chairman of the meeting has declared the official commencement of the meeting, he shall firstly announce that the number of shareholders attending the meeting and the number of shares represented by such shareholders are in compliance with the legal requirements. Subsequently he shall read out the agenda as stated in the notice of the meeting, and shall inquire whether any person present at the meeting has any objection to the voting order of the motions. If an AGM is convened, the chairman of the meeting shall also inquire whether the supervisory committee or the shareholders individually or jointly holding more than 5% of the Company's voting shares need to put forward new motions. Where a new motion is put forward by a shareholder, the chairman of the meeting shall decide whether to accept the motion according to Article 23 of these Rules.
Where the board of directors or chairman of the meeting decides not to include the motion of the supervisory committee or shareholders into the agenda of the AGM, explanations and statements shall be given at such AGM.
At an extraordinary general meeting, no person shall be allowed to request for discussion of new motions not set out in the notice of the shareholders' general meeting.
Article 50 After the chairman of the meeting has made inquires regarding the agenda, he shall read out the motions or appoint another person to read out the motions, and shall explain the motions according to the following requirements if necessary:
(1) Where the motion is put forward by the board of directors, the motion shall be explained by the Chairman or other persons designated by the Chairman;
(2) Where the motion is put forward by the supervisory committee or shareholders individually or jointly holding more than 5% of the Company's voting shares, the motion shall be explained by the person putting forward the motion or its legal representative or lawful and valid proxy.
Article 51 Motions included in the agenda shall be examined before voting.
Reasonable time shall be given at the shareholders' general
meeting for each motion to be discussed, and the chairman of the
meeting shall orally ask the shareholders attending the meeting
whether they have completed the examination procedures.
Examination procedures shall be regarded as completed if there
are no objections by shareholders attending the meeting.
Article 52 No shareholder shall speak for more than twice at the meeting without the consent of the chairman. A shareholder is allowed to speak for no more than five minutes for the first time, and no more than three minutes for the second time.
When a shareholder requests to speak, he shall only do so if he does not interrupt report which is being made by the meeting reporter or speeches which are being made by other shareholders.
Article 53 Shareholders may query the Company at the shareholders' general meeting. The chairman of the meeting shall direct the directors or supervisors to answer such queries unless they relates to the Company's business secret and shall not be disclosed at the meeting.
Section 5 Voting and Resolution
Article 54 Shareholders' general meeting shall resolve on any specific motions.
Article 55 Matters not included in the notice convening the shareholders' extraordinary general meeting shall not be resolved on at such a meeting. In approving the motions included in the notice of an extraordinary general meeting, no alteration shall be made to the relevant motions in respect of the following matters:
(1) increase or reduction of the registered capital of the Company;
(2) issuance of bonds of the Company;
(3) division, merger, dissolution and liquidation of the Company;
(4) amendment to the Articles of Association;
(5) profits distribution plans and loss recovery plans of the Company;
(6) appointment and removal of a member of the board of directors and the supervisory committee;
(7) changing the use of proceeds from a share offer;
(8) the entering into of a connected transaction which requires the approval of the shareholders in general meetings;
(9) acquisition or sale of assets which requires the approval of the shareholders in general meetings;
(10) changing the accounting firm engaged.
Any alteration in respect of the contents of the above motions shall be deemed to be a new motion and shall not be voted on at that shareholders' general meeting.
Shareholders' general meetings shall resolve on all motions included in the agenda one by one, and shall not for any reason cause delay in considering, or fail to consider, such motions. Where different motions are put forward at the annual general meeting for the same matter, such motions shall be resolved on in the order of time in which they are put forward.
Article 56 The chairman of the meeting is obliged to request the shareholders to approve the motions by open ballot at the general meeting.
Each shareholder or proxy shall exercise his voting rights in accordance with the number of voting shares represented by him. Except for the circumstances where cumulative voting system is applicable to the election of directors in accordance with the Articles of Association, each share shall carry one voting right.
Article 57 Resolutions in respect of the election of directors shall be passed by a way of cumulative voting at shareholders' general meeting in accordance with the Articles of Association. The details of the cumulative voting system are as follows:
(1) Where the number of directors to be elected is more than two, the cumulative voting system must be adopted.
(2) Where cumulative voting system is adopted, each of the shares held by a shareholder shall carry the same number of votes as the number of directors to be elected.
(3) The notice of a shareholders' general meeting shall notify the shareholders that a cumulative voting system will be adopted for the election of directors. The convenors of the shareholders' general meeting shall prepare ballots suitable for cumulative voting, and shall give explanations in writing regarding the cumulative voting system, the completion of the ballots and the methods of counting the votes.
(4) In casting his votes for the director candidates at a shareholders' general meeting, a shareholder may exercise his voting rights by spreading his votes evenly and cast for each of the candidates the number of votes corresponding to the number of shares he holds; or he may focus his votes on one candidate and cast for a particular candidate the total number of votes carried by all of his shares while the number of voting rights carried by each of his shares is the same as the number of directors to be elected; or he may spread his votes over several candidates and cast for each of them part of the total number of votes carried by the shares he holds while the number of voting rights carried by each of his shares is the same as the number of directors to be elected.
(5) Upon the exercise of his voting rights by focusing his votes on one or several of the candidates while the number of voting rights carried by each of his shares is the same as the number of directors to be elected, a shareholder shall not have any right to vote for any other candidates.
(6) Where the total number of votes cast by a shareholder for one or several of the candidates is in excess of the number of votes carried by the total number of shares held by him, the votes cast by the shareholder shall be invalid, and the shareholder shall be deemed to have waived his voting rights. Where the total number of votes cast for one or several candidates by a shareholder is less than the number of votes carried by the total number of shares held by such a shareholder, the votes cast by the shareholder shall be valid, and the voting rights attached to the shortfall between the votes actually cast and the votes which the shareholder is entitled to cast shall be deemed to have been waived by the shareholder.
(7) Where the number of approval votes won by a director candidate exceeds one-half of the total voting rights (to be calculated according to the total number of shares if the cumulative voting is not adopted) represented by the shareholders present at the shareholders' general meeting and the approval votes exceeds the objection votes, the candidate shall be the elected director candidate. If the number of the elected director candidates exceeds the total number of directors to be elected, those candidates who win the largest number of approval votes shall be elected as directors (however, if the elected director candidates whose approval votes are comparatively fewer win the same number of approval votes, and the election of such candidates as directors will give rise to the number of directors elected exceeding the number of directors to be elected, such candidates shall be deemed as having not been elected); if the number of directors elected at a shareholders' general meeting is less than the number of directors to be elected, a new round of voting shall be carried out for the purpose of filling such directorship vacancies, until all the directors to be elected are validly elected.
(8) Where a new round of voting is carried out according to the provisions of paragraph (7) of this Article at the shareholders' general meeting, the number of votes casted by the shareholders in the cumulative voting shall be re-counted according to the number of directors to be elected in the new round of voting.
Article 58 In examining the motions on the election of directors and supervisors at a shareholders' general meeting, shareholders shall vote on the candidates for the office of directors or supervisors one by one.
Article 59 Resolutions of a shareholders' general meeting shall be divided into ordinary resolutions and special resolutions.
(1) Ordinary resolutions
(i) Ordinary resolutions shall be passed by votes representing more than one-half of the voting rights represented by the shareholders (including proxies) present at the meeting.
(ii) The following matters shall be approved by ordinary resolutions at shareholders' general meetings:
(a) work reports of the board of directors and the supervisory committee;
(b) profit distribution plans and loss recovery plans formulated by the board of directors;
(c) appointment and removal of members of the board of directors and members of the supervisory committee, their remuneration and manner of payment and their liability insurance;
(d) annual preliminary and final budgets, balance sheets and profit and loss accounts and other financial statements of the Company;
(e) annual reports of the Company;
(f) matters other than those which are required by laws and regulations or by the Articles of Association to be passed by special resolutions.
(2) Special resolutions
(i) Special resolutions shall be passed by votes representing more than two-thirds of the voting rights represented by the shareholders (including proxies) present at the meeting.
(ii) The following matters shall be approved by special resolutions at a shareholders' general meetings:
(a) increase or reduction in share capital and the issue of shares of any class, warrants and other similar securities;
(b) issue of bonds of the Company;
(c) division, merger, dissolution and liquidation of the Company; (d) repurchase of shares of the Company;
(e) amendment to the Articles of Association, the Rules and Procedures for the Shareholders' General Meetings, the Rules and Procedures for the Board of Directors' Meetings and the Rules and Procedures for the Supervisors' Meetings;
(f) any other matters approved by an ordinary resolution by the shareholders at a general meeting which may have material impacts on the Company and accordingly should be passed by special resolutions.
Article 60 As far as any matter relating to sub-paragraphs (2) to (8), (11) to (12) of Article 25 of these Rules, the affected class shareholders, whether or not such shareholders originally have the right to vote at shareholders' general meetings, shall have the right to vote at the class meetings. However, interested shareholder(s) shall not be entitled to vote at such class meetings.
"(An) interested shareholder(s)", as such term is used in the preceding paragraph, means:
(1) in the case of a repurchase of shares by way of a general offer to all shareholders of the Company or by way of public dealing on a stock exchange pursuant to Article 29 of the Articles of Association, an interested shareholder is a controlling shareholder within the meaning of Article 55 of the Articles of Association;
(2) in the case of a repurchase of shares by an off-market agreement pursuant to Article 29 of the Articles of Association, a holder of the shares to which the proposed agreement relates;
(3) in the case of a restructuring of the Company, a shareholder who assumes a relatively lower proportion of obligation than the obligations imposed on shareholders of that class under the proposed restructuring or who has an interest in the proposed restructuring which is different from the general interests of the shareholders of that class.
Article 61 Resolutions of a class of shareholders shall be passed by votes representing more than two-thirds of the voting rights of shareholders of that class represented at the relevant meeting who, according to Article 62, are entitled to vote at the meeting.
The special procedures for approval by a class of shareholders shall not apply in the following circumstance: where the Company issues, upon the approval by special resolution of its shareholders in a general meeting, either separately or concurrently once every twelve months, not more than 20% of each of its existing issued Domestic-Invested Shares and Overseas-Listed Foreign-Invested Shares.
Article 62 Where a connected transaction is being considered at a shareholders' general meeting, the connected shareholders shall abstain from voting, and the voting rights represented by the shares held by them shall not be counted towards the total number of valid votes. The voting result of the non-connected shareholders shall be fully disclosed in the announcement in relation to the resolutions passed at the shareholders' general meeting.
If any shareholder are required to abstain from voting or may only vote for or against a matter according to the Rules Governing the Listing of Securities of the Hong Kong Stock Exchange Limited, any vote by such shareholder or his proxy in violation of the relevant rules or restrictions referred to above shall not be counted in the voting results.
Article 63 Shareholders (and proxies) shall complete their ballot papers carefully as instructed and put the ballot papers into the ballot box. Any ballot paper containing uncompleted parts, false information, illegible writing and any uncast paper shall be deemed to be an abstention of voting by the shareholder, and such ballot papers shall not be regarded as valid votes.
Article 64 Prior to voting, the shareholders present at a shareholders' general meeting shall nominate at least one supervisor and two shareholders to act as counting officers. Such counting officers shall count all the votes cast on site and sign the counting statistical sheet.
If the votes for and against a resolution are equal, the chairman of the meeting shall be entitled to cast one more vote.
Article 65 The chairman of the meeting shall be responsible for deciding whether or not a resolution is duly passed according to the results of the votes counting. The chairman's decision, which shall be final and conclusive, shall be announced at the meeting and recorded in the minutes of the meeting.
Article 66 A shareholders' general meeting shall be recorded by the minutes of the meeting, which shall be signed by the directors present at the meeting and the minutes-taking officer. If no director is present at the meeting, the shareholder or the shareholder's proxy chairing the meeting together with the minutes-taking officer shall sign the minutes. The minutes of the meeting shall record the following matters:
(1) the number of voting shares represented by the shareholders present at the meeting, and the percentage of such shares out of the total number of shares of the Company;
(2) the date and place of the meeting;
(3) the name of the person chairing the meeting and the agenda of the meeting;
(4) the main points regarding the matters made by each person who speaks at the meeting;
(5) the voting result of each matter considered;
(6) the inquiries and suggestions of the shareholders and the answers to these inquiries or statement made by the directors and supervisors;
(7) other matters which according to the opinions of the shareholders' general meeting and the provisions of the Articles of Association shall be recorded in the minutes of the meeting.
Article 67 The board of directors of the Company shall retain (a) PRC lawyer(s) to attend the shareholders' general meeting in accordance with law to enable him(them) to give legal opinions on the following matters, and shall publish these legal opinions together with the resolutions of the shareholders' general meeting:
(1) whether the procedures for convening and holding the shareholders' general meeting comply with the relevant laws and regulations as well as the Articles of Association;
(2) verification of the legality and validity of the eligibility of the participants of the meeting;
(3) verification of the eligibility of the shareholders who put forward new motions at the shareholders' annual general meeting;
(4) whether the voting procedures of the shareholders' general meeting are lawful and valid;
(5) the issue of any legal advice on any other matters requested by the Company.
Where the shareholders' extraordinary general meeting is chaired by the shareholders proposing the holding of such a meeting, the proposing shareholders shall, in accordance with law, retain (a) lawyer(s) to give witness legal opinions according to the provisions as set out above, and the procedures for convening such a meeting shall also comply with relevant laws, regulations and this Article.
Adjournment of a Meeting
Section 6
Article 68 The board of directors of the Company shall ensure that a shareholders' general meeting is held continuously within reasonable office hours, until the resolutions are finally voted on.
Article 69 If, in the course of the meeting, disputes arising out of the identity of any shareholder or the results of the calculation of the votes and so on cannot be resolved on site in such a way that the order of the meeting is affected and the meeting cannot proceed as usual, the chairman shall declare an adjournment of the meeting.
If the foregoing circumstances cease to exist, the chairman of the meeting shall notify the shareholders of the resumption of the meeting as soon as possible.
Article 70 Where a shareholders' general meeting is adjourned for more than one working day due to force majeure or any other extraordinary reasons, and the meeting cannot be convened properly or no resolution is passed, the board of directors of the Company shall give explanations to the stock exchanges on which the Company's shares are listed and make a proper announcement. The board of directors of the Company is obliged to take all necessary measures to resume the shareholders' general meeting as soon as possible.
Post-meeting Affairs and Announcement
Section 7
Article 71 The secretary to the board of directors shall be responsible for submitting the minutes of the meeting and the resolutions passed at the meeting and other relevant documentation to the relevant regulatory authorities in accordance with laws, regulations, the requirements of the securities regulatory authority of the State Council and the stock exchanges on which the Company's shares are listed after the meeting. He shall also be responsible for handling the announcement to be published in the designated media.
Article 72 The announcement of the resolutions of the shareholders' general meeting shall state the number of the shareholders (or the proxies) present at the meeting, the number of shares held by them (or nominees) and the percentage of such shares out of the total voting shares of the Company, the method of voting and the voting result of each motion. The resolutions on the motions shall state the names of the proposing shareholders, the percentage of shares held and the details of the motions. Where a shareholder's motion is not included in the agenda of an AGM, the details of the motion and the statement made by the board of directors or the chairman at the AGM shall be published together with the resolutions of the AGM.
Where the board of directors or the chairman of the meeting decides not to include the motions put forward by the
supervisory committee or the shareholders in the agenda of the AGM, explanations and statements shall be given at such a meeting. Such statements and details of the motions shall, together with the resolutions of the AGM, be published after the conclusion of the AGM.
Where a resolution of the meeting is not adopted, or a resolution passed at the previous shareholders' general meeting is changed at the current shareholders' general meeting, the board of directors shall give an explanation in relation to the resolutions of the current shareholders' general meeting.
The announcement of resolutions passed at shareholders' general meetings shall be published in designated newspapers and on the Company's website.
Article 73 The secretary to the board of directors shall be responsible for keeping written information such as the register of attendees, power of attorney, voting statistical sheet, minutes of the meeting, legal opinions endorsed by lawyer(s) and announcements of resolutions.
CHAPTER 5 SUPPLEMENTARY ARTICLES
Article 74 These Rules shall come into effect upon the adoption by the shareholders' general meeting by a special resolution and the approval by the relevant authorities in accordance with law.
Article 75 Any amendment to these Rules shall be proposed by the board of directors in the form of an amendment proposal, and shall be submitted to the shareholders' general meeting for approval by a special resolution.
Article 76 The right to interpret these Rules shall rest with the board of directors.
Article 77 Where any relevant matters are not covered in these Rules or where these Rules fail to comply with the relevant laws, administrative rules and other relevant regulatory documents as promulgated from time to time, those laws, administrative rules and other relevant regulatory documents shall prevail.
Appendix II
Rules and Procedures
for
Board of Directors' Meetings
of
China Petroleum & Chemical Corporation
CHAPTER 1 GENERAL PROVISIONS
Article 1 In order to ensure that the board of directors of China Petroleum & Chemical Corporation (the "Company") fulfils the duties and responsibilities conferred by all shareholders of the Company, conducts discussions efficiently, makes scientific, immediate and prudent decisions and standardizes the operation of the board of directors, these Rules are formulated according to the "Company Law of the People's Republic of China" (the "Company Law"), "Mandatory Provisions for the Articles of Association of Companies to be Listed Overseas", "Guidelines for the Articles of Association of Listed Companies", "Standards for the Governance of Listed Companies" and other governing regulations of the places of the Company's listings inside and outside the PRC and the Articles of Association of China Petroleum & Chemical Corporation ("Articles of Association").
CHAPTER 2 FUNCTIONS, POWERS AND AUTHORITY OF THE BOARD OF DIRECTORS
Article 2 The board of directors is accountable to the shareholders' general meetings and shall exercise the following functions and powers:
(1) to be responsible for convening shareholders' general meetings and to report on its work to the shareholders' general meetings;
(2) to implement the resolutions passed at shareholders' in general meetings;
(3) to determine the Company's business plans and investment proposals;
(4) to formulate the Company's annual preliminary and final financial budgets;
(5) to formulate the Company's profit distribution proposals and loss recovery proposals;
(6) to formulate proposals for the credit and financial policies of the Company, the increase or reduction of the registered capital of the Company and for the issue of debentures and securities of any kinds (including but without limitation to the debentures of the Company) and the listing or repurchase of the shares of the Company;
(7) to draw up plans for significant acquisition or disposal proposals, the merger, division or dissolution of the Company;
(8) to determine the risks investment of the Company according to the authority given in the shareholders' general meeting;
(9) to determine matters relating to external guarantees (including pledging of assets) of the Company according to the authority given in the shareholder's general meeting;
(10) to decide on the Company's internal management structure;
(11) to appoint or remove the Company's president and to appoint or remove the vice-president and Chief Financial Officer of the Company according to the recommendations of the president; to appoint or remove the secretary of the board of directors and to decide on their remuneration;
(12) to appoint or replace the members of the board of directors and the supervisory committee of its wholly-owned subsidiaries; to appoint, replace or recommend the shareholders' proxies, directors (candidates) and supervisors (candidates) of its subsidiaries which are controlled or invested by the Company;
(13) to determine the establishment of the Company's branch offices;
(14) to formulate proposals for any amendment of the Company's Articles of Association and its appendices;
(15) to formulate the Company's basic management system;
(16) to manage the disclosure of information of the Company;
(17) to propose in a shareholders' general meeting to engage or replace the accounting firm which undertakes auditing work of the Company;
(18) to listen to the president's work report and check the president's work;
(19) to determine important matters and administrative matters of the Company other than those which should be determined by resolution of a shareholders' general meeting of the Company except for matters as specified by law, administrative rules, regulations of the competent government department(s) and the Articles of Association, and to sign other important agreements;
(20) to exercise any other powers stipulated by laws, administrative rules, regulations of the competent government department(s) or the Articles of Association, and any other functions and powers conferred by the shareholders' in general meetings.
The necessary conditions for the board of directors to perform its duties shall include the following:
Article 3 The president shall provide the directors with necessary information and data, enabling the board of directors to make scientific, immediate and prudent decisions.
A director may require the president or, through the president, require the relevant departments of the Company to provide information and explanations which are necessary for him to make scientific, immediate and prudent decisions.
Where the independent directors think necessary, they may engage
(an) independent institution(s) to provide independent opinions
to be relied upon by them in making decisions. The fees incurred
in the engagement of such (an) independent institution(s) shall
be borne by the Company.
Article 4 The board of directors shall examine and resolve on the matters which the board of directors is required by laws, administrative rules, regulations of the competent government department(s) and the Articles of Association to submit to the shareholders in general meetings for determination (including matters proposed by two or more than half of the independent directors).
The board of directors shall examine the provisional motions put forward by the shareholders individually or jointly holding more than 5% of the Company's voting shares at the shareholders' annual general meeting (the "AGM") according to the standard of "relevance" as set out in the Rules and Procedures for the Shareholders' General Meetings, and to decide whether to submit the provisional motions to the AGM for examination.
Article 5 In order to ensure and increase the stability and efficiency of the daily operation of the Company, the board of directors shall explicitly authorise, on a partial basis, the chairman, other one or more directors or the president to exercise its functions and powers on investment plans, assets disposals, external guarantees, the credit and financial policies and the internal management structure of the Company according to the provisions of the Articles of Association and the authorisation of the shareholders' general meeting.
Article 6 The powers and authority of the board of directors on investments shall include the following:
(1) The board of directors shall be responsible for conducting preliminary examination of the medium and long-term investment plans proposed by the president, and shall submit them to the shareholders' general meetings for approval.
(2) The board of directors shall be responsible for conducting preliminary examination of the annual investment plans proposed by the president, and shall submit them to the shareholders' general meetings for approval. The board of directors may make adjustments of not more than 15% of the amount of the capital expenditure for the current year as approved at the shareholders' general meeting. The chairman of the board of directors is authorised to make adjustments of not more than of not more than 8% of the amount of the capital expenditure for the current year as approved at the shareholders' general meeting.
(3) Individual project investments (including but not limited to exploration and development, fixed assets, external shareholdings) shall be approved by the board of directors if the investment amounts are not more than 5% of the latest audited net asset value of the Company. The Chairman of the board of directors is authorised to examine and approve projects if the investment amount is not more than 3% of the latest audited net asset value of the Company.
(4) Where the Company uses its own assets to make risky investment in areas not related to the business of the Company (including but not limited to debentures, futures, shares), risky investments shall be approved by the board of directors if the amount of the individual investment is not more than 1% of the latest audited net asset value of the Company. The chairman of the board of directors is authorised to examine and approve projects if the investment amount is not more than 0.5% of the latest audited net asset value of the Company.
The powers and authority of the board of directors on asset disposals shall include the following:
Article 7
(1) When the Company acquires or sells assets, it has to take into account of the following four testing indices: (i) total asset ratio: the total amount of the assets to be acquired or sold (according to the latest audited financial report, valuation report or capital verification report) divided by the latest audited total asset value of the Company; (ii) net profit (loss) ratio of the acquisition: the absolute value of the net profit or loss relating to the assets to be acquired (according to the audited financial report of the preceding year) divided by the absolute value of the audited net profit or loss of the Company for the preceding year; (iii) net profit (loss) ratio of the sale: the absolute value of the net profit or loss relating to the assets to be sold (according to the audited financial report of the preceding year) or the absolute value of the profit or loss arising from such transaction divided by the absolute value of the audited net profit or loss of the Company for the preceding year; (iv) transaction amount ratio: the transaction amount (taking into account of the assumed liabilities and costs, etc) of the acquired assets divided by the total amount of the latest audited net asset value of the Company.
The board of directors shall examine and approve projects with a ratio of less than 50% according to all the above four testing indices. The chairman of the board of directors is authorised to examine and approve projects with a ratio of less than 10% according to all the above four testing indices.
(2) In disposing of fixed assets, where the total value of the expected value of the fixed assets to be disposed of and the value of the fixed assets which have been disposed of in the four months prior to such proposed disposal does not exceed 33% of the value of the fixed assets as shown in the latest balance sheet considered by the shareholders' general meeting, the board of directors shall examine and approve such disposal, and the Chairman of the beard of directors is authorised to examine and approve those fixed asset disposals of less than 10%.
(3) As regards others (including but not limited to the
entering into, varying and termination of important
contracts relating to entrustment of operation, entrusted
operation, entrusted financial management, contracting
and leasing), the relevant amount or the amount
accumulate in twelve months shall be calculated according
to one of four testing indices referred to in paragraph
(1) of this Article.
Projects with a ratio of not more than 5% according to all the above four testing indices shall be examined and approved by the board of directors. The chairman of the board of directors is authorised to examine and approve projects with a ratio of not more than 1% according to all the above four testing indices.
Article 8 The powers and authority of the board of directors on debt liabilities shall include the following:
(1) The board of directors shall examine and approve the amount of the long-term loans for the current year according to the annual investment plan as approved by the shareholders' general meeting. The chairman of the board of directors is authorised to make adjustments of not more than 10% of the total amount of the long-term loans for the current year as approved by the board of directors. Within the total amount of the long-term loans as approved by the board of directors, the chairman of the board of directors is authorised to approve and sign the contract for every single long-term loan for the amount exceeding RMB1 billion, and the president is authorised to approve and sign the contract for every single long-term loan for the amount not exceeding RMB1 billion.
(2) Within the total amount of the working capital loans for the current year as approved by the board of directors, the Chairman of the board of directors is authorised to sign the overall short-term loan facility contracts for raising working capitals required by the operation and management of the Company according to the demand of the Company. Within the amount limit as fixed by these loan facility contracts, the chairman of the board of directors is authorised to approve and sign the working capital short-term loan contracts where the amount of one single loan exceeds RMB1 billion, and the president is authorised to approve and sign the working capital short-term loan contracts where the amount of one single loan does not exceed RMB1 billion.
(3) The Company shall not provide any guarantees for its shareholders, controlling subsidiaries of its shareholders, subsidiary enterprises of shareholders or personal liability. If the Company provides guarantees to others, the guaranteed person shall provide counter-guarantee to the Company or take other necessary risk preventive measures.
If the guarantee amount does not exceed 5% of the latest audited net asset value of the Company, such guarantees shall be examined and approved by the board of directors. The chairman of the board of directors is authorised to approve and sign the external guarantee contracts the guaranteed amount of which does not exceed 1% of the latest audited net asset value of the Company but more than RMB100 million. The president is authorised to approve and sign the external guarantee contracts the guaranteed amount of which does not exceed RMB100 million.
Article 9 If, when applying the relevant standards as set out above, the approving offices of any investment, asset disposal and external guarantee matters as referred to above include the board of directors, chairman of the board of directors and/or president, such matters shall be submitted to the approving offices of the highest level for approval.
If the above investment, asset disposal and loan matters constitute connected transactions according to the regulatory stipulations of the places where the Company is listed, the relevant matters shall be dealt with according to the relevant stipulations.
Article 10 The board of directors authorises the chairman to determine the
following matters: (1) internal management structure of the
Company; (2) the establishment of branch offices by the Company;
(3) to appoint or replace the members of the board of directors
and the members of the supervisory committee of the wholly-owned
subsidiaries of the Company; and (4) to appoint, replace or
recommend the shareholders' representatives, director
(candidates) and supervisors (candidates) of the subsidiaries
which are controlled or invested by the Company.
CHAPTER 3 COMPOSITION OF THE BOARD OF DIRECTORS AND ITS
SUBORDINATED OFFICES
Article 11 The board of directors shall consist of twelve directors. The board of directors shall have one chairman and one vice-chairman.
Article 12 The board of directors shall establish strategic decision-making sub-committee, auditing sub-committee, remuneration and evaluation sub-committee and other special committees. These special committees shall conduct research on specific matters and provide opinions and suggestions on these matters to the board of directors for the reference.
Members of the special committees shall be directors of the Company. The majority of the membership of the auditing sub-committee, and remuneration and evaluation sub-committee shall consist of the independent directors, who shall also act as convenors. The auditing sub-committee shall have at least one independent director who is also an accounting professional.
Article 13 The major responsibilities of the strategic decision-making sub-committee shall be to conduct research and put forward proposals on the long-term development strategy and significant investment decisions of the Company.
Article 14 The major responsibilities of the auditing sub-committee shall include the following:
(1) to propose the appointment or replacement of the external auditor of the Company;
(2) to oversee the Company's internal auditing system and its implementation;
(3) to be responsible for the communication between the internal auditing department of the Company and the external auditor;
(4) to examine and approve the Company's financial information and it disclosure;
(5) to examine the internal control system of the Company.
Article 15 The major responsibilities of the remuneration and evaluation sub-committee shall include the following:
(1) to research on the criteria for the evaluation of directors and the president, to conduct evaluation of them and make necessary suggestions;
(2) to research on and review the policies and proposals in respect of the remuneration of directors, supervisors, president, vice-president, Chief Financial Officer and secretary of the board of directors.
Article 16 The special committees of the board of directors shall formulate detailed working rules, which shall come into effect upon the submission to, and the approval of, the board of directors.
CHAPTER 4 SECRETARY OF THE BOARD OF DIRECTORS
Article 17 The Company shall have one secretary of the board of directors.
The main duty of the secretary of the board of directors is to
promote and improve the Company's corporate governance standards
and properly deal with the matters regarding disclosure of
information.
Article 18 The main duties of the secretary of the board of directors include:
(1) to organize and arrange for board meetings and shareholders' general meetings, prepare the meeting materials, handle the meeting related affairs, to be responsible for record of meetings, ensure the accuracy and completeness of records, keep the meeting documents and records and take initiative to keep abreast of the execution of the related resolutions; and submit reports to the board of directors and put forward the proposals for importance issues arising during the implementation;
(2) to ensure that the material issues concerning the resolutions of the board of directors can be strictly implemented in accordance with the specified procedures; to participate and organize the consultation and analysis
on the decision-making matters of the board in accordance with its requirements, and put forward the related opinions and suggestions; to deal with the daily matters of the board of directors and its related committees if authorised;
(3) to be the contact person of the Company with the securities regulatory authorities, be responsible for organisation, preparation and timely submission of related documents as required by the regulatory authorities, and be responsible for related tasks assigned by the regulatory authorities and to organise and complete these tasks, and to ensure that the Company prepares and submits the reports and other documents as required by the regulatory authorities in accordance with law;
(4) to be responsible for the co-ordination and organization of the matters on disclosure of information of the Company, establish and perfect the system concerning information disclosure, participate in all related meetings of the Company concerning information disclosure, and keep abreast of the important business policies and related information of the Company in a timely manner;
(5) to be responsible for keeping confidential of the sensitive materials concerning the share price of the Company, and formulate effective and enforceable secrecy systems and measures. For the divulgence of the sensitive materials concerning the share price of the Company due to various reasons, he shall take necessary remedial measures, make timely explanation and clarification, and notify the regulatory organizations in the places where the shares of the Company are listed as well as the securities regulatory authority of the State Council;
(6) to be responsible for the co-ordination and organization of market promotion, coordinate the visit and interview, deal with the relationship with investors, maintain the relationship with investors, intermediary organs and news agencies, be responsible for the co-ordination and explanation of the inquiries of the public, and ensure the investors to obtain the information as disclosed by the Company in a timely manner, organize and arrange the promotion and advertising activities of the Company inside and outside the PRC, prepare and work out the summary report on market promotion and other important visiting activities, and report the related matters to the securities regulatory authorities of the State Council; to establish effective communication channels between the Company and its shareholders, including designating a staff and/or establishing (a) special office(s) to keep sufficient and necessary contacts with the shareholders, and to relay, in a timely manner, all the feedbacks including opinions and suggestions of the shareholders to the board of directors or the management team of the Company;
(7) to ensure the proper preparation of the register of shareholders, to be responsible for the management and proper maintenance of the materials concerning register of shareholders, directors' register, quantity of shares held by majority shareholders and record of shares held by directors, as well as the name list of the beneficiaries of the outstanding debentures of the Company;
(8) to assist directors and the president to practically implement the domestic and foreign laws, regulations, the Company's Articles of Association and other provisions in discharge of their duties and exercise of their powers; be liable to remind directors and the president timely on becoming aware that the Company passes or may pass resolutions which may breach the relevant regulations, and be entitled to report the related matters to securities regulatory authorities of the State Council and other regulatory authorities according to the facts;
(9) to provide the related information necessary for the supervisory committee of the Company and other approving authorities to discharge their duties and to exercise their powers, assist the investigation on the Chief Financial Officer, directors and the president of the Company concerning the performance of their fiduciary duties;
(10) to ensure the complete organizational documents and records of the Company are kept properly, and the persons who have the rights of access to the relevant documents and records of the Company obtain those documents and records in a timely manner; and
(11) to discharge other duties and to exercise other powers as conferred by the board of directors, as well as other duties and powers as required by the listing rules of the stock exchanges on which the Company's shares are listed.
Article 19 The board of directors of the Company shall have a secretarial office, which shall be a daily working body assisting the secretary of the board of directors in performing his duties.
Article 20 The Company shall formulate regulations in relation to the work of the secretary of the board, and perform the work for disclosure of information and investor relations. The relevant system shall be effective after reporting to the board of directors for approval.
CHAPTER 5 RULES OF THE BOARD OF DIRECTORS' MEETING
Article 21 The board of directors' meetings shall be divided into regular meetings and provisional meetings according to the regularity of such meetings.
Article 22 The regular meetings shall include the following:
(1) The board meetings approving financial reports of the Company:
(i) The annual results meetings
The annual results meetings shall be convened within 120 days from the end of the accounting year of the Company. The directors shall approve the Company's annual reports and deal with other relevant matters at such meetings. The timing of such meetings shall ensure that the annual reports of the Company will be despatched to the shareholders within the time limit specified by the relevant regulations and the Articles of Association, and shall ensure that the preliminary annual financial results of the Company will be announced within the time limit specified by the relevant regulations of the Company, and shall ensure that the AGM will be convened within 180 days from the end of the accounting year of the Company.
(ii) The interim results meetings
The interim results meetings shall be convened within 60 days from the end of the first six months of the accounting year of the Company. The directors shall approve the Company's interim reports and deal with other relevant matters at such meetings.
(iii) The quarterly results meetings
The quarterly results meetings shall be held in the first month of each of the second and fourth quarter of the Gregorian calendar year. The directors shall approve the Company's quarterly reports for the preceding quarters at such meetings.
(2) The year-end review meetings
The year-end review meetings shall be convened in December of each year. The directors shall listen to and approve the president's report in respect of the expected performance of the Company in the year and the work arrangements for the following year at such meetings.
Article 23 The chairman of the board of directors shall approve the issue of a notice convening the provisional board of directors' meeting within seven days in any one of the following events:
(1) where the chairman of the board of directors considers necessary;
(2) where more than one-third of the directors propose in their joint names;
(3) where more than one-half of the independent directors propose in their joint names;
(4) where the supervisory committee proposes;
(5) where the president proposes.
Article 24 The board of directors' meetings shall be divided into meetings at which all directors must be physically present and meetings which the directors may authorise other directors to attend on their behalf, according to whether the directors are physically present at the meetings. The meetings which all directors must be physically present shall be held at least once every six months, and such meetings shall not be held by way of written resolutions or video-telephone meetings.
Article 25 The board of directors' meetings shall be divided into on-site meetings, video-telephone meetings and meetings by way of written resolutions.
All the meetings of the board of directors may be held by the way of on-site meetings.
The board of directors' meetings may be held by the way of video-telephone meetings, provided that the attending directors are able to hear clearly the director who speaks at the meeting and communicate amongst themselves. The meetings convened by this way shall be recorded and videotaped. In the event that the attending directors are unable to sign for the resolutions on site, they shall express their opinions orally during the meeting and shall complete the signing procedures as soon as practicable. The verbal voting by a director shall have the same effect as signing in the voting sheet, provided that there is no discrepancy between the opinions expressed by such director in completing signing procedure and the opinions orally expressed by him during the meeting.
In the case of urgency (limiting to cases where an on-site meeting or a video-telephone meeting is impractical), and the matters to be examined are comparatively procedural and unique so that the a discussion of the motions proves to be unnecessary, the board of directors' meeting may be held by written resolutions, in which case the motions shall be passed by way of circulating the motions for directors' review. Unless otherwise expressed by the directors, signing on the written resolutions by the directors shall be sufficient evidence that they have agreed to the resolutions.
CHAPTER 6 PROCEEDINGS OF THE BOARD OF DIRECTORS' MEETING
Article 26 Putting forward Motions
The motions of the board of directors' meetings shall be put forward in the following circumstances:
(1) matters proposed by the directors;
(2) matters proposed by the supervisory committee;
(3) motions from the special committees of the board of directors;
(4) matters proposed by the president;
(5) matters to be considered by the shareholders of the subsidiaries controlled or invested by the Company in their shareholders' meetings (shareholders' general meetings).
Article 27 Collecting Motions
The secretary of the board of directors shall be responsible for collecting the draft motions in respect of the matters to be considered at the meeting. Each person who puts forward the relevant motion(s) shall submit the motions and relevant explanatory materials before the date of the meeting. Motions concerning material connected transactions (which are determined according to the standards promulgated by the relevant regulatory authorities from time to time) shall first be approved by the independent directors. The relevant materials shall be submitted to the chairman of the board of directors after scrutinized by the secretary of the board of directors, who shall also set out the time, place and agenda of the meeting in the materials submitted.
Article 28 Convening the Meetings
A board of directors' meeting shall be convened by the chairman of the board of directors, who shall also approve the issue of the notice convening the meeting. If the chairman of the board of directors is unable to convene the meeting due to special reasons, he shall designate the vice-chairman or other director(s) to convene the meeting. Where the chairman fails to convene a meeting with no reason or designate specific personnel to act on his behalf, a director chosen by the vice-chairman and one-half of the directors jointly shall convene the meeting. The convenors of the meeting shall be responsible for approving the issue of the notice of the meeting.
Article 29 Notice of the Meetings
(1) The notice of a board of directors' meeting shall be delivered to all directors, supervisors and other personnel attending the meeting before the date of the meeting. The notice of the meeting shall generally set out the following:
i. the time and place of the meeting;
ii. the duration of the meeting;
iii. the agenda, reasons, subject matters and other relevant particulars of the meeting;
iv. the date of the issue of the notice.
(2) The board of directors' meetings shall be noticed according to the following requirements and form:
i. the notice of the meeting may be served on the directors by courier, facsimile, electronic means, telegraph or mail;
ii. the notice of the board of directors' meeting shall be delivered to the directors ten days before the date of the meeting;
iii. the notice shall be written in Chinese, if necessary, the English version can be attached.
Any director may waive the right to receive the notice of board meeting.
Notice of a meeting shall be deemed to have been given to any director who attends the meeting without protesting against, before or at its commencement, any lack of notice.
Article 30 Communication before the Meetings
After the issue of the notice of a meeting and before the date of the meeting, the secretary of the board of the directors shall be responsible for, and shall communicate and liaise with all supervisors, to seek their opinions or suggestions in respect of the motions of the meeting, and shall pass on these opinions or suggestions to the persons put forward the motions, so as to enable necessary amendments to be made to them. The secretary of the board of directors shall also, in a timely manner, arrange for the provision of the supplemental materials which are required for the directors to make decisions on the motions of the meeting, including the background information relating to the subject of the meeting and other information which will assist the directors in making scientific, immediate and prudent decisions.
Where more than one-fourth of the directors or two external directors are of the opinion that the materials provided are insufficient or unclear, they may make a proposal jointly concerning the postponement of holding of the board meeting or the postponement of discussions on the part of the issues put forward by the board of directors, and the board of directors shall adopt such a proposal. Unless such a proposal is put forward during the meeting, the secretary of the board of directors shall serve a notice on the directors, supervisors and other personnel attending the meeting upon receiving a written request concerning the postponement of holding of the meeting or the postponement of discussions on part of the issues put forward by the board of directors.
Article 31 Attendance of the Meetings
Meetings of the board shall be held only if more than half of the directors are present.
Directors shall attend the meetings of the board of directors in person. Where a director is unable to attend a meeting for any reason, he may by a written power of attorney appoint another director to attend the meeting on his behalf (where an independent director is unable to attend in person, he shall appoint another independent director to attend on his behalf). The power of attorney shall set out the name of the attorney, the particulars and the scope of authorisation, duration of the validity of such authorisation, and shall be signed or sealed by the principal.
In the event that an independent director does not attend the board of directors' meeting for three consecutive meetings, the board of directors may propose to the shareholders' general meeting to have such independent directors dismissed.
The board of directors' meeting shall be chaired by the chairman of the board of directors. Where circumstances preclude the Chairman, he may designate the vice-chairman or other directors to act on his behalf. Where the chairman of the board fails to chair the meeting without reason or designate specific personnel to act on his behalf, a director chosen by the vice-chairman or more than half of the directors shall chair the meeting. Upon the expiry of the term of office of the directors and the re-election of the new directors at the shareholders' general meeting, the directors who obtains the largest number of votes at such re-election (if more than one, one shall be chosen amongst them) shall chair such meeting, at which the chairman of the new board of directors shall be elected.
Article 32 Examining the Motions
The chairman of the meeting shall declare the commencement of the meeting as scheduled. The directors in presence shall reach an agreement on the agenda of the meeting thereafter. Where more than one-fourth of the directors or more than two external directors are of the opinion that the materials of the meeting are insufficient or unclear, they may make a proposal jointly concerning the postponement of holding of the board meeting or the postponement of discussions on the part of the issues put forward by the board of directors, and the board of directors shall adopt such a proposal.
When an agreement is reached in respect of the agenda of the meeting by the directors present at the meeting, the chairman of the meeting shall direct the motions to be examined one by one. Persons who put forward the motions or their attorneys shall first report to the board of directors their work or make statements in respect of the motions.
In reviewing the relevant proposals, motions and reports, in order to understand the main points and the background information of the motions in detail, the board of directors' meeting may require the heads of the departments which are responsible for handling the motions to attend the meeting to listen to and make inquiries of the relevant statements made at the meeting, so that proper decisions can be made at the meeting. If, in the course of the meeting, any motions examined are found to be unclear or infeasible, the board of directors shall require the departments which are responsible for handling the motions to give a statement at the meeting, and the motions can be returned to such departments for re-handling and their examination and approval shall be postponed.
The independent directors shall give their independent opinions to the board of directors on the following matters:
(1) the nomination, appointment and removal of the directors;
(2) the appointment and dismissal of the president, vice-president, Chief Financial Officer and secretary of the board of directors;
(3) the remuneration of the directors, the president, vice-president, Chief Financial Officer and secretary of the board of directors of the Company;
(4) the loans made by the Company to its shareholders, the person in actual control of the Company or the associated enterprises of the Company or other money transfer between them, the amounts of which are equivalent to or exceed the relevant thresholds of the Company's material connected transactions (which shall be determined in accordance with the standards promulgated from time to time by the relevant regulatory authorities) which must be examined by the board of directors or shareholders' general meeting according to law, and whether the Company has taken effective measures to recover such debts;
(5) any matters which the independent shareholders consider to be detrimental to the interests of minority shareholders.
An independent director shall give his opinion on the above-mentioned matters in the following manner:
(1) consent;
(2) opinion reserved and reasons;
(3) opposition and its reasons;
(4) no opinion can be expressed and the obstacles.
Article 33 Voting on the Motions
In reviewing the motions at the board of directors' meeting, all attending directors shall deliver their opinions in respect of approval or objection to such motions or abstention from voting.
The directors who are acting as proxies of others shall exercise the rights of voting within the authorisation.
Where a director is not present at a board of directors' meeting and fails to appoint a proxy to act on his behalf, such director shall be deemed to have waived his rights to vote at the meeting.
In reaching resolutions by the board of directors, except the following matters the resolutions of which shall be passed by the consent of more than two-thirds of the directors, the other matters shall be passed by the consent of more than one-half of the directors:
(1) to formulate proposals for the credit and financial policies of the Company, the increase or reduction of the registered capital of the Company and the issuance of debentures and securities of any kind (including but without limitation to the debentures of the Company) and the listing or repurchase of the shares of the Company;
(2) to draw up plans for significant acquisition or disposal proposals, the merger, division or dissolution of the Company;
(3) to determine to provide external guarantees;
(4) to formulate proposals for any amendment to the Articles of Association and its schedules.
The resolutions of the board of directors may be decide on a poll or show of hands. Each director shall have one vote.
Where the votes for and against a resolution are equal, the chairman of the board of directors is entitled to cast one more vote. If a director or his associate (as defined in the Rules Governing the Listing of Securities of the Hong Kong Stock Exchange Limited) have a material interest in any contract, transaction, arrangement or other matters that requires the approval of the board of directors, the relevant director shall not vote for the relevant matter at the meeting of the board of directors, and shall not be listed in the quorum of the meeting. Where resolutions cannot be reached due to the abstention from voting of the connected directors, the relevant motions shall be submitted directly to the shareholders' general meeting for examination.
Article 34 Liability of Directors in respect of Resolutions of the Board of Directors' Meetings
A written resolution of the board of directors shall not take effect as a resolution of the board of directors if it has not been formulated in accordance with the stipulated procedures, notwithstanding all the directors have already expressed their opinions in different ways. The directors shall be responsible for the resolutions passed at the meetings of the board of directors. Any director who votes for a resolution which contravenes the laws, administrative regulations or the Articles of Association thus causing serious damages to the Company shall be directly liable (including the compensation of damages) for all the loss incurred by the Company as a result. A director who votes against the resolution, and who has been proved as having expressed dissenting opinions on the resolution and such opinions are recorded in the minutes of the meeting can be exempt from liability. A director who waives his right of voting, or who fails to attend the meeting and fails to appoint a proxy to act on his behalf, cannot escape liability. A director who explicitly express his objection in the course of discussion but fails to cast an objection vote in the voting cannot escape liability.
Article 35 Resolutions of the Meeting
In principle, the board of directors' meeting shall resolve on all the matters examined at the meeting.
A resolution on the Company's connected transaction shall not be valid until it is signed by all directors.
The independent directors' opinions shall be set out in the resolutions of the board of directors meetings.
Article 36 Minutes of the Meetings
Minutes of the board of directors' meeting are proof of the resolutions on the matters examined at the meeting. Detailed minutes in respect of the matters examined at the meeting shall be recorded. The minutes of the board of directors' meeting shall state the following:
(1) the date, place, names of the convenors and chairman of the meeting;
(2) the names of the attending directors and the names of the present, the names of appointing directors and their attorneys;
(3) the agenda of the meeting;
(4) the essential points of the directors' presentations (for the written resolution meeting, the version containing the directors' feedbacks in writing shall prevail);
(5) the voting methods and outcome for each proposal (the outcome of the voting shall set out the respective number of assenting or dissenting votes or votes that were waived);
(6) the directors' signature.
The secretary of the board of directors shall take initiative to arrange for the matters examined at the meeting to be recorded. The minutes of each meeting shall be provided to the directors for review without delay. Those directors who wish to make supplementary revision on the minutes shall report their opinions on the revision to the chairman of the board of directors in written form within one week after the receipts of the minutes of the board meeting. After the minutes of board meeting are finally determined, the attending directors, the secretary of the board of directors and the minute-taking officer shall sign the minutes of the board meeting. The secretary of the board of directors shall deliver the complete duplicate of the minutes to all directors. The minutes of the board meeting, being an important document, shall be properly kept at the business address of the Company.
CHAPTER 7 DISCLOSURE OF INFORMATION RELATING TO THE
BOARD OF DIRECTORS' MEETING
Article 37 The board of directors of the Company shall strictly comply with the requirements of the regulatory authorities and the stock exchanges on which the Company's shares are listed in relation to the disclosure of information. It shall ensure that matters examined or resolutions passed at the board of directors' meeting which are discloseable are disclosed accurately and in a timely manner. Information relating to significant matters of the Company must be reported to the stock exchanges on which the Company's shares are listed at the earliest opportunity, and shall be submitted to relevant regulatory authorities for filing.
Article 38 Where a matter which requires the independent opinions of the independent directors is discloseable, the Company shall disclose such opinions in the relevant announcement. If the independent directors are of divergent views and cannot reach any consensus, the board of directors shall disclose the respective opinions of each of the independent directors.
Article 39 Regarding confidential information, the attendees of the meeting must keep such information confidential. Punishment shall be imposed on those who are in breach of this duty.
CHAPTER 8 IMPLEMENTATION OF THE RESOLUTIONS OF THE BOARD
OF DIRECTORS' MEETING AND FEEDBACKS
Article 40 The following matters shall not be implemented until they are examined and preliminarily approved by the board of directors and submitted to the shareholders' general meeting for approval thereafter:
(1) the formulation of the Company's annual preliminary and final financial budgets;
(2) the formulation of Company's profit distribution proposals and loss recovery proposals;
(3) the increase or reduction of the registered capital of the Company and the issue of debentures or other securities, as well as the listing or repurchase of the shares of the Company;
(4) the formulation of plans for merger, division or dissolution of the Company;
(5) the formulation of proposals for any amendment to the Articles of Associations; and
(6) proposal to be submitted to the shareholders in general meeting for the appointment or replacement of the accounting firm auditing the accounts of the Company.
Article 41 After resolutions are passed at a board of directors' meeting, the president shall implement the resolutions which fall within the scope of the authority of the president, or which the board of directors authorises the president to handle, and shall report the status of implementation to the board of directors.
Article 42 The chairman of the board shall have the power to, or authorize the vice-chairman or the directors to, urge, examine and supervise the implementation of the resolutions of the meeting.
Article 43 At each board of directors' meeting, the president shall deliver a written report to the meeting in relation to the status of implementation of the matters which, according to the resolutions of the previous meeting, must be implemented.
Article 44 Under the direction of the board of directors and the chairman, the secretary of the board of directors shall take initiative to obtain information in respect of the progress on the implementation of the resolutions, and shall, in a timely manner, report to and submit proposals to the board of directors and the chairman in relation to the important issues to be implemented.
CHAPTER 9 SUPPLEMENTAL ARTICLES
Article 45 Where these Rules fail to comply with relevant laws, regulations and other regulatory documents as promulgated from time to time, these laws, regulations and other regulatory documents shall prevail.
Article 46 Upon the unanimous consensus of all directors of the Company, the formulation of and the amendment to these Rules shall come into effect if they are adopted by the shareholders' general meeting by a special resolution and approved by the relevant authorities.
Article 47 The right to interpret these Rules shall vest with the board of directors.
Appendix III
Rules and Procedures
for
Supervisory Committee's Meetings
of
China Petroleum & Chemical Corporation
CHAPTER 1 GENERAL PROVISIONS
Article 1 In order to standardize the operation of the supervisory committee of China Petroleum & Chemical Corporation (the "Company"), to ensure the supervisory committee implementing the duties and responsibilities conferred by all shareholders of the Company, these Rules are formulated according to the "Company Law of the People's Republic of China" (the "Company law"), "Mandatory Provisions for the Articles of Association of Companies to be Listed Overseas", "Guidelines for the Articles of Association of Listed Companies", "Standards for the Governance of Listed Companies" and other relevant laws and regulations regulating listed companies inside and outside the PRC and the Articles of Association of China Petroleum & Chemical Corporation ("Articles of Association").
Article 2 The supervisory committee is accountable to the shareholders' general meetings. It shall be responsible for supervising the financial affairs of the Company and the lawfulness of the performance of their duties by the directors, president, vice-president, Chief Financial Officer and secretary of the board of directors of the Company so as to safeguard the legitimate interests of the Company and its shareholders.
Article 3 The Company shall take measures to ensure the supervisors' rights to know the Company's affairs, and provide them with necessary information and materials, so as to enable the supervisory committee to conduct effective supervision, inspection and evaluation of the financial status and management situation of the Company.
The president shall report to the supervisory committee the entering into of, and the enforcement of, material contracts by the Company, the use of capitals and the profitability of the Company upon the request of the supervisory committee. The president shall ensure the truthfulness of such report.
CHAPTER 2 COMPOSITION OF THE SUPERVISORY COMMITTEE
AND ITS ADMINISTRATIVE OFFICE
Article 4 The supervisory committee shall compose of ten supervisors. Of which, six of them shall be shareholder representatives (including those who are eligible to be external supervisors); four of them shall be representatives of workers and staff of the Company. The supervisory committee shall have one chairman and one vice-chairman.
The election and removal of the chairman of the supervisory committee shall be determined by two-thirds or more of the members of the supervisory committee.
Article 5 The term of the office of a supervisor shall be three years.
The supervisors representing the shareholders shall be elected
and removed by the shareholders' general meeting. The
supervisors representing the workers and staff of the Company
shall be elected and removed democratically by those workers
and staff of the Company. The term of a supervisor is renewable
upon re-election and re-appointment.
Article 6 Except for complying with the eligibility requirements as set out in the Company Law and the Articles of Association, the supervisors shall possess professional knowledge and work experience in the field of law or accounting.
Article 7 A supervisor may resign before the expiry of his term of office by submitting a written resignation letter to the supervisory committee.
Provisions in respect of the resignation of directors as set out in the Articles of Association shall be applicable to the resignation of supervisors, including (but without limitation to) where a supervisor's resignation will result in the number of supervisors of the Company falling below the quorum as provided by law, the resignation letter of such supervisor shall not be effective until the vacancy created by his resignation has been filled.
Article 8 The supervisory committee shall have an administrative office responsible for handling daily affairs of the supervisory committee.
CHAPTER 3 FUNCTIONS AND POWERS OF THE SUPERVISORY COMMITTEE
Article 9 The supervisory committee shall exercise the following functions and powers in accordance with law:
(i) to review the Company's financial position. Where necessary, the supervisory committee may appoint another accounting firm on behalf of the Company to carry out independent audit;
(ii) to supervise the directors, president, vice-president, Chief Financial Officer and secretary of the board of directors of the Company in order to ensure that they do not act in contravention of any law, regulation or the Articles of Association in performing their duties;
(iii) to demand the directors, president, vice-president, Chief Financial Officer and secretary of the board of directors of the Company who acts in a manner which is harmful to the Company's interest to rectify such acts, and report to the shareholders' general meeting and relevant authorities of the State when necessary;
(iv) to check and inspect the financial information such as the financial report, business report and plans for distribution of profits to be submitted by the board of directors to the shareholders' general meetings and to authorize, in the Company's name, publicly certified and practicing accountants to assist in reviewing such information should any doubt arise in respect thereof;
(v) to give opinions on the appointment of an accounting firm of the Company;
(vi) to propose to convene an extraordinary general meeting, and may put forward provisional motions at the shareholders' annual general meeting;
(vii) to propose to convene provisional board meetings;
(viii) to represent the Company in negotiations with or in bringing actions against a director;
(ix) other duties and powers provided for in the Articles of Association. The supervisors shall attend meetings of the board of directors.
Article 10 The supervisory committee shall declare the Company's supervisory report for the preceding year at the AGM. Such report shall include the following matters:
(i) the review of the Company's financial position;
(ii) the implementation of relevant laws, regulations, Articles of Association and the resolutions of the shareholders' general meetings by the directors, president, vice-president, Chief Financial Officer and secretary of the board of directors of the Company;
(iii) the evaluation of the performance of the directors, president, vice-president, Chief Financial Officer and secretary of the board of directors of the Company by the supervisory committee, in particular the specific opinions of the external supervisors;
(iv) other significant events which in the opinion of the supervisory committee shall be reported to the shareholders' general meeting.
Where the supervisory committee thinks necessary, it may express its opinions on the motions examined at the shareholders' general meetings, and may submit an independent report to the shareholders' general meetings.
Article 11 All reasonable fees incurred in respect of the employment of professionals such as lawyers, certified public accountants or practicing auditors which are required by the supervisory committee in the exercise of its functions and powers shall be borne by the Company.
The expenses incurred by the supervisors in attending the supervisors' meeting shall be borne by the Company. These expenses shall include the transport fares incurred by the supervisors in travelling from their own addresses to the places of the meetings, and fees for the accommodation and meals during the meeting.
Article 12 The chairman of the supervisory committee shall exercise the following functions and powers:
(i) to convene and chair the meetings of the supervisory committee;
(ii) to organise and carry out the duties of the supervisory committee;
(iii) to review and approve, and signing the reports of the supervisory committee and other important documents;
(iv) to represent the supervisory committee to report to the shareholders' general meetings;
(v) other duties that shall be performed by him in accordance with law or the Articles of Association.
Where special circumstances preclude the chairman from exercising his functions and powers, these functions and powers shall be exercised by a supervisor designated by him.
Article 13 In performing its duties, the supervisory committee may report to the board of directors and the shareholders general meetings the breach of laws and rules relating to the Company's financial affairs and the acts of the directors, president, vice-president, Chief Financial Officer and secretary of the board of directors of the Company which are in violation of laws, regulations or the Articles of Association. It may also directly report the same to the securities regulatory authorities of the State Council and other relevant authorities.
Article 14 A supervisor shall abide by the laws, regulations and the Articles of Association, and shall perform his duties faithfully and diligently.
CHAPTER 4 RULES OF THE SUPERVISORS' MEETINGS
Article 15 The supervisors' meetings shall be divided into regular meetings and provisional meetings according to the regularity of such meetings.
Article 16 The regular meetings shall be convened at least four times each year, including the interim results meeting, the annual results meeting, the year-end review and the arrangement meetings for supervisors financial management meetings.
The interim results meetings shall be convened within sixty days from the end of the first six months of the accounting year of the Company. The supervisors shall listen to and approve the Company's interim reports and deal with other relevant matters at such meetings.
The annual results meetings shall be convened within 120 days from the end of the accounting year of the Company. The supervisors shall listen to and approve the Company's annual reports and deal with other relevant matters at such meetings.
The year-end review and arrangement meetings shall be convened in December of each year. The supervisors shall listen to and approve the president's report in respect of the expected performance of the Company in the year and the work arrangements for the following year at such meetings.
The financial management meetings shall be convened within 30 days from the end of the annual financial work meeting of the Company. The supervisors shall listen to and approve the report of the Company's financial department in respect of conducting the overall budget management and strengthening financial control by the Company.
Article 17 A provisional supervisors' meeting shall be convened in any one of the following events:
(i) here the chairman of the supervisory committee considers necessary;
(ii) where more than two-thirds of the supervisors propose in their joint names;
(iii) where the Company has suffered or is suffering loss of substantial assets causing the shareholders' interests to be damaged;
(iv) where the directors, president, vice-president, Chief Financial Officer and secretary of the board of directors of the Company act in a way which is in contravention of laws, regulations or the Articles of Association causing the Company's interests to be seriously damaged.
Article 18 The supervisors' meetings shall be divided into on-site meetings, video-telephone meetings and meetings by way of written resolutions.
All the meetings of the supervisory committee may be held by the way of on-site meeting.
The meetings of the supervisory committee may be held by the way of video-telephone meetings, provided that the attending supervisors are able to hear clearly the supervisor who speaks at the meeting and communicate amongst themselves. In the event that the attending supervisors are unable to sign for the resolutions on site, they shall express their opinions orally during the meeting and shall complete the signing procedures as soon as practicable.
Where an on-site meeting or a video-telephone meeting is impractical, the supervisors' meeting may be held by way of written resolutions, in which case details of the motions to be discussed and examined at the meeting, which are in the written form, shall be despatched to the supervisors for decision. Unless otherwise expressed by the supervisors, signing on the written resolutions by the supervisors shall be sufficient evidence that they have agreed to the resolutions.
Article 19 A supervisors' meeting shall be validly convened by the presence of not less than two-thirds of the supervisors.
The supervisors shall be physically present at the supervisors' meetings. If for any reason a supervisor is unable to attend the meeting, he shall by written authorisation appoint another supervisor to act as his proxy to attend the meeting and exercise his functions and powers. The written authorisation shall state the name of the proxy, the scope of the authorisation, the authority of the proxy and the period of validity. It shall also be signed by the proxy or affix the seal of the proxy.
In the event that a supervisor does not attend the supervisors' meeting in person for two consecutive meetings, he shall be deemed to be unable to perform his duties, and the shareholders' general meeting or the staff representative meeting shall dismiss such supervisor.
CHAPTER 5 PROCEEDINGS OF THE SUPERVISORS' MEETING
Article 20 The supervisory committee shall put forward motions according to the matters to be examined by the board of directors and matters proposed by the supervisors.
Article 21 The administrative office of the supervisory committee shall be responsible for gathering the matters to be examined by the board of directors and the matters proposed by the supervisors, and shall submit these matters to the chairman of the supervisory committee in time. The chairman of the supervisory committee shall determine whether to submit these matters to the supervisory committee for review according to the importance and urgency of these matters.
Article 22 The chairman of the supervisory committee shall be responsible for convening the supervisors' meeting, and shall sign the notice of the meeting. Such notice shall state the date, place, duration, agenda, reasons and subject matters of the meeting and other relevant information, as well as the date of the issuance of such notice.
The notice of a supervisors' meeting shall be delivered to the supervisors ten days before the date of the meeting. Any
supervisor may waive his right to demand the notice of the meeting.
The notice of the meeting may be served on the supervisors by courier, facsimile, telegraph or mail.
Article 23 After the issue of the notice of a meeting and before the date of the meeting, the administrative office of the supervisory committee shall be responsible for, and shall communicate and liaise with all supervisors, to seek their opinions or suggestions in respect of the motions of the meeting, so as to enable necessary amendments to be made to them.
Where more than one-fourth of the members of the supervisors or two external supervisors are of the opinion that the information in respect of a specific motion is insufficient to allow judgment to be made, or the motion is not convincing, they may in their joint name propose to postpone the examination of such a motion, and the supervisory committee shall adopt such a proposal.
Article 24 The supervisors' meeting shall be chaired by the chairman of the committee. Where circumstances preclude the chairman to chair the meeting, he may designate a supervisor to chair the meeting. Upon the expiry of the term of office of the supervisory committee and the re-election of the new supervisors by the shareholders' general meeting, the supervisor who obtains the largest number of approval votes at such re-election (if more than one, one shall be chosen amongst them) shall chair such meeting, at which the chairman of the new supervisory committee shall be elected.
Article 25 The chairman of the meeting shall declare the commencement of the meeting as scheduled. The supervisors in presence shall reach an agreement on the agenda of the meeting thereafter.
Where more than one-fourth of the supervisors or two external supervisors are of the opinion that the information in respect of one specific motion is insufficient to allow judgment to be made, or the motion is not convincing, they may in their joint name propose to postpone the examination of such a motion, and the chairman of the meeting shall adopt their proposal.
Where an agreement is reached in respect of the agenda of the meeting by the supervisors present at the meeting, the chairman of the meeting shall direct the motions to be examined one by one.
Article 26 In reviewing the relevant motions and reports, the supervisors' meeting may require the directors, president, vice-president, Chief Financial Officer, secretary of the board of directors and the internal and external auditors of the Company to attend the meeting to give necessary explanations to the relevant matters, and to answer the questions which the supervisory committee is concerned with.
Article 27 In reviewing the motions at supervisors' meetings, all attending supervisors shall deliver their opinions in respect of approval or objection to such motions or abstention from voting.
The supervisors who are acting as proxies of others shall exercise the rights of voting within the authorization.
Where a supervisor is not present at a supervisors' meeting and fails to appoint a proxy to act on his behalf, such supervisor shall be deemed to have waived his rights to vote at the meeting.
Article 28 In principle, resolutions shall be made on the matters examined at the supervisors' meeting. Such resolutions shall be decided on a poll or show of hands. No resolution shall be effective unless approved by more than two-thirds of all the supervisors.
Article 29 Detailed minutes of a supervisors' meeting shall be recorded as proof of the resolutions on the matters examined at the meeting.
The minutes of the meeting shall state the date and place of the meeting, name of the chairman of the meeting, names of the attending supervisors and names of the principals and proxies who have fulfilled the necessary procedures for attending the meeting, agenda of the meeting, main points of each supervisor's speech, the methods of voting for each matter to be resolved on and the voting result (the result shall state the number of votes for approval or objection to the motion or abstention).
The administrative office of the supervisory committee shall designate staff to arrange for the matters examined at the meeting to be recorded. The minutes of each meeting shall be provided to the attending supervisors for review without delay. Supervisors present at the meeting and the minutes-taking officer shall sign the minutes of that meeting. A supervisor shall have the right to request an explanatory note be made for his speech at the meeting.
Article 30 Minutes of a supervisors' meeting and the resolutions passed at such meeting, being important documents, shall be properly kept by the administrative office of the supervisory committee at the Company's place of business.
CHAPTER 6 DISCLOSURE OF INFORMATION RELATING TO
THE SUPERVISORS' MEETING
Article 31 The supervisory committee shall strictly comply with the requirements of the regulatory authorities and the stock exchanges on which the Company's shares are listed in relation to the disclosure of information. It shall ensure that matters examined or resolutions passed at supervisors' meetings which are discloseable are disclosed accurately and in a timely manner.
Article 32 Regarding confidential information, the attendees of the meeting must keep such information confidential. Punishment shall be imposed on those who are in breach of this duty.
CHAPTER 7 IMPLEMENTATION OF THE RESOLUTIONS OF THE
SUPERVISORS' MEETING AND FEEDBACKS
Article 33 The supervisory committee may pass resolutions and make proposals to the board of directors and the shareholders' general meetings. These resolutions and proposals shall be implemented by the relevant departments of the Company under the direction of the board of directors.
Article 34 The administrative office of the supervisory committee shall, under the direction of the committee and its chairman, take initiative to obtain the information in respect of the implementation of the relevant resolutions, and shall report and make proposals to the supervisory committee and the chairman of the committee.
Article 35 Where resolutions concerning the proposals to convene a provisional board meeting or shareholders' extraordinary general meeting, or the submission of provisional motions to the AGM are passed by the supervisory committee, the supervisory committee shall, within a specified period, submit to the board of directors the subjects of such meetings and the detailed motions in writing, and shall ensure that the contents of the motions comply with relevant laws, regulations and the Articles of Association.
CHAPTER 8 SUPPLEMENTARY ARTICLES
Article 36 The right to interpret these Rules shall vest with the supervisory committee.
Article 37 Where these Rules fail to comply with relevant laws, regulations and other regulatory documents as promulgated from time to time, these laws, regulations and other regulatory documents shall prevail.
Exhibit 4.1
Dated the 24th day of May 2006
Form of Executive Director Service Contract
between
China Petroleum & Chemical Corporation
and
the Following Directors:
Mr. Wang Tianpu
Mr. Zhang Jianhua
Mr. Wang Zhigang
Mr. Dai Houliang
This Contract was made between the following two parties on 24th May, 2006:
(1) China Petroleum & Chemical Corporation, a company established according to the laws of The People's Republic of China ("PRC") with its legal address located at A6 Huixindong Street, Chaoyang District, Beijing, China, PRC ("Party A");
and
(2) [Name of Director], a [Chinese citizen] of [ ], Postal Code [ ] ("Party B").
As Party B was elected as an executive director of Party A at the Shareholders' General Meeting of year 2005 convened on 24th May, 2006, both parties have entered into the following agreement through friendly negotiations on the principle of equality and mutual benefits in order to confirm and regulate the relationship between Party A as the employer and Party B as the employee in respect of the service.
Article 1 Employment
1.1 Party A shall employ Party B as director and senior officer of Party A's board of directors in accordance with the terms of this Contract.
1.2 Party B agrees to be employed as director and senior officer of Party A's board of directors in accordance with the terms of this Contract.
Article 2 Term of Office
2.1 The term of office of Party B employed as Party A's director and senior officer shall be three (3) consecutive years commencing from 24th May, 2006 (the "Effective Date") until the termination of this Contract upon the occurrence of the events referred to in Article 7.1 or upon the giving of notice by Party A under Article 7.2 hereof.
Article 3 Duties
3.1 Party B undertakes to Party A that he shall perform his duties as a director and senior officer in accordance with the Company Law of the PRC, Special Regulations of the State Council regarding the Issue of Shares Overseas and the Listing of Shares Overseas by Companies Limited by Shares and other relevant laws, regulations, rules and standards of the PRC, Party A's articles of association, this Contract, regulations and internal rules relating to the directors and senior officers formulated by Party A, resolutions of Party A's board of directors and shareholders' general meetings, and agrees that Party A shall be entitled to the remedial measures stipulated in the articles of association in connection with breach of any provision provided therein by Party B. Party B undertakes to each shareholder of Party A that he shall observe and perform its obligations owed to the shareholders as stipulated in the articles of association of Party A.
3.2 Party B undertakes to Party A and warrants to observe and comply with the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (including the Model Code for Securities Transactions by Directors of Listed Companies), Code on Takeovers and Mergers and Share Repurchases promulgated by the Hong Kong Securities and Futures Commission and the relevant restraints and obligations contained in the Securities (Disclosure of Interests) Ordinance (Chapter 36 of the Laws of Hong Kong) and Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and other laws or regulations and the relevant rules of the Shanghai Stock Exchange, London Stock Exchange and the New York Stock Exchange.
3.3 Party B confirms that he owes a fiduciary and diligence obligation to Party A and that he shall not engage in any activities in competition with Party A's business or carry out any activities detrimental to the interests of Party A.
3.4 Party B undertakes to Party A that during the term of this Contract, (a) Party B shall notify Party A in writing as soon as possible of any new post of and new employment as director and any new director's benefits; (b) Party B shall not acquire or hold any shares of Party A (except to the extent not exceeding the limit imposed by the relevant laws, regulations and listing rules).
Article 4 Remuneration and Expenses
4.1 From the Effective Date, the remuneration to be received by Party B for the performance of his services under this Contract as director and senior officer of Party A shall be determined according to relevant PRC regulations and the Implementing Measures of Compensations for Senior Officers of China Petroleum & Chemical Corporation.
4.2 During the term of this Contract, Party A shall reimburse Party B, to the extent such reimbursement is permitted by the relevant laws and policies of the PRC, all reasonable and necessary expenses (including traveling and entertainment expenses, etc.) incurred by Party B in the provision of services to Party A hereunder or execution of work in relation to Party A's operation upon presentation by Party B of the relevant receipts and/or valid documentary evidence. Party A may also provide Party B beforehand with sums for Party B to pay various necessary expenses mentioned above, but Party B shall produce to Party A valid supporting evidence of the expenses as soon as possible, or regularly as required by Party A, after making use of such sums so as to offset the sums.
4.3 During the term of this Contract, Party B may participate in the Liability Insurance Scheme for Directors and Senior Officers arranged by Party A and the relevant insurance premiums shall be paid by Party A. Party A shall have the right to cancel or alter the relevant liability insurance scheme (including the insurance coverage and amount of compensation) or change the relevant insurance company.
Article 5 Non-Competition
5.1 Unless the relevant competition is made known to the public and (if required) approved by the relevant regulatory authorities, Party B warrants that during the term of his employment as Party A's director and senior officer and within six months after the termination of such employment with Party A, Party B shall not in any way engage in any business in competition with Party A, or seek any position from any company or individual who competes in business with Party A or subsidiaries and branch companies of Party A ("Party A's Group"), or accept any capacity or position offered by any company or individual who competes in business with any member of Party A's Group.
Article 6 Confidentiality Liability
6.1 Party B is aware that he will gain access to secret information possessed by members of Party A's Group and/or kept in custody by members of Party A's Group (hereinafter referred to as "Confidential Information") in the performance of his duties hereunder, including but not limited to, documents, materials, data, information, plans and insider information. Party B confirms that such Confidential Information is solely owned by members of Party A's Group and/or is kept in custody by members of Party A's Group.
6.2 Whether during the term of this Contract or within any time after the termination of Party B's employment as Party A's director, Party B warrants that (except such Confidential Information may be disclosed to the public not in violation of the confidentiality undertaking under this Contract):
(a) Party B shall not divulge or disclose the Confidential Information to any third party in any way, with the exception of any Confidential Information which Party B must disclose to the relevant employees of members of Party A's Group and the professional personnel employed by members of Party A's Group for the performance of his obligations hereunder and any Confidential Information the disclosure of which is authorised by the board of directors or is ordered by a court of competent jurisdiction;
(b) Party B shall not make use of the Confidential Information in any way for his own benefit or for the benefit of his friends and relatives or any third party without Party A's permission; or
(c) Party B shall take all necessary measures to prevent the Confidential Information from spreading or disclosure to any third party without Party A's permission.
6.3 Upon the expiry of this Contract or earlier termination of Party B's employment, Party B shall immediately, completely and effectively return to Party A all the information relating to the business of members of Party A's Group (including, but not limited to, Party A's documents, personal notes, records, reports, handbooks, drawings, forms, computer diskettes and tapes)
within Party B's possession or under his control whether or not the same was originally supplied to Party B by Party A.
6.4 Party B agrees that various intellectual rights formulated, developed, created and made by him during the term of his services hereunder shall exclusively belong to Party A, with the exception of various intellectual rights which are not formulated, developed, created and made by him during his working hours with the use of any assets or resources belonging to Party A.
Article 7 Termination of Employment
7.1 When any one of the following events occurs to Party B, the employment relationship between Party A and Party B herein shall be immediately and automatically terminated: (unless otherwise decided by the board of directors)
(a) Party B is prohibited by any laws, regulations, rules, practice directions or practice rules from taking up the post of director and senior officer or Party B loses the qualifications to act as director and senior officer;
(b) Party B leaves the service according to the articles of association of Party A;
(c) Party B is removed from the office of director and senior officer of Party A or fails to be re-elected as a director and senior officer of Party A;
(d) Party B is sued for criminal liability or convicted of any criminal offence other than an offence which in the reasonable opinion of the board of directors of Party A does not affect Party B's position as a director and senior officer of Party A (bearing in mind the nature of the duties in which Party B is employed and the capacities in which Party B is employed);
(e) Party B commits any serious breach and/or repeated and/or continual breach of any of Party B's obligations hereunder;
(f) Party B is guilty of any serious misconduct or serious neglect in the discharge of Party B's duties hereunder;
(g) Party B's actions or omissions bring the name or reputation of Party A or any member of Party A's Group into serious disrepute or prejudices the business interests of Party A or other members of Party A's Group;
(h) death of Party B;
(i) if due to health reasons, Party B is unable to fully perform his duties hereunder for twelve months;
(j) Party B is or has become of unsound mind or shall be or become a patient for the purpose of any laws relating to mental health; or
(k) Party B fails to attend the board of directors' meeting of Party A in person consecutively for three times.
7.2 In addition to the aforesaid provisions of Article 7.1, Party A may also discharge the employment relationship between Party A and Party B by giving notice in writing to Party B when any one of the following events occurs:
(a) Party B is unable to substantially perform his duties hereunder due to health reasons, within any twelve-month period for a cumulative total of two hundred and sixty-five working days. Then, Party A may at any time discharge Party B from the post of executive director by giving Party B a fourteen-day written notice of discharge.
(b) Party B is in breach of his obligations as a director and senior officer or the provisions of this Contract and does not repent after warning has been given by Party A.
(c) Damage or loss has been caused to Party A due to Party B's willful or material default in the performance of his duties hereunder.
Any delay by Party A in exercising such right of termination shall not constitute a waiver thereof.
7.3 If the employment relationship between both parties herein is terminated due to the occurrence of any of the events referred to in Article 7.1 or 7.2 above, such termination shall not affect Party A's rights herein against Party B and the provisions of Articles 5 and 6 hereof shall still be applicable.
7.4 In the event of the termination of the employment of Party B for whatever reason and whether by prior notice or in any other manner whatsoever, Party B agrees that he will not at any time after such termination represent himself as still having any connection with Party A.
7.5 Party B shall not, during the continuance of his employment or within a period of one year after the termination thereof, either on his own behalf or on behalf of any other person, entice away from any member of Party A's Group any employee, worker, manager or director of any member of Party A's Group, whether or not such person would commit any breach of his contract of employment with any member of Party A's Group by reason of his leaving service.
Article 8 Effectiveness of the Contract
This Contract shall become effective after approval at the shareholders' general meeting of Party A and signing by both parties.
Article 9 Additional Clauses
9.1 This Contract is an agreement relating to the provision of services by Party B personally. Therefore Party B's rights, interests, obligations, duties, etc. hereunder shall not be transferred, assigned or delegated to any third party (except the employment in writing by Party B of any other director of Party A as proxy to attend a board meeting of Party A).
9.2 Without the written consent of both parties, neither party hereto shall make any addition to, deletion from or amendment to any provisions hereof.
9.3 The heading of each Article hereof is inserted for the purpose of convenience only and shall not prejudice the meaning or construction of the provisions hereof.
9.4 The word "laws" referred to herein include such legal documents as laws, regulations, rules, provisions, standard opinions, decisions, etc. formulated by the legislative and administrative authorities of the PRC and any amendments or alterations by such authorities to the legal documents promulgated or formulated by them.
9.5 The enactment, validity, construction and performance of this Contract and the settlement of disputes shall be protected and governed by the law of the PRC.
9.6 Any disputes arising from or in connection with this Contract shall be settled by both parties through friendly consultation. Either Party hereto may, if any dispute cannot be settled by both parties through consultation, submit the dispute for arbitration.
9.7 Both parties agree to the following terms:
(a) Any dispute or claim relating to the affairs of Party A and incurring as a result of this Contract, the articles of association of Party A, the Company Law and other rights and obligations stipulated by the relevant laws and administrative regulations between (i) Party A and its directors; and (ii) holders of overseas listed foreign shares and Party A's directors shall be submitted to arbitration by the relevant party.
When the above dispute or claim is submitted to arbitration, all the claims or disputes shall be taken as a whole. Where any person having a cause of action due to the same reason or any person is required to participate in the settlement of such dispute or claim, if his capacity is Party A or a shareholder, director, supervisor, manager or other senior officer of Party A, he shall comply with the arbitration.
Disputes in relation to the classification of shareholders or register of shareholders shall not be settled by way of arbitration.
(b) Any party applying for arbitration may elect arbitration by the China International Economic and Trade Arbitration Commission or by the Hong Kong International Arbitration Centre according to their respective rules. After the party applying for arbitration has submitted the dispute or claim for arbitration, the other party must conduct arbitration at the arbitral organ elected by the applicant.
If the party applying for arbitration elects the arbitration to be conducted at the Hong Kong International Arbitration Centre, any party may request such arbitration to be conducted in Shenzhen according to the provisions of the securities arbitral rules of Hong Kong International Arbitration Centre.
(c) Settlement of disputes or claims referred to in (a) above by way of arbitration shall be governed by PRC law, except otherwise stipulated by laws and administrative regulations.
(d) The award of the arbitral organ shall be final and binding on both parties.
(e) Such arbitration agreement is concluded between Party A and Party B. Party A represents both itself and each shareholder.
(f) Any submitted arbitration shall be deemed to be an authorisation to the arbitral court to conduct a public hearing and announce its award.
9.8 If any of the provisions hereof are judged or ruled by the judicial authorities of the PRC to be invalid or unenforceable, the judgment or ruling shall not prejudice the effectiveness of the other provisions hereof.
9.9 If either party hereto is in breach of its obligations hereunder, the other party shall be entitled to take remedial measures such as fixing a time limit for effecting remedy, performance of the contract, removal of obstructions, compensation for losses or other legal remedial measures. To the extent that the same is not against any legal proceedings, either party's non-exercise or partial exercise of its rights hereunder or non-adoption or partial adoption of legal remedies shall not operate as such party's waiver of the exercise of all its rights or the rights which have not been exercised or such party's waiver of the taking of all the legal remedies or the legal remedies which have not been taken.
If Party B is in breach of its obligations under this Contract, Party A shall have the right to take remedial measures according to the articles of association of Party A.
9.10 The written notices stated herein may be delivered by hand, served by special delivery or sent by mail. If Party B changes his address, he shall inform Party A within seven days after he obtains the new address. If Party B changes his address, he shall conduct the same by fax within seven days after he obtains the new address.
9.11 This Contract is executed in English and Chinese. If there is any discrepancy between the two versions, the Chinese version shall prevail.
9.12 This Contract shall have two copies. Party A and Party B shall each hold one copy which shall have the same effect.
IN WITNESS HEREOF, Party A and Party B have signed this Contract in Beijing.
Party A:
For and on behalf of
China Petroleum & Chemical Corporation
Party B:
Dated the 24th day of May 2006
Form of Independent Non-executive Director Service Contract
between
China Petroleum & Chemical Corporation
and
the Following Directors:
Mr. Liu Zhongli
Mr. Shi Wanpeng
Mr. Li Deshui
This Contract was made between the following two parties on 24th May, 2006:
(1) China Petroleum & Chemical Corporation, a company established according to the laws of The People's Republic of China ("PRC") with its legal address located at A6 Huixindong Street, Chaoyang District, Beijing, China, PRC ("Party A");
and
(2) [Name of Director], a [Chinese citizen] of [ ], Postal Code [ ] ("Party B").
As Party B was elected as an independent non-executive director of Party A at the Shareholders' General Meeting of year 2005 convened on 24th May, 2006, both parties have entered into the following agreement through friendly negotiations on the principle of equality and mutual benefits in order to confirm and regulate the relationship between Party A as the appointer and Party B as the appointee in respect of the service.
Article 1 Appointment
1.1 Party A shall appoint Party B as independent non-executive director of Party A's board of directors in accordance with the terms of this Contract.
1.2 Party B agrees to be appointed as independent non-executive director of Party A's board of directors in accordance with the terms of this Contract.
Article 2 Term of Office
2.1 The term of office of Party B appointed as Party A's independent non-executive director shall be three (3) consecutive years commencing from 24th May, 2006 (the "Effective Date") until the termination of this Contract upon the occurrence of the events referred to in Article 7.1 or upon the giving of notice by Party A under Article 7.2 hereof.
Article 3 Duties
3.1 Party B undertakes to Party A that he shall perform his duties as a director in accordance with the Company Law of the PRC, Special Regulations of the State Council regarding the Issue of Shares Overseas and the Listing of Shares Overseas by Companies Limited by Shares and other relevant laws, regulations, rules and standards of the PRC, Party A's articles of association, this Contract, regulations and internal rules relating to the directors formulated by Party A, resolutions of Party A's board of directors and shareholders' general meetings, and agrees that Party A shall be entitled to the remedial measures stipulated in the articles of association in connection with breach of any provision provided therein by Party B. Party B undertakes to each shareholder of Party A that he shall observe and perform its obligations owed to the shareholders as stipulated in the articles of association of Party A.
3.2 Party B undertakes to Party A and warrants to observe and comply with the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (including the Model Code for Securities Transactions by Directors of Listed Companies), Code on Takeovers and Mergers and Share Repurchases promulgated by the Hong Kong Securities and Futures Commission and the relevant restraints and obligations contained in the Securities (Disclosure of Interests) Ordinance (Chapter 36 of the Laws of Hong Kong) and Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and other laws or regulations and the relevant rules of the Shanghai Stock Exchange, London Stock Exchange and the New York Stock Exchange.
3.3 Party B confirms that he owes a fiduciary and diligence obligation to Party A and that he shall not engage in any activities in competition with Party A's business or carry out any activities detrimental to the interests of Party A.
3.4 Party B undertakes to Party A that during the term of this Contract, (a) Party B shall notify Party A in writing as soon as possible of any new post of and new appointment as director and any new director's benefits; (b) Party B shall not acquire or hold any shares of Party A (except to the extent not exceeding the limit imposed by the relevant laws, regulations and listing rules).
Article 4 Remuneration and Expenses
4.1 From the Effective Date, the remuneration to be received by Party B for the performance of his services under this Contract as independent non-executive director of Party A shall be RMB 240,000 (pre-tax) and shall be paid by Party A.
4.2 During the term of this Contract, Party A shall reimburse Party B, to the extent such reimbursement is permitted by the relevant laws and policies of the PRC, all reasonable and necessary expenses (including traveling and entertainment expenses, etc.) incurred by Party B in the provision of services to Party A hereunder or execution of work in relation to Party A's operation upon presentation by Party B of the relevant receipts and/or valid documentary evidence. Party A may also provide Party B beforehand with sums for Party B to pay various necessary expenses mentioned above, but Party B shall produce to Party A valid supporting evidence of the expenses as soon as possible, or regularly as required by Party A, after making use of such sums so as to offset the sums.
4.3 During the term of this Contract, Party B may participate in the Liability Insurance Scheme for Directors and Senior Officers arranged by Party A and the relevant insurance premiums shall be paid by Party A. Party A shall have the right to cancel or alter the relevant liability insurance scheme (including the insurance coverage and amount of compensation) or change the relevant insurance company.
Article 5 Non-Competition
5.1 Unless the relevant competition is made known to the public and (if required) approved by the relevant regulatory authorities, Party B warrants that during the term of his appointment as Party A's independent non-executive director and within six months after the termination of such appointment with Party A, Party B shall not in any way engage in any business in competition with Party A, or seek any position from any company or individual who competes in business with Party A or subsidiaries and branch companies of Party A ("Party A's Group"), or accept any capacity or position offered by any company or individual who competes in business with any member of Party A's Group.
Article 6 Confidentiality Liability
6.1 Party B is aware that he will gain access to secret information possessed by members of Party A's Group and/or kept in custody by members of Party A's Group (hereinafter referred to as "Confidential Information") in the performance of his duties hereunder, including but not limited to, documents, materials, data, information, plans and insider information. Party B confirms that such Confidential Information is solely owned by members of Party A's Group and/or is kept in custody by members of Party A's Group.
6.2 Whether during the term of this Contract or within any time after the termination of Party B's appointment as Party A's director, Party B warrants that (except such Confidential Information may be disclosed to the public not in violation of the confidentiality undertaking under this Contract):
(a) Party B shall not divulge or disclose the Confidential Information to any third party in any way, with the exception of any Confidential Information which Party B must disclose to the relevant employees of members of Party A's Group and the professional personnel employed by members of Party A's Group for the performance of his obligations hereunder and any Confidential Information the disclosure of which is authorised by the board of directors or is ordered by a court of competent jurisdiction;
(b) Party B shall not make use of the Confidential Information in any way for his own benefit or for the benefit of his friends and relatives or any third party without Party A's permission; or
(c) Party B shall take all necessary measures to prevent the Confidential Information from spreading or disclosure to any third party without Party A's permission.
6.3 Upon the expiry of this Contract or earlier termination of Party B's appointment, Party B shall immediately, completely and effectively return to Party A all the information relating to the business of members of Party A's Group (including, but not limited to, Party A's documents, personal notes, records, reports, handbooks, drawings, forms, computer diskettes and tapes) within Party B's possession or under his control whether or not the same was originally supplied to Party B by Party A.
6.4 Party B agrees that various intellectual rights formulated, developed, created and made by him during the term of his services hereunder shall exclusively belong to Party A, with the exception of various intellectual rights which are not formulated, developed, created and made by him during his working hours with the use of any assets or resources belonging to Party A.
Article 7 Termination of Appointment
7.1 When any one of the following events occurs to Party B, the appointment relationship between Party A and Party B herein shall be immediately and automatically terminated: (unless otherwise decided by the board of directors)
(a) death of Party B;
(b) Party B is prohibited by any laws, regulations, rules, practice directions or practice rules from taking up the post of independent non-executive director or Party B loses the qualifications to act as independent non-executive director;
(c) if due to health reasons, Party B is unable to fully perform his duties hereunder for twelve months;
(d) Party B commits any serious breach and/or repeated and/or continual breach of any of Party B's obligations hereunder;
(e) Party B is guilty of any serious misconduct or serious neglect in the discharge of Party B's duties hereunder;
(f) Party B's actions or omissions bring the name or reputation of Party A or any member of Party A's Group into serious disrepute or prejudices the business interests of Party A or other members of Party A's Group;
(g) Party B is or has become of unsound mind or shall be or become a patient for the purpose of any laws relating to mental health;
(h) Party B is sued for criminal liability or convicted of any criminal offence other than an offence which in the reasonable opinion of the board of directors of Party A does not affect Party B's position as an independent non-executive director of Party A (bearing in mind the nature of the duties in which Party B is appointed and the capacities in which Party B is appointed);
(i) Party B is removed from the office of independent non-executive director of Party A or fails to be re-elected as an independent non-executive director of Party A;
(j) Party B leaves the service according to the articles of association of Party A; or
(k) Party B fails to attend the board of directors' meeting of Party A in person consecutively for three times.
7.2 In addition to the aforesaid provisions of Article 7.1, Party A may also discharge the appointment relationship between Party A and Party B by giving notice in writing to Party B when any one of the following events occurs:
(a) Party B is unable to substantially perform his duties hereunder due to health reasons, within any twelve-month period for a cumulative total of two hundred and sixty-five working days. Then, Party A may at any time discharge Party B from the post of independent non-executive director by giving Party B a fourteen-day written notice of discharge.
(b) Party B is in breach of his obligations as an independent non-executive director or the provisions of this Contract and does not repent after warning has been given by Party A.
(c) Damage or loss has been caused to Party A due to Party B's willful or material default in the performance of his duties hereunder.
Any delay by Party A in exercising such right of termination shall not constitute a waiver thereof.
7.3 If the appointment relationship between both parties herein is terminated due to the occurrence of any of the events referred to in Article 7.1 or 7.2 above, such termination shall not affect Party A's rights herein against Party B and the provisions of Articles 5 and 6 hereof shall still be applicable.
7.4 In the event of the termination of the appointment of Party B for whatever reason and whether by prior notice or in any other manner whatsoever, Party B agrees that he will not at any time after such termination represent himself as still having any connection with Party A.
7.5 Party B shall not, during the continuance of his appointment or within a period of one year after the termination thereof, either on his own behalf or on behalf of any other person, entice away from any member of Party A's Group any employee, worker, manager or director of any member of Party A's Group, whether or not such person would commit any breach of his contract of appointment with any member of Party A's Group by reason of his leaving service.
Article 8 Effectiveness of the Contract
This Contract shall become effective after approval at the shareholders' general meeting of Party A and signing by both parties.
Article 9 Additional Clauses
9.1 This Contract is an agreement relating to the provision of services by Party B personally. Therefore Party B's rights, interests, obligations, duties, etc. hereunder shall not be transferred, assigned or delegated to any third party (except the appointment in writing by Party B of any other director of Party A as proxy to attend a board meeting of Party A).
9.2 Without the written consent of both parties, neither party hereto shall make any addition to, deletion from or amendment to any provisions hereof.
9.3 Any contents of this Contract shall not constitute any employment relationship between Party A and Party B.
9.4 The heading of each Article hereof is inserted for the purpose of convenience only and shall not prejudice the meaning or construction of the provisions hereof.
9.5 The word "laws" referred to herein include such legal documents as laws, regulations, rules, provisions, standard opinions, decisions, etc. formulated by the legislative and administrative authorities of the PRC and any amendments or alterations by such authorities to the legal documents promulgated or formulated by them.
9.6 The enactment, validity, construction and performance of this Contract and the settlement of disputes shall be protected and governed by the law of the PRC.
9.7 Any disputes arising from or in connection with this Contract shall be settled by both parties through friendly consultation. Either Party hereto may, if any dispute cannot be settled by both parties through consultation, submit the dispute for arbitration.
9.8 Both parties agree to the following terms:
(a) Any dispute or claim relating to the affairs of Party A and incurring as a result of this Contract, the articles of association of Party A, the Company Law and other rights and obligations stipulated by the relevant laws and administrative regulations between (i) Party A and its directors; and (ii) holders of overseas listed foreign shares and Party A's directors shall be submitted to arbitration by the relevant party.
When the above dispute or claim is submitted to arbitration, all the claims or disputes shall be taken as a whole. Where any person having a cause of action due to the same reason or any person is required to participate in the settlement of such dispute or claim, if his capacity is Party A or a shareholder, director, supervisor, manager or other senior officer of Party A, he shall comply with the arbitration.
Disputes in relation to the classification of shareholders or register of shareholders shall not be settled by way of arbitration.
(b) Any party applying for arbitration may elect arbitration by the China International Economic and Trade Arbitration Commission or by the Hong Kong International Arbitration Centre according to their respective rules. After the party applying for arbitration has submitted the dispute or claim for arbitration, the other party must conduct arbitration at the arbitral organ elected by the applicant.
If the party applying for arbitration elects the arbitration to be conducted at the Hong Kong International Arbitration Centre, any party may request such arbitration to be conducted in Shenzhen according to the provisions of the securities arbitral rules of Hong Kong International Arbitration Centre.
(c) Settlement of disputes or claims referred to in (a) above by way of arbitration shall be governed by PRC law, except otherwise stipulated by laws and administrative regulations.
(d) The award of the arbitral organ shall be final and binding on both parties.
(e) Such arbitration agreement is concluded between Party A and Party B. Party A represents both itself and each shareholder.
(f) Any submitted arbitration shall be deemed to be an authorisation to the arbitral court to conduct a public hearing and announce its award.
9.9 If any of the provisions hereof are judged or ruled by the judicial authorities of the PRC to be invalid or unenforceable, the judgment or ruling shall not prejudice the effectiveness of the other provisions hereof.
9.10 If either party hereto is in breach of its obligations hereunder, the other party shall be entitled to take remedial measures such as fixing a time limit for effecting remedy, performance of the contract, removal of obstructions, compensation for losses or other legal remedial measures. To the extent that the same is not against any legal proceedings, either party's non-exercise or partial exercise of its rights hereunder or non-adoption or partial adoption of legal remedies shall not operate as such party's waiver of the exercise of all its rights or the rights which have not been exercised or such party's waiver of the taking of all the legal remedies or the legal remedies which have not been taken.
If Party B is in breach of its obligations under this Contract, Party A shall have the right to take remedial measures according to the articles of association of Party A.
9.11 The written notices stated herein may be delivered by hand, served by special delivery or sent by mail. If Party B changes his address, he shall inform Party A within seven days after he obtains the new address. If Party B changes his address, he shall conduct the same by fax within seven days after he obtains the new address.
9.12 This Contract is executed in English and Chinese. If there is any discrepancy between the two versions, the Chinese version shall prevail.
9.13 This Contract shall have two copies. Party A and Party B shall each hold one copy which shall have the same effect.
IN WITNESS HEREOF, Party A and Party B have signed this Contract in Beijing.
Party A:
For and on behalf of
China Petroleum & Chemical Corporation
Party B:
Dated the 24th day of May 2006
Form of Non-executive Director Service Contract
between
China Petroleum & Chemical Corporation
and
the Following Directors:
Mr. Chen Tonghai
Mr. Zhou Yuan
This Contract was made between the following two parties on 24th May, 2006:
(1) China Petroleum & Chemical Corporation, a company established according to the laws of The People's Republic of China ("PRC") with its legal address located at A6 Huixindong Street, Chaoyang District, Beijing, China, PRC ("Party A");
and
(2) [Name of Director], a [Chinese citizen] of [ ], Postal Code [ ] ("Party B").
As Party B was elected as a non-executive director of Party A at the Shareholders' General Meeting of year 2005 convened on 24th May, 2006, both parties have entered into the following agreement through friendly negotiations on the principle of equality and mutual benefits in order to confirm and regulate the relationship between Party A as the appointer and Party B as the appointee in respect of the service.
Article 1 Appointment
1.1 Party A shall appoint Party B as non-executive director of Party A's board of directors in accordance with the terms of this Contract.
1.2 Party B agrees to be appointed as non-executive director of Party A's board of directors in accordance with the terms of this Contract.
Article 2 Term of Office
2.1 The term of office of Party B appointed as Party A's non-executive director shall be three (3) consecutive years commencing from 24th May, 2006 (the "Effective Date") until the termination of this Contract upon the occurrence of the events referred to in Article 7.1 or upon the giving of notice by Party A under Article 7.2 hereof.
Article 3 Duties
3.1 Party B undertakes to Party A that he shall perform his duties as a director in accordance with the Company Law of the PRC, Special Regulations of the State Council regarding the Issue of Shares Overseas and the Listing of Shares Overseas by Companies Limited by Shares and other relevant laws, regulations, rules and standards of the PRC, Party A's articles of association, this Contract, regulations and internal rules relating to the directors formulated by Party A, resolutions of Party A's board of directors and shareholders' general meetings, and agrees that Party A shall be entitled to the remedial measures stipulated in the articles of association in connection with breach of any provision provided therein by Party B. Party B undertakes to each shareholder of Party A that he shall observe and perform its obligations owed to the shareholders as stipulated in the articles of association of Party A.
3.2 Party B undertakes to Party A and warrants to observe and comply with the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (including the Model Code for Securities Transactions by Directors of Listed Companies), Code on Takeovers and Mergers and Share Repurchases promulgated by the Hong Kong Securities and Futures Commission and the relevant restraints and obligations contained in the Securities (Disclosure of Interests) Ordinance (Chapter 36 of the Laws of Hong Kong) and Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and other laws or regulations and the relevant rules of the Shanghai Stock Exchange, London Stock Exchange and the New York Stock Exchange.
3.3 Party B confirms that he owes a fiduciary and diligence obligation to Party A and that he shall not engage in any activities in competition with Party A's business or carry out any activities detrimental to the interests of Party A.
3.4 Party B undertakes to Party A that during the term of this Contract, (a) Party B shall notify Party A in writing as soon as possible of any new post of and new appointment as director and any new director's benefits; (b) Party B shall not acquire or hold any shares of Party A (except to the extent not exceeding the limit imposed by the relevant laws, regulations and listing rules).
Article 4 Remuneration and Expenses
4.1 During the term of this Contract, Party A shall reimburse Party B, to the extent such reimbursement is permitted by the relevant laws and policies of the PRC, all reasonable and necessary expenses (including traveling and entertainment expenses, etc.) incurred by Party B in the provision of services to Party A hereunder or execution of work in relation to Party A's operation upon presentation by Party B of the relevant receipts and/or valid documentary evidence. Party A may also provide Party B beforehand with sums for Party B to pay various necessary expenses mentioned above, but Party B shall produce to Party A valid supporting evidence of the expenses as soon as possible, or regularly as required by Party A, after making use of such sums so as to offset the sums.
4.2 During the term of this Contract, Party B may participate in the Liability Insurance Scheme for Directors and Senior Officers arranged by Party A and the relevant insurance premiums shall be paid by Party A. Party A shall have the right to cancel or alter the relevant liability insurance scheme (including the insurance coverage and amount of compensation) or change the relevant insurance company.
Article 5 Non-Competition
5.1 Unless the relevant competition is made known to the public and (if required) approved by the relevant regulatory authorities, Party B warrants that during the term of his appointment as Party A's non-executive director and within six months after the termination of such appointment with Party A, Party B shall not in any way engage in any business in competition with Party A, or seek any position from any company or individual who competes in business with Party A or subsidiaries and branch companies of Party A ("Party A's Group"), or accept any capacity or position offered by any company or individual who competes in business with any member of Party A's Group.
Article 6 Confidentiality Liability
6.1 Party B is aware that he will gain access to secret information possessed by members of Party A's Group and/or kept in custody by members of Party A's Group (hereinafter referred to as "Confidential Information") in the performance of his duties hereunder, including but not limited to, documents, materials, data, information, plans and insider information. Party B confirms that such Confidential Information is solely owned by members of Party A's Group and/or is kept in custody by members of Party A's Group.
6.2 Whether during the term of this Contract or within any time after the termination of Party B's appointment as Party A's director, Party B warrants that (except such Confidential Information may be disclosed to the public not in violation of the confidentiality undertaking under this Contract):
(a) Party B shall not divulge or disclose the Confidential Information to any third party in any way, with the exception of any Confidential Information which Party B must disclose to the relevant employees of members of Party A's Group and the professional personnel employed by members of Party A's Group for the performance of his obligations hereunder and any Confidential Information the disclosure of which is authorised by the board of directors or is ordered by a court of competent jurisdiction;
(b) Party B shall not make use of the Confidential Information in any way for his own benefit or for the benefit of his friends and relatives or any third party without Party A's permission; or
(c) Party B shall take all necessary measures to prevent the Confidential Information from spreading or disclosure to any third party without Party A's permission.
6.3 Upon the expiry of this Contract or earlier termination of Party B's appointment, Party B shall immediately, completely and effectively return to Party A all the information relating to the business of members of Party A's Group (including, but not limited to, Party A's documents, personal notes, records, reports, handbooks, drawings, forms, computer diskettes and tapes) within Party B's possession or under his control whether or not the same was originally supplied to Party B by Party A.
6.4 Party B agrees that various intellectual rights formulated, developed, created and made by him during the term of his services hereunder shall exclusively belong to Party A, with the exception of various intellectual
rights which are not formulated, developed, created and made by him during his working hours with the use of any assets or resources belonging to Party A.
Article 7 Termination of Appointment
7.1 When any one of the following events occurs to Party B, the appointment relationship between Party A and Party B herein shall be immediately and automatically terminated: (unless otherwise decided by the board of directors)
(a) Party B is prohibited by any laws, regulations, rules, practice directions or practice rules from taking up the post of non-executive director or Party B loses the qualifications to act as non-executive director;
(b) Party B leaves the service according to the articles of association of Party A;
(c) Party B is removed from the office of non-executive director of Party A or fails to be re-elected as a non-executive director of Party A;
(d) Party B is sued for criminal liability or convicted of any criminal offence other than an offence which in the reasonable opinion of the board of directors of Party A does not affect Party B's position as a non-executive director of Party A (bearing in mind the nature of the duties in which Party B is appointed and the capacities in which Party B is appointed);
(e) Party B commits any serious breach and/or repeated and/or continual breach of any of Party B's obligations hereunder;
(f) Party B is guilty of any serious misconduct or serious neglect in the discharge of Party B's duties hereunder;
(g) Party B's actions or omissions bring the name or reputation of Party A or any member of Party A's Group into serious disrepute or prejudices the business interests of Party A or other members of Party A's Group;
(h) death of Party B;
(i) if due to health reasons, Party B is unable to fully perform his duties hereunder for twelve months;
(j) Party B is or has become of unsound mind or shall be or become a patient for the purpose of any laws relating to mental health; or
(k) Party B fails to attend the board of directors' meeting of Party A in person consecutively for three times.
7.2 In addition to the aforesaid provisions of Article 7.1, Party A may also discharge the appointment relationship between Party A and Party B by giving notice in writing to Party B when any one of the following events occurs:
(a) Party B is unable to substantially perform his duties hereunder due to health reasons, within any twelve-month period for a cumulative total of two hundred and sixty-five working days. Then, Party A may at any time discharge Party B from the post of non-executive director by giving Party B a fourteen-day written notice of discharge.
(b) Party B is in breach of his obligations as a non-executive director or the provisions of this Contract and does not repent after warning has been given by Party A.
(c) Damage or loss has been caused to Party A due to Party B's willful or material default in the performance of his duties hereunder.
Any delay by Party A in exercising such right of termination shall not constitute a waiver thereof.
7.3 If the appointment relationship between both parties herein is terminated due to the occurrence of any of the events referred to in Article 7.1 or 7.2 above, such termination shall not affect Party A's rights herein against Party B and the provisions of Articles 5 and 6 hereof shall still be applicable.
7.4 In the event of the termination of the appointment of Party B for whatever reason and whether by prior notice or in any other manner whatsoever, Party B agrees that he will not at any time after such termination represent himself as still having any connection with Party A.
7.5 Party B shall not, during the continuance of his appointment or within a period of one year after the termination thereof, either on his own behalf or on behalf of any other person, entice away from any member of Party A's Group any employee, worker, manager or director of any member of Party A's Group, whether or not such person would commit any breach of his contract of appointment with any member of Party A's Group by reason of his leaving service.
Article 8 Effectiveness of the Contract
This Contract shall become effective after approval at the shareholders' general meeting of Party A and signing by both parties.
Article 9 Additional Clauses
9.1 This Contract is an agreement relating to the provision of services by Party B personally. Therefore Party B's rights, interests, obligations, duties, etc. hereunder shall not be transferred, assigned or delegated to any third party (except the appointment in writing by Party B of any other director of Party A as proxy to attend a board meeting of Party A).
9.2 Without the written consent of both parties, neither party hereto shall make any addition to, deletion from or amendment to any provisions hereof.
9.3 The heading of each Article hereof is inserted for the purpose of convenience only and shall not prejudice the meaning or construction of the provisions hereof.
9.4 The word "laws" referred to herein include such legal documents as laws, regulations, rules, provisions, standard opinions, decisions, etc. formulated by the legislative and administrative authorities of the PRC and any amendments or alterations by such authorities to the legal documents promulgated or formulated by them.
9.5 The enactment, validity, construction and performance of this Contract and the settlement of disputes shall be protected and governed by the law of the PRC.
9.6 Any disputes arising from or in connection with this Contract shall be settled by both parties through friendly consultation. Either Party hereto may, if any dispute cannot be settled by both parties through consultation, submit the dispute for arbitration.
9.7 Both parties agree to the following terms:
(a) Any dispute or claim relating to the affairs of Party A and incurring as a result of this Contract, the articles of association of Party A, the Company Law and other rights and obligations stipulated by the relevant laws and administrative regulations between (i) Party A and its directors; and (ii) holders of overseas listed foreign shares and Party A's directors shall be submitted to arbitration by the relevant party.
When the above dispute or claim is submitted to arbitration, all the claims or disputes shall be taken as a whole. Where any person having a cause of action due to the same reason or any person is required to participate in the settlement of such dispute or claim, if his capacity is Party A or a shareholder, director, supervisor, manager or other senior officer of Party A, he shall comply with the arbitration.
Disputes in relation to the classification of shareholders or register of shareholders shall not be settled by way of arbitration.
(b) Any party applying for arbitration may elect arbitration by the China International Economic and Trade Arbitration Commission or by the Hong Kong International Arbitration Centre according to their respective rules. After the
party applying for arbitration has submitted the dispute or claim for arbitration, the other party must conduct arbitration at the arbitral organ elected by the applicant.
If the party applying for arbitration elects the arbitration to be conducted at the Hong Kong International Arbitration Centre, any party may request such arbitration to be conducted in Shenzhen according to the provisions of the securities arbitral rules of Hong Kong International Arbitration Centre.
(c) Settlement of disputes or claims referred to in (a) above by way of arbitration shall be governed by PRC law, except otherwise stipulated by laws and administrative regulations.
(d) The award of the arbitral organ shall be final and binding on both parties.
(e) Such arbitration agreement is concluded between Party A and Party B. Party A represents both itself and each shareholder.
(f) Any submitted arbitration shall be deemed to be an authorisation to the arbitral court to conduct a public hearing and announce its award.
9.8 If any of the provisions hereof are judged or ruled by the judicial authorities of the PRC to be invalid or unenforceable, the judgment or ruling shall not prejudice the effectiveness of the other provisions hereof.
9.9 If either party hereto is in breach of its obligations hereunder, the other party shall be entitled to take remedial measures such as fixing a time limit for effecting remedy, performance of the contract, removal of obstructions, compensation for losses or other legal remedial measures. To the extent that the same is not against any legal proceedings, either party's non-exercise or partial exercise of its rights hereunder or non-adoption or partial adoption of legal remedies shall not operate as such party's waiver of the exercise of all its rights or the rights which have not been exercised or such party's waiver of the taking of all the legal remedies or the legal remedies which have not been taken.
If Party B is in breach of its obligations under this Contract, Party A shall have the right to take remedial measures according to the articles of association of Party A.
9.10 The written notices stated herein may be delivered by hand, served by special delivery or sent by mail. If Party B changes his address, he shall inform Party A within seven days after he obtains the new address. If Party B changes his address, he shall conduct the same by fax within seven days after he obtains the new address.
9.11 This Contract is executed in English and Chinese. If there is any discrepancy between the two versions, the Chinese version shall prevail.
9.12 This Contract shall have two copies. Party A and Party B shall each hold one copy which shall have the same effect.
IN WITNESS HEREOF, Party A and Party B have signed this Contract in Beijing.
Party A:
For and on behalf of
China Petroleum & Chemical Corporation
Party B:
Dated the 24th day of May 2006
Form Non-executive Director Service Contract
between
China Petroleum & Chemical Corporation
and
the Following Directors:
Mr. Yao Zhongmi
Mr. Fan Yifei
This Contract was made between the following two parties on 24th May, 2006:
(1) China Petroleum & Chemical Corporation, a company established according to the laws of The People's Republic of China ("PRC") with its legal address located at A6 Huixindong Street, Chaoyang District, Beijing, China, PRC ("Party A");
and
(2) [Name of Director], a [Chinese citizen] of [ ], Postal Code [ ] ("Party B").
As Party B was elected as a non-executive director of Party A at the Shareholders' General Meeting of year 2005 convened on 24th May, 2006, both parties have entered into the following agreement through friendly negotiations on the principle of equality and mutual benefits in order to confirm and regulate the relationship between Party A as the appointer and Party B as the appointee in respect of the service.
Article 1 Appointment
1.1 Party A shall appoint Party B as non-executive director of Party A's board of directors in accordance with the terms of this Contract.
1.2 Party B agrees to be appointed as non-executive director of Party A's board of directors in accordance with the terms of this Contract.
Article 2 Term of Office
2.1 The term of office of Party B appointed as Party A's non-executive director shall be three (3) consecutive years commencing from 24th May, 2006 (the "Effective Date") until the termination of this Contract upon the occurrence of the events referred to in Article 7.1 or upon the giving of notice by Party A under Article 7.2 hereof.
Article 3 Duties
3.1 Party B undertakes to Party A that he shall perform his duties as a director in accordance with the Company Law of the PRC, Special Regulations of the State Council regarding the Issue of Shares Overseas and the Listing of Shares Overseas by Companies Limited by Shares and other relevant laws, regulations, rules and standards of the PRC, Party A's articles of association, this Contract, regulations and internal rules relating to the directors formulated by Party A, resolutions of Party A's board of directors and shareholders' general meetings, and agrees that Party A shall be entitled to the remedial measures stipulated in the articles of association in connection with breach of any provision provided therein by Party B. Party B undertakes to each shareholder of Party A that he shall observe and perform its obligations owed to the shareholders as stipulated in the articles of association of Party A.
3.2 Party B undertakes to Party A and warrants to observe and comply with the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (including the Model Code for Securities Transactions by Directors of Listed Companies), Code on Takeovers and Mergers and Share Repurchases promulgated by the Hong Kong Securities and Futures Commission and the relevant restraints and obligations contained in the Securities (Disclosure of Interests) Ordinance (Chapter 36 of the Laws of Hong Kong) and Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and other laws or regulations and the relevant rules of the Shanghai Stock Exchange, London Stock Exchange and the New York Stock Exchange.
3.3 Party B confirms that he owes a fiduciary and diligence obligation to Party A and that he shall not engage in any activities in competition with Party A's business or carry out any activities detrimental to the interests of Party A.
3.4 Party B undertakes to Party A that during the term of this Contract, (a) Party B shall notify Party A in writing as soon as possible of any new post of and new appointment as director and any new director's benefits; (b) Party B shall not acquire or hold any shares of Party A (except to the extent not exceeding the limit imposed by the relevant laws, regulations and listing rules).
Article 4 Remuneration and Expenses
4.1 From the Effective Date, the remuneration to be received by Party B for the performance of his services under this Contract as non-executive director of Party A shall be RMB 5,000 (after-tax) for each attendance of the meeting of the board of directors by Party B.
4.2 During the term of this Contract, Party A shall reimburse Party B, to the extent such reimbursement is permitted by the relevant laws and policies of the PRC, all reasonable and necessary expenses (including traveling and entertainment expenses, etc.) incurred by Party B in the provision of services to Party A hereunder or execution of work in relation to Party A's operation upon presentation by Party B of the relevant receipts and/or valid documentary evidence. Party A may also provide Party B beforehand with sums for Party B to pay various necessary expenses mentioned above, but Party B shall produce to Party A valid supporting evidence of the expenses as soon as possible, or regularly as required by Party A, after making use of such sums so as to offset the sums.
4.3 During the term of this Contract, Party B may participate in the Liability Insurance Scheme for Directors and Senior Officers arranged by Party A and the relevant insurance premiums shall be paid by Party A. Party A shall have the right to cancel or alter the relevant liability insurance scheme (including the insurance coverage and amount of compensation) or change the relevant insurance company.
Article 5 Non-Competition
5.1 Unless the relevant competition is made known to the public and (if required) approved by the relevant regulatory authorities, Party B warrants that during the term of his appointment as Party A's non-executive director and within six months after the termination of such appointment with Party A, Party B shall not in any way engage in any business in competition with Party A, or seek any position from any company or individual who competes in business with Party A or subsidiaries and branch companies of Party A ("Party A's Group"), or accept any capacity or position offered by any company or individual who competes in business with any member of Party A's Group.
Article 6 Confidentiality Liability
6.1 Party B is aware that he will gain access to secret information possessed by members of Party A's Group and/or kept in custody by members of Party A's Group (hereinafter referred to as "Confidential Information") in the performance of his duties hereunder, including but not limited to, documents, materials, data, information, plans and insider information. Party B confirms that such Confidential Information is solely owned by members of Party A's Group and/or is kept in custody by members of Party A's Group.
6.2 Whether during the term of this Contract or within any time after the termination of Party B's appointment as Party A's director, Party B warrants that (except such Confidential Information may be disclosed to the public not in violation of the confidentiality undertaking under this Contract):
(a) Party B shall not divulge or disclose the Confidential Information to any third party in any way, with the exception of any Confidential Information which Party B must disclose to the relevant employees of members of Party A's Group and the professional personnel employed by members of Party A's Group for the performance of his obligations hereunder and any Confidential Information the disclosure of which is authorised by the board of directors or is ordered by a court of competent jurisdiction;
(b) Party B shall not make use of the Confidential Information in any way for his own benefit or for the benefit of his friends and relatives or any third party without Party A's permission; or
(c) Party B shall take all necessary measures to prevent the Confidential Information from spreading or disclosure to any third party without Party A's permission.
6.3 Upon the expiry of this Contract or earlier termination of Party B's appointment, Party B shall immediately, completely and effectively return to Party A all the information relating to the business of members of Party A's Group (including, but not limited to, Party A's documents, personal notes, records, reports, handbooks, drawings, forms, computer diskettes and tapes) within Party B's possession or under his control whether or not the same was originally supplied to Party B by Party A.
6.4 Party B agrees that various intellectual rights formulated, developed, created and made by him during the term of his services hereunder shall exclusively belong to Party A, with the exception of various intellectual rights which are not formulated, developed, created and made by him during his working hours with the use of any assets or resources belonging to Party A.
Article 7 Termination of Appointment
7.1 When any one of the following events occurs to Party B, the appointment relationship between Party A and Party B herein shall be immediately and automatically terminated: (unless otherwise decided by the board of directors)
(a) Party B is prohibited by any laws, regulations, rules, practice directions or practice rules from taking up the post of non-executive director or Party B loses the qualifications to act as non-executive director;
(b) Party B leaves the service according to the articles of association of Party A;
(c) Party B is removed from the office of non-executive director of Party A or fails to be re-elected as a non-executive director of Party A;
(d) Party B is sued for criminal liability or convicted of any criminal offence other than an offence which in the reasonable opinion of the board of directors of Party A does not affect Party B's position as a non-executive director of Party A (bearing in mind the nature of the duties in which Party B is appointed and the capacities in which Party B is appointed);
(e) Party B commits any serious breach and/or repeated and/or continual breach of any of Party B's obligations hereunder;
(f) Party B is guilty of any serious misconduct or serious neglect in the discharge of Party B's duties hereunder;
(g) Party B's actions or omissions bring the name or reputation of Party A or any member of Party A's Group into serious disrepute or prejudices the business interests of Party A or other members of Party A's Group;
(h) death of Party B;
(i) if due to health reasons, Party B is unable to fully perform his duties hereunder for twelve months;
(j) Party B is or has become of unsound mind or shall be or become a patient for the purpose of any laws relating to mental health; or
(k) Party B fails to attend the board of directors' meeting of Party A in person consecutively for three times.
7.2 In addition to the aforesaid provisions of Article 7.1, Party A may also discharge the appointment relationship between Party A and Party B by giving notice in writing to Party B when any one of the following events occurs:
(a) Party B is unable to substantially perform his duties hereunder due to health reasons, within any twelve-month period for a cumulative total of two hundred and sixty-five working days. Then, Party A may at any time discharge Party B from the post of non-executive director by giving Party B a fourteen-day written notice of discharge.
(b) Party B is in breach of his obligations as a non-executive director or the provisions of this Contract and does not repent after warning has been given by Party A.
(c) Damage or loss has been caused to Party A due to Party B's willful or material default in the performance of his duties hereunder.
Any delay by Party A in exercising such right of termination shall not constitute a waiver thereof.
7.3 If the appointment relationship between both parties herein is terminated due to the occurrence of any of the events referred to in Article 7.1 or 7.2 above, such termination shall not affect Party A's rights herein against Party B and the provisions of Articles 5 and 6 hereof shall still be applicable.
7.4 In the event of the termination of the appointment of Party B for whatever reason and whether by prior notice or in any other manner whatsoever, Party B agrees that he will not at any time after such termination represent himself as still having any connection with Party A.
7.5 Party B shall not, during the continuance of his appointment or within a period of one year after the termination thereof, either on his own behalf or on behalf of any other person, entice away from any member of Party A's Group any employee, worker, manager or director of any member of Party A's Group, whether or not such person would commit any breach of his contract of appointment with any member of Party A's Group by reason of his leaving service.
Article 8 Effectiveness of the Contract
This Contract shall become effective after approval at the shareholders' general meeting of Party A and signing by both parties.
Article 9 Additional Clauses
9.1 This Contract is an agreement relating to the provision of services by Party B personally. Therefore Party B's rights, interests, obligations, duties, etc. hereunder shall not be transferred, assigned or delegated to any third party (except the appointment in writing by Party B of any other director of Party A as proxy to attend a board meeting of Party A).
9.2 Without the written consent of both parties, neither party hereto shall make any addition to, deletion from or amendment to any provisions hereof.
9.3 The heading of each Article hereof is inserted for the purpose of convenience only and shall not prejudice the meaning or construction of the provisions hereof.
9.4 The word "laws" referred to herein include such legal documents as laws, regulations, rules, provisions, standard opinions, decisions, etc. formulated by the legislative and administrative authorities of the PRC and any amendments or alterations by such authorities to the legal documents promulgated or formulated by them.
9.5 The enactment, validity, construction and performance of this Contract and the settlement of disputes shall be protected and governed by the law of the PRC.
9.6 Any disputes arising from or in connection with this Contract shall be settled by both parties through friendly consultation. Either Party hereto may, if any dispute cannot be settled by both parties through consultation, submit the dispute for arbitration.
9.7 Both parties agree to the following terms:
(a) Any dispute or claim relating to the affairs of Party A and incurring as a result of this Contract, the articles of association of Party A, the Company Law and other rights and obligations stipulated by the relevant laws and administrative regulations between (i) Party A and its directors; and (ii) holders of overseas listed foreign shares and Party A's directors shall be submitted to arbitration by the relevant party.
When the above dispute or claim is submitted to arbitration, all the claims or disputes shall be taken as a whole. Where any person having a cause of action due to the same reason or any person is required to participate in the settlement of such dispute or claim, if his capacity is Party A or a shareholder, director, supervisor, manager or other senior officer of Party A, he shall comply with the arbitration.
Disputes in relation to the classification of shareholders or register of shareholders shall not be settled by way of arbitration.
(b) Any party applying for arbitration may elect arbitration by the China International Economic and Trade Arbitration Commission or by the Hong Kong International Arbitration Centre according to their respective rules. After the party applying for arbitration has submitted the dispute or claim for arbitration, the other party must conduct arbitration at the arbitral organ elected by the applicant.
If the party applying for arbitration elects the arbitration to be conducted at the Hong Kong International Arbitration Centre, any party may request such arbitration to be conducted in Shenzhen according to the provisions of the securities arbitral rules of Hong Kong International Arbitration Centre.
(c) Settlement of disputes or claims referred to in (a) above by way of arbitration shall be governed by PRC law, except otherwise stipulated by laws and administrative regulations.
(d) The award of the arbitral organ shall be final and binding on both parties.
(e) Such arbitration agreement is concluded between Party A and Party B. Party A represents both itself and each shareholder.
(f) Any submitted arbitration shall be deemed to be an authorisation to the arbitral court to conduct a public hearing and announce its award.
9.8 If any of the provisions hereof are judged or ruled by the judicial authorities of the PRC to be invalid or unenforceable, the judgment or ruling shall not prejudice the effectiveness of the other provisions hereof.
9.9 If either party hereto is in breach of its obligations hereunder, the other party shall be entitled to take remedial measures such as fixing a time limit for effecting remedy, performance of the contract, removal of obstructions, compensation for losses or other legal remedial measures. To the extent that the same is not against any legal proceedings, either party's non-exercise or partial exercise of its rights hereunder or non-adoption or partial adoption of legal remedies shall not operate as such party's waiver of the exercise of all its rights or the rights which have not been exercised or such party's waiver of the taking of all the legal remedies or the legal remedies which have not been taken.
If Party B is in breach of its obligations under this Contract, Party A shall have the right to take remedial measures according to the articles of association of Party A.
9.10 The written notices stated herein may be delivered by hand, served by special delivery or sent by mail. If Party B changes his address, he shall inform Party A within seven days after he obtains the new address. If Party B changes his address, he shall conduct the same by fax within seven days after he obtains the new address.
9.11 This Contract is executed in English and Chinese. If there is any discrepancy between the two versions, the Chinese version shall prevail.
9.12 This Contract shall have two copies. Party A and Party B shall each hold one copy which shall have the same effect.
IN WITNESS HEREOF, Party A and Party B have signed this Contract in Beijing.
Party A:
For and on behalf of
China Petroleum & Chemical Corporation
Party B:
Exhibit 4.2
Dated the 24th day of May 2006
Form of Supervisor Service Contract
between
China Petroleum & Chemical Corporation
and
the Following Supervisors:
Mr. Wang Zuoran
Mr. Kang Xianzhang
Mr. Zou Huiping
This Contract was made between the following two parties on 24th May, 2006:
(1) China Petroleum and Chemical Corporation, a company established according to the laws of The People's Republic of China ("PRC") with its legal address located at A6 Huixindong Street, Chaoyang District, Beijing, China, PRC ("Party A"); and
(2) [Name of Supervisor], a [Chinese citizen] of [ ], Postal Code [ ] ("Party B").
As Party B was elected as an employee supervisor of the supervisory committee of Party A at the annual Shareholders' general Meeting of year 2005 convened on 24th May, 2006, both parties have entered into the following agreement through friendly negotiations on the principle of equality and mutual benefits in order to confirm and regulate the relationship between Party A as the employer and Party B as the employee in respect of the service under employment.
Article 1 Engagement
1.1 Party A shall employ Party B as supervisor of Party A's supervisory committee in accordance with the terms of this Contract.
1.2 Party B agrees to be employed as supervisor of Party A's supervisory committee in accordance with the terms of this Contract.
Article 2 Term of Office
2.1 The term of office of Party B employed as Party A's supervisor shall be three (3) consecutive years commencing from 24th May, 2006 (the "Effective Date") until the termination of this Contract upon the occurrence of the events referred to in Article 7.1 or upon the giving of notice by Party A under Article 7.2 hereof.
Article 3 Duties
3.1 Party B undertakes to Party A that he shall perform his duties as a
supervisor in accordance with the Company Law of the PRC, Special Regulations
of the State Council regarding the Issue of Shares Overseas and the Listing of
Shares Overseas by Companies Limited by Shares and other relevant laws,
regulations, rules and standards of the PRC, Party A's articles of
association, this Contract, regulations and internal rules relating to the
supervisors formulated by Party A, resolutions of Party A's board of directors
and supervisory committee, and agrees that Party A shall be entitled to the
remedial measures stipulated in the articles of association in connection with
breach of any provision provided therein by Party B.. Party B undertakes to
each shareholder of Party A that he shall observe and perform its obligations
owed to the shareholders as stipulated in the articles of association of Party
A.
3.2 Party B undertakes to Party A and warrants to observe and comply with the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (including the Model Code for Securities Transactions by Directors of Listed Companies), Code on Takeovers and Mergers and Share Repurchases promulgated by the Hong Kong Securities and Futures Commission and the relevant restraints and obligations contained in the Securities (Disclosure of Interests) Ordinance (Chapter 36 of the Laws of Hong Kong) and Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and other laws or regulations and the relevant rules of the Shanghai Stock Exchange, London Stock Exchange and the New York Stock Exchange.
3.3 Party B confirms that he owes a fiduciary and diligence obligation to Party A and that he shall not engage in any activities in competition with Party A's business or carry out any activities detrimental to the interests of Party A.
3.4 Party B undertakes to Party A that during his term of employment as a member of the supervisory committee of Party A, his main duties shall be supervising the chairman, directors, managers and senior officers of Party A in order to prevent them from abusing powers or infringing the interests of Party A, its shareholders and employees.
3.5 During the period when Party B acting as supervisor of Party A, Party B shall be directly accountable to the supervisory committee and shall, at the request of the supervisory committee, provide the relevant information during the period of exercise of power to the supervisory committee, and shall ultimately obey the reasonable and lawful instructions of the supervisory committee.
3.6 During the period when Party B acting as supervisor of Party A, Party B shall ultimately and fully report to the supervisory committee the conditions of his engagement in the affairs of Party A in a timely manner, and shall make the relevant explanations according to the request of the supervisory committee.
Article 4 Remuneration and Expenses
4.1 During the term of this Contract, Party A shall reimburse Party B, to the extent such reimbursement is permitted by the relevant laws and policies of the PRC, all reasonable and necessary expenses (including traveling and entertainment expenses, etc.) incurred by Party B in the provision of services to Party A hereunder or execution of work in relation to Party A's operation upon presentation by Party B of the relevant receipts and/or valid documentary evidence. Party A may also provide Party B beforehand with sums for Party B to pay various necessary expenses mentioned above, but Party B shall produce to Party A valid supporting evidence of the expenses as soon as possible, or regularly as required by Party A, after making use of such sums so as to offset the sums.
4.2 During the term of this Contract, Party B may participate in the Liability Insurance Scheme for Directors and Senior Officers arranged by Party A and the relevant insurance premiums shall be paid by Party A. Party A shall have the right to cancel or alter the relevant liability insurance scheme (including the insurance coverage and amount of compensation) or change the relevant insurance company.
Article 5 Non-Competition
5.1 Unless the relevant competition is made known to the public and (if required) approved by the relevant regulatory authorities, Party B warrants that during the term of his employment as Party A's supervisor and within six months after the termination of such employment with Party A, Party B shall not in any way engage in any business in competition with Party A, or seek any position from any company or individual who competes in business with Party A or subsidiaries and branch companies of Party A ("Party A's Group"), or accept any capacity or position offered by any company or individual who competes in business with any member of Party A's Group.
Article 6 Confidentiality Liability
6.1 Party B is aware that he will gain access to secret information possessed by members of Party A's Group and/or kept in custody by members of Party A's Group (hereinafter referred to as "Confidential Information") in the performance of his duties hereunder, including but not limited to, documents, materials, data, information, plans and insider information. Party B confirms that such Confidential Information is solely owned by members of Party A's Group and/or is kept in custody by members of Party A's Group.
6.2 Whether during the term of this Contract or within any time after the termination of Party B's employment as Party A's supervisor, Party B warrants that (except such Confidential Information may be disclosed to the public not in violation of the confidentiality undertaking under this Contract):
(a) Party B shall not divulge or disclose the Confidential Information to any third party in any way, with the exception of any Confidential Information which Party B must disclose to the relevant employees of members of Party A's Group and the professional personnel employed by members of Party A's Group for the performance of his obligations hereunder and any Confidential Information the disclosure of which is authorized by the board of directors or is ordered by a court of competent jurisdiction;
(b) Party B shall not make use of the Confidential Information in any way for his own benefit or for the benefit of his friends and relatives or any third party without Party A's permission; or
(c) Party B shall take all necessary measures to prevent the Confidential Information from spreading or disclosure to any third party without Party A's permission.
6.3 Upon the expiry of this Contract or earlier termination of Party B's employment, Party B shall immediately, completely and effectively return to Party A all the information relating to the business of members of Party A's Group (including, but not limited to, Party A's documents, personal notes, records, reports, handbooks, drawings, forms, computer diskettes and tapes) within Party B's possession or under his control whether or not the same was originally supplied to Party B by Party A.
6.4 Party B agrees that various intellectual rights formulated, developed, created and made by him during the term of his services hereunder shall exclusively belong to Party A, with the exception of various intellectual rights which are not formulated, developed, created and made by him during his working hours with the use of any assets or resources belonging to Party A.
Article 7 Termination of Employment
7.1 When any one of the following events occurs to Party B, the employment between Party A and Party B herein shall be immediately and automatically terminated: (unless otherwise decided by the board of directors)
(a) death of Party B;
(b) Party B is prohibited by any laws, regulations, rules, practice directions or practice rules from taking up the post of supervisor or Party B loses the qualifications to act as supervisor;
(c) if due to health reasons, Party B is unable to fully perform his duties hereunder for twelve months;
(d) Party B commits any serious breach and/or repeated and/or continual breach of any of Party B's obligations hereunder;
(e) Party B is guilty of any serious misconduct or serious neglect in the discharge of Party B's duties hereunder;
(f) Party B's actions or omissions bring the name or reputation of Party A or any member of Party A's Group into serious disrepute or prejudices the business interests of Party A or other members of Party A's Group;
(g) Party B is or has become of unsound mind or shall be or become a patient for the purpose of any laws relating to mental health;
(h) Party B is sued for criminal liability or convicted of any criminal offence other than an offence which in the reasonable opinion of the board of directors of Party A does not affect Party B's position as a supervisor of Party A (bearing in mind the nature of the duties in which Party B is engaged and the capacities in which Party B is engaged);
(i) Party B is removed from the office of supervisor of Party A or fails to be re-elected as a supervisor of Party A;
(j) Party B leaves the service according to the articles of association of Party A; or
(k) Party B fails to attend the supervisors' meeting of Party A in person consecutively for two times.
7.2 In addition to the aforesaid provisions of Article 7.1, Party A may also discharge the employment relationship between Party A and Party B by giving notice in writing to Party B when any one of the following events occurs:
(a) Party B is unable to substantially perform his duties hereunder due to health reasons, within any twelve-month period for a cumulative total of two hundred and sixty-five working days. Then, Party A may at any time discharge Party B from the post of supervisor by giving Party B a fourteen-day written notice of discharge.
(b) Party B is in breach of his obligations as a supervisor or the provisions of this Contract and does not repent after warning has been given by Party A.
(c) Damage or loss has been caused to Party A due to Party B's willful or material default in the performance of his duties hereunder.
Any delay by Party A in exercising such right of termination shall not constitute a waiver thereof.
7.3 If the employment relationship between both parties herein is terminated due to the occurrence of any of the events referred to in Article 7.1 or 7.2 above, such termination shall not affect Party A's rights herein against Party B and the provisions of Articles 5 and 6 hereof shall still be applicable.
7.4 In the event of the termination of the employment of Party B for whatever reason and whether by prior notice or in any other manner whatsoever, Party B agrees that he will not at any time after such termination represent himself as still having any connection with Party A.
7.5 Party B shall not, during the continuance of his employment or within a period of one year after the termination thereof, either on his own behalf or on behalf of any other person, entice away from any member of Party A's Group any employee, worker, manager or director of any member of Party A's Group, whether or not such person would commit any breach of his contract of employment with any member of Party A's Group by reason of his leaving service.
Article 8 Effectiveness of the Contract
This Contract shall become effective after approval at the shareholders' general meeting of Party A and signing by both parties.
Article 9 Additional Clauses
9.1 This Contract is an agreement relating to the provision of services by Party B personally. Therefore Party B's rights, interests, obligations, duties, etc. hereunder shall not be transferred, assigned or delegated to any third party (except the appointment in writing by Party B of any other supervisor of Party A as proxy to attend a supervisory committee meeting of Party A).
9.2 Without the written consent of both parties, neither party hereto shall make any addition to, deletion from or amendment to any provisions hereof.
9.3 The heading of each Article hereof is inserted for the purpose of convenience only and shall not prejudice the meaning or construction of the provisions hereof.
9.4 The word "laws" referred to herein include such legal documents as laws, regulations, rules, provisions, standard opinions, decisions, etc. formulated by the legislative and administrative authorities of the PRC and any amendments or alterations by such authorities to the legal documents promulgated or formulated by them.
9.5 The enactment, validity, construction and performance of this Contract and the settlement of disputes shall be protected and governed by the law of the PRC.
9.6 Any disputes arising from or in connection with this Contract shall be settled by both parties through friendly consultation. Either Party hereto may, if any dispute cannot be settled by both parties through consultation, submit the dispute for arbitration.
9.7 Both parties agree to the following terms:
(a) Any dispute or claim relating to the affairs of Party A and incurring
as a result of this Contract, the articles of association of Party A, the
Company Law and other rights and obligations stipulated by the relevant laws
and administrative regulations between (i) Party A and its supervisor; and
(ii) holders of overseas listed foreign shares and Party A's supervisors shall
be submitted to arbitration by the relevant party.
When the above dispute or claim is submitted to arbitration, all the claims or disputes shall be taken as a whole. Where any person having a cause of action due to the same reason or any person is required to participate in the
settlement of such dispute or claim, if his capacity is Party A or a shareholder, director, supervisor, manager or other senior officer of Party A, he shall comply with the arbitration.
Disputes in relation to the classification of shareholders or register of shareholders shall not be settled by way of arbitration.
(b) Any party applying for arbitration may elect arbitration by the China International Economic and Trade Arbitration Commission or by the Hong Kong International Arbitration Centre according to their respective rules. After the party applying for arbitration has submitted the dispute or claim for arbitration, the other party must conduct arbitration at the arbitral organ elected by the applicant.
If the party applying for arbitration elects the arbitration to be conducted at the Hong Kong International Arbitration Centre, any party may request such arbitration to be conducted in Shenzhen according to the provisions of the securities arbitral rules of Hong Kong International Arbitration Centre.
(c) Settlement of disputes or claims referred to in (a) above by way of arbitration shall be governed by PRC law, except otherwise stipulated by laws and administrative regulations.
(d) The award of the arbitral organ shall be final and binding on both parties.
(e) Such arbitration agreement is concluded between Party A and Party B. Party A represents both itself and each shareholder.
(f) Any submitted arbitration shall be deemed to be an authorization to the arbitral court to conduct a public hearing and announce its award.
9.8 If any of the provisions hereof are judged or ruled by the judicial authorities of the PRC to be invalid or unenforceable, the judgment or ruling shall not prejudice the effectiveness of the other provisions hereof.
9.9 If either party hereto is in breach of its obligations hereunder, the other party shall be entitled to take remedial measures such as fixing a time limit for effecting remedy, performance of the contract, removal of obstructions, compensation for losses or other legal remedial measures. To the extent that the same is not against any legal proceedings, either party's non-exercise or partial exercise of its rights hereunder or non-adoption or partial adoption of legal remedies shall not operate as such party's waiver of the exercise of all its rights or the rights which have not been exercised or such party's waiver of the taking of all the legal remedies or the legal remedies which have not been taken.
If Party B is in breach of its obligations under this Contract, Party A shall have the right to take remedial measures according to the articles of association of Party A.
9.10 The written notices stated herein may be delivered by hand, served by special delivery or sent by mail. If Party B changes his address, he shall inform Party A within seven days after he obtains the new address. If Party B changes his address, he shall conduct the same by fax within seven days after he obtains the new address.
9.11 This Contract is executed in English and Chinese. If there is any discrepancy between the two versions, the Chinese version shall prevail.
9.12 This Contract shall have two copies. Party A and Party B shall each hold one copy which shall have the same effect.
IN WITNESS HEREOF, Party A and Party B have signed this Contract in Beijing.
Party A:
For and on behalf of
China Petroleum & Chemical Corporation
Party B:
Dated the 24th day of May 2006
Form of Employee Representative Supervisor Service Contract
between
China Petroleum & Chemical Corporation
and
the Following Supervisors:
Mr. Su Wensheng
Mr. Zhang Jitian
Mr. Cui Guoqi
Mr. Li Zhonghua
This Contract was made between the following two parties on 24th May, 2006:
(1) China Petroleum and Chemical Corporation, a company established according to the laws of The People's Republic of China ("PRC") with its legal address located at A6 Huixindong Street, Chaoyang District, Beijing, China, PRC ("Party A"); and
(2) [Name of Supervisor], a [Chinese citizen] of [ ], Postal Code [ ] ("Party B").
As Party B was elected as an employee supervisor of the supervisory committee of Party A at the annual Shareholders' general Meeting of year 2005 convened on 24th May, 2006, both parties have entered into the following agreement through friendly negotiations on the principle of equality and mutual benefits in order to confirm and regulate the relationship between Party A as the employer and Party B as the employee in respect of the service under employment.
Article 1 Engagement
1.1 Party A shall employ Party B as supervisor of Party A's supervisory committee in accordance with the terms of this Contract.
1.2 Party B agrees to be employed as supervisor of Party A's supervisory committee in accordance with the terms of this Contract.
Article 2 Term of Office
2.1 The term of office of Party B employed as Party A's supervisor shall be three (3) consecutive years commencing from 24th May, 2006 (the "Effective Date") until the termination of this Contract upon the occurrence of the events referred to in Article 7.1 or upon the giving of notice by Party A under Article 7.2 hereof.
Article 3 Duties
3.1 Party B undertakes to Party A that he shall perform his duties as a
supervisor in accordance with the Company Law of the PRC, Special Regulations
of the State Council regarding the Issue of Shares Overseas and the Listing of
Shares Overseas by Companies Limited by Shares and other relevant laws,
regulations, rules and standards of the PRC, Party A's articles of
association, this Contract, regulations and internal rules relating to the
supervisors formulated by Party A, resolutions of Party A's board of directors
and supervisory committee, and agrees that Party A shall be entitled to the
remedial measures stipulated in the articles of association in connection with
breach of any provision provided therein by Party B.. Party B undertakes to
each shareholder of Party A that he shall observe and perform its obligations
owed to the shareholders as stipulated in the articles of association of Party
A.
3.2 Party B undertakes to Party A and warrants to observe and comply with the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (including the Model Code for Securities Transactions by Directors of Listed Companies), Code on Takeovers and Mergers and Share Repurchases promulgated by the Hong Kong Securities and Futures Commission and the relevant restraints and obligations contained in the Securities (Disclosure of Interests) Ordinance (Chapter 36 of the Laws of Hong Kong) and Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and other laws or regulations and the relevant rules of the Shanghai Stock Exchange, London Stock Exchange and the New York Stock Exchange.
3.3 Party B confirms that he owes a fiduciary and diligence obligation to Party A and that he shall not engage in any activities in competition with Party A's business or carry out any activities detrimental to the interests of Party A.
3.4 Party B undertakes to Party A that during his term of employment as a member of the supervisory committee of Party A, his main duties shall be supervising the chairman, directors, managers and senior officers of Party A in order to prevent them from abusing powers or infringing the interests of Party A, its shareholders and employees.
3.5 During the period when Party B acting as supervisor of Party A, Party B shall be directly accountable to the supervisory committee and shall, at the request of the supervisory committee, provide the relevant information during the period of exercise of power to the supervisory committee, and shall ultimately obey the reasonable and lawful instructions of the supervisory committee.
3.6 During the period when Party B acting as supervisor of Party A, Party B shall ultimately and fully report to the supervisory committee the conditions of his engagement in the affairs of Party A in a timely manner, and shall make the relevant explanations according to the request of the supervisory committee.
Article 4 Remuneration and Expenses
4.1 From the Effective Date, the remuneration to be received by Party B for the performance of his services under this Contract as employee representative supervisor of Party A shall be determined in accordance with relevant PRC regulations and the Implementing Measures of Compensations for Senior Officers of China Petroleum & Chemical Corporation.
4.2 During the term of this Contract, Party A shall reimburse Party B, to the extent such reimbursement is permitted by the relevant laws and policies of the PRC, all reasonable and necessary expenses (including traveling and entertainment expenses, etc.) incurred by Party B in the provision of services to Party A hereunder or execution of work in relation to Party A's operation upon presentation by Party B of the relevant receipts and/or valid documentary evidence. Party A may also provide Party B beforehand with sums for Party B to pay various necessary expenses mentioned above, but Party B shall produce to Party A valid supporting evidence of the expenses as soon as possible, or regularly as required by Party A, after making use of such sums so as to offset the sums.
4.3 During the term of this Contract, Party B may participate in the Liability Insurance Scheme for Directors and Senior Officers arranged by Party A and the relevant insurance premiums shall be paid by Party A. Party A shall have the right to cancel or alter the relevant liability insurance scheme (including the insurance coverage and amount of compensation) or change the relevant insurance company.
Article 5 Non-Competition
5.1 Unless the relevant competition is made known to the public and (if required) approved by the relevant regulatory authorities, Party B warrants that during the term of his employment as Party A's supervisor and within six months after the termination of such employment with Party A, Party B shall not in any way engage in any business in competition with Party A, or seek any position from any company or individual who competes in business with Party A or subsidiaries and branch companies of Party A ("Party A's Group"), or accept any capacity or position offered by any company or individual who competes in business with any member of Party A's Group.
Article 6 Confidentiality Liability
6.1 Party B is aware that he will gain access to secret information possessed by members of Party A's Group and/or kept in custody by members of Party A's Group (hereinafter referred to as "Confidential Information") in the performance of his duties hereunder, including but not limited to, documents, materials, data, information, plans and insider information. Party B confirms that such Confidential Information is solely owned by members of Party A's Group and/or is kept in custody by members of Party A's Group.
6.2 Whether during the term of this Contract or within any time after the termination of Party B's employment as Party A's supervisor, Party B warrants that (except such Confidential Information may be disclosed to the public not in violation of the confidentiality undertaking under this Contract):
(a) Party B shall not divulge or disclose the Confidential Information to any third party in any way, with the exception of any Confidential Information which Party B must disclose to the relevant employees of members of Party A's Group and the professional personnel employed by members of Party A's Group for the performance of his obligations hereunder and any Confidential Information the disclosure of which is authorized by the board of directors or is ordered by a court of competent jurisdiction;
(b) Party B shall not make use of the Confidential Information in any way for his own benefit or for the benefit of his friends and relatives or any third party without Party A's permission; or
(c) Party B shall take all necessary measures to prevent the Confidential Information from spreading or disclosure to any third party without Party A's permission.
6.3 Upon the expiry of this Contract or earlier termination of Party B's employment, Party B shall immediately, completely and effectively return to Party A all the information relating to the business of members of Party A's Group (including, but not limited to, Party A's documents, personal notes, records, reports, handbooks, drawings, forms, computer diskettes and tapes) within Party B's possession or under his control whether or not the same was originally supplied to Party B by Party A.
6.4 Party B agrees that various intellectual rights formulated, developed, created and made by him during the term of his services hereunder shall exclusively belong to Party A, with the exception of various intellectual rights which are not formulated, developed, created and made by him during his working hours with the use of any assets or resources belonging to Party A.
Article 7 Termination of Employment
7.1 When any one of the following events occurs to Party B, the employment between Party A and Party B herein shall be immediately and automatically terminated: (unless otherwise decided by the board of directors)
(a) death of Party B;
(b) Party B is prohibited by any laws, regulations, rules, practice directions or practice rules from taking up the post of supervisor or Party B loses the qualifications to act as supervisor;
(c) if due to health reasons, Party B is unable to fully perform his duties hereunder for twelve months;
(d) Party B commits any serious breach and/or repeated and/or continual breach of any of Party B's obligations hereunder;
(e) Party B is guilty of any serious misconduct or serious neglect in the discharge of Party B's duties hereunder;
(f) Party B's actions or omissions bring the name or reputation of Party A or any member of Party A's Group into serious disrepute or prejudices the business interests of Party A or other members of Party A's Group;
(g) Party B is or has become of unsound mind or shall be or become a patient for the purpose of any laws relating to mental health;
(h) Party B is sued for criminal liability or convicted of any criminal offence other than an offence which in the reasonable opinion of the board of directors of Party A does not affect Party B's position as a supervisor of Party A (bearing in mind the nature of the duties in which Party B is engaged and the capacities in which Party B is engaged);
(i) Party B is removed from the office of supervisor of Party A or fails to be re-elected as a supervisor of Party A;
(j) Party B leaves the service according to the articles of association of Party A; or
(k) Party B fails to attend the supervisors' meeting of Party A in person consecutively for two times.
7.2 In addition to the aforesaid provisions of Article 7.1, Party A may also discharge the employment relationship between Party A and Party B by giving notice in writing to Party B when any one of the following events occurs:
(a) Party B is unable to substantially perform his duties hereunder due to health reasons, within any twelve-month period for a cumulative total of two hundred and sixty-five working days. Then, Party A may at any time discharge Party B from the post of supervisor by giving Party B a fourteen-day written notice of discharge.
(b) Party B is in breach of his obligations as a supervisor or the provisions of this Contract and does not repent after warning has been given by Party A.
(c) Damage or loss has been caused to Party A due to Party B's willful or material default in the performance of his duties hereunder.
Any delay by Party A in exercising such right of termination shall not constitute a waiver thereof.
7.3 If the employment relationship between both parties herein is terminated due to the occurrence of any of the events referred to in Article 7.1 or 7.2 above, such termination shall not affect Party A's rights herein against Party B and the provisions of Articles 5 and 6 hereof shall still be applicable.
7.4 In the event of the termination of the employment of Party B for whatever reason and whether by prior notice or in any other manner whatsoever, Party B agrees that he will not at any time after such termination represent himself as still having any connection with Party A.
7.5 Party B shall not, during the continuance of his employment or within a period of one year after the termination thereof, either on his own behalf or on behalf of any other person, entice away from any member of Party A's Group any employee, worker, manager or director of any member of Party A's Group, whether or not such person would commit any breach of his contract of employment with any member of Party A's Group by reason of his leaving service.
Article 8 Effectiveness of the Contract
This Contract shall become effective after approval at the shareholders' general meeting of Party A and signing by both parties.
Article 9 Additional Clauses
9.1 This Contract is an agreement relating to the provision of services by Party B personally. Therefore Party B's rights, interests, obligations, duties, etc. hereunder shall not be transferred, assigned or delegated to any third party (except the appointment in writing by Party B of any other supervisor of Party A as proxy to attend a supervisory committee meeting of Party A).
9.2 Without the written consent of both parties, neither party hereto shall make any addition to, deletion from or amendment to any provisions hereof.
9.3 The heading of each Article hereof is inserted for the purpose of convenience only and shall not prejudice the meaning or construction of the provisions hereof.
9.4 The word "laws" referred to herein include such legal documents as laws, regulations, rules, provisions, standard opinions, decisions, etc. formulated by the legislative and administrative authorities of the PRC and any amendments or alterations by such authorities to the legal documents promulgated or formulated by them.
9.5 The enactment, validity, construction and performance of this Contract and the settlement of disputes shall be protected and governed by the law of the PRC.
9.6 Any disputes arising from or in connection with this Contract shall be settled by both parties through friendly consultation. Either Party hereto may, if any dispute cannot be settled by both parties through consultation, submit the dispute for arbitration.
9.7 Both parties agree to the following terms:
(a) Any dispute or claim relating to the affairs of Party A and incurring
as a result of this Contract, the articles of association of Party A, the
Company Law and other rights and obligations stipulated by the relevant laws
and administrative regulations between (i) Party A and its supervisor; and
(ii) holders of overseas listed foreign shares and Party A's supervisors shall
be submitted to arbitration by the relevant party.
When the above dispute or claim is submitted to arbitration, all the claims or disputes shall be taken as a whole. Where any person having a cause of action due to the same reason or any person is required to participate in the settlement of such dispute or claim, if his capacity is Party A or a shareholder, director, supervisor, manager or other senior officer of Party A, he shall comply with the arbitration.
Disputes in relation to the classification of shareholders or register of shareholders shall not be settled by way of arbitration.
(b) Any party applying for arbitration may elect arbitration by the China International Economic and Trade Arbitration Commission or by the Hong Kong International Arbitration Centre according to their respective rules. After the party applying for arbitration has submitted the dispute or claim for arbitration, the other party must conduct arbitration at the arbitral organ elected by the applicant.
If the party applying for arbitration elects the arbitration to be conducted at the Hong Kong International Arbitration Centre, any party may request such arbitration to be conducted in Shenzhen according to the provisions of the securities arbitral rules of Hong Kong International Arbitration Centre.
(c) Settlement of disputes or claims referred to in (a) above by way of arbitration shall be governed by PRC law, except otherwise stipulated by laws and administrative regulations.
(d) The award of the arbitral organ shall be final and binding on both parties.
(e) Such arbitration agreement is concluded between Party A and Party B. Party A represents both itself and each shareholder.
(f) Any submitted arbitration shall be deemed to be an authorization to the arbitral court to conduct a public hearing and announce its award.
9.8 If any of the provisions hereof are judged or ruled by the judicial authorities of the PRC to be invalid or unenforceable, the judgment or ruling shall not prejudice the effectiveness of the other provisions hereof.
9.9 If either party hereto is in breach of its obligations hereunder, the other party shall be entitled to take remedial measures such as fixing a time limit for effecting remedy, performance of the contract, removal of obstructions, compensation for losses or other legal remedial measures. To the extent that the same is not against any legal proceedings, either party's non-exercise or partial exercise of its rights hereunder or non-adoption or partial adoption of legal remedies shall not operate as such party's waiver of the exercise of all its rights or the rights which have not been exercised or such party's waiver of the taking of all the legal remedies or the legal remedies which have not been taken.
If Party B is in breach of its obligations under this Contract, Party A shall have the right to take remedial measures according to the articles of association of Party A.
9.10 The written notices stated herein may be delivered by hand, served by special delivery or sent by mail. If Party B changes his address, he shall inform Party A within seven days after he obtains the new address. If Party B changes his address, he shall conduct the same by fax within seven days after he obtains the new address.
9.11 This Contract is executed in English and Chinese. If there is any discrepancy between the two versions, the Chinese version shall prevail.
9.12 This Contract shall have two copies. Party A and Party B shall each hold one copy which shall have the same effect.
IN WITNESS HEREOF, Party A and Party B have signed this Contract in Beijing.
Party A:
For and on behalf of
China Petroleum & Chemical Corporation
Party B:
Dated the 24th day of May 2006
Form of Independent Supervisor Service Contract
between
China Petroleum & Chemical Corporation
and
the Following Supervisors:
Mr. Zhang Youcai
Mr. Li Yonggui
This Contract was made between the following two parties on 24th May, 2006:
(1) China Petroleum and Chemical Corporation, a company established according to the laws of The People's Republic of China ("PRC") with its legal address located at A6 Huixindong Street, Chaoyang District, Beijing, China, PRC ("Party A"); and
(2) [Name of Supervisor], a [Chinese citizen] of [ ], Postal Code [ ] ("Party B").
As Party B was elected as an independent supervisor of the supervisory committee of Party A at the annual Shareholders' general Meeting of year 2005 convened on 24th May, 2006, both parties have entered into the following agreement through friendly negotiations on the principle of equality and mutual benefits in order to confirm and regulate the relationship between Party A as the appointer and Party B as the appointee in respect of the service under appointment.
Article 1 Appointment
1.1 Party A shall appoint Party B as supervisor of Party A's supervisory committee in accordance with the terms of this Contract.
1.2 Party B agrees to be appointed as supervisor of Party A's supervisory committee in accordance with the terms of this Contract.
Article 2 Term of Office
2.1 The term of office of Party B appointed as Party A's supervisor shall be three (3) consecutive years commencing from 24th May, 2006 (the "Effective Date") until the termination of this Contract upon the occurrence of the events referred to in Article 7.1 or upon the giving of notice by Party A under Article 7.2 hereof.
Article 3 Duties
3.1 Party B undertakes to Party A that he shall perform his duties as a
supervisor in accordance with the Company Law of the PRC, Special Regulations
of the State Council regarding the Issue of Shares Overseas and the Listing of
Shares Overseas by Companies Limited by Shares and other relevant laws,
regulations, rules and standards of the PRC, Party A's articles of
association, this Contract, regulations and internal rules relating to the
supervisors formulated by Party A, resolutions of Party A's board of directors
and supervisory committee, and agrees that Party A shall be entitled to the
remedial measures stipulated in the articles of association in connection with
breach of any provision provided therein by Party B.. Party B undertakes to
each shareholder of Party A that he shall observe and perform its obligations
owed to the shareholders as stipulated in the articles of association of Party
A.
3.2 Party B undertakes to Party A and warrants to observe and comply with the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (including the Model Code for Securities Transactions by Directors of Listed Companies), Code on Takeovers and Mergers and Share Repurchases promulgated by the Hong Kong Securities and Futures Commission and the relevant restraints and obligations contained in the Securities (Disclosure of Interests) Ordinance (Chapter 36 of the Laws of Hong Kong) and Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and other laws or regulations and the relevant rules of the Shanghai Stock Exchange, London Stock Exchange and the New York Stock Exchange.
3.3 Party B confirms that he owes a fiduciary and diligence obligation to Party A and that he shall not engage in any activities in competition with Party A's business or carry out any activities detrimental to the interests of Party A.
3.4 Party B undertakes to Party A that during his term of appointment as a member of the supervisory committee of Party A, his main duties shall be supervising the chairman, directors, managers and senior officers of Party A in order to prevent them from abusing powers or infringing the interests of Party A, its shareholders and employees.
3.5 During the period when Party B acting as supervisor of Party A, Party B shall be directly accountable to the supervisory committee and shall, at the request of the supervisory committee, provide the relevant information during the period of exercise of power to the supervisory committee, and shall ultimately obey the reasonable and lawful instructions of the supervisory committee.
3.6 During the period when Party B acting as supervisor of Party A, Party B shall ultimately and fully report to the supervisory committee the conditions of his engagement in the affairs of Party A in a timely manner, and shall make the relevant explanations according to the request of the supervisory committee.
Article 4 Remuneration and Expenses
4.1 From the Effective Date, the remuneration to be received by Party B for the performance of his services under this Contract as an independent supervisor of Party A shall be RMB 240,000 payable by Party A.
4.2 During the term of this Contract, Party A shall reimburse Party B, to the extent such reimbursement is permitted by the relevant laws and policies of the PRC, all reasonable and necessary expenses (including traveling and entertainment expenses, etc.) incurred by Party B in the provision of services to Party A hereunder or execution of work in relation to Party A's operation upon presentation by Party B of the relevant receipts and/or valid documentary evidence. Party A may also provide Party B beforehand with sums for Party B to pay various necessary expenses mentioned above, but Party B shall produce to Party A valid supporting evidence of the expenses as soon as possible, or regularly as required by Party A, after making use of such sums so as to offset the sums.
4.3 During the term of this Contract, Party B may participate in the Liability Insurance Scheme for Directors and Senior Officers arranged by Party A and the relevant insurance premiums shall be paid by Party A. Party A shall have the right to cancel or alter the relevant liability insurance scheme (including the insurance coverage and amount of compensation) or change the relevant insurance company.
Article 5 Non-Competition
5.1 Unless the relevant competition is made known to the public and (if required) approved by the relevant regulatory authorities, Party B warrants that during the term of his appointment as Party A's supervisor and within six months after the termination of such appointment with Party A, Party B shall not in any way engage in any business in competition with Party A, or seek any position from any company or individual who competes in business with Party A or subsidiaries and branch companies of Party A ("Party A's Group"), or accept any capacity or position offered by any company or individual who competes in business with any member of Party A's Group.
Article 6 Confidentiality Liability
6.1 Party B is aware that he will gain access to secret information possessed by members of Party A's Group and/or kept in custody by members of Party A's Group (hereinafter referred to as "Confidential Information") in the performance of his duties hereunder, including but not limited to, documents, materials, data, information, plans and insider information. Party B confirms that such Confidential Information is solely owned by members of Party A's Group and/or is kept in custody by members of Party A's Group.
6.2 Whether during the term of this Contract or within any time after the termination of Party B's appointment as Party A's supervisor, Party B warrants that (except such Confidential Information may be disclosed to the public not in violation of the confidentiality undertaking under this Contract):
(a) Party B shall not divulge or disclose the Confidential Information to any third party in any way, with the exception of any Confidential Information which Party B must disclose to the relevant employees of members of Party A's Group and the professional personnel employed by members of Party A's Group for the performance of his obligations hereunder and any Confidential Information the disclosure of which is authorized by the board of directors or is ordered by a court of competent jurisdiction;
(b) Party B shall not make use of the Confidential Information in any way for his own benefit or for the benefit of his friends and relatives or any third party without Party A's permission; or
(c) Party B shall take all necessary measures to prevent the Confidential Information from spreading or disclosure to any third party without Party A's permission.
6.3 Upon the expiry of this Contract or earlier termination of Party B's appointment, Party B shall immediately, completely and effectively return to Party A all the information relating to the business of members of Party A's Group (including, but not limited to, Party A's documents, personal notes, records, reports, handbooks, drawings, forms, computer diskettes and tapes) within Party B's possession or under his control whether or not the same was originally supplied to Party B by Party A.
6.4 Party B agrees that various intellectual rights formulated, developed, created and made by him during the term of his services hereunder shall exclusively belong to Party A, with the exception of various intellectual rights which are not formulated, developed, created and made by him during his working hours with the use of any assets or resources belonging to Party A.
Article 7 Termination of Appointment
7.1 When any one of the following events occurs to Party B, the appointment between Party A and Party B herein shall be immediately and automatically terminated: (unless otherwise decided by the board of directors)
(a) death of Party B;
(b) Party B is prohibited by any laws, regulations, rules, practice directions or practice rules from taking up the post of supervisor or Party B loses the qualifications to act as supervisor;
(c) if due to health reasons, Party B is unable to fully perform his duties hereunder for twelve months;
(d) Party B commits any serious breach and/or repeated and/or continual breach of any of Party B's obligations hereunder;
(e) Party B is guilty of any serious misconduct or serious neglect in the discharge of Party B's duties hereunder;
(f) Party B's actions or omissions bring the name or reputation of Party A or any member of Party A's Group into serious disrepute or prejudices the business interests of Party A or other members of Party A's Group;
(g) Party B is or has become of unsound mind or shall be or become a patient for the purpose of any laws relating to mental health;
(h) Party B is sued for criminal liability or convicted of any criminal offence other than an offence which in the reasonable opinion of the board of directors of Party A does not affect Party B's position as a supervisor of Party A (bearing in mind the nature of the duties in which Party B is engaged and the capacities in which Party B is engaged);
(i) Party B is removed from the office of supervisor of Party A or fails to be re-elected as a supervisor of Party A;
(j) Party B leaves the service according to the articles of association of Party A; or
(k) Party B fails to attend the supervisors' meeting of Party A in person consecutively for two times.
7.2 In addition to the aforesaid provisions of Article 7.1, Party A may also discharge the appointment relationship between Party A and Party B by giving notice in writing to Party B when any one of the following events occurs:
(a) Party B is unable to substantially perform his duties hereunder due to health reasons, within any twelve-month period for a cumulative total of two hundred and sixty-five working days. Then, Party A may at any time discharge Party B from the post of supervisor by giving Party B a fourteen-day written notice of discharge.
(b) Party B is in breach of his obligations as a supervisor or the provisions of this Contract and does not repent after warning has been given by Party A.
(c) Damage or loss has been caused to Party A due to Party B's willful or material default in the performance of his duties hereunder.
Any delay by Party A in exercising such right of termination shall not constitute a waiver thereof.
7.3 If the appointment relationship between both parties herein is terminated due to the occurrence of any of the events referred to in Article 7.1 or 7.2 above, such termination shall not affect Party A's rights herein against Party B and the provisions of Articles 5 and 6 hereof shall still be applicable.
7.4 In the event of the termination of the appointment of Party B for whatever reason and whether by prior notice or in any other manner whatsoever, Party B agrees that he will not at any time after such termination represent himself as still having any connection with Party A.
7.5 Party B shall not, during the continuance of his appointment or within a period of one year after the termination thereof, either on his own behalf or on behalf of any other person, entice away from any member of Party A's Group any employee, worker, manager or director of any member of Party A's Group, whether or not such person would commit any breach of his contract of appointment with any member of Party A's Group by reason of his leaving service.
Article 8 Effectiveness of the Contract
This Contract shall become effective after approval at the shareholders' general meeting of Party A and signing by both parties.
Article 9 Additional Clauses
9.1 This Contract is an agreement relating to the provision of services by Party B personally. Therefore Party B's rights, interests, obligations, duties, etc. hereunder shall not be transferred, assigned or delegated to any third party (except the appointment in writing by Party B of any other supervisor of Party A as proxy to attend a supervisory committee meeting of Party A).
9.2 Without the written consent of both parties, neither party hereto shall make any addition to, deletion from or amendment to any provisions hereof.
9.3 The heading of each Article hereof is inserted for the purpose of convenience only and shall not prejudice the meaning or construction of the provisions hereof.
9.4 The word "laws" referred to herein include such legal documents as laws, regulations, rules, provisions, standard opinions, decisions, etc. formulated by the legislative and administrative authorities of the PRC and any amendments or alterations by such authorities to the legal documents promulgated or formulated by them.
9.5 The enactment, validity, construction and performance of this Contract and the settlement of disputes shall be protected and governed by the law of the PRC.
9.6 Any disputes arising from or in connection with this Contract shall be settled by both parties through friendly consultation. Either Party hereto may, if any dispute cannot be settled by both parties through consultation, submit the dispute for arbitration.
9.7 Both parties agree to the following terms:
(a) Any dispute or claim relating to the affairs of Party A and incurring
as a result of this Contract, the articles of association of Party A, the
Company Law and other rights and obligations stipulated by the relevant laws
and administrative regulations between (i) Party A and its supervisor; and
(ii) holders of overseas listed foreign shares and Party A's supervisors shall
be submitted to arbitration by the relevant party.
When the above dispute or claim is submitted to arbitration, all the claims or disputes shall be taken as a whole. Where any person having a cause of action due to the same reason or any person is required to participate in the settlement of such dispute or claim, if his capacity is Party A or a shareholder, director, supervisor, manager or other senior officer of Party A, he shall comply with the arbitration.
Disputes in relation to the classification of shareholders or register of shareholders shall not be settled by way of arbitration.
(b) Any party applying for arbitration may elect arbitration by the China International Economic and Trade Arbitration Commission or by the Hong Kong International Arbitration Centre according to their respective rules. After the party applying for arbitration has submitted the dispute or claim for arbitration, the other party must conduct arbitration at the arbitral organ elected by the applicant.
If the party applying for arbitration elects the arbitration to be conducted at the Hong Kong International Arbitration Centre, any party may request such arbitration to be conducted in Shenzhen according to the provisions of the securities arbitral rules of Hong Kong International Arbitration Centre.
(c) Settlement of disputes or claims referred to in (a) above by way of arbitration shall be governed by PRC law, except otherwise stipulated by laws and administrative regulations.
(d) The award of the arbitral organ shall be final and binding on both parties.
(e) Such arbitration agreement is concluded between Party A and Party B. Party A represents both itself and each shareholder.
(f) Any submitted arbitration shall be deemed to be an authorization to the arbitral court to conduct a public hearing and announce its award.
9.8 If any of the provisions hereof are judged or ruled by the judicial authorities of the PRC to be invalid or unenforceable, the judgment or ruling shall not prejudice the effectiveness of the other provisions hereof.
9.9 If either party hereto is in breach of its obligations hereunder, the other party shall be entitled to take remedial measures such as fixing a time limit for effecting remedy, performance of the contract, removal of obstructions, compensation for losses or other legal remedial measures. To the extent that the same is not against any legal proceedings, either party's non-exercise or partial exercise of its rights hereunder or non-adoption or partial adoption of legal remedies shall not operate as such party's waiver of the exercise of all its rights or the rights which have not been exercised or such party's waiver of the taking of all the legal remedies or the legal remedies which have not been taken.
If Party B is in breach of its obligations under this Contract, Party A shall have the right to take remedial measures according to the articles of association of Party A.
9.10 The written notices stated herein may be delivered by hand, served by special delivery or sent by mail. If Party B changes his address, he shall inform Party A within seven days after he obtains the new address. If Party B changes his address, he shall conduct the same by fax within seven days after he obtains the new address.
9.11 This Contract is executed in English and Chinese. If there is any discrepancy between the two versions, the Chinese version shall prevail.
9.12 This Contract shall have two copies. Party A and Party B shall each hold one copy which shall have the same effect.
IN WITNESS HEREOF, Party A and Party B have signed this Contract in Beijing.
Party A:
For and on behalf of
China Petroleum & Chemical Corporation
Party B:
Exhibit 4.15
DATED 11 June 2001
BETWEEN
CHINA PETROLEUM CORPORATION
AND
CHINA PETROLEUM & CHEMICAL CORPORATION
AGREEMENT ON
ADJUSTMENTS TO
THIS AGREEMENT is made on the 11th day of June 2001 in Beijing:
BETWEEN
China Petrochemical Group (hereinafter referred to as "Party A"), a
state-owned enterprise established and legally subsisting under the
laws of the People's Republic of China (the "PRC"), fully
representing its related subsidiaries;
China Petroleum & Chemical Corporation (hereinafter referred to as "Party
B"), a corporation established and legally subsisting under the laws
of the PRC, fully representing its related subsidiaries.
|
Party A and Party B are collectively referred to herein as the "Parties" and individually as a "Party".
WHEREAS:
A. Party A is the controlling shareholder of Party B and the Parties had entered into a series of agreements on connected transactions on 3 June 2000.
B. Party B proposes to aquire Sinopec Star Petroleum Co., Ltd. (hereinafter referred to as "Star Company"), a subsidiary wholly-owned by Party A. Star Company will become one of the subsidiaries of Party B after the acquisition is completed.
C. Star Company will acquire certain necessary products and services from Party A and will lease from Party A the land use rights and properties after completion of the acquisition. Whereas Party A will acquire certain necessary products and services from Star Company and certain intellectural properties of Star Company. Both Parties shall thereby make certain adjustments to the existing connected transactions between the Parties.
The Parties hereby agree as follows on the aforementioned adjustments to existing connected transactions:
1. The period of the Mutual Supply Agreement relating to the Products, Production and Engineering Construction Services (including the public utilities project), the Culture and Hygiene and Community Services Agreement and the Product Sales Agency Agreement entered into by the Parties on 3 June 2000 shall all be extended and remain in effect until such agreements be individually or jointly terminated. Should the Parties agree to terminate or Party B unilaterally proposes to terminate the same for the purpose of complying with the provisions of the listing rules of the Hong Kong Stock Exchange or other stock exchange, the forementioned agreements will be jointly or severally be terminated.
2. The Additional New Connected Transactions between the Parties in relation to the provision of products, production and engineering construction services (including the public utilities project) resulted from the acquisition of Star Company by Party B shall be governed by the provisions contained in the Mutural Supply Agreement relating to the Products, Production and Engineering Construction (including the public utilities project) Services and its supplementary agreement (except the provision on effective date and the appendixes).
3. The Additional New Connected Transactions between the Parties in relation to the provision of culture, hygiene and community services resulted from the acquisition of Star Company by Party B shall be governed by
the provisions contained in the Culture and Hygiene and Community Services Agreement and its supplementary agreement (except the provision on effective date and the appendixes).
4. Party B shall lease from Party A the land use rights of certain parcel of
land with a total area of 4,633,731.019 square meters located in 13 provinces
and municipalities such as Sichuan Province. Party A has obtained the approval
from the Ministry of Land and Resources of PRC (Document Number: Guo Tu Zi Han
[2001] No. 262) for the land use rights in relation to such land by way of
authorized operations and may lease the same in compliance with the relevant
laws. The issues relating to such lease shall be governed by the provisions
under the Land Use Rights Leasing Agreement (other than the provisions
regarding the basic conditions of the land use rights, the effective date, the
lease period and the appendixes) entered into by the Parties on 3 June 2000.
The lease period shall commence from the effective date of this Agreement
until the expiry date of the relevant land use rights certificate. Please
refer to Appendix I for the detailed rental and the period of the authorized
operations.
5. Party B shall increase the lease of buildings with a total area of 213,464 square meters as set out in Appendix II. The issues in relation to such lease shall be governed by the provisions under the Properties Leasing Agreement (other than the provision on effective date and the appendixes) . The lease period shall commence from the effective date of this Agreement. Please refer to Appendix II for the specific rental of each individual building.
6. In view that the values of the intellectural properties such as the patents, know-how and computer softwares were not incorporated into the consideration for the aquisation of Start Company by Party B, Party B agrees to grant a license to Party A free of charge to make use of such intellectural properties as set out in Appendix III.
7. The various connected transactions as stated in this Agreement shall be governed by the agreements mentioned in Clauses 2 to 5 above from the effective date of the aforementioned acquisition.
8. The subsidiaries of Party A and Party B as stated in this Agreement shall include their subsidiaries, branches and other units and any companies or other entities which hold 30% or above interests or voting rights or have control over the board of directors or are under the direct or indirect control of the aforementioned entities.
9. This Agreement will come into effect upon its execution by the representatives of the Parties and the obtaining of the approval from the independent shareholders at the general meeting of Party B and shall remain in effect since then.
IN WITNESS WHEREOF, this Agreement has been duly executed by the representatives properly appointed the Parties on the day and year first written above.
For and on behalf of :
China Petrochemical Corporation
By: /s/ Li Yizhong -------------------------------------------------- |
For and on behalf of:
China Petroleum & Chemical Corporation
By: /s/ Wang Jiming -------------------------------------------------- |
Exhibit 4.16
DATED 22 August 2003
BETWEEN
CHINA PETROLEUM CORPORATION
AND
CHINA PETROLEUM & CHEMICAL CORPORATION
THIS AGREEMENT is made on this 22nd day of August 2003 in Beijing:
BETWEEN
China Petrochemical Group (hereinafter referred to as "Party A"), a
state-owned enterprise established and legally subsisting under the
laws of the People's Republic of China (the "PRC"), fully
representing its related subsidiaries and associates (the "Lessor");
and
China Petroleum & Chemical Corporation (hereinafter referred to as "Party
B"), a corporation established and legally subsisting under the laws
of the PRC, fully representing its related subsidiaries and
associates (the "Lessee").
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According to the relevant state laws and regualtions of the PRC and the apprvoal from the Ministry of Land and Resource (Guo tu Zi Han [2003] No. 65), Party A hereby agrees to lease the state-owned land use right to Party B. The Parties hereby enter into this Agreement to clarify the rights and duties of each party.
1. BASIC INFORMATION OF THE LAND USE RIGHT
1.1 Party A hereby agrees to lease the land located in 21 provinces, cities
and autonomous regions including but not limited to Tianjin and Hebei
Provinces to Party B with the total area of 51,711,335.46 sqare meters
(the "Leased Land")
1.2 Party A has obtained the legitimate land use right and leasing right of 50,307,802.96 square meters out of the Leased Land through the authorized operation. Party A has obtained a document (Guo Tu Zi Han No. [2003] 65) issued by the Ministry of Land and Resources (including detailed description of Leased land), attached as Appendix I, which forms a part of this Agreement.
1.3 Party A has obtained legitimate land use right and leasing right of 1,403,552.5 square meters out of the Leased Land as defined in Clause 1.1 above through an assignment. For a detailed description of such land, please refer to the document attached to as Appendix II ([2003] Zhong Di Han Zi No. 003) issued by Beijing Zhongdi Real Estate Appraisal Co., Ltd.
2. TERM OF THE LEASE
2.1 This Agreement shall commence on 1 January 2003 (hereinafter referred to as "Commencement Date"). For land obtained through authorized operation, the lease term of land for industrial use and land for commercial use are fifty (50) years and forty (40) years, respectively; for land use right as defined in Clause 1.3, the term shall be determined by the term of assignment.
2.2 In the event that Party B requests to extend the lease term of Leased land, Party B shall notify Party B in writing no later than 12 months before the expiration of above lease term.
2.3 After receiving such lease extension notice from Party B before the expiration of lease term, Party A shall make best effort to obtain all of the governmental approvals and procedures in relation to the renewal of such land use right and shall enter into new leasing agreement with Party B. The renewal rental standard shall be based on relevant state standard or in the absence of such standard, on the prevailing market price.
2.4 Upon the mutual agreement by both Parties, Party B may terminate to lease any or all of the Leased land under this Agreement at any time before the expiration of lease term in Clause 1 above. Party B shall notify Party A in writing no later than 6 months before such termination date
3. USE OF THE LEASED LAND
3.1 Party B shall utilize land within the usage scope set out in Land Authorized Management Letter/Land Use Right Certificate entered into between Party A and the land administrative authorities.
3.2 During the term, in the event that Party B proposes to change the usage of any or all Leased land, Party B shall notify Party A in writing. Party A shall make a decision on whether to agree on such change within 30 days of receipt of Party B's written notice. If Party A agrees, Party A shall obtain relevant approval procedures with the relevant government authorities. Party B shall not use this Leased land with changed purpose until the obtaining of such approval.
4. RENT AND ADJUSTMENT OF RENT AND PAYMENT METHODS
4.1 Party B shall pursuant to this Agreement pay to Party A an annual rent amounting to RMB 273,471,700. The rent shall be collected by China Petrochemical Corporation on behalf of Party A. The Leased land shall be categorized into several parcels, each parcel shall have a corresponding rent as indicated in Appendix 3. Such rent shall be based on the valuation of the land use right of the Leased land and shall be referred to the standard rates under the Land Use Right Leasing Agreement entered into by the Parties in 2000. The rent of Leased land from 2004 to 2006 shall be adjusted according to the rent under the Land Use Right Leasing Contract (if any). The rental of the Leased land may be negotiated for adjustment every three years pursuant to the Land Use Right Leasing Agreement thereafter. The adjusted rent shall be confirmed by independent valuer as whether the price is the market price or below the market price.
4.2 The Parties agree that in the event of termination of use of part of the Leased land pursuant to this Agreement, the aggregated rent payable by Party B to Party A shall decrease accordingly with reference to the market price.
4.3 Rental under this Agreement shall be paid by Party B to Party A within ten (10) days after the end of each quarter and rent paid each time shall be 25% of the total amount of annual rent. Notwithstanding previous provisions, the first instalment of the rent shall be paid to Party A on first payment date after this Agreement becoming effective on basis of the following calculation: annual rent/360 x actual number of days from the Commencement Date to the first payment date
5. RIGHTS AND DUTIES OF THE PARTIES
5.1 The rights and duties of Party A shall include:
5.1.1 Collecting rent from Party B pursuant to this Agreement;
5.1.2 Supervising Party B in relation to the use of the land pursuant to this Agreement. In the event that Party B changes the use of land without the prior consent of Party A, Party A shall be entitled to withdraw the land use right of the relevant land;
5.1.3 In the event that this Agreement is not renewed, Party A shall be entitled to withdraw its land use rights;
5.1.4 Party A shall obtain and provide all relevant land use rights of the Leased land to Party B in a timely manner pursuant to this Agreement;
5.1.5 Party A shall support Party B, after obtaining all necessary approvals, in constructing, expanding or rebuilding permanent or temporary buildings or structures on the Leased land;
5.1.6 During the lease term, the enforcement of rights on neighbouring land of the Leased land by Party A shall not disturb Party B in performing reasonable rights on the Leased land;
5.1.7 In the event that Party B allows utilities service provided by the government to be built across the Leased Land (on planting area or other areas), Party A shall not be required to make any compensation;
5.1.8 Party A undertakes not to infringe Party B's ownership right on any buildling or fixture, including the rights and interests of occupancy, use, disposition and collection of profits; and
5.1.9 The payment of land tax, fee and other legal fees in connection with the Leased land.
5.2 The rights and duties of Party B shall include:
5.2.1 Party B shall use the Leased Land pursuant to the law and this Agreement;
5.2.2 Party B shall pay rent to Party A in a timely manner pursuant to this Agreement;
5.2.3 In the event that this Agreement is not renewed upon expiration or Party A withdraws the relevant land use right in accordance with this Agreement, Party B shall return all the land use right in connection with part or all of the Leased land which are not renewed or withdrawn by Party A in a timely manner;
5.2.4 Party B shall ensure that government administrations, public security, fire and rescue services and their emergency equipments and vehicles could enter and exit the Leased land when conducting urgent aiding or public duty;
5.2.5 Party B shall protect city planning facilities in the Leased land during the lease term and shall not damage such facilities. Party B shall bear all repair expenses in case of such damage; and
5.2.6 Except for the expenses paid by Party A in accordance with Clause 5.1.9 above, Party B shall bear all relevant fees in connection with using such lands after the leasing of such land.
6. EFFECTIVENESS, ALTERATION AND TERMINATION
6.1 This Agreement shall take effect upon satisfaction of the following conditions:
6.1.1 This Agreement is executed and sealed by China Petrochemical Corporation and Party B and their respective authorized representatives; and
6.1.2 The board of direcotrs of Party B approves this Agreement and the leasing of the land use right under this Agreement.
6.2 Any amendement to this Agreement shall be mutually agreed by both Parties and shall be made in writing before taking effect.
6.3 This Agreement shall be terminated in the following ways:
6.3.1 The lease term expires; or
6.3.2 The Parties agree to terminate this Agreement during the term of this Agreement; or
6.3.3 This Agreement is terminated pursuant to laws and regulations, judgment, ruling or decision on termination of this Agreement by a competent court or an arbitration institution.
7. REPRESENTATIONS AND WARRANTIES OF THE PARTIES
7.1 Party A represents and warrants to Party B that:
7.1.1 Party A is a corporation duly incorporated, has independent legal entity status and holds an effective business license;
7.1.2 Party A has been engaging in business activities in accordance with the laws and regulations and has never been involved in any activity beyond business scope under law;
7.1.3 Party A has obtained all necessary govenmental approvals (if required) and the required internal authorizations for the execution of this Agreement. The person executing this Agreement is the authorized representative of Party A. This Agreement will be binding on Party A upon its execution;
7.1.4 The execution of this Agreement by Party A or the performance of the obligations under this Agreement by Party A are not in breach of any other agreements it entered into or its Articles of Association;
7.1.5 Party A shall assume any compensation, liability or expense incurred in any ongoing and potential litigation, dispute, claim or government penalty arising from any Leased Land prior to the execution of this Agreement; and
7.1.6 Party A has legitimate land use right and leasing right of the Leased Land.
7.2 Party B represents and warrants to Party A that:
7.2.1 Party B is a corporation duly incorporated, has independent legal entity status and holds an effective business license;
7.2.2 Party B has been engaging in business activities in accordance with the laws and regulations and has never been involved in any activity beyond business scope under law;
7.2.3 Party B has obtained all necessary govenmental approvals (if required) and the required internal authorizations for the execution of this Agreement. The person executing this Agreement is the authorized representative of Party B. This Agreement will be binding on Party B upon its execution; and
7.1.4 The execution of this Agreement by Party B or the performance of the obligations under this Agreement by Party B are not in breach of any other agreements it entered into or its Articles of Association.
8. IMPLEMENTATION OF THE AGREEMENT
8.1 In the event that any transaction under this Agreement constitutes a connected transaction as stipulated in Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the "Listing Rules" ) and in accordance with the Listing Rules, such transaction shall be subject to a waiver granted by The Stock Exchange of Hong Kong Limited (the "Hong Kong Stock Exchange"), approval from the independent shareholders or any other provision regarding connected transactions under Listing Rules, this Agreement and the execution of such transaction shall be conditional upon the approval by the Hong Kong Stock Exchange and observance of any other provision regarding connected transactions under Listing Rules.
8.2 If the waiver granted by the Hong Kong Stock Exchange is conditional, this Agreement shall be implemented in accordance with such condition(s).
8.3 If the waiver granted by the Hong Kong Stock Exchange in relation to any connected transaction is withdrawn, void, invalid, or the waiver application is rejected, and such transaction fails to meet provisions regarding connected transactions under the Listing Rules, implementation in relation to such transaction of this Agreement shall be ceased.
8.4 In the event that this Agreement and the implementation of all matters thereunder are ceased pursuant to Clause 8.3, this Agreement shall be terminated
9. FORCE MAJEURE
9.1 In the event that any Party is prevented from performing any or all of the duties under this Agreement due to force majeure, the performance of such duty during the period Force Majeure affecting such performance shall be ceased. "Force Majeure" shall mean all and any events occurring after the execution of this Agreement, which are unforeseen, or, even if foreseeable, but reasonably unavoidable, and which are beyond the reasonable control of the Parties and prevent performance of this Agreement or makes such performance unpractical (including prevents performance after spending reasonable fees), and shall include, but not be limited to events such as flood, fire, drought, typhoon, earthquake and other nature disasters, traffic accident, strike, agitation, rebellion and war (regardless of whether declared or not), action or inaction of government authorities.
9.2 Should either Party claim to be affected by a Force Majeure event, the affected Party shall notify the other Party in writing regarding the occurrence of such Force Majeure event as soon as practical and shall, within fifteen (15) days from such event, provide the other Party with suitable evidence on the Force Majeure event and its duration by delivery in person or by registered air mail. The Party who claims that the performance of this Agreement becomes impossible or unpractical due to the Force Majeure event shall take all reasonable efforts in eliminating or mitigating the effect by such event of Force Majeure.
9.3 In the case of a Force Majeure event, the Parties shall determine how to implement this Agreement through negotiation in good faith. After the event of Force Majeure or its effect is terminated or eliminated, the Parties shall immediately resume the performance of its duties under this Agreement.
10. MISCELLANEOUS
10.1 Unless otherwise agreed in this Agreement, any Party shall not assign any or all of its rights and duties under this Agreement without the prior written consent of the other Party.
10.2 This Agreement and its appendices reflect the entire agreement of the Parties, and supersede all previous written or oral agreements, negotiations, understandings and commitments with respect to its subject matter.
10.3 If any term or provision of this Agreement shall be illegal, invalid or unenforceable, then notwithstanding such illegality, invalidity or unenforceability, the Parties intend that the remaining provisions shall be given full force and effect and enforceability.
10.4 The amendment to this Agreement or its appendices shall be made by way of written agreement which shall be signed by authorized representatives of the Parties and approved by necessary legal persons of the Parties.
10.5 Unless otherwise prescribed, any Party's failure of performance or postponement of performance any right, power or privilege under this Agreement shall not be considered as abandonment of such right, power or privilege. The single or partial performance of such right, power or privilege shall not exclude the performance of other rights, power, or privileges.
10.6 The appendices to this Agreement shall form part of this Agreement and shall have the same binding effect with this Agreement as having been incorporated in this Agreement.
11. NOTICE
Any notice or other communications sent by any Party in accordance with this Agreement shall be made in writing and in Chinese, and shall be delivered to the designated address of the other Party by hand or registered air mail, or be facsimiled to the designated fax number of the other Party. The effective date of the notice shall be determined by:
11.1 In case where notice is delivered by hand, such notice shall become effective commencing from the date of signature of receiving by the designated person of the other Party.
11.2 In case where notice is sent by registered mail, such notice shall become effective commencing from the 7th date (if the last date is Sunday or legal public holiday, be postponed to the next working day) of sending for mailing (the date of postmark).
11.3 In case where notice is sent by facsimile, such notice shall become effective commencing from the completion of facsimile, nonetheless the sender shall provide with the report printed by the facsimile machine proving that such document has been sent to the other Party in its entirety.
The communication addresses of the Parties are as follows:
China Petrochemical Corporation
Address: Jia No. 6, East Huixin Avenue, Chaoyang District, Beijing, PRC
Postal Code: 100029
China Petroleum & Chemical Corporation
Address: Jia No. 6, East Huixin Avenue, Chaoyang District, Beijing, PRC
Postal Code: 100029
If any Party changes its communication address, such Party shall notify the other Party in writing as soon as practical in accordance with this Clause.
12. APPLICABLE LAW AND DISPUTE RESOLUTION
12.1 This Agreement shall be governed by and construed in accordance with the laws of the PRC.
12.2 Any disputes arising from or in connection with this Agreement shall be resolved through amicable negotiations of the Parties. Failing such negotiation, either party to this Agreement shall have the right to submit any dispute to the Beijing Arbitration Commission ("BAC") for arbitration according to the arbitration rules of the BAC then in effect when the application is submmitted. The arbitration award will be final and binding upon both Parties.
13. SUPPLMENTARY PROVISIONS
13.1 This Agreement shall be made in Chinese.
13.2 This Agrement shall be executed in eight (8) counterparts. Each counterpart shall have the same effect.
IN WITNESS WHEREOF, this Agreement has been duly executed by the properly appointed representative of the Parties on the day and year first written above.
For and on behalf of :
China Petrochemical Corporation and its subsidiaries
Authroized Representative:
For and on behalf of: /s/ Chen Tonghai China Petroleum & Chemical Corporation and its subsidiaries Authroized Representative: /s/ Wang Jiming |
APPENDIX 1
GUO TU ZI HAN [2003] NO. 65 DOCUMENT
APPENDIX 2
[2003] ZHONG HAN ZI NO. 003 DOCUMENT
ISSUED BY BEIJING ZHONGDI REAL ESTATE APPRAISAL CO., LTD.
APPENDIX 3
LAND RENTAL ALLOCATION SHEET OF THE GROUP
Exhibit 4.17
DATED 31 October 2004
BETWEEN
CHINA PETROLEUM CORPORATION
AND
CHINA PETROLEUM & CHEMICAL CORPORATION
ADJUSTMENTS TO
THIS AGREEMENT is made on the 31st day of October 2004 in Beijing:
BETWEEN
China Petrochemical Group (hereinafter referred to as "Party A"), a
state-owned enterprise established and legally subsisting under the
laws of the People's Republic of China (the "PRC"), fully
representing its related subsidiaries ;
China Petroleum & Chemical Corporation (hereinafter referred to as "Party
B"), a corporation established and legally subsisting under the laws
of the PRC, fully representing its related subsidiaries.
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Party A and Party B are collectively referred to herein as the "Parties" and individually as a "Party".
WHEREAS:
D. Party B is a listed company listed on stock exchanges of Shanghai, Hong Kong, New York and London; Party A is the controlling shareholder of Party B. The Parties had entered into a series of agreements on connected transactions on 3 June 2000 and subsequently entered into a series of adjustment or supplemental agreements (collectively referred to as the "Existing Connected Transaction Agreements"). Provisions in relation to the conditions of the connected transactions for the mutual supply of products, production and engineering construction (including the public utilities projects) services, lease of the land use rights and lease of properties, etc. made between the Parties (including the respective subsidiaries of the Parties) are set out in the Agreements on Connected Transactions.
E. Party B proposes to enter into an asset aquisition agreement with Party A for the aquisition of the core assets and businesses of ethylene, synthetic fibre monomer and polymer owned by China Petrochemical Corporation Tianjin Company, the assets and businesses of synthetic fibre monomer and polymer owned by SINOPEC Luoyang Petrochemical Engineering Corporation (including a 55% equity interests of Luoyang Petrochemical Polypropylene Co., Ltd.), the entire asset and businesses of the Power Assets Business Department of SINOPEC Guangzhou Petrochemical Engineering Corporation, the oil refining plants of SINOPEC Maoming Refining & Chemical Co., Ltd. and a 93.51% equity interests of SINOPEC Zhongyuan Company which are owned by Party A.
F. Party B proposes to enter into an asset aquisition agreement with Party A for the aquisition of the following equity interests and assets directly or indirectly owned by Party A: 81% equity interests of Hunan Jianchang Petrochemical Co., Ltd., 50% equity interests of Beijing Aoda Petrochemical Technology Development Center, 60% equity interests of Shanghia Leader Catalyst Co., Ltd. and the major assets of SINOPEC Changling Company Catalyst Plant, SINOPEC Qilu Petrochemical Co. Catalyst Plant, Ltd. Petrochemical Co., Ltd., SINOPEC Technology Development Company, Head Office of China Petrochemical Corporation Shanghai Petrochemical Research Institute, the experimentation factory of SINOPEC Shanghai Research Institute of Petrochemical Technology and SINOPEC Nanjing Catalyst Co., Ltd.
G. Party B proposes to enter into an asset aquisition agreement with Party A for the aquisition of the 1,023 gas stations and 54 oil depots of Party A and its subsidiaries.
H. Party B proposes to enter into an asset sales agreement with Party A for the sale of the downhole operation assets and businesses owned by eight oilfield subsidiaries or branch companies of Party B and its subsidiaries to Party A, namely SINOPEC Shengli Oilfield Co., Ltd., SINOPEC Central China Company, SINOPEC Henan Oilfield Company, SINOPEC Jianghan Oilfield
Company, SINOPEC Jiangsu Oilfield Company, SINOPEC North China Company, SINOPEC East China Company and SINOPEC Southwest China Company.
I. The aforementioned assets aquisition and sale agreements are collectively referred to as the "Sale and Acquisition Agreements".
J. Upon the completion of the sale and acquisition transaction mentioned above, new connected transactions (the "Additional New Connected Transactions") in relation to the lease of the land use rights and the properties will arise between Party A and Party B (including the respective subsidiaries of the Parties), the Parties will make certain adjustments to the existing connected transactions between them.
The Parties hereby agree on the following adjustments to connected transactions:
1. Party A agrees to increase the land leased to Party B by a total of 8,888,498.51 square meters according to the Land Use Rights Leasing Agreement after the completion of the sale and acquisition transaction; Party B agrees to increase the rental payable to Party A by RMB 110,356,761.10 per year. Party A agrees to increase the area of the properties leased to Party B by a total of 15,114 square meters pursuant to the Properties Leasing Agreement after the completion of the sale and acquisition transaction whereas Party B agrees to increase the rental payble to Party A by RMB 1,350,000.00 per year. The Parties agree that apart from the provision on effective date and the appendixes, the remaining clauses of the Land Use Rights Leasing Agreement, the Properties Leasing Agreement and their adjustment and supplemental agreements will be applicable to matters in relation to the lease of land and properties mentioned above. The lease of the land use rights and properties aforementioned will commence on the effective date of this Agreement.
2. The consideration for the lease of land use rights and properties is determined based on the leased area according to the normal commercial practice and through fair and reasonable negotiations of the Parties and based on the prices not exceeding the market price. With reference to the existing rentals for lease of land use rights and properties under the Existing Connected Transactions Agreements, the locations, areas and the usage of the related land and buildings, the consideration determined is reasonable, justified without prejudice to the interests of Party B and the minority shareholders.
3. The Parties agree that the agreements entered into between the Parties (including the respective subsidiaries of the Parties) or the provisions contained therein which are applicable to the Additional New Connected Transactions under this Agreement will be automatically terminated following this Agreement coming into effect.
4. The Parties agree that upon completion of the sale and acquisition transaction, all the continuing connected transactions will be operated in line with the market practice so that win-win and market-oriented pricing principles as well as principles of fairness, reasonableness and justice will be upheld and the interests of the minority shareholders will not be prejudiced.
5. The subsidiaries of Party A and Party B as stated in this Agreement include all the respective subsidiaries, branches and other units as well as any companies or entities which hold 30% or above interests or voting rights or have control over the board of directors or are under direct or indirect control of the aforementioned entities.
6. This Agreement will come into effect upon its execution by the representatives of the Parties and completion of the related sales and acquisations.
IN WITNESS WHEREOF, this Agreement has been duly executed by the properly appointed representatives of the Parties on the day and year first written above.
For and on behalf of :
China Petrochemical Corporation (Sealed)
By: /s/ Chen Tonghai
--------------------------------------------------
Name: Chen Tonghai
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Legal Representative or Authorized Representative:___
For and on behalf of:
China Petroleum & Chemical Corporation (Sealed)
By: /s/ Wang Jiming
--------------------------------------------------
Name: /s/ Wang Jiming
------------------------------------------------
Legal Representative or Authorized Representative:___
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Exhibit 4.18
MEMORANDUM ON ADJUSTMENT OF RENT OF LAND USE RIGHTS
According to the Land Use Right Leasing Agreement entered into between China Petrochemical Corporation (the "Sinopec Group Company") and China Petroleum Corporation ("Sinopec Corp.") in 2000 and the Agreement on Adjustments to Connected Transactions in 2001 and the Rental Adjustment Memorandum signed in 2003, the above two agreements aggregate a lease land area of 366,524,536.24 square meters with an annual rent of RMB2,145,974,415.35. Due to the needs of Sinopec Corp. in developing and continuing its business and operation, together with the acquisition of Maoming Ethylene, Maoming Refinery, and other petrochemical projects, Sinopec Corp. increases the land leased from Sinopec Group Company by 15,528,469.8 square meters and raised the annual rent by RMB177,350,304.44. At the same time, due to a change in business structure, Sinopec Corp. terminates the land lease from Sinopec Group Company of 7,319,669.27 square meters with the respective annual rent of RMB31,370,176.7. After the adjustment, the abovementioned agreement shall have an actual leasing area of 374,733,336.77 square meters with an annual rent amounting to a 20% increase of the base rent of RMB2,291,954,543.09, amounting to RMB2,750,345,451.71.
The above adjustment has been approved by the directors at the 25th meeting of the 2nd Board of Director of Sinopec Corp.
According to the relevant clauses in the Land Use Right Leasing Agreement dated August 2003 in relation to the increased land and the Rental Adjustment Memorandum dated 28 October 2003 signed by Sinopec Corp. and Sinopec Group Company, the annual rental of the land area of 51,711,355.46 square meters under this Agreement shall be increased by 20%, from the initial amount of RMB300,818,873.55 to RMB360,982,648.26.
After the adjustment of the abovementioned agreement, the aggregate leasing area is 426,444,692.23 square meters and the total annual rent amounts to RMB3,111,328,099.97.
In addition, considering further restructuring of Sinopec Corp.'s subsidiaries, the anticipated increase of land leased from Sinopec Group Company amounts to 10,488.259 square meters with an increase of land rental of RMB123,083,122.45.
China Petrochemical Corporation
/s/ Chen Tonghai ---------------------------- Authorized Representative 31 March 2006 |
China Petroleum & Chemical Corporation
/s/ Wang Tianpu ---------------------------- Authorized Representative 31 March 2006 |
Exhibit 4.19
DATED 31 March 2006
BETWEEN
CHINA PETROLEUM CORPORATION
AND
CHINA PETROLEUM & CHEMICAL CORPORATION
ON
SUPPLEMENTARY AGREEMENT ON
CONNECTED TRANSACTIONS
THIS AGREEMENT is made the 31th day of March 2006 in Beijing:
BETWEEN
China Petrochemical Group (hereinafter referred to as "Party A"), a state-owned enterprise established and legally subsisting under the laws of the People's Republic of China (the "PRC"), fully representing its related subsidiaries and associates; and
China Petroleum & Chemical Corporation (hereinafter referred to as "Party B"), a corporation established and legally subsisting under the laws of the PRC, fully representing its related subsidiaries and associates.
Party A and Party B are collectively referred to herein as the "Parties" and individually as a "Party".
WHEREAS:
K. Party A is the controlling shareholder of Party B and the parties had entered into the Mutural Supply Agreement, the Land Use Rights Leasing Agreement, the Community Services Agreement, the Properties Leasing Agreement, the Intellectural Property License Agreement and the Products Sales Agency Agreement on 3 June 2000.
L. When Party B acquired the assets of Sinopec Star Petroleum Co., Ltd. and the assets in relation to chemical, katalyst and gas stations respectively in 2001 and 2004, the parties had entered into several agreements for making adjustments to the aforementioned agreements
M. On 22 August 2003, the Parties had entered into the Land Use Rights Leasing (Additional) Agreement on the lease of land with an area of approximately 50 million square meters, in which the annual rental was set at RMB 273,471,703. The Parties subsequently raised the rental to RMB 300,818,873 in the memorandom signed into on 28 October of the same year.
N. The Hong Kong Stock Exchange had made certain amendments to the Listing Rules in 2004. In view of such amendements, the Parties propose to make supplements to the aforementioned agreements pursuant to the provisions contained in this Agreement.
The Parties hereby agree as follows on the aforementioned agreements:
1. DEFINITIONS
Unless otherwise interpreted in the context, for the purposes of this Agreement (including the Recitals), the following words have the meanings as follows:
"Listing Rules" means the Rules Governing the Listing of Securities on the Stock Exchange;
"Stock Exchange" means The Stock Exchange of Hong Kong Limited;
"Intellectural Property License Agreement" means the Trademark Use License Agreement, Computer Software Use License Agreement and Patents Know-how License Agreement dated 3 June 2000 (as amended subsequently by the Parties);
"Land Use Rights Leasing Agreement" means the Land Use Rights Leasing Agreement dated 3 June 2000 (as amended subsequently by the Parties);
"Land Use Rights Leasing (Additional) Agreement" means the Land Use Rights Leasing Agreement entered into by the Parties on 22 August 2003;
"Mutual Supply Agreement" means the Mutural Supply Agreement dated 3 June 2000 (as amended subsequently by the Parties) for the services in relation to the products, production and engineering construction;
"Products Sales Agency Agreement" means the Products Sales Agency Agreement dated 3 June 2000 (as amended subsequently by the Parties);
"Community Services Agreement" means the Culture and Hygiene and Community Services Agreement dated 3 June 2000 (as amended subsequently by the Parties);
"Properties Leasing Agreement" means the Properties Leasing Agreement dated 3 June 2000 (as amended subsequently by the Parties).
2. CONDITIONS AND THE EFFECTIVE DATE
2.1 Subject to Clause 2.2, this Agreement will come into effect after it has been duly signed and sealed by the reperesentatives of the Parties.
2.2 Clause 4 (Supplementation to the Community Services Agreement) and Clause
5 (Supplementation to the Mutural Supply Agreement) of this Agreement
shall come into effect subject to the approvals from the independent
shareholders of Party B for the transactions under the Community Services
Agreement and the Mutural Supply Agreement pursuant to the Listing Rules.
In addition, if the conditions in relation to the obtaining of the
shareholders' approval are not satisfied on or before 31 December 2006,
Clause 4 and Clause 5 shall lapse automatically as at such date and as a
result, the obligations of the Parties under Clause 4 and Clause 5 will
be termindated without prejudice to the liabilities arising from breach
of the Agreement of either party prior to such termination.
3. PRODUCTS SALES AGENCY AGREEMENT
The Parties agree to forthwith terminate the Products Sales Agency Agreement. Other than any prior breaches, the Parties agree that the Parties shall cease to be liable to the other party under the Products Sales Agency Agreement.
4. SUPPLEMANTATION TO COMMUNITY SERVICES AGREEMENT
The Parties agree that as of 1 January 2007, the effective date under Clause 6.4 of the Community Services Agreement shall be extended to 31 December 2009.
5. SUPPLEMANTATION TO MUTURAL SUPPLY AGREEMENT
5.1 The Parties agree that the following wordings shall be added to Clause 1.2.1 of the Mutural Supply Agreement under which Party A provides products and services to Party B: "purchase crude oil and natrual gas through Party A, including purchase crude oil and natrual gas from overseas".
5.2 The Parties agree that as of 1 January 2007, the effective date under Clause 6.4 of the Mutural Supply Agreement shall be extended to 31 December 2009.
6. SUPPLEMANTATION TO LAND USE RIGHTS LEASING AGREEMENT
The Parties agree that the parcel of land with an area of approximately 51,711,355.46 square meters, which was leased to Party A by Party B under the Land Use Rights Lease (Additional) Agreement will be incorporated into the scope of lease under the Land Use Rights Lease Agreement. The Parties agree that, for the purpose of the aforementioned land lease, the commencing date of lease shall be 1 January 2003 and the related rental (excluding the rental under the Land Use Rights Leasing Agreement) shall be RMB 300,818,873. The Parties agree that all of the related provisions under the Land Use Rights Leasing Agreement (including the power of Party A to make adjustments to the rental and the lease period) will be applicable to such lease.
7. REPRESENTATIONS AND WARRANTIES OF THE PARTIES
7.1 Party A represents and warrants to Party B that:
7.1.1 Party A is a company legally established and currently holding an effective business license;
7.1.2 Party A has conducted its business in compliance with the relevant laws and it has not conducted its business beyond the business scope as stipulated by the relevant laws;
7.1.3 Party A has obtained all necessary govenmental approvals and the required internal authorisations for the execution of this Agreement. The person executing this Agreement is the authorised representative of Party A. This Agreement will be binding on Party A upon its execution; and
7.1.4 The execution of this Agreement by Party A or the performance of the obligations under this Agreement by Party A is not in breach of its Articles of Association or any other agreements it entered into.
7.2 Party B represents and warrants to Party A that:
7.2.1 Party B is a company legally established and currently holding an effective business license;
7.2.2 Party B has conducted its business in compliance with the relevant laws and it has not conducted its business beyond the business scope as stipulated by the relevant laws;
7.2.3 Party B has obtained the required internal authorisations for the execution of this Agreement other than the approvals from the independent shareholders as mentioned above in this Agreement. The person executing this Agreement is the authorised representative of Party B. This Agreement will be binding on Party B upon its execution; and
7.1.4 The execution of this Agreement by Party B or the performance of the obligations under this Agreement by Party B is not in breach of its Articles of Association or any other agreements it entered into.
8. APPLICABLE LAW AND DISPUTE RESOLUTION
8.1 This Agreement shall be governed by and construed in accordance with the laws of the PRC.
8.2 Any disputes arising from or in connection with this Agreement shall be resolved through amicable negotiations of the Parties. Failing such negotiation, either party to this Agreement shall have the right to submit any dispute to the Beijing Arbitration Commission ("BAC") for arbitration according to the arbitration rules of the BAC then in effect when the application is submmitted. The arbitration award will be final and binding upon the Parties.
IN WITNESS WHEREOF, this Agreement has been duly executed by the properly appointed representative of the Parties on the day and year first written above.
For and on behalf of :
China Petrochemical Corporation
By: /s/ Chen Tonghai
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Name: Chen Tonghai
------------------------------------------------
Title: President
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For and on behalf of:
China Petroleum & Chemical Corporation
By: /s/ Wang Tianpu
--------------------------------------------------
Name: Wang Tianpu
------------------------------------------------
Title: President
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Exhibit 8
List of Subsidiaries
A list of China Petroleum & Chemical Corporation's principal subsidiaries is provided in Note 33 to the consolidated financial statements included in this annual report following Item 33.
Exhibit 12.1
CERTIFICATIONS
I, Chen Tonghai, certify that:
1. I have reviewed this annual report on Form 20-F of China Petroleum & Chemical Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this annual report;
4. The company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) Design such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by the report based on such evaluation; and
(d) Disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and
5. The company's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of company's board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting.
Date: April 6, 2007
By: /s/ Chen Tonghai
--------------------------
Chen Tonghai, Chairman
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Exhibit 12.2
I, Wang Tianpu, certify that:
1. I have reviewed this annual report on Form 20-F of China Petroleum & Chemical Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this annual report;
4. The company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) Design such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by the report based on such evaluation; and
(d) Disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and
5. The company's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of company's board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting.
Date: April 6, 2007
By: /s/ Wang Tianpu
-------------------------
Wang Tianpu, President
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Exhibit 12.3
I, Dai Houliang, certify that:
1. I have reviewed this annual report on Form 20-F of China Petroleum & Chemical Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this annual report;
4. The company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) Design such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by the report based on such evaluation; and
(d) Disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and
5. The company's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of company's board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting.
Date: April 6, 2007
By: /s/ Dai Houliang
-----------------------------------------
Dai Houliang
Senior Vice President and Chief Financial
Officer
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Exhibit 13
Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, and Pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")
In connection with the Annual Report on Form 20-F of China Petroleum & Chemical Corporation (the "Company") for the year ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Chen Tonghai, as Chairman of the Company, Wang Tianpu, as President of the Company, and Dai Houliang, as Senior Vice President and Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. ss. 1350 and Rule 13a-14(b) under the Exchange Act, that, to the best of his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d), as applicable, of the Exchange Act; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
By: /s/ Chen Tonghai Name: Chen Tonghai Title: Chairman Date: April 6, 2007 By: /s/ Wang Tianpu Name: Wang Tianpu Title: President Date: April 6, 2007 By: /s/ Dai Houliang Name: Dai Houliang Title: Senior Vice President and Chief Financial Officer Date: April 6, 2007 |
This certification accompanies the Report pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350 and shall not be deemed "filed" by the Company for purposes of ss.18 of the Exchange Act, or otherwise subject to the liability of that section