UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

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

OR

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

For the fiscal year ended December 31, 2019

OR

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

OR

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

Date of event requiring this shell company report

For the transition period from                  to                 

Commission file number 1-12158

中国石化上海石油化工股份有限公司

(Exact name of Registrant as specified in its charter)

Sinopec Shanghai Petrochemical Company Limited

(Translation of Registrant’s name into English)

The People’s Republic of China

(Jurisdiction of incorporation or organization)

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

(Address of principal executive offices)

Mr. Wu Haijun

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

The People’s Republic of China

Tel: +86 (21) 57943143

Fax: +86 (21) 57940050

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

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
American Depositary Shares, each representing 100 H Shares, par value RMB1.00 per Share H Shares, par value RMB1.00 per Share	SHI	New York Stock Exchange New York Stock Exchange*

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

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

None

(Title of Class)

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

None

(Title of Class)

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

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

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

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

Act.     Yes  ☒    No  ☐

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

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

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

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

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

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

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☒

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

U.S. GAAP  ☐ International Financial Reporting Standards as issued by the International Accounting Standards Board  ☒ Other  ☐

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

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

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. *    Yes  ☐    No  ☐

* This requirement does not apply to the registrant in respect of this filing.

Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS		ii
EXCHANGE RATES		iii
CERTAIN TERMS AND CONVENTIONS		iii
PART I		1
ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS.	1
ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE.	1
ITEM 3.	KEY INFORMATION.	1
ITEM 4.	INFORMATION ON THE COMPANY.	12
ITEM 4A.	UNRESOLVED STAFF COMMENTS.	36
ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS.	36
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.	54
ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.	65
ITEM 8.	FINANCIAL INFORMATION.	70
ITEM 9.	THE OFFER AND LISTING.	70
ITEM 10.	ADDITIONAL INFORMATION.	71
ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.	86
ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.	88
PART II		89
ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.	89
ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.	89
ITEM 15.	CONTROLS AND PROCEDURES.	90
ITEM 16A.	AUDIT COMMITTEE FINANCIAL EXPERT.	91
ITEM 16B.	CODE OF ETHICS.	91
ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES.	91
ITEM 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.	92
ITEM 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.	92
ITEM 16F.	CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT.	92
ITEM 16G.	CORPORATE GOVERNANCE.	92
ITEM 16H.	MINE SAFETY DISCLOSURE.	96
PART III		96
ITEM 17.	FINANCIAL STATEMENTS.	96
ITEM 18.	FINANCIAL STATEMENTS.	96
ITEM 19.	EXHIBITS.	97

i

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

• amount and nature of future development;

• future prices of and demand for our products;

• future earnings and cash flow;

• capital expansion programs;

• future plans and capital expenditures;

• expansion and other development trends of the petrochemical industry;

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

• expansion and growth of our business and operations; and

• our prospective operational and financial information.

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

• fluctuations in crude oil and natural gas prices;

• fluctuations in prices of our products;

• failures or delays in achieving production from development projects;

• potential acquisitions and other business opportunities;

• continued availability of capital and financing;

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

• other risks and factors beyond our control.

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

ii

EXCHANGE RATES

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

We publish our financial statements in Renminbi. Unless otherwise indicated, all translations from Renminbi to U.S. Dollars have been made at a rate of RMB6.9618 to U.S. $1.00, the noon buying rate on December 31, 2019 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. We do not represent that Renminbi or U.S. Dollar amounts could be converted into U.S. Dollars or Renminbi, as the case may be, at any particular rate.

CERTAIN TERMS AND CONVENTIONS

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

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

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

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

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

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

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

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

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

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

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

iii

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS.

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.

Not applicable.

ITEM 3. KEY INFORMATION.

A. Selected Financial Data.

Our selected consolidated statements of operations data (except for ADS data) and cash flows data for each of the years ended December 31, 2017, 2018 and 2019 and our selected consolidated balance sheets data as of December 31, 2018 and 2019 are derived from our consolidated financial statements included in Item 18. Financial Statements. Our selected consolidated statements of operations data and cash flows data for the years ended December 31, 2015 and 2016 and our consolidated balance sheets data as of December 31, 2015, 2016 and 2017 are derived from our consolidated financial statements not included in this annual report. Our selected consolidated financial data should be read in conjunction with our consolidated financial statements, and the notes thereto, and Item 5. Operating and Financial Review and Prospects. Our consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board.

Selected Consolidated Financial Data

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

	Year Ended December 31,
	2015 (RMB million)		2016 (RMB million)		2017 (RMB million)		2018 (RMB million)			2019 (RMB million)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
Net sales:
Synthetic fibers		2,328.2		1,855.5		2,005.3		2,182.4			2,158.9
Resins and plastics		9,992.2		9,797.6		10,218.4		10,542.1			9,979.9
Intermediate petrochemicals		9,332.0		8,827.6		10,070.2		12,160.6			10,313.6
Petroleum products		30,802.0		24,002.6		32,400.6		43,403.0			43,125.9
Trading of petrochemical products		13,718.2		20,585.4		23,697.3		26,544.0			21,690.7
Others		864.6		867.8		826.5		781.4			786.7
Profit from operations		3,908.9		6,777.9		6,401.9		5,585.1			1,320.5
Profit before income tax		4,237.2		7,778.3		7,852.9		6,808.1			2,656.1
Net profit attributable to owners of the Company		3,274.3		5,968.5		6,143.2		5,336.3			2,215.7
Net profit/(loss) attributable to non-controlling interests		36.1		13.0		11.0		(0.1	)		11.4
Basic earnings per share(RMB) (a)		0.303		0.553		0.569		0.493			0.205
Basic earnings per ADS(RMB) (b)		30.32		55.26		56.86		49.30			20.45

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

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

1

	Year Ended December 31,
	2015 (RMB million)			2016 (RMB million)			2017 (RMB million)			2018 (RMB million)			2019 (RMB million)
CONSOLIDATED STATEMENTS OF CASH FLOWS DATA
Net cash generated from operating activities		4,932.8			7,181.8			7,060.8			6,659.4			5,057.8
Net cash used in investing activities		(439.0	)		(189.9	)		(2,400.7	)		(1,928.4	)		(4,623.2	)
Net cash used in financing activities		(3,695.7	)		(2,637.2	)		(2,589.8	)		(3,507.2	)		(1,737.4	)
Capital expenditure		(695.3	)		(901.5	)		(1,197.1	)		(1,187.0	)		(1,430.4	)
Proceeds from borrowings		31,999.8			2,589.4			2,119.1			2,536.8			4,755.1
Repayments of borrowings		(35,684.7	)		(4,113.0	)		(2,059.4	)		(2,646.2	)		(3,695.2	)

	As of December 31,
	2015 (RMB million)		2016 (RMB million)		2017 (RMB million)		2018 (RMB million)		2019 (RMB million)
CONSOLIDATED BALANCE SHEETS DATA
Current assets		8,144.0		14,875.9		19,866.1		25,298.9		22,309.2
Property, plant and equipment		14,383.3		13,474.3		12,866.4		11,646.4		11,300.8
Total assets		27,820.6		33,945.6		39,443.5		44,385.9		45,494.1
Short term borrowings (a)		2,070.0		546.4		606.2		497.2		1,547.6
Current liabilities		7,726.3		8,942.4		10,922.2		13,913.0		15,479.6
Long term borrowings (excluding current portion)		—		—		—		—		—
Total equity attributable to owners of the Company		19,797.3		24,722.0		28,230.2		30,346.1		29,863.3

(a) Including corporate bonds and current portion of long term borrowings.

Dividends

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

Dividend Period	Dividend per Share
January 1, 2015-December 31, 2015	RMB0.10 (U.S.$0.015)
January 1, 2016-December 31, 2016	RMB0.25 (U.S.$0.036)
January 1, 2017-December 31, 2017	RMB0.30 (U.S.$0.046)
January 1, 2018-December 31, 2018	RMB0.25 (U.S.$0.036)
January 1, 2019-December 31, 2019	RMB0.12 (U.S.$0.017) (a)

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

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

B. Capitalization and Indebtedness.

Not applicable.

C. Reasons for the Offer and Use of Proceeds.

Not applicable.

2

D. Risk Factors.

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

The recent coronavirus outbreak could materially and adversely affect our business.

In the beginning of 2020, a novel strain of coronavirus (COVID-19) was reported to have surfaced and then caused a pandemic outbreak. The outbreak of the coronavirus and related adverse public health developments have had a material adverse impact upon our normal operating activities, the demand for our end products and our financial performance. Our normal operating activities were disrupted by the temporary closure of our offices, suspension of business travel, disruptions to our normal working schedules, various restrictions on our employees’ activities and similar disruptive effects to our normal operations. In addition, the global spread of COVID-19, and the implementation by governments around the world of measures intended to slow down the spread, have caused a material reduction in worldwide business activity, resulting in a drop in demand for our products.

We have taken measures in response to the outbreak, including the adoption of more stringent workplace sanitation measures. We will continue to monitor the situation and consider additional measures to protect the health and safety of our employees and to respond to future developments. At this time, we are unable to predict the duration or severity of the COVID-19 pandemic and its long-term impact upon our future performance and financial condition. The long-term impact of the COVID-19 pandemic on our performance depends in large part on factors that are not within our control, such as the scope and severity of the outbreak, measures implemented by governmental authorities to address the pandemic, the effect of the pandemic on global and regional economies and the response of world financial markets. An extended outbreak could depress global economic activity, disrupting our operations, reducing demand for our products and adversely impacting our financial performance.

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

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

We consume large amounts of crude oil to manufacture our products of which more than 95% is typically imported. In 2019, crude oil costs accounted for RMB 47.08 billion, or 56.20% of our annual cost of sales. As a result, changes in crude oil prices can affect our profitability. In recent years, due to various reasons, the price of crude oil has fluctuated significantly. We cannot rule out the possibility of the occurrence of certain global emergencies which might disrupt our crude oil supply. We expect that the volatility and uncertainty of the prices of crude oil and petrochemical products will continue, and that increasing crude oil prices and declines in prices of petrochemical products may adversely affect our business and results of operations and financial condition.

3

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

We consume large amounts of crude oil to manufacture our products of which more than 95% is typically imported. We attempt to mitigate the effect of increased costs due to rising crude oil prices. However, our ability to pass on these increased costs to our customers is dependent on market conditions and government regulations. Given that the increase of the sales prices of our products may lag behind the increase of crude oil costs, we may fail to completely cover the increased costs by increasing our sales prices, particularly where government regulations restrict the prices of certain of our fuel products. In particular, gasoline, diesel and jet fuel, and liquefied petroleum gas are subject to government price controls at present. In 2017, 2018 and 2019 approximately 36.95%, 41.62% and 44.81% of our net sales were from such products subject to price controls. Although the current price-setting mechanism for refined petroleum products in China allows the Chinese government to adjust price in the PRC market when the average international crude oil price fluctuates beyond certain levels within a certain time period (see Item 4. Information on the Company – B. Business Overview – Product Pricing), the Chinese government still retains discretion as to whether or when to adjust the prices of the refined oil products. The Chinese government generally exercises certain price control over refined oil products once international crude oil prices experience a sustained rise or become significantly volatile. For instance, some of our fuel products are required to be sold to designated distributors (such as the subsidiaries of Sinopec Corp.). Because we cannot freely sell our fuel products to take advantage of opportunities for higher prices, we may not be able to fully cover increases in crude oil prices by increasing the sale prices of our products, which has had and will possibly continue to have a material adverse effect on our financial condition, results of operations and cash flows.

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

The petrochemical business is a capital intensive business. Our ability to maintain and increase our revenues, net profit and cash flows depends upon continued capital spending. Our current business strategy contemplates capital expenditure for 2020 of approximately RMB1.5 billion (U.S.$ 215.5 million), which will be provided through financing activities and use of our own capital. Our actual capital expenditures may vary significantly from these planned amounts, subject to our ability to generate sufficient cash flows from operations, investments and other factors that may be beyond our control. In addition, there can be no assurance as to whether, or at what cost, our capital projects will be completed or the success of these projects if completed.

As of March 31, 2020, we had an aggregate outstanding indebtedness of approximately RMB 3,037 million (U.S.$ 436 million). Most of our borrowings are with state-controlled banks in China and structured as short term debt obligations with payment due in one year or less. These banks have generally been willing to provide new short term loans while we pay off existing loans. Sinopec Corp., our controlling shareholder, did not provide any guarantee or credit support for our debt for the year ended December 31, 2019 and for the three months ended March 31, 2020.

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

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

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

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

• the imposition of environmental protection tax for the discharge of waste substances;

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

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

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

4

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

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

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

• debt service costs on foreign currency-denominated debt;

• purchases of imported equipment;

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

• import of crude oil and other materials.

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

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

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

The exchange rate of the Renminbi against the US Dollar and other foreign currencies may fluctuate and is subject to alterations due to changes on the Chinese political and economic situations. In July 2005, the PRC government overhauled its policy of pegging the value of the Renminbi to the US dollar by permitting the Renminbi to fluctuate within a certain band against a basket of foreign currencies. Since the adoption of this new policy, the value of the Renminbi against the US dollar fluctuates daily. In addition, the Chinese government has been under international pressure to further ease its exchange rate policy, and may as a result further change its currency policy.

A portion of our cash and cash equivalents is denominated in foreign currencies (mainly the U.S. Dollar). As of December 31, 2019, our bank deposits denominated in foreign currencies were equivalent to RMB336.08 million. Any increase in the value of Renminbi against other currencies, including the US dollar, may decrease the Renminbi value of our cash and cash equivalents that are denominated in foreign currencies.

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

5

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

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

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

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

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

We maintain a package of insurance coverage plan through Sinopec Group on our property, facilities and inventory. In addition, we maintain insurance policies for such assets as the engineering construction projects and products in transit with third-party commercial insurance companies. We carry a third party liability insurance with a coverage capped at RMB50 million in 2020 to cover claims, subject to deductibles, in respect of personal injury, property or environmental damage arising from accidents on our property or relating to our operations other than on our transportation vehicles. Our insurance coverage may not be sufficient to cover all the financial losses caused by operating hazards. Resulting losses required to be compensated or otherwise paid for by us due to such operating hazards that are not fully insured against may have a material adverse effect on our financial condition and results of operations.

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

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

• mandating distribution channels for our fuel products;

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

• assessing taxes and fees payable;

• setting import and export quotas and procedures; and

• setting safety, environmental and quality standards.

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

6

Our development plans may require regulatory approval.

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

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

We could face increasing competition in China.

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

We face increasing foreign competition in our lines of business.

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

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

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

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

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

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

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

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

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

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

7

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

Interpretation and enforcement of Chinese laws and regulations is uncertain.

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

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

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

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

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

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

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

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

8

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

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

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

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

If remedial measures are imposed on the “big four” PRC-based accounting firms, including our independent registered public accounting firm, we might not be able to timely file future financial statements in compliance with the requirements of the Exchange Act.

Starting in 2011, the Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, were affected by a conflict between the United States and Chinese law. Specifically, for certain United States listed companies operating and audited in mainland China, the SEC and the PCAOB sought to obtain from the Chinese accounting firms access to their audit work papers and related documents. The firms were, however, advised and directed that under Chinese law they could not respond directly to the United States regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the CSRC.

In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese accounting firms, including our independent registered public accounting firm. In January 2014, an administrative law judge reached an initial decision to impose penalties on the firms including a temporary suspension of their right to practice before the SEC. The accounting firms filed a petition for review of the initial decision. On February 6, 2015, before a review by the Commissioners of the SEC had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms will receive matching requests, and are required to abide by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit work, commencement of a new proceeding against a firm, or in extreme cases the resumption of the current proceeding against all four firms. Under the terms of the settlement, the underlying proceeding against the four China-based accounting firms was deemed dismissed with prejudice four years after entry of the settlement. The four-year mark occurred on February 6, 2019.

In the event that the SEC brings new administrative proceedings, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act. Moreover, any negative news about any such future proceedings against these audit firms may cause investor uncertainty regarding China-based, United States listed companies and the market price of the ADSs may be adversely affected.

If our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our consolidated financial statements, our consolidated financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of the ADSs from the NYSE or deregistration with the SEC, which would substantially reduce or effectively terminate the trading of the ADSs in the United States.

9

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

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

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

The United States has adopted a number of measures since 1996 that provide for the possible imposition of sanctions against non-U.S. companies engaged in certain activities in and with Iran in the energy and other sectors, including, the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRSHRA”) enacted August 10, 2012 and the Iran Freedom and Counter-Proliferation Act (“IFCA”) enacted January 2, 2013, Section 1245 of the National Defense Authorization Act of 2012 (“NDAA”) enacted December 31, 2011, and Executive Order 13846 of August 6, 2018 that was issued in connection with the termination of the participation by the United States in the Joint Comprehensive Plan of Action, or JCPOA, that became effective January 16, 2016, and resulted in the waiver of certain U.S. sanctions against non-U.S. persons engaging in certain transactions with Iran. The withdrawal was effected in two stages that resulted on November 5, 2018, in the complete re-imposition of the U.S. sanctions that were waived under the JCPOA. On November 5, 2018, the United States also granted a 180-day waiver (that is potentially renewable) under Section 1245 of the NDAA to China (and seven other countries) allowing for the purchase of petroleum from Iran under specified conditions. The NDAA waiver does not authorize transactions that remain prohibited under other U.S. sanctions laws. On April 22, 2019, the U.S. Secretary of State announced that the United States would not grant any further waivers under the NDAA.

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

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

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

10

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

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

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

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

11

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

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

• actual or anticipated fluctuations in our quarterly results of operations;

• changes in financial estimates by securities research analysts;

• conditions in petroleum and petrochemical markets;

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

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

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

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

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

ITEM 4. INFORMATION ON THE COMPANY.

A. History and Development of the Company

General Information

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

Our Predecessor

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

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Construction Projects

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

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

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

Our Initial Public Offering and Listing

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

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

A Share Reform

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

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

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

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

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

Description of Principal Capital Expenditures and Divestitures

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

B. Business Overview

We are one of the largest petrochemical companies in China based on 2019 net sales and ethylene production. Our highly integrated petrochemical complex processes crude oil into a broad range of products in four major product areas:

• synthetic fibers,

• resins and plastics,

• intermediate petrochemicals, and

• petroleum products.

Based on 2019 sales volumes, we are a leading Chinese producer of synthetic fibers and resins and plastic products. We believe that we are also a leading competitor in sales of petroleum products and intermediate petrochemicals in our regional markets.

Our net sales by business lines as a percentage of total net sales in each of 2017, 2018 and 2019 are summarized as follows:

Net Sales of RMB79,218.3 million in 2017

Synthetic fibers	2.53	%
Resins and plastics	12.90	%
Intermediate petrochemicals	12.71	%
Petroleum products	40.90	%
Trading of petrochemical products	29.91	%
Others	1.05	%
Total	100.00	%

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Net Sales of RMB95,613.5 million in 2018

Synthetic fibers	2.29	%
Resins and plastics	11.03	%
Intermediate petrochemicals	12.72	%
Petroleum products	45.39	%
Trading of petrochemical products	27.76	%
Others	0.81	%
Total	100.00	%

Net Sales of RMB88,055.7 million in 2019

Synthetic fibers	2.45	%
Resins and plastics	11.33	%
Intermediate petrochemicals	11.71	%
Petroleum products	48.98	%
Trading of petrochemical products	24.63	%
Others	0.90	%
Total	100.00	%

We derive a substantial portion of our revenues from customers in Eastern China (principally Shanghai and its six neighboring provinces), an area that has experienced economic growth above the national average in recent years. Shown by geographic region and exports, our net sales by business lines as a percentage of total net sales for each of 2017, 2018 and 2019 are as follows:

2017 Net Sales by Region (%)

	Eastern China		Other parts of China		Exports
Synthetic fibers		88.07		11.93		0.00
Resins and plastics		92.75		7.25		0.00
Intermediate petrochemicals		96.52		2.25		1.23
Petroleum products		91.99		3.81		4.20
Trading of petrochemical products		40.86		47.49		11.65
Total net sales		92.68		7.13		0.19

2018 Net Sales by Region (%)

	Eastern China		Other parts of China		Exports
Synthetic fibers		87.61		12.39		0.00
Resins and plastics		94.13		5.87		0.00
Intermediate petrochemicals		90.25		8.67		1.08
Petroleum products		86.60		0.90		12.50
Trading of petrochemical products		50.67		5.42		43.91
Total net sales		78.63		3.60		17.77

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2019 Net Sales by Region (%)

	Eastern China		Other parts of China		Exports
Synthetic fibers		89.32		10.68		0.00
Resins and plastics		83.40		16.60		0.00
Intermediate petrochemicals		93.88		5.42		0.70
Petroleum products		85.40		0.55		14.05
Trading of petrochemical products		48.48		48.26		3.26
Total net sales		78.36		3.36		18.28

Business Strategies

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

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

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

• Improve the level of safety and environmental protection

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

• Keep smooth operation of production devices

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

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

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

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

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

• Further strengthen corporate management and advance the reform of management system

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

Principal Products

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

The following table shows a comparison of the production volume and sales volume in 2018 and 2019 by our major products.

	Production							Sales
Products	2019 (10,000 tons)		2018 (10,000 tons)		Year-on-year change			2019 (10,000 tons)		2018 (10,000 tons)		Year-on-year change
DieselNote1		384.50		373.08		3.06	%		384.14		372.70		3.07	%
Gasoline		346.84		322.92		7.41	%		345.31		325.67		6.03	%
Jet FuelNote1		187.86		146.82		27.95	%		135.39		100.37		34.89	%
Paraxylene		66.68		67.30		-0.92	%		45.55		49.82		-8.57	%
BenzeneNote2		37.33		34.86		7.09	%		32.98		31.02		6.32	%
Ethylene Glycol		28.67		41.52		-30.95	%		18.23		30.65		-40.52	%
Ethylene Oxide		27.55		19.43		41.79	%		26.69		18.48		44.43	%
EthyleneNote2		84.13		77.78		8.16	%		0.19		2.90		-93.45	%
Polyethylene		53.73		41.79		28.57	%		53.58		41.62		28.74	%
Polypropylene		46.96		49.36		-4.86	%		43.36		49.37		-12.17	%
Polyester PelletNote2		35.90		40.65		-11.69	%		28.09		27.18		-3.35	%
Acrylic		13.69		11.32		20.94	%		13.70		11.33		20.92	%
Polyester Staple		3.94		4.77		-17.40	%		3.94		4.16		-5.29	%

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

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

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

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The following table shows our 2019 net sales by major products as a percentage of total net sales together with the typical uses of these products.

Product	% of net sales		Typical Use
SYNTHETIC FIBERS
Polyester staple fiber		0.22	Textiles and apparel
Acrylic staple fiber		2.08	Cotton type fabrics, wool type fabrics
Others		0.15
Sub-total		2.45
RESINS AND PLASTICS
Polyester chips		1.99	Polyester fibers, films and containers
Polypropylene pellets		4.72	Films, ground sheeting, wire and cable compound and other injection molding products such as housewares and toys
Polypropylene pellets		4.10	Films or sheets, injection molding products such as housewares, toys and household electrical appliances and automobile parts
Polyvinyl alcohol (“PVA”)		0.12	PVA fibers, building coating materials and textile starch
Others		0.40
Sub-total		11.33
INTERMEDIATE PETROCHEMICALS
Ethylene		0.01	Feedstock for polyethylene, ethylene glycol, polyvinyl chloride and other intermediate petrochemicals which can be further processed into resins, plastics and synthetic fiber.
Ethylene oxide		1.99	Intermediate products for the chemical and pharmaceutical industry, including dyes, detergents and adjuvant

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Product	% of net sales		Typical Use
Benzene		1.61	Intermediate petrochemical products, styrene, plastics, explosives, dyes, detergents, epoxies and polyamide fiber
Paraxylene		3.19	Intermediate petrochemicals and polyester
Butadiene		0.90	Synthetic rubber and plastics
Ethylene glycol		0.87	Fine chemicals
Others		3.14
Sub-total		11.71
PETROLEUM PRODUCTS
Gasoline		19.37	Transportation fuels
Diesel		18.21	Transportation fuels and agricultural machinery fuels
Jet Fuel		6.38	Transportation fuels
Others		5.02
Sub-total		48.98
Trading of petrochemical products		24.63	Import and export trade of petrochemical products (purchased from domestic and overseas suppliers)
Others		0.90
Total		100.00

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

Product	Industry segment	Primary upstream raw material	Transport/storage method	Primary downstream application fields	Key price-influencing factors
Diesel	Petroleum products	Petroleum	Pipeline transportation and shipping/ storage tank	Transportation fuel, agricultural machinery fuel	International crude oil price, government control
Gasoline	Petroleum products	Petroleum	Pipeline transportation and shipping/ storage tank	Transportation fuel	International crude oil price, government control
Jet Fuel	Petroleum products	Petroleum	Pipeline transportation and shipping/ storage tank	Transportation fuel	International crude oil price, supply-demand balance
Paraxylene	Intermediate petrochemicals	Naphtha	Road transportation/ storage tank	Intermediate petrochemical products and polyester	Raw material price, supply-demand balance
Benzene	Intermediate petrochemicals	Naphtha	Road transportation, shipping, rail transportation/ storage tank	Intermediate petrochemical products, styrene, plastic, explosive, dye, detergent, epoxy resin, chinlon	International crude oil price, market supply-demand condition
Ethylene Glycol	Intermediate petrochemicals	Naphtha	Road transportation/ storage tank	Fine Chemicals engineering	International crude oil price, market supply-demand condition

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Product	Industry segment	Primary upstream raw material	Transport/storage method	Primary downstream application fields	Key price-influencing factors
Ethylene Oxide	Intermediate petrochemicals	Naphtha	Road transportation, pipeline transportation/ storage tank	Chemical and medical industry intermediate products, including dyes, detergents and auxiliary	International crude oil price, market supply-demand condition
Ethylene	Intermediate petrochemicals	Naphtha	Road transportation, pipeline transportation, shipping/storage tank	PE, EG, PVC and other raw material for further processing of intermediate petrochemical products such as resins, plastics and synthetic fibres	International crude oil price, supply-demand balance
Polyethylene	Resins and plastics	Ethylene	Road transportation, shipping and rail transportation/ warehousing	Film, mulching film, cable insulation material and housewares, toys injection moulding products	Raw material price and market supply-demand condition
Polypropylene	Resins and plastics	Propylene	Road transportation, shipping and rail transportation/ warehousing	Film, mulching film, housewares, toys, household appliances and auto parts injection moulding products	Raw material price and market supply-demand condition
Polyester chips	Resins and plastics	PTA, EG	Road transportation, shipping and rail transportation/ warehousing	Polyester fibre or film, container	Raw material price and market supply-demand condition
Acrylics	Synthetic fibres	Acrylonitrile	Road transportation, shipping and rail transportation/ warehousing	Simple spinning or blend with other material for texture or acrylic top	Raw material price and market supply-demand condition
Polyester	Synthetic fibres	Polyester	Road transportation, shipping and rail transportation/ warehousing	Texture, apparel	Raw material price and market supply-demand condition

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Production Processes

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

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Intermediate Petrochemicals

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

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

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

Resins and Plastics and Synthetic Fibers

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

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

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

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

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

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

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

Raw Materials

In 2019, we continued to strengthen our advantages in refining and chemical integration and leverage the strong adaptability of our refining plants to process more high-sulfur crude oil; we used a Process Industry Modeling System to determine the cost performance of crude oil to further improve the cost control of crude oil purchases; and the total volume of the top ten main types of oil purchased in the whole year of 2019 accounted for 100% of the total purchase of crude oil.

To enhance the overall profitability, we optimized our ethylene cracking stocks, adjusted and improved our natural gas and fuel gas structure, optimized our hydrogen system, reduced the emission and increased the efficiency of flare gas, increased the outputs of gasoline and aviation kerosene, and optimized naphtha, residual oil and wax oil processing lines. By reducing the output of paraxylene, we increased our supply of high-octane gasoline blending components to produce more gasoline. By substituting aviation kerosene hydrogenation equipment for diesel hydrogenation equipment and upgrading the 3.3 million tons of diesel hydrogenation equipment, we further optimized the structure of our finished oil products, achieving a diesel to gasoline ratio of 1.11:1 for 2019. We strengthened our tracking of the margin contribution of our units, and continuously carried out daily profitability measurement for each product so as to promptly detect changes in profitability, quickly adjust the load and running schedule of our production units and afford priority to the production of products with high profitability and market demand.

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Crude Oil

Crude oil is our primary raw material and the most significant raw material we purchase from outside sources. In 2019, crude oil accounted for approximately 56.20% of our total cost of sales. Accordingly, the supply and price of crude oil are key factors in determining our profitability.

Supply and Transportation – The crude oil required by us is purchased through Sinopec Corp., as an agent, from foreign sources and Shanghai Nanguang Petrochemical Co., Ltd., as an agent, from domestic sources. During 2019, we did not experience any significant problems in obtaining sufficient crude oil to meet our production needs.

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

We have received confirmation from Sinopec Corp. that it will purchase on our behalf 15.30 million tons of imported crude oil in 2020. Sinopec Corp. has further confirmed that, subject to China’s national crude oil policy and our actual production needs, it will continue to purchase on our behalf sufficient quantities and appropriate types of crude oil, including domestic offshore and imported crude oil, to satisfy our anticipated annual needs. We anticipate that we will fully utilize our supply of crude oil in 2020. We believe that the mix of crude oil feedstock currently available is satisfactory for our 2020 production capacity and targets. Additionally, as part of China’s commitment at its accession into WTO, certain non-state-owned enterprises have been granted an increasing amount of quota to import crude oil. Although we do not expect to obtain crude oil through this channel in the foreseeable future due to the current crude oil supply system, this may provide us with an alternative source of crude oil supply.

Crude Oil Mix – Our refining equipment is designed to process certain grades of crude oil. Therefore, the origin and quality of the crude oil available can be important to our business. We believe that as we have been significantly increasing usage of imported crude oil, we will continue to be able to obtain from the market such imported crude oil that is compatible with our refining equipment. The overall mix of foreign versus domestic crude oil we process in 2020 will depend on a variety of factors, including the amount of future supply of domestic offshore crude oil and the availability, price, quality, processing profitability and compatibility with our refining capabilities of imported crude oil. Provided there are no significant modifications to the existing channels of crude oil supply, we believe that sufficient supplies of crude oil will be available on the domestic or international markets for our 2020 production capacity and goals.

In 2019, our crude oil was sourced as follows:

Domestic offshore crude oil	1.03	%
Imported crude oil	98.97	%
Total:	100.00	%

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

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

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

Pricing – The price of domestic crude oil shall apply the market –adjusted rate and the imported crude oil is generally sold to us at prevailing international market prices. The average cost of imported crude oil and domestic offshore crude oil in 2019 was RMB 3,321.09 (U.S.$ 477.04) per ton and RMB 3,661.41 (U.S.$ 525.93) per ton, respectively. In 2019, we processed 14,013,663 tons of imported crude oil and 1,185,699 tons of domestic offshore crude oil (including 1,064,566 tons of crude oil processed on a sub-contract basis).

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

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

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

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

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

Coal

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

We expect that our total requirement for coal to generate electricity in 2020 will be approximately 1.85 million tons. In 2019, we consumed approximately 1.89 million tons of coal, a decrease of 0.11 million tons from 2018 of 2.00 million tons.

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Other Raw Materials

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

We purchase some ancillary raw materials from outside sources. These raw materials include natural gas, methanol, ammonia, sodium hydroxide, sulfur, acetone, acrylonitrile, PTA, propylene and a variety of catalytic agents. In 2019, the total cost of these materials accounted for approximately 11.96% of our total cost of sales. We do not expect any difficulties in obtaining a supply of any of these ancillary raw materials in amounts sufficient to meet our needs in the foreseeable future.

Sales and Marketing

Distribution

The distribution of our fuel products is subject to government regulations. We are required to sell certain refined products to the subsidiaries of Sinopec Group or customers designated by Sinopec Group. Since the second half of 2005, Sinopec Group has executed reforms to its system of selling petrochemical products and implemented what it refers to as a “Five Consolidations” strategy featuring “consolidated marketing strategy, consolidated promotion, consolidated logistics optimization, consolidated sales and consolidated branding.” As a result, the sales of our major petrochemical products are now conducted in a consolidated manner by sales agents designated by Sinopec Group. However, we have the autonomy to decide on the distribution method of our other products in accordance with market conditions. The products we sold in 2019 that were subject to planned distribution by Sinopec Group, sales by agents and sales based on our own discretion accounted for 62.55%, 34.21% and 3.24%, respectively, of the total products we sold.

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

We use long term contracts to sell most of our products. We did not experience significant write-offs or defaults on our accounts receivable or other trading accounts in 2019. In general we managed to maintain a stable correlation between production and sales in 2019.

Product breakdown

Synthetic Fibers – In 2019, 32.0% of our synthetic fiber products were purchased by provincial and municipal government trading companies that act as intermediaries between us and end-users. No single customer accounted for more than 22% of our sales of synthetic fibers in 2019. List of customers each accounting for more than 10% of the sales in this segment: Shanghai Xinshan Chemical Co., Ltd.: 14.2%; Shaoxing Xiangyu Green Packing Co., Ltd.: 21.9%.

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

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

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

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

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

Major Suppliers and Customers

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

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

To the knowledge of the Board, among the suppliers and customers listed above, none of the directors or shareholders of the Company (and their respective close associates) had any interests in Shengyuan Ji (Jiangsu) Industrial Co., Ltd., Shanghai Gas Co., Ltd., Shanghai International Holding Co., Ltd., Jiaxing Petrochemical Co., Ltd., Hengli Petrochemical (Dalian) Co., Ltd., Macau New Solar Co., Ltd., and Zhongtuo (Fujian) Industry Co., Ltd. China International United Petroleum & Chemical Co. Ltd., Materials and Equipment Department of China Petroleum and Chemical Corporation, and East China Branch of Sinopec Sales Company Limited are subsidiaries of Sinopec Corp., the controlling shareholder of the Company.

Product Pricing

Most of our products are permitted to be sold at market prices. However, four types of petroleum products (gasoline, diesel and jet fuel, and liquefied petroleum gas) that we sell are subject to varying degrees of government pricing control and are, accordingly, sold at prices set by the Chinese government, which may sometimes be below our costs. In 2017, 2018 and 2019, approximately 36.95%, 41.62% and 44.81% of our net sales, respectively, were from products subject to price controls. Price controls may apply to these products in various ways. Such price controls are sometimes applied exclusively to our products, exclusively to our competitors’ products or sometimes applied to neither our products nor our competitors’ products. The Chinese government has adopted changes to the pricing mechanism for domestic refined oil to be indirectly aligned with international crude oil prices in a controlled manner through use of certain formula(s).

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

Competition

We compete principally in the Chinese domestic market where 81.7% of our products in volume were sold in 2019. In addition, we believe the limitation in transportation infrastructure in China and the difficulties involved in transporting petrochemical products force petrochemical companies in China, including us, to compete primarily on a regional basis. In 2019, 78.4% of our net sales were made to customers in Eastern China.

Our Competitive Advantages

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

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

The Domestic Competitive Environment

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

Foreign Competition and the World Trade Organization

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

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

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

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

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

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

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

Our Competitive Position

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

Synthetic Fibers

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

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

Product	Our share of domestic consumption		Our competitive ranking		Location of principal domestic competitor	Principal domestic competitor’s share of consumption		Imports’ share of consumption
	(%)					(%)		(%)
Acrylic		19.57		2	Jilin Province		38.58		12.8

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

Resins and Plastics

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

Product	Our share of domestic consumption		Our competitive ranking		Location of principal domestic competitor	Principal Domestic competitor’s Share of consumption		Imports’ share of consumption
	(%)					(%)		(%)
Polyester chips		2.61		5	Zhejiang Province		5.12		4.14
Polyethylene		1.57		22	Guangdong Province		2.55		48.56
Polypropylene		1.84		22	Zhejiang Province		1.80		13.69

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

Intermediate Petrochemicals

In 2019, we were one of the largest sellers of intermediate petrochemicals in China, holding an approximate 1.97% share of total domestic consumption, while imports had an approximate 23.32% share of domestic consumption. Ethylene glycol, paraxylene, benzene and butadiene are our major intermediate petrochemical products. In 2019, we were a major producer of ethylene glycol, paraxylene and benzene in China. The following table summarizes the competitive position of our principal intermediate petrochemicals according to domestic sales in 2019.

Product	Our share of domestic consumption		Our competitive ranking		Location of principal domestic competitor	Principal Domestic competitor’s Share of consumption		Imports’ share of consumption
	(%)					(%)		(%)
Ethylene glycol		1.61		6	Zhejiang Province		2.71		55.76
Paraxylene		2.25		11	Zhejiang Province		5.40		50.55
Benzene		2.87		3	Jiangsu Province		3.02		14.92
Butadiene		3.20		23	Zhejiang Province		1.23		8.83

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

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Petroleum Products

In 2019, we had an approximate 2.87% share of total domestic petroleum products market while imports had an approximate 7.3% share. Although we have one of the largest refining capabilities in China, we use most of our refining capacity to produce feedstock for our own downstream processing of petrochemical products.

The domestic markets for each of our major petroleum products are geographically concentrated because these markets tend to be highly localized with individual producers controlling a large share of the markets in their locality. In 2019, we sold approximately 85.40% of our petroleum products in Eastern China.

Research and Development, Patents and Licenses, etc.

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

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

Investments

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

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

Environmental Protection

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

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

We believe our environmental protection facilities and systems are adequate for the existing national and local environmental protection regulations. In 2019, we continued to carry out various energy-saving and emissions reduction measures in accordance with the relevant domestic energy conservation and emissions reduction requirements, and achieved all energy-saving and emissions reduction goals set by the Chinese government during the year.

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

Insurance

We currently participate in a package of insurance coverage plan through Sinopec Group as its controlled subsidiary, which, as of December 31, 2019, was approximately RMB43.448 billion (U.S.$ 6.241 billion) on our property and facilities and approximately RMB4.82 billion (U.S.$ 692.35 million) on our inventory. In addition, we maintain insurance policies for such assets as engineering construction projects and products in transit with third-party’s commercial insurance company. The Sinopec Group insurance coverage is compulsory and applies to all enterprises controlled by Sinopec Group, pursuant to guidelines of Sinopec Group which may not be legally enforceable against Sinopec Group. Thus, there are uncertainties under Chinese law as to what percentage insurance claims we may demand against Sinopec Group.

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

Cyber Security

We have implemented policies and procedures intended to prevent cyber incidents and to identify and respond to unauthorized intrusions. With respect to our internal internet policies on cybersecurity, we have established an information safety management system and issued internal regulations on cybersecurity, internal hardware and data safety systems and we are gradually implementing measures relating to the office environment information safety management, information system access control, protection from any malicious software, and internal review and audit of information safety risks, in order to prevent loss of information due to cybersecurity incidents, network outages or hardware incidents. In 2019, we did not experience any material cybersecurity incidents or related losses.

Government Regulations

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

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

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

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

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

In 2019, we sourced no crude oil from Iran.

In addition, based on feedback to our inquiries to Sinopec Corp., in 2019, it sourced approximately 2.0% of its total refinery throughputs of crude oil from Iran. Based on Sinopec Corp.’s internal reports and statistics, Sinopec Corp. recorded no revenue or net profit from its trading activities with Iranian companies.

In addition, based on feedback to our inquiries to Sinopec Group, the controlling shareholder of Sinopec Corp., Sinopec Group engaged in a small amount of business activities in Iran such as providing engineering services and designs. Sales revenue and profits from these business activities accounted for 0.05% and 0.06% of its total unaudited sales revenue and profits, respectively.

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

C. Organizational Structure.

Our Subsidiaries

As of December 31, 2019, our significant subsidiaries are listed below. All of the subsidiaries named below are incorporated in China.

Subsidiary Name	Our ownership interest (%)		Our voting power (%)
Shanghai Petrochemical Investment Development Company Limited		100.00		100.00
China Jinshan Associated Trading Corporation		67.33		67.33
Shanghai Jinchang Engineering Plastics Company Limited		74.25		71.43
Shanghai Golden Phillips Petrochemical Company Limited		100.00		100.00
Shanghai Jinshan Trading Corporation		67.33		67.33

Sinopec Corp.

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

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

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Subsidiaries

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

Name of Company	Particulars of issued capital	Type of legal entity	Percentage of equity held by Sinopec Corp. and its subsidiary		Principal activities
	(millions)		(%)
Sinopec International Petroleum Exploration and Production Company Limited	RMB8,000	Limited company		100.00	Investment in exploration, development, production, sales of petroleum and natural gas and other areas
Sinopec Great Wall Energy and Chemical Company Limited	RMB22,761	Limited company		100.00	Coal chemical industry investment management, production and sale of coal chemical products
Sinopec Yangzi Petrochemical Company Limited	RMB15,651	Limited company		100.00	Manufacturing of intermediate petrochemical products and petroleum products
Sinopec Pipeline Storage & Transportation Company Limited	RMB12,000	Limited company		100.00	Pipeline storage and transportation of crude oil
Sinopec Yizheng Chemical Fiber Limited Liability Company	RMB4,000	Limited company		100.00	Production and sale of polyester chips and polyester fibers
Sinopec Lubricant Company Limited	RMB3,374	Limited company		100.00	Production and sale of refined petroleum products, lubricant products, lubricant base oil, and petrochemical materials
Sinopec Qingdao Petrochemical Company Limited	RMB1,595	Limited company		100.00	Manufacturing of intermediate petrochemical products and petroleum products
Sinopec Chemical Sales Company Limited	RMB1,000	Limited company		100.00	Marketing and distribution of petrochemical products
China International United Petroleum & Chemical Company Limited	RMB5,000	Limited company		100.00	Trading of crude oil and petrochemical products
Sinopec Overseas Investment Holding Limited	U.S.$1,662	Limited company		100.00	Investment holding of overseas business
Sinopec Catalyst Company Limited	RMB1,500	Limited company		100.00	Production and sale of catalyst products
China Petrochemical International Company Limited	RMB1,400	Limited company		100.00	Trading of petrochemical products
Sinopec Beihai Refining and Chemical Limited Liability Company	RMB5,294	Limited company		98.98	Import and processing of crude oil, production, storage and sales of petroleum and petrochemical products
Sinopec Qingdao Refining and Chemical Company Limited	RMB5,000	Limited company		85.00	Manufacturing of intermediate petrochemical products and petroleum products
Sinopec Hainan Refining & Chemical Company Limited	RMB9,628	Limited company		75.00	Manufacturing of intermediate petrochemical products and petroleum products

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Name of Company	Particulars of issued capital	Type of legal entity	Percentage of equity held by Sinopec Corp. and its subsidiary		Principal activities
	(millions)		(%)
Sinopec Marketing Co.	RMB28,403	Limited company		70.42	Marketing and distribution of refined petroleum products
Shanghai SECCO Petrochemical Company Limited	RMB7,801	Limited company		67.60	Manufacturing and sales of petrochemical products
Sinopec-SK (Wuhan) Petrochemical Company Ltd.	RMB7,193	Limited company		59.00	Production, sale, research and development of petrochemical products, ethylene and downstream derivatives
Sinopec Kantons Holdings Limited	HK$248	Limited company		60.33	Provision of crude oil jetty services and natural gas pipeline transmission services
Sinopec Shanghai Gaoqiao Petrochemical Company Limited	RMB10,000	Limited company		55.00	Manufacturing of intermediate petrochemical products and petroleum products
Sinopec Shanghai Petrochemical Company Limited	RMB10,824	Limited company		50.44	Manufacturing of synthetic fibers, Resin and plastics, intermediate petrochemical products and petroleum products
Fujian Petrochemical Company Limited	RMB8,140	Limited company		50.00	Manufacturing of plastics, intermediate petrochemical products and petroleum products

D. Property, Plant and Equipment.

Real Property

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

Plants and Facilities

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

The following table sets forth the Rated Capacities and weighted average utilization rates of our principal production units for petroleum products and intermediate petrochemicals in 2019:

Production Unit (number of units)	Rated Capacity (tons)		Utilization Rate (%)
Crude oil distillation units (2)		14,000,000		99.15
Hydrocracker (2)		3,000,000		90.18
Ethylene unit		700,000		109.76
*Aromatics units (2)		835,000		98.91
PTA unit		400,000		81.40
Ethylene oxide / ethylene glycol units (2)		525,000		91.04
Cracking and catalyzing		3,500,000		102.32

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Production Unit (number of units)	Rated Capacity (tons)		Utilization Rate (%)
Delayed coking (2)		2,200,000		87.94
Diesel oil hydrogenation units (2)		3,850,000		96.20
**Acrylonitrile unit		650,000		101.37
C5 segregation units (2)		205,000		137.85

* The No. 1 paraxylene unit (235,000 tons/year) ceased operating during the whole year.

** No. 2 Diesel hydrogenation facility (1,200,000 tons/year) was revamped into acrylonitrile facility by the end of 2016. Annual production is 650,000 tons/year.

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

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

Production Unit (number of units)	Rated Capacity (tons)		Utilization Rate (%)
*Polyester units (3)		550,000		88.11
**Polyester staple units (2)		158,000		88.39
Polyester filament unit		21,000		82.47
Acrylic staple fiber units (3)		141,000		113.58
Polypropylene units (3)		408,000		97.80
Polypropylene units (3)		400,000		98.48
Vinyl acetate unit		86,000		93.54

* No. 3 polyester fibre facility (100,000 tons/year) was discontinued on 1 September 2013.

** No. 1 Polyester staple fibre facility (4,000 tons/year) was suspended for the whole year.

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

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

Power Facilities

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

Other Facilities

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

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Maintenance

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

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

Transportation-Related Fixtures

Crude oil, our principal raw material, is transported by pipeline and oil tanker to a crude oil terminal wharf and storage tanks. Our products leave the factory by water, rail, road and pipeline. In 2019, approximately 89.97% of our products by sales volume were collected by customers from our premises, and we delivered the balance. Our major ethylene customer is supplied via a pipeline. Some of the products collected by customers were also transported using our facilities.

Wharfs

We own one chemical wharf at Jinshan with five berths of 3,000, 5,000, 10,000, 10,000 and 30,000 tons. We also own a connecting pipeline capable of loading up to approximately 4.6 million tons of chemical products annually onto ocean-going barges and ships. In 2019, products representing 28.37% of total sales volume were shipped from the wharf. We also have a facility to load ships and barges which use the region’s inland waterways. In 2019, products representing 0.95% of total sales volume were shipped from these facilities. We believe that we have a competitive advantage because a greater proportion of our products are shipped by water as opposed to rail and truck, which is subject to capacity constraints on China’s rail and highway networks. Additionally, we own facilities for receiving crude oil and coal at docks that we own and transporting such materials by pipeline or conveyor to our production facilities.

Rail

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

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Capital Expansion Program

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

Increasing Quality of Oil Products

In 2016, we launched No. 2 Diesel Hydrogenation Unit Reconstruction and Diesel Quality Upgrading Project so as to further improve the quality of oil products and perfect oil product structure. In 2017, we launched an oil cleaning project with 400,000 tons/year clean gasoline components units, which is anticipated to complete in 2020.

Expansion of New and Existing Downstream Petrochemical Products

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

To take advantage of our specialty in producing acrylics fiber and to improve our industrial structure and upgrade certain products, we plan to construct a carbon fiber project with a capacity of 1,500 tons/year. Sinopec Corp. approved the basic design for this project in December 2010; pile foundation construction was commenced in December 2010; civil engineering was commenced in February 2011 and one series of facilities under phase I were launched for trial operation in 2012. Subject to the market conditions, we commenced the construction of Phase II of the Project in April 2019, and plan to complete the mid-term delivery of it in December 2020.

Upgrading Environmental Protection Facilities Projects

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

ITEM 4A. UNRESOLVED STAFF COMMENTS.

None.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.

General

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

Critical Accounting Policies

The following discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements. The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during 2019. Our financial condition and results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of our financial statements. We based our assumptions and estimates on historical experience and on various other assumptions that we believe to be reasonable and which form the basis for making judgments about matters that are not readily apparent from other sources. On an on-going basis, our management evaluates its estimates. Actual results may differ from those estimates as facts, circumstances and conditions change.

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

Net realizable value (“NRV”) of inventories

The NRV is determined based on the estimated selling prices less the estimated costs to completion, if relevant, other costs necessary to make the sale, and the related taxes. Determination of estimated selling prices requires significant management judgement, taking into consideration of historical selling prices and future market trend. If the actual selling prices were to be lower or the costs of completion were to be higher than estimated, the actual allowance for diminution in value of inventories could be higher than the estimate.

Impairments for non-financial assets

In determining the value in use, expected cash flows generated by the non-financial assets or the cash-generating unit are discounted to their present value. We use all readily available information in determining an amount that is a reasonable approximation of recoverable amount, including estimates based on reasonable and supportable assumptions and projections of sale volume, selling price and amount of operating costs.

Useful life and residual value of property, plant and equipment

Property, plant and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets, after taking into account the estimated residual value. We review the estimated useful lives of the assets annually in order to determine the amount of depreciation expense to be recorded during any reporting period. The useful lives are based on our historical experience with similar assets, taking into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates. There were no significant changes in these estimates during the years ended December 31, 2017, 2018 and 2019.

A. Results of Operations

Government Policies

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

In particular, we consume large amounts of crude oil to manufacture our products of which more than 95% is typically imported. We attempt to mitigate the effect of increased costs due to rising crude oil prices. However, our ability to pass on these increased costs to our customers is dependent on government regulations, among other factors. Given that the increase of the sales prices of our products can lag behind the increase of crude oil costs, we sometimes fail to completely cover the increased costs by increasing our sales prices, particularly where government regulations restrict the prices of certain of our fuel products such as gasoline, diesel and jet fuel, and liquefied petroleum gas. In 2017, 2018 and 2019, approximately 36.95%, 41.62% and 44.81% of our net sales were from such products subject to price controls. Although the current price-setting mechanism for refined petroleum products in China allows the Chinese government to adjust price in the PRC market when the average international crude oil price fluctuates beyond certain levels within a certain time period (see Item 4. Information on the Company – B. Business Overview – Product Pricing), the Chinese government still retains discretion as to whether or when to adjust the prices of the refined oil products. The Chinese government generally exercises certain price control over refined oil products once international crude oil prices experience a sustained rise or become significantly volatile. Moreover, the Chinese government controls the distribution of many fuel products in China. For instance, some of our fuel products are required to be sold to designated distributors (such as the subsidiaries of Sinopec Corp.). Because we cannot freely sell our fuel products to take advantage of opportunities for higher prices, we may not be able to fully cover increases in crude oil prices by increases in the sale prices of our products, which has had and will continue to have a material adverse effect on our financial condition, results of operations and cash flows.

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

Inflation

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

Summary

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

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

	Year ended December 31,
	2017						2018						2019
	Sales Volume (‘000 tons)		Net Sales (RMB million)		% of Total Net Sales		Sales Volume (‘000 tons)		Net Sales (RMB million)		% of Total Net Sales		Sales Volume (‘000 tons)		Net Sales (RMB million)		% of Total Net Sales
Synthetic fibers		172.6		2,005.3		2.5		156.0		2,182.4		2.3		177.9		2,158.9		2.5
Resins and plastics		1,262.4		10,218.4		12.9		1,208.6		10,542.1		11.0		1,292.4		9,979.9		11.3
Intermediate petrochemicals		1,938.5		10,070.2		12.7		2,134.4		12,160.6		12.7		2,193.7		10,313.6		11.7
Petroleum products		9,233.5		32,400.6		40.9		9,917.3		43,403.0		45.4		10,294.6		43,125.9		49.0
Trading of petrochemical products		—		23,697.3		29.9		—		26,544.0		27.8		—		21,690.7		24.6
Others		—		826.5		1.1		—		781.4		0.8		—		786.7		0.9
Total		12,607.0		79,218.3		100.0		13,416.3		95,613.5		100.0		13,958.6		88,055.7		100.0

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

	Year ended December 31,
	2017						2018						2019
	RMB million			% of Net sales			RMB million			% of Net sales			RMB million			% of Net sales
Synthetic fibers
Net sales		2,005.3			2.5			2,182.4			2.3			2,158.9			2.5
Operating expenses		(2,480.6	)		(3.1	)		(2,755.9	)		(2.9	)		(2,699.2	)		(3.1	)
Segment loss		(475.3	)		(0.6	)		(573.5	)		(0.6	)		(540.3	)		(0.6	)

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	Year ended December 31,
	2017						2018						2019
	RMB million			% of Net sales			RMB million			% of Net sales			RMB million			% of Net sales
Resins and plastics
Net sales		10,218.4			12.9			10,542.1			11.0			9,979.9			11.3
Operating expenses		(8,862.5	)		(11.2	)		(9,641.7	)		(10.1	)		(9,578.5	)		(10.9	)
Segment profit		1,355.9			1.7			900.4			0.9			401.4			0.4
Intermediate petrochemicals
Net sales		10,070.2			12.7			12,160.6			12.7			10,313.6			11.7
Operating expenses		(7,864.1	)		(9.9	)		(10,225.7	)		(10.7	)		(9,899.6	)		(11.2	)
Segment profit		2,206.1			2.8			1,934.9			2.0			414.0			0.5
Petroleum products
Net sales		32,400.6			40.9			43,403.0			45.4			43,125.9			49.0
Operating expenses		(29,280.6	)		(37.0	)		(40,493.0	)		(42.4	)		(42,420.4	)		(48.2	)
Segment profit		3,120.0			3.9			2,910.0			3.0			705.5			0.8
Trading of petrochemical products
Net sales		23,697.3			29.9			26,544.0			27.8			21,690.7			24.6
Operating expenses		(23,636.7	)		(29.8	)		(26,439.1	)		(27.7	)		(21,637.5	)		(24.5	)
Segment profit		60.6			0.1			104.9			0.1			53.2			0.1
Others
Net sales		826.5			1.1			781.4			0.8			786.7			0.9
Operating expenses		(691.9	)		(0.9	)		(473.0	)		(0.5	)		(500.0	)		(0.6	)
Segment profit		134.6			0.2			308.4			0.3			286.7			0.3
Total
Net sales		79,218.3			100.0			95,613.5			100.0			88,055.7			100.0
Operating expenses		(72,816.4	)		(91.9	)		(90,028.4	)		(94.2	)		(86,735.2	)		(98.5	)
Profit from operations		6,401.9			8.1			5,585.1			5.8			1,320.5			1.5
Net finance income		207.3			0.3			337.4			0.4			363.0			0.4
Investment income		—			—			—			—			—			—
Share of profit of associates and jointly controlled entities		1,243.7			1.6			885.6			0.9			972.6			1.1
Profit before income tax		7,852.9			10.0			6,808.1			7.1			2,656.1			3.0
Income tax		(1,698.7	)		(2.2	)		(1,471.9	)		(1.5	)		(429.0	)		(0.5	)
Net profit		6,154.2			7.8			5,336.2			5.6			2,227.1			2.5
Attributable to:
Equity shareholders of the Company		6,143.2			7.8			5,336.3			5.6			2,215.7			2.5
Non-controlling interests		11.0			0.0			(0.1	)		0.0			11.4			0.0
Net profit		6,154.2			7.8			5,336.2			5.6			2,227.1			2.5

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

Year ended December 31, 2019 compared with year ended December 31, 2018

Net sales

In 2019, our net sales amounted to RMB 88,055.7 million, representing a decrease of 7.90% as compared to RMB95,613.5 million in 2018. The decrease was primarily due to the decrease in weighted average sales price of our petroleum and petrochemical products, among which, the weighted average prices (exclude tax) of our synthetic fibers, resins and plastics, intermediate petrochemical products and petroleum products decreased by 13.24%, 11.48%, 17.48% and 4.28%, respectively, over the previous year. The total volume of our products was 13,958.6 million tons in 2019, representing an increase of 4.40% over the previous year. Our production/sales ratio was 100.02%, and the trade receivables recovery rate was 100%. Our total amount of sales from export was RMB18.3 billion, a decrease of 4.19% compared with 2018.

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(i) Synthetic fibers

In 2019, our net sales for synthetic fibers amounted to RMB 2,158.9 million, representing a decrease of 1.08% compared to RMB2,182.4 million in 2018. The decrease was mainly due to the downturn in the downstream market this year. The general decline in the sales price of synthetic fiber products led to the sales decline during the reporting period. Sales volume of synthetic fibers increased by 14.02% compared with the previous year, while the weighted average sales price decreased by 13.24%. Meanwhile, the weighted average sales price of acrylic fiber, the main product of our synthetic fibers, decreased by 14.44%, and the weighted average sales price of polyester fiber decreased by 14.13% over the previous year. Net sales of acrylic fiber, polyester fiber and other products accounted for 84.83%, 9.03% and 6.14% of the total sales of synthetic fibers, respectively.

Net sales of synthetic fiber products accounted for 2.5% of total net sales in 2019, representing a decrease of 0.2% as compared to the previous year.

(ii) Resins and plastics

Net sales of resins and plastics amounted to RMB 9,979.9 million in 2019, representing a decrease of 5.33% as compared to RMB10,542.1 million in 2018. The decrease in net sales was mainly attributable to the downturn in the downstream market this year. The general decline in the sales price of resins and plastics products led to the sales decline during the reporting period. The weighted average sales price of resins and plastics decreased by 11.48%, while the sales volume of resins and plastics products increased by 6.94% as compared to the previous year. Meanwhile, the weighted average sales price of polyethylene and polypropylene decreased by 17.94% and 4.08%, and the weighted polyester chips decreased by 15.91%, respectively. Sales of polyethylene, polypropylene, polyester chips and other products accounted for 31.92%, 36.21%, 17.55% and 14.32% of the total sales of resins and plastics, respectively.

Net sales of resins and plastics accounted for 11.3% of total net sales in 2019, representing a decrease of 0.3% as compared to the previous year.

(iii) Intermediate petrochemicals

Net sales of intermediate petrochemical products amounted to RMB10,313.6 million in 2019, representing a decrease of 15.19% as compared to RMB12,160.6 million in 2018. The decline in raw material costs this year has driven down the unit price of intermediate petrochemical products. The weighted average sales price of intermediate petrochemical products decreased by 17.48% compared to the previous year, and its sales volume increased by 2.78% compared to the previous year. The sales of p-xylene, ethylene oxide, pure benzene, ethylene glycol and other products accounted for 27.26%, 16.97%, 13.72%, 7.40% and 34.67% of the total sales of intermediate petrochemical products respectively.

Net sales of intermediate petrochemicals accounted for 11.7% of total net sales in 2019, representing a decrease of 1.01% as compared to the previous year.

(iv) Petroleum products

Net sales of petroleum products amounted to RMB43,125.9 million in 2019, representing a decrease of 0.64% as compared to RMB43,403.0 million in 2018, representing a slight change. The weighted average sales price of major products decreased by 4.28%, and sales volume increased by 3.80% as compared to the previous year.

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Net sales of petroleum products accounted for 49.0% of total net sales in 2019, representing an increase of 3.6% as compared to the previous year.

(v) Trading of petrochemical products

Net sales from trading of petroleum products amounted to RMB21,690.7 million in 2019, representing a decrease of 18.28% as compared to RMB26,544.0 million in 2018. Mainly due to the decrease in customer purchase demand of the subsidiary China Jinshan Associated Trading Corporation, the sales of this year decreased by RMB4,513 million.

Net sales from trading of petrochemical products accounted for 24.6% of total net sales in 2019, representing a decrease of 3.2% as compared to the previous year.

(vi) Others

Net sales of other products amounted to RMB786.7 million in 2019, representing an increase of 0.68% as compared to RMB781.4 million in the previous year.

Net sales of other products accounted for 0.9% of our total net sales in 2019, representing an increase of 0.1% as compared to the previous year.

Cost of sales and operating expenses

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

Our cost of sales and operating expenses amounted to RMB86,735.2 million in 2019, representing a decrease of 3.66% as compared to RMB90,028.4 million in 2018. Our cost of sales and operating expenses of synthetic fibers, resins and plastics, intermediate petrochemicals, petroleum products, trading of petrochemical products and others were RMB2,699.2 million, RMB9,578.5 million, RMB9,899.6 million, RMB42,420.4 million, RMB21,637.5 million and RMB500 million, respectively. Meanwhile, cost of sales and operating expenses of synthetic fibers and petroleum products increased by 4.48% and 4.76% compared to the previous year, respectively. while cost of sales and operating expenses of resins and plastics, intermediate petrochemical products, petrochemical products and other products decreased by 0.66%, 3.19%, 18.16% and 22.54% compared to the previous year.

Compared to the previous year, the cost of sales and operating expenses of the petrochemical products decreased this year, which was mainly due to the decrease in sales of the subsidiary China Jinshan Associated Trading Corporation and thus the decrease in corresponding costs.

• Cost of sales

Our cost of sales amounted to RMB86,468.0 million in 2019, representing a decrease of 3.75% as compared to RMB89,839.0 million in 2018. Cost of sales accounted for 98.02% of net sales for 2019.

• Selling and administrative expenses

Our selling and administrative expenses amounted to RMB549.9 million in 2019, representing a slight increase of 2.57% as compared to RMB536.1 million in the previous year, which was mainly due to the increase in transportation fee by RMB13.5 million.

• Other operating income

Our other operating income amounted to RMB150.7 million in 2019, representing a decrease of 25.62% as compared to RMB202.6 million in the previous year. This was mainly due to the decrease of RMB22.1 million in tax refunds and RMB12.9 million in subsidies of R&D projects, leading to a reduction in the revenue of other businesses.

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• Other operating expenses

Our other operating expenses were RMB21.9 million in 2019, representing a decrease of 32.62% as compared to RMB32.5 million in the previous year. This was mainly due to the decrease of RMB10.9 million in compromise and costs this year, leading to a reduction in expenses of other businesses.

• Other gains/(losses)-net

Our other gains amounted to RMB153.9 million in 2019, representing a decrease of RMB22.8 million as compared to other gains of RMB176.7 million in the previous year. The decrease in other gains was primarily due to the decrease of net gains on disposal of property, plant and equipment of RMB14.0 million in 2019.

Profits from operations

Our profit from operations amounted to RMB1,320.6 million in 2019, representing a decrease of RMB4,264.5 million as compared to RMB5,585.1 million in the previous year. The sharp decrease was mainly due to impacts of the increase in crude oil prices and the production cycle in 2019. Affected by the overall economic environment and the demands of downstream manufacturers, the price of the our products fell sharply, while our raw material purchase prices and processing costs fell less, resulting in a significant reduction in profits.

(i) Synthetic fibers

Loss from operations related to synthetic fibers amounted to RMB540.3 million in 2019, representing a decrease of RMB33.2 million in the amount of loss as compared to a loss of RMB573.5 million in the previous year. The overall poor performance of the textile industry, the downstream market of synthetic fibers segment, together with the impact of the external trade situation resulted in weak market demand and an increase in losses in the synthetic fibers sector during 2019.

(ii) Resins and plastics

Profit from operations related to resins and plastics amounted to RMB401.4 million in 2019, representing a decrease of RMB499.0 million as compared to RMB900.4 million in the previous year. The decrease was mainly due to the increase in the cost of raw materials and the market downturn, which led to a significant decline in sales prices. For the period, cost of sales and expenses decreased by 0.66%, unit cost of sales increased by 6.94%, and net sales decreased by 5.33%.

(iii) Intermediate petrochemicals

Profit from operations related to intermediate petrochemical products amounted to RMB413.9 million in 2019, representing a decrease of RMB1,521.0 million as compared to RMB1,934.9 million in the previous year. The decrease in gross profit of chemical products was due to the increase in the cost of crude oil, which made the average unit cost of intermediate petrochemical products rise more, and the sales affected by the needs of downstream manufacturers and the overall economic environment, hence the gross profit dropped significantly.

(iv) Petroleum products

Profit from operations related to petroleum products amounted to RMB705.5 million in 2019, representing a decrease of RMB2,204.5 million as compared to RMB2,910.0 million in the previous year. The decrease was mainly attributable to the weighted average sales price of major products decreasing by 4.28%, and sales volume increasing by 3.80% as compared to the previous year.

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(v) Trading of petrochemical products

Profit from trading of petrochemical products amounted to RMB53.2 million in 2019, representing a decrease of RMB51.7 million as compared to RMB104.9 million in the previous year. The increase was mainly attributable to the decrease of RMB4,853.3 million in net sales of the trading business, and the cost of sales and expenses for the same period was decreased by RMB4,801.6 million, leading to a lower profit as compared to the previous year.

(vi) Others

Profit from other operations amounted to RMB286.8 million in 2019, representing a decrease of RMB21.6 million as compared to RMB308.4 million in the previous year, which was mainly due to the decrease in the amount of government subsidies issued this year and the increase in the amount of asset disposal income.

Net finance income

Our net finance income was RMB363.0 million in 2019, representing an increase of RMB25.6 million as compared to RMB337.4 million in the previous year. The increase was mainly due to reduction in interest expenses incurred on short-term borrowings during the reporting period, which led to a decrease of RMB52.4 million in interest expenses from RMB106.2 million in 2018 to RMB53.8 million in 2019.

Profit before income tax

Our profit before taxation was RMB2,656.1 million in 2019, representing a decrease of RMB4,152.0 million as compared to the profit before taxation of RMB6,808.1 million in the previous year.

Income tax

Our income tax expenses amounted to RMB429.0 million in 2019, representing a decrease of RMB1,042.9 million as compared to RMB1,471.9 million in the previous year. The decrease was primarily due to the decrease in our profit before income tax. In accordance with the PRC Enterprise Income Tax Law (amended) which took effect from January 1, 2008, the income tax rate of the Company in 2019 was 25% (2018:25%). However, the effective rate for income tax was 16.15% in 2019, as compared to 21.62% in 2018.

Net profit

Our net profit was RMB2,227.1 million in 2019, representing a decrease of RMB3,109.1 million as compared to RMB5,336.2 million in 2018.

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

Net sales

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

(i) Synthetic fibers

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

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

(ii) Resins and plastics

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

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

(iii) Intermediate petrochemicals

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

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

(iv) Petroleum products

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

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

(v) Trading of petrochemical products

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

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

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(vi) Others

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

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

Cost of sales and operating expenses

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

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

• Cost of sales

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

• Selling and administrative expenses

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

• Other operating income

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

• Other operating expenses

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

• Other gains/(losses)-net

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

Profits/(losses) from operations

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

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(i) Synthetic fibers

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

(ii) Resins and plastics

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

(iii) Intermediate petrochemicals

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

(iv) Petroleum products

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

(v) Trading of petrochemical products

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

(vi) Others

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

Net finance income

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

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Profit before income tax

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

Income tax

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

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

Net profit

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

B. Liquidity and Capital Resources.

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

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

The following table sets forth a condensed summary of our consolidated statement of cash flows for the years ended December 31, 2017, 2018 and 2019.

	Year Ended December 31,
	2017		2018		2019
	(RMB million)
Net cash generated from operating activities		7,060.8		6,659.4		5,057.8
Net cash used in investing activities		2,400.7		1,928.4		4,623.2
Net cash used in financing activities		2,589.8		3,507.2		1,737.4
Net increase/(decrease) in cash and cash equivalents		2,070.3		1,223.9		(1,302.8	)

Net cash generated from operating activities

The net cash generated from operating activities amounted to RMB5,057.8 million in 2019, representing a decrease in cash inflows of RMB1,601.6 million as compared to the net cash inflows of RMB6,659.4 million in 2018.During the reporting period, with profitability in operating, the Company’s cash inflows generated from operating activities in 2019 amounted to RMB5,655.7 million, a decrease of RMB2,845.8 million from the cash inflows generated from operating activities of RMB8,501.5 million. The income tax payable in 2019 amounted to RMB534.5 million, a decease of RMB1,271.9 million from the income tax payable of RMB1,806.4 million in the previous year.

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

Net cash used in investing activities

Our net cash used in investing activities increased from RMB1,928.4 million in 2018 to RMB4,623.2 million in 2019. This was primarily due to the increase in the amount of structured deposits and fixed deposits.

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

Net cash used in financing activities

Our net cash used in financing activities decreased from was RMB3,507.2 million in 2018 to RMB1,737.4 million in 2019. The decrease was primarily due to (i) an increase in borrowings to third parties of RMB1,050.0 million, and (ii) a decrease in payment of dividends to shareholders of RMB541.0 million.

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

Borrowings and banking facilities

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

	Year Ended December 31,
Debt instruments	2018		2019
	(RMB million)
Short term bank loans (1)		497.2		1,547.6
Long term bank loans		—		—
	497.2		1,547.6

(1) As of December 31, 2019, no borrowings were secured by the way of property, plant and equipment. We obtained a credit rating of AAA for financing loans, assessed by Shanghai Huajie Credit Rating & Investors Service Co., Ltd., a credit rating agency authorized by the Shanghai Branch of the People’s Bank of China. As of December 31, 2019, the current assets exceeded current liabilities by RMB6.83 billion. The liquidity of the Company is primarily dependent on the ability to maintain adequate cash inflow from operations, the renewal of its short-term bank loans and on its ability to obtain adequate external financing to support its working capital and meet its debt obligation when they become due. As of December 31, 2019, we had standby credit facilities of RMB21.3 billion, within which the maturity dates of unused facility amounting to RMB15.1 billion will be after December 31, 2020. We assessed that all the facilities could be renewed upon their expiration dates. We have carried out a detailed review of the cash flow forecast for the 12 months ending December 31, 2020. Based on such forecast, we believe that we will be able to renew these facilities when they expire based on our well-established relationships with various lenders and adequate sources of liquidity exist to fund our working capital and capital expenditure requirements.

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

• the cost of financing and the condition of financial markets;

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

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

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

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

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

Gearing ratio

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

Capital expenditure

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

Major Project	Total amount of project investment RMB million		Amount of project Investment in 2019 RMB million		Project progress as of December 31, 2019
Oil cleaning project 400,000 tons/year clean gasoline components units		782		420	Under construction
Second stage of PAN (Polyacrylonitrile) based carbon fiber project with annual production of 1500 tons		323		210	Under construction
Function Reconstruction of Emergency Shut-off Valve in the Tank Area of the Storage and Transportation Department		77		54	Under construction
Separation of Waste and Clear Water Project in the Tank Area of Storage and Transportation Department		64		38	Under construction
Upgraded Factory Facilities Reconstruction of Bunker Fuel Oil		48		38	In Operation
Equity Investment in Shanghai Shidian Energy Co., Ltd. (“Shidian Energy”)		400		320	In Progress

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

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Proposed Dividend Distribution

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

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

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

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

D. Trend Information

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

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

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

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

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

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

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

E. Off-balance Sheet Arrangements

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

F. Contractual Obligations and Commercial Commitments

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

			As of December 31, 2019/Payment Due by Period
	Total		Within 1 year or on demand		More than 1 year but within 2 years		More than 2 years but within 5 years		More than 5 years
	(RMB’000)		(RMB’000)		(RMB’000)		(RMB’000)		(RMB’000)
Contractual obligations
Short term borrowings		1,547,600		1,547,600		—		—		—
Long term borrowings		—		—		—		—		—
Lease liabilities		23,476		11,700		8,846		2,435		495
Total contractual obligations		1,571,076		1,559,300		8,846		2,435		495
Estimated future interest payments
Fixed rate		26,352		—		—		—		—
Variable rate		1,224		—		—		—		—
Total estimated future interest payments		27,576		—		—		—		—
Investment commitments
Capital contribution to SECCO (Note 30(h))		111,263		—		—		—		—
Capital contribution to Shidian Energy (Note 30(h))		80,000		—		—		—		—
T Total investment commitments		191,263		—		—		—		—
Other commercial commitments
Capital commitments (Note 33)		247,220		—		—		—		—

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

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G. Other Information

Purchase, Sale and Investment

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

Pledge of Assets

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

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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.

A. Directors and Senior Management.

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

Name	Age		Position
Directors
Wu Haijun		57	Chairman of the Board of Directors, Chairman of Strategy Committee and Member of Nomination Committee
Jin Qiang		54	Executive Director and Vice President
Zhou Meiyun		50	Executive Director, Member of Strategy Committee and Remuneration and Appraisal Committee, Vice President and Chief Financial Officer
Jin Wenmin		55	Executive Director and Vice President
Lei Dianwu		57	Non-executive Director and Member of Strategy Committee
Mo Zhenglin		55	Non-executive Director and Member of Strategy Committee
Zhang Yimin		65	Independent Director and Chairman of the Remuneration and Appraisal Committee and Nomination Committee
Liu Yunhong		43	Independent Director and Member of Audit Committee
Du Weifeng		43	Independent Director and Member of Audit Committee, Remuneration and Appraisal Committee and Nomination Committee
Li Yuanqin		46	Independent Director, Chairman of Audit Committee and Member of Strategy Committee
Supervisory Committee
Ma Yanhui		49	Chairman of the Supervisory Committee
Zhang Feng(1)		50	Employee Supervisor
Chen Hongjun(1)		49	Employee Supervisor
Zhai Yalin		55	Supervisor
Zheng Yunrui		54	Independent Supervisor
Cai Tingki		65	Independent Supervisor
Senior Management
Guan Zemin(2)		55	President
Huang Xiangyu(2)		51	Vice President
Huang Fei(2)		43	Vice President

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

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

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Directors

Wu Haijun, aged 57, is an Executive Director, Chairman, President, Chairman of the Strategy Committee, member of the Nomination Committee of the Company, Acting Secretary to the Board and Chairman of Shanghai SECCO. Mr. Wu joined the Shanghai Petrochemical Complex (the “Complex”) in 1984 and has held various positions, including Deputy Director and Director of the Company’s No.2 Chemical Plant, as well as manager of the Chemical Division. He was Vice President of the Company from May 1999 to March 2006 and Director of the Company from June 2004 to June 2006. Mr. Wu was manager and Secretary of the Communist Party Committee of the Chemical Sales Branch of Sinopec Corp from December 2005 to March 2008. From December 2005 to April 2010, he was Director of the Chemical Business Department of Sinopec Corp. In April 2010, he was appointed as a Director of Shanghai SECCO. From April 2010 to February 2011, Mr. Wu was President of Shanghai SECCO. In April 2010, he was appointed Secretary of the Communist Party Committee of Shanghai SECCO and in June 2010 he was appointed Director of the Company. From June 2010 to December 2017, he served as Vice President of the Company. From February 2011 to March 2015, he acted as Vice President of Shanghai SECCO, and was President of Shanghai SECCO from March 2015 to December 2017. Mr. Wu was appointed Chairman of Shanghai SECCO in October 2017. He has served as Chairman, President and Secretary of the Communist Party Committee of the Company since December 2017. In December 2019, he was appointed as Acting Secretary to the Board. Mr. Wu graduated from the East China Institute of Chemical Technology in 1984, majoring in chemical engineering, and obtained a bachelor’s degree in engineering. In 1997, he obtained a master’s degree in business administration from the China Europe International Business School. He is a professor-grade senior engineer by professional title.

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

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

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

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External Directors

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

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

Independent Directors

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

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

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

Li Yuanqin, aged 46, is an Independent Non-executive Director, the Chairman of the Audit Committee and a member of the Strategy Committee of the Company, a professor of the School of Management and the associate head of the Department of Accountancy at Shanghai University. She is currently an independent director of Shanghai New World Co., Ltd. (listed on Shanghai Stock Exchange, stock code: 600628). From April 2000 to March 2003, she served at the Settlement Department at the headquarters of ICBC. From June 2006 to September 2009, she was a lecturer at the School of Management at Shanghai University. From September 2009 to March 2019, she was an associate professor of the School of Management at Shanghai University. She has been the professor of the School of Management and the associate head of the Department of Accountancy of Shanghai University since March 2019 and May 2011. During that period, she was also a visiting scholar at Foster School of Business, University of Washington in the United States between February 2012 and February 2013. She also serves as a member of the eighth session of the Shanghai Baoshan Committee of the Chinese People’s Political Consultative Conference and a non-executive member of the Chinese Institute of Certified Public Accountants. She received a PhD in Management from Antai College of Economics and Management (ACEM) at Shanghai Jiao Tong University.

Supervisory Committee

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

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

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Zhang Feng, aged 50, is currently Supervisor and Auditing Director of the Company. Mr. Zhang started his career in Shanghai Petrochemical Complex in 1991. He served as Assistant of Chief and Deputy Chief of Finance Section of Polyester II Factory, Deputy Chief of Finance Section of Polyester Department, Deputy Chief and Chief of Cost Section of Finance Division of Polyester Department, Deputy Chief and Chief of Finance Division, Director Assistant, Deputy Director, Deputy Director (Hosting Work), Director of Finance Department and Chief of Finance Division. He has been the Auditing Director of the Company in December 2018 and Supervisor in October 2019. Mr. Zhang graduated from Shanghai University of Finance and Economics in 1991, majoring in Accounting, and obtained a bachelor’s degree in Economics. Mr. Zhang holds a senior accountant title.

Chen Hongjun, aged 49, is currently Supervisor, Vice-President of Labour Union, Director of the Public Affairs Department and Vice-President of the Association of Science and Technology of the Company. Mr. Chen started his career in the Company in 1996. He served as Vice Party Branch Secretary of Fibre Polymer Office, Deputy Director of Spinning Office, Director of Simulation Office, Section Manager of Scientific Research Management Department, Deputy Secretary and Secretary of Youth League Committee of the Company, Party Secretary and Deputy Director of the Chemical Engineering Department, Party Secretary and Assistant Manager of Fine Chemicals Department and Director of Public Affairs Department. Mr. Chen was appointed as Vice-President of Labour Union of the Company in November 2013. He was appointed as Vice President of the Association of Science and Technology in December 2017. He served as Director of the Public Affairs Department of the Company in April 2018, and he was elected as Supervisor of the Company in October 2019. In 1993, Mr. Chen graduated from Chengdu University of Science and Technology, majoring in Dyeing and Finishing Engineering, and obtained a bachelor’s degree in Engineering. In 1996, he obtained a master’s degree in Chemical Fibre from Sichuan Unite University. Mr. Chen holds a senior engineer title.

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

Independent Supervisor

Zheng Yunrui, aged 54, is an Independent Supervisor of the Company and a professor in civil and commercial law at the Faculty of Law of the East China University of Political Science and Law in the PRC and Member of Expert Consultation Committee of Shanghai Yangpu District People’s Procuratorate and Mediator of Shanghai Second Intermediate People’s Court. He has been serving as an Independent Supervisor since December 2014. From April 2013 to May 2019, Mr. Zheng was an independent director of Hangzhou Innover Technology Co., Ltd. (listed on the Shenzhen Stock Exchange, stock code: 002767). He is an independent director of Jiangxi XinyuGuoke Technology Co., Ltd. (listed on the Shenzhen Stock Exchange, stock code: 300722), an External Supervisor of Fuxin Dare Automotive Parts Co., Ltd. (listed on the Shenzhen Stock Exchange, stock code: 300473), Dalian Insulator Group Co., Ltd (listed on the Shenzhen Stock Exchange, stock code: 002606) and Zhejiang Reclaim Construction Group Co., Ltd (listed on the Shenzhen Stock Exchange, stock code: 002586). Mr. Zheng graduated from Shangrao Normal University in Jiangxi Province, majoring in English Language. Mr. Zheng obtained a master’s degree in law and a doctorate’s degree in law from the Faculty of Law of Peking University in July 1993 and July 1998, respectively. Mr. Zheng previously worked at the Education Bureau of Shangrao County, Jiangxi Province, Hainan Airport Limited, China Township Enterprise Investment and Development Company Limited and the Legal Affairs Office of the Shanghai Municipal People’s Government. He has been teaching at East China University of Political Science and Law since August 2001. He was a visiting scholar at the Faculty of Law of National University of Singapore between July 2002 and December 2002. Mr. Zheng has been engaged in trials, teaching and research relating to civil law, property law, contract law, company law, insurance law, social insurance law and government procurement law. He is experienced in the legal affairs on corporate governance and has great academic achievements. He is also an arbitrator at the Arbitration Commission of Shenzhen, Shenyang, Xuzhou and Wuxi. Mr. Zheng was appointed as a member of Expert Advisory Committee of the People’s Procuratorate of Shanghai Yangpu District and mediator of Shanghai No. 2 intermediate People’s Court on March 24, 2017 and June 26, 2017, respectively.

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

Senior Management:

Guan Zemin, aged 55, is the President of the Company. Mr. Guan started to work in 1990, and he has successively served as Director of Catalyzing Workshop, Deputy Director and Director of Production Scheduling Department, and Deputy Chief Engineer of Sinopec Corp., Wuhan Branch (“Wuhan Branch”). From December 2012 to December 2018, he served as Deputy General Manager of Wuhan Branch. From May 2016 to December 2019, he served as President and a member of the Board of Sinopec-SK (Wuhan) Petrochemical Company Limited. From December 2018 to December 2019, he served as the Director and Deputy Party Secretary of Wuhan Petrochemical Works and President of Wuhan Branch. Mr. Guan Zemin graduated from the East China University of Chemical Technology in July 1990 with a master’s degree in fine chemical engineering and obtained a master’s degree in engineering. He obtained the title of Senior Engineer.

Huang Xiangyu, aged 51, is a Deputy General Manager of the Company. Mr. Huang started his career in 1990 and joined Shanghai Petrochemical Complex in 1992. He served as the Deputy Director of the chemical workshop, Deputy Director of Jinyang Unitof of Shanghai Jinyang Acrylic Plant, Deputy Director and Director of Jinyang Acrylic Equipment of Acrylic Business Unit and Chief Engineer of Acrylic Business Divison of the Company. From July 2011 to January 2020, he served as the Director of the Acrylic Fiber Research Institute of the Company. From November 2011 to January 2020, he served as the Chief Engineer of the Acrylic Fiber Division of the Company. From February 2019 to January 2020, he served as Deputy Chief Engineer of the Company. Mr. Huang graduated from the Organic Chemical Major of School of Chemical Engineering, East China University of Science and Technology with a bachelor’s degree in Engineering in July 1990. He obtained a master’s degree in Engineering from Donghua University in May 2004. He graduated from Polymeric Chemistry and Physics Major of Fudan University with a doctor’s degree in Engineering in June 2013. He obtained the title of professor-level Senior Engineer.

Huang Fei, aged 43, is a Deputy General Manager of the Company. Mr. Huang joined Sinopec Shanghai Petrochemical Company Limited in 2000, and he has successively served as Polyolefin Plant Deputy Director of Plastic Business Unit and Manager Assistant and Polyolefin Plant Director of Plastic Department. From August 2012 to June 2014, he served as Deputy Manager of the Plastic Department. From June 2014 to February 2017, he served as Director and Vice Party Secretary of Statistical Center. From February 2017 to December 2018, he served as Manager and Deputy Party Secretary of Olefin Department. From December 2018 to January 2019, he served as General Manager Assistant and the Director of Production Department. From January 2019 to December 2019, Mr. Huang served as General Manager Assistant and Manager of Production Department of SECCO. In July 2000, Mr. Huang graduated from the Polymer Materials and Engineering Major of East China University of Science and Technology with a bachelor’s degree of Engineering. He graduated from Chemical Engineering Major of East China University of Science and Technology with a master’s degree. He obtained the title of Senior Engineer in April 2008.

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B. Compensation.

The aggregate amount of cash compensation we paid to our directors, supervisors and executive officers during the year ended December 31, 2019 was approximately RMB9.35 million. In addition, directors and supervisors who are also officers or employees receive certain other benefits-in-kind, such as subsidized or free health care services, housing and transportation, which large Chinese enterprises customarily provide to their employees. No benefits are payable to members of the board or the Supervisory Committee or the executive officers upon termination of their relationship with us.

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

Name	Position with the Company	Salaries and other benefits		Retirement scheme contributions*		Discretionary bonus		Fees		Total Remuneration in 2019 (excluding share options)
		(RMB’000) (before tax)		(RMB’000) (before tax)		(RMB’000) (before tax)		(RMB’000) (before tax)		(RMB’000) (before tax)
Wu Haijun	Chairman & Executive Director		343		26		557		—		926
Jin Qiang	Executive Director, & Vice President		289		26		745		—		1,060
Zhou Meiyun	Executive Director, Vice President & Chief Financial Officer		248		26		709		—		983
Jin Wenmin	Executive Director & Vice President		260		26		721		—		1,007
Lei Dianwu	External Director		—		—		—		—		—
Mo Zhenglin	External Director		—		—		—		—		—
Zhang Yimin	Independent Director		—		—		—		150		150
Liu Yunhong	Independent Director		—		—		—		150		150
Du Weifeng	Independent Director		—		—		—		150		150
Li Yuanqin	Independent Director		—		—		—		150		150
Ma Yanhui	Chairman of Supervisory Committee		267		22		685		—		974
Zhang Feng(1)	Supervisor		31		9		107		—		147
Chen Hongjun(1)	Supervisor		34		9		110		—		153
Zhai Yalin	Supervisor		—		—		—		—		—
Zheng Yunrui	Independent Supervisor		100		—		—		—		100
Cai Tingki	Independent Supervisor		100		—		—		—		100

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Shi Wei(2)	Former Executive Director, & President	329	26	797	—	1,152
Guo Xiaojun(2)	Former Executive Director, Vice President, Secretary to the Board & Joint Company Secretary	283	26	751	—	1,060
Zuo Qiang(3)	Former Supervisor	102	15	324	—	441
Li Xiaoxia(4)	Former Supervisor	102	14	529	—	645
Fan Qingyong(5)	Former Supervisor	—	—	—	—	—
Guan Zemin(6)	President	—	—	—	—	—
Huang Xiangyu(6)	Vice President	—	—	—	—	—
Huang Fei(6)	Vice President	—	—	—	—	—

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

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

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

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

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

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

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

C. Board Practices.

Board of Directors

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

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Independent Board Committee

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

Supervisory Committee

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

Remuneration and Appraisal Committee

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

Audit Committee

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

Nomination Committee

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

Strategy Committee

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

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Summary Corporate Governance Differences

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

D. Employees.

As of December 31, 2019, we had 8,878 employees.

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

	December 31,
	2017		2018		2019
Management		1,148		1,057		1,081
Engineers, technicians and factory personnel		6,197		5,753		5,430
Accounting, marketing and others		3,016		2,787		2,367
Total		10,361		9,597		8,878

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

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A system of labor contracts has been adopted in our Company. The contract system imposes discipline, provides incentives to adopt better work habits and gives us greater management control over our work force. We believe that by linking remuneration to productivity, the contract system has also improved employee morale. As of December 31, 2019, almost all of the work force was employed pursuant to labor contracts which specify the employee’s position, responsibilities, remuneration and grounds for termination. The contracts generally have short terms of one to five years and may be renewed with the agreement of both parties. The remaining personnel are employed for an indefinite term.

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

Total remuneration of our employees includes salary and bonuses. Employees also receive certain benefits in terms of housing, education and health services that we subsidize, and other miscellaneous subsidies. In 2019, we incurred RMB3,147.4 million in employment costs.

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

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

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E. Share Ownership.

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

Name	Position held	Number of Shares held (shares)	Percentage of total issued shares of the Company (%)		Percentage of total issued A shares (%)
Jin Qiang	Executive Director and Vice President	301,000 A shares (L)		0.002781		0.00411
Jin Wenmin	Executive Director and Vice President	175,000 A shares (L)		0.001617		0.00239
Zhang Feng	Supervisor	10,000 A shares (L)		0.000092		0.00014
Chen Hongjun	Supervisor	31,000 A shares (L)		0.000290		0.00043

(L): Long position

Share Option Incentive Scheme

The Share Option Incentive Scheme of the Company took effect from 23 December 2014, with a validity period of 10 years until 22 December 2024. The first grant of A-share share options under the Share Option Incentive Scheme was on 6 January 2015. For details, please refer to the relevant announcements uploaded on the websites of Shanghai Stock Exchange, Hong Kong Stock Exchange and the Company on 6 January 2015. All the exercise periods of the first grant have ended on 28 December 2018. For details, please refer to the relevant announcements uploaded on the websites of Shanghai Stock Exchange, Hong Kong Stock Exchange and the Company on 28 December 2018. At present, the Company has no other granting scheme.

During 2019, the Company did not grant A-share share options under the Share Option Incentive Scheme, nor did the grantees exercise any A-share share options, and no A-share share options were cancelled or lapsed.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.

A. Major Shareholders.

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

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

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The table below sets forth information regarding ownership of our shares as of March 31, 2020 by all persons who we know own more than five percent of our A shares and our H Shares. Our major shareholders listed below do not have voting rights different from those of our other shareholders.

Name of shareholders	Interests held (shares)	Percentage of total issued shares of the Company (%)	Percentage of total issued shares for this category(%)
Sinopec Corp.	5,460,000,000A shares (L)	50.44	74.50
The Bank of New York Mellon Corporation	436,867,031 H shares (L)   367,331,900 H shares (S)   61,158,279 H shares (P)	4.04   3.39   0.57	12.50   10.51   1.75
BlackRock, Inc.	282,286,866 H shares (L)   5,906,000 H shares (S)	2.61   0.05	8.08   0.17
Hung Hin Fai(1)	211,008,000 H shares (L)    200,020,000 H shares (S)	1.95   1.85	6.04   5.72
Chan Kin Sun(2)	200,020,000 H shares (L)	1.85	5.72
Citigroup Inc.	244,040,695 H shares (L)   2,204,900 H shares (S)   223,103,401 H shares (P)	2.25   0.02   2.06	6.98   0.06   6.38
Brown Brothers Harriman & Co.	177,771,311 H shares (L)   177,771,311 H shares (P)	1.64   1.64	5.09   5.09

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

Notes:

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

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

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As of March 31, 2020, a total of 3,495,000,000 H Shares were outstanding, and a total of 7,328,813,500 A Shares were outstanding.

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

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

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

B. Related Party Transactions.

Intercompany service agreements and business-related dealings

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

As the above-mentioned framework agreement expired on 31 December 2019, to ensure that the normal operation of the Company is not affected, we renewed the Mutual Product Supply and Sales Services Framework Agreement with Sinopec Group and Sinopec Corp. and the Comprehensive Services Framework Agreement with Sinopec Group on 23 October 2019, and intended to continue the above-mentioned continuing connected transactions from 2020 to 2022, valid for three years until 31 December 2022. We disclosed the two agreements and the respective continuing connected transactions under the agreements in an announcement dated 23 October 2019 and a circular dated 13 November 2019. These two agreements and the respective continuing connected transactions under the agreements together with the associated annual caps from 2020 to 2022 were considered and approved at the first extraordinary general meeting for 2019 held on 10 December 2019.

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

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

The table below sets forth certain relevant information regarding our continuing connected transactions with Sinopec Corp. and Sinopec Group under the Mutual Product Supply and Sales Services Framework Agreement and the Comprehensive Services Framework Agreement in 2019.

Type of major transactions	Connected parties	Annual cap for 2019		Transaction Amount during the reporting Period		Unit: RMB’000 Percentage Of the total Amount of the same type of transaction (%)
Mutual Product Supply and Sales Services Framework Agreement
Purchases of raw materials	Sinopec Corp., Sinopec Group and their associates		80,286,000		55,385,078		78.63	%
Sales of petroleum and petrochemical products	Sinopec Corp. and its associates		102,914,000		58,996,676		58.79	%
Property leasing	Sinopec Corp. and its associates		36,000		31,972		41.86	%
Agency sales of petrochemical	Sinopec Corp. and its associates		240,000		125,619		100.00	%
Comprehensive Services Framework Agreement
Construction, installation and engineering design services	Sinopec Group and its associates		3,444,000		143,560		23.92	%
Petrochemical industry insurance services	Sinopec Group and its associates		180,000		108,223		100.00	%
Financial services	Sinopec Group and its associates		200,000		1,295		0.33	%

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On December 31, 2018, the Company entered into an asset leasing agreement (the “Lease Agreement”) with Baishawan branch of Sinopec Petroleum Reserve Company Limited (the “Baishawan Branch”), a wholly owned subsidiary of the Company’s de facto controller, Sinopec Group. Pursuant to the Lease Agreement, the Company rents the oil tanks and ancillary equipment from the Baishawan Branch at an annual rent up to RMB95.0 million (including VAT) with the leasing period from January 1, 2019 to December 31, 2019. The Lease Agreement was considered and approved at the 14th meeting of the Ninth Session of the Board on December 28, 2018. Related announcements were published on the websites of the Shanghai Stock Exchange, the Hong Kong Stock Exchange and the Company on December 28, 2018, as well as on “Shanghai Securities News” and “China Securities Journal” on December 29, 2018. During the reporting period, the Company incurred leasing costs of RMB82.00 million (including VAT).

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

On December 28, 2018, the Company entered into a technical service agreement with Petro-CyberWorks Information Technology Co., Ltd. (“PCITC”), a non wholly-owned subsidiary of the Company’s de facto controller, Sinopec Group. Pursuant to the technical service agreement, the Company appointed PCITC to implement the design, construction, operation and maintenance of smart plant project for a total amount of RMB30,580,000 (inclusive of tax). The term of the technical service agreement starts from the date of signing by both parties, and the main function construction was completed in February 2020. Related announcements were published on the official websites of the Shanghai Stock Exchange, the Hong Kong Stock Exchange and the Company on December 28, 2018, as well as on “Shanghai Securities News” and “China Securities Journal” on December 29, 2018.

HKSE connected transactions rules

We are required by HKSE listing rules to obtain advance shareholder approval for certain transactions with related parties such as Sinopec Group, Sinopec Corp., or its associates. We comply with such HKSE listing rules by obtaining advance shareholder approval at least every three years for the renewal of our framework agreements (e.g., the Mutual Product Supply and Sales Services Framework Agreement and the Comprehensive Services Framework Agreement) with Sinopec Corp. and Sinopec Group for setting maximum aggregated annual values spent on the supply of products and services under these agreements. The independent non-executive directors will need to confirm each year, upon reviewing our continuing connected transaction, that these transactions are conducted in the ordinary and usual course of our business, on normal commercial terms and in accordance with the terms of these agreements.

C. Interests of Experts and Counsel.

Not applicable.

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ITEM 8. FINANCIAL INFORMATION.

A. Consolidated Statements and Other Financial Information.

Please see Item 18. Financial Statements for our audited consolidated financial statements filed as part of this annual report.

Litigation

Neither we nor any of our subsidiaries is a party to, nor is any of our or their property the subject of any legal or arbitration proceedings which may have significant effects on our financial position or profitability or cash flows. We are not aware of any litigation or arbitration proceedings in which any of our directors, any member of our senior management or any of our affiliates is an adverse party or has a material adverse interest.

Dividend Policy

Our Board of Directors may propose dividend distributions subject to the approval of the shareholders. The Articles of Association also provide that, the aggregate profits distributed in cash in the recent three years shall not be less than 30% of the average annual distributable profits within such three-year period. Shareholders receive dividends in proportion to their shareholdings.

The Articles of Association require that cash dividends and other distributions in respect of H Shares be declared in Renminbi and paid by us in Hong Kong Dollars while cash dividends and other distributions in respect of our A Shares be paid in Renminbi. If we record no profit for the year, we may not distribute dividends in such year.

We expect to continue to pay dividends, although there can be no assurance as to the particular amounts that might be paid from year to year. Payment of future dividends will depend upon our revenue, financial condition, future earnings and other factors. See Item 5. Operating and Financial Review and Prospects and Item 3. Key Information – A. Selected Financial Data – Dividends.

B. Significant Changes.

No significant change has occurred since the date of the financial statements included in this annual report.

ITEM 9. THE OFFER AND LISTING.

A. Offer and Listing Details

The principal trading market for our H Shares is the HKSE. The ADSs, each representing 100 H Shares, have been issued by The Bank of New York Mellon as a depositary under a Deposit Agreement with us and are listed on the NYSE under the symbol “SHI.” We have also listed our A Shares on the Shanghai Stock Exchange. Prior to our initial public offering on July 26, 1993 and subsequent listings on the HKSE and NYSE, there was no market for our H Shares or the ADSs. Public trading in our A Shares commenced on November 8, 1993.

B. Plan of Distribution

Not applicable.

C. Markets

Our H Shares are listed for trading on the HKSE (Code: 00338), our ADSs are listed for trading on the NYSE under the symbol “SHI” and our A Shares are listed for trading on the Shanghai Stock Exchange (Code: 600688).

D. Selling Shareholders

Not applicable.

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E. Dilution

Not applicable.

F. Expenses of the Issuer

Not applicable.

ITEM 10. ADDITIONAL INFORMATION.

A. Share Capital

Not applicable.

B. Memorandum and Articles of Association.

We are a joint stock limited company established in accordance with the PRC Company Law and certain other laws and regulations of the PRC. We are registered with the Shanghai Administration of Industry and Commerce with business license number 91310000132212291W.

The following is a summary based upon provisions of our Articles of Association as currently in effect, the PRC Company Law (1993) (as amended) and other selected laws and regulations applicable to us. You should refer to the text of the Articles of Association and to the texts of applicable laws and regulations for further information.

Our Articles of Association provide, at article 12, that our purpose is:

• to build and operate a diversified industrial company which will be one of the world’s leading petrochemical companies;

• to promote the development of the petrochemical industry in China through the production of a broad variety of outstanding products; and

• to practice advanced, scientific management and apply flexible business principles, and to develop overseas markets for our products so that we and our shareholders receive reasonable economic benefits.

Our scope of business is limited to matters approved by Chinese authorities. Article 13 provides that our primary business scope includes:

Refining crude oil, petroleum products, petrochemical products, synthetic fibers and monomers, plastic products, raw materials for knitting and textile products, preparation of catalysts and recover waste catalysts, power, heat, water and gas supply, water treatment, railway cargo loading and unloading, inland water transport, wharf operation, warehousing, design, research and development, technology development, transfer, consultancy and other services, property management, lease of self-owned premises, internal staff training, design and fabrication of various advertisements, release of advertisements on self-owned media and quality technology services (administrative license should be obtained when required). We may adjust these subject to approval by governmental authorities.

The following discussion primarily concerns our shares and the rights of our shareholders. Holders of our ADSs will not be treated as our shareholders and will be required to surrender their ADSs for cancellation and withdrawal from the depositary facility in which the H Shares are held in order to exercise shareholder rights in respect of H Shares.

A Shares and overseas-listed foreign invested H Shares are both ordinary shares in our share capital. A Shares are shares we issue to domestic Chinese investors for subscription in Renminbi, while H Shares are shares we issue for subscription in other currencies to investors from Hong Kong, Macau, Taiwan and outside of China.

Sources of Shareholders’ Rights

China’s legal system is based on written statutes and is a system in which decided legal cases have little precedent value. China’s legal system is similar to civil law systems in this regard. In 1979, China began the process of developing its legal system by undertaking to promulgate a comprehensive system of laws. In December 1993, the Standing Committee of the 8th National People’s Congress adopted the PRC Company Law. Although the PRC Company Law is expected to serve as the core of a body of regulatory measures, which will impose a uniform standard of corporate behavior on companies and their directors and shareholders, only a limited portion of this body of regulatory measures has so far been promulgated.

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Currently, the primary sources of shareholder rights are the Articles of Association, the PRC Company Law and the HKSE listing rules, which, among other things, impose standards of conduct, fairness and disclosure on us, our directors and our controlling shareholder. To facilitate the offering and listing of shares of Chinese companies overseas, and to regulate the behavior of companies whose shares are listed overseas, the former State Council Securities Committee and the former State Commission for Restructuring the Economic System issued the Mandatory Provisions for articles of association of Companies Listing Overseas on August 27, 1994. These provisions have been incorporated into our Articles of Association and any amendment to those provisions will only become effective after approval by the companies approval department authorized by the State.

In addition, upon the listing of and for so long as the H Shares are listed on the HKSE, we will be subject to those relevant ordinances, rules and regulations applicable to companies listed on the HKSE, the Securities and Futures Ordinance and the Codes on Takeovers and Mergers and Share Repurchases.

Unless otherwise specified, all rights, obligations and protections discussed below derive from our Articles of Association and/or the PRC Company Law.

Enforceability of Shareholders’ Rights

There has not been any public disclosure in relation to the enforcement by holders of H Shares of their rights under the charter documents of joint stock limited companies or the PRC Company Law or in the application or interpretation of the Chinese or Hong Kong regulatory provisions applicable to Chinese joint stock limited companies.

In most states of the United States, shareholders may sue a corporation “derivatively.” A derivative suit involves the commencement by a shareholder of a corporate cause of action against persons who have allegedly wronged the corporation, where the corporation itself has failed to enforce the claims directly. This would include suits against corporate officers, directors, or the controlling shareholder. This type of action is brought based upon a primary right of the corporation, but is asserted by a shareholder on behalf of the corporation. In accordance with the PRC Company Law, if a company incurs losses due to the violation of any provision of laws, administrative regulations or the company’s articles of association by any of its directors, supervisors and officers during his/her discharge of duties entrusted by the company, or due to any other person’s infringement of the company’s legal rights or interests, the shareholders of the company may take legal action before a court under the PRC Company Law.

Our Articles of Association provide that all differences or claims

• between a holder of H Shares and us;

• between a holder of H Shares and any of our directors, supervisors, manager or other senior officers; or

• between a holder of H Shares and a holder of A Shares,

involving any right or obligation provided in the Articles of Association, the PRC Company Law or any other relevant law or administrative regulation which concerns our affairs must, with certain exceptions, be referred to arbitration at either the China International Economic and Trade Arbitration Commission in China or the Hong Kong International Arbitration Center. Our Articles of Association also provide that the arbitration will be final and conclusive. On June 21, 1999, an arrangement was made between Hong Kong and China for the summary mutual enforcement of each other’s arbitration awards in a manner consistent with the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards and practices that occurred before the handover of Hong Kong to China. This arrangement was approved by the Supreme Court of China and the Hong Kong Legislative Council, and became effective on February 1, 2000.

All of our directors and officers reside outside the United States (principally in China) and substantially all of our assets and of those persons are located outside the United States. Therefore, you may not be able to effect service of process within the United States against any of those persons. In addition, China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts within the United States or most other countries that are members of the Organization for Economic Cooperation and Development. This means that administrative actions brought by regulatory authorities such as the Securities and Exchange Commission, and other actions which result in foreign court judgments could only be enforced in China if the judgments or rulings do not violate the basic principles of the law of China or the sovereignty, security and social public interest of the society of China, as determined by a People’s Court of China which has jurisdiction for recognition and enforcement of judgments. We have been advised by our Chinese counsel, Haiwen & Partners, that there is doubt as to the enforceability in China of any actions to enforce judgments of United States courts arising out of or based on the ownership of our H Shares or ADSs, including judgments arising out of or based on the civil liability provisions of United States federal or state securities laws.

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Restrictions on Transferability and the Share Register

All fully paid up H Shares will be freely transferable in accordance with the Articles of Association unless otherwise prescribed by law and/or administrative regulations. Under current laws and regulations, H Shares may be traded only among investors who are not Chinese persons, and may not be sold to Chinese investors. Consequences under Chinese law of a purported transfer of H Shares to Chinese investors are unclear.

As provided in our Articles of Association, we may refuse to register a transfer of H Shares without providing any reason unless:

• all relevant transfer fees and stamp duties are paid;

• the instrument of transfer is accompanied by the share certificates to which it relates and any other evidence reasonably required by our board to prove the transferor’s right to make the transfer;

• there are no more than four joint holders as transferees; and

• the H Shares are free from any lien of ours.

Additionally, no transfers of shares may be registered within the 30 days prior to a shareholders’ general meeting or within five days before we decide on the distribution of dividends.

We are required to keep a register of our shareholders which shall be comprised of various parts, including one part which is to be maintained in Hong Kong in relation to H Shares listed on the HKSE. Shareholders have the right to inspect the share register. For a reasonable fee, shareholders may copy any part of the share register, obtain background information regarding our directors, supervisors, manager and other senior officers, minutes of shareholder general meetings and reports regarding our share capital and any share repurchases in the prior year.

Dividends

Upon approval by ordinary resolution at a shareholders’ meeting, our Board of Directors may propose dividend distribution at any time. The Articles of Association permits dividends issued in the form of cash or shares. Special resolution of the shareholders’ general meeting is required for dividends issued in the form of shares.

Dividends may only be distributed, however, after allowance has been made for:

• recovery of losses, if any;

• allocations to the statutory common reserve fund; and

• allocations to a discretionary common reserve fund.

The Articles of Association require us to appoint on behalf of the holders of H Shares a receiving agent which is registered as a trust corporation under the Trustee Ordinance of Hong Kong to receive dividends we declare in respect of the H Shares on behalf of the H shareholders. The Articles of Association require that cash dividends and other distributions in respect of H Shares be declared in Renminbi and paid by us in Hong Kong Dollars while cash dividends and other distributions of the A Shares shall be paid in Renminbi.

If we record no profit for the year, we may not normally distribute dividends for the year.

Dividend payments may be subject to Chinese withholding tax. See Item 10. Additional Information – E. Taxation.

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Voting Rights and Shareholders’ Meetings

Our Board of Directors must convene a shareholders’ annual general meeting once every year within six months from the end of the preceding financial year. Our board must convene an extraordinary general meeting within two months of the occurrence of any one of the following events:

• where the number of directors is less than five as required by the PRC Company Law or two-thirds of the number specified in our Articles of Association;

• where our unrecovered losses reach one-third of the total amount of our share capital;

• where shareholder(s) holding 10% or more of our issued and outstanding voting shares request(s) in writing; or

• whenever our board deems necessary or our Supervisory Committee so requests.

Meetings of a special class of shareholders must be called in specified situations when the rights of the holders of that class of shares may be varied or abrogated, as discussed below. The Board of Directors, the Supervisory Committee, and shareholders individually or collectively holding 3% or more of our total voting shares are entitled to make written proposals to a shareholders’ meeting. Shareholders individually or collectively holding more than 3% of our total shares may submit written interim proposals to the convener of a shareholders’ meeting ten days before the meeting.

All shareholders’ meetings must be convened by our board by notice given to shareholders by personal service, mail or announcement in the newspaper not less than 45 days before the meeting. Based on the written replies we receive 20 days before a shareholders’ meeting, we will calculate the number of voting shares represented by shareholders who have indicated that they intend to attend the meeting. We can convene the shareholders’ general meeting if the number of voting shares represented by those shareholders is more than one-half of our total voting shares. Otherwise, we shall, within five days, inform the shareholders again of the motions to be considered and the date and venue of the meeting by way of public announcement. After the announcement is made, the shareholders’ meeting may be convened. Our accidental omission to give notice of a meeting to, or the non-receipt of notice of a meeting by, a shareholder will not invalidate the proceedings at that shareholders’ meeting. However, an extraordinary shareholders meeting cannot conduct any business not contained in the notice of meeting.

Shareholders at meetings have the power, among other things, to decide on our operational policies and investment plans, to approve or reject our proposed annual budget, approve our profit distribution plans, an increase or decrease in share capital, the issuance of debentures, our merger or liquidation and any amendment to our Articles of Association. Shareholders also have the right to review any proposals by a shareholder owning 3% or more of our shares.

In general, holders of H Shares and A Shares vote together as a single class at all meetings and on all matters. However, the rights of a class of shareholders may not be varied or abrogated, unless approved by both a special resolution of all shareholders at a general shareholders’ meeting and by a special resolution of shareholders of that class of shares at a separate meeting. Our Articles of Association specify, without limitation, that the following amendments would be deemed to be a variation or abrogation of the rights of a class of shareholders:

• increasing or decreasing the number of shares of a class or of a class having voting or distribution rights or privileges equal or superior to that class;

• removing or reducing rights to receive dividends in a particular currency;

• creating shares with voting or distribution rights superior to shares of that class;

• restricting or adding restrictions to the transfer of ownership of shares of that class;

• allotting and issuing rights to subscribe for, or to convert into, shares of that class or another class;

• increasing the rights or privileges of any other class; or

• modifying the provision of our Articles of Association that specifies which amendments would be deemed a variation or abrogation of the rights of a class of shareholder.

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For votes on any of these matters, or any other matter that would vary or abrogate the rights of the A Shares or H Shares, the holders of A Shares and H Shares are deemed to be separate classes and vote separately. However, “Interested Shareholders” are not entitled to vote at class meetings. The meaning of “Interested Shareholder” depends on the proposal to be voted on at the class meeting:

• If the proposal is for us to repurchase our shares either from all shareholders proportionately or by purchasing share on a stock exchange, an “Interested Shareholder” is our controlling shareholder;

• If the proposal is for us to repurchase our shares from a shareholder by a private contract, an “Interested Shareholder” is the shareholder whose shares would be repurchased;

• If the proposal is for our restructuring, an “Interested Shareholder” is any shareholder that has an interest in the restructuring different from the other shareholders of the class or who bears a burden under the proposed restructuring that is less than proportionate to his shareholdings of the class.

Our Articles of Association specifically provide that an issue of up to 20% of A and H Shares would not be a variation or abrogation of the rights of A shareholders or H shareholders, therefore, separate approval of the A shareholders or H Shareholders would not be required.

Each share is entitled to one vote on all matters submitted to a vote of our shareholders at all shareholders’ meetings, except for meetings of a special class of shareholders where only holders of shares of the affected class are entitled to vote on the basis of one vote per share of the affected class.

Shareholders are entitled to attend and vote at meetings either in person or by proxy. Proxy authorization forms must be in writing and deposited at our company’s principal offices, or at such other place specified in the notice of shareholders meeting not less than 24 hours before the time that such meeting will be held or the time appointed for passing upon the relevant resolutions. If a proxy authorization form is signed by a third party on behalf of the relevant shareholder, then such proxy authorization form must be accompanied by the signature authorization letter or other such document authorizing such third party to sign on behalf of the shareholder.

Except for those actions discussed below, which require supermajority votes, or special resolutions, resolutions of the shareholders are passed by a simple majority of the voting shares held by shareholders who are present in person or by proxy. Special resolutions must be passed by more than two-thirds of the voting rights represented by shareholders who are present in person or by proxy.

The following decisions must be adopted by special resolution:

• an increase or reduction of our share capital or the issue of shares of any class, warrants and other similar securities;

• the issue of our debentures;

• our division, merger, dissolution and liquidation;

• amendments to our Articles of Association;

• significant acquisition or disposal of material assets or provision of guarantees conducted within the period of one year with a value exceeding 30% of our latest audited total assets;

• share incentive schemes; and

• any other matters considered by the shareholders in a general meeting and which they have resolved by way of an ordinary resolution to be material and should be adopted by special resolution.

All other actions taken by the shareholders, including the appointment and removal of our directors and independent auditors and the declaration of normal dividend payments, will be decided by an ordinary resolution of the shareholders.

Our listing agreement with the HKSE provides that we may not permit amendments to certain sections of our Articles of Association that are subject to the Mandatory Provisions. These sections include provisions relating to (i) varying the rights of existing classes of shares, (ii) voting rights, (iii) our ability to purchase our own shares, (iv) rights of minority shareholders and (v) procedures on liquidation. In addition, certain amendments to the Articles of Association require the approval and assent of Chinese authorities.

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Board of Directors

Our Articles of Association authorize up to 12 directors. Directors are elected by shareholders at a general meeting for a three year term from among candidates nominated by the Board of Directors or by shareholders holding 3% or more of our shares (Independent Directors may be nominated by shareholders each holding 1% or more of our shares). Because our directors do not serve staggered terms, the entire Board of Directors will stand for election, and could be replaced, every three years. Our directors are not required to hold any shares in us, and there is no age limit requirement for the retirement or non- retirement of our directors.

In addition to obligations imposed by laws, administrative regulations or the listing rules of the stock exchanges on which our shares are listed, the Articles of Association place on each of our directors, supervisors, manager and any other senior officers a duty to each shareholder, in the exercise of our functions and powers entrusted to them:

• not to cause us to exceed the scope of business stipulated in our business license;

• to act honestly in what he considers our best interests;

• not to expropriate our assets in any way, including (without limitation) usurpation of opportunities which may benefit us; and

• not to expropriate the individual rights of shareholders, including (without limitation) rights to distributions and voting rights, except according to a restructuring which has been submitted to the shareholders for their approval in accordance with the Articles of Association.

Our Articles of Association further place on each of our directors, supervisors, manager and other senior officers:

• a duty, in the exercise of their powers and discharge of their duties, to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances;

• a fiduciary obligation, in the discharge of his duties, not to place himself or herself in a position where his or her interests may conflict with his or her duty to us; and

• a duty not to cause a person or an organization related or connected to him or her in specified relationships to do what they are prohibited from doing.

We pay all expenses that our directors incur for their services as directors. Directors also receive compensation for their services under service contracts that are negotiated by the Board of Directors and approved by the shareholders.

Subject to the stipulations of relevant laws and regulations, the shareholders in a general meeting may by ordinary resolution remove any director before the expiration of his term of office. Except for the restrictions placed on the controlling shareholder, discussed below, our shareholders in general meeting have the power to relieve a director or supervisor from liability for specific breaches of duty.

Cumulative voting is required for a meeting of shareholders held for the election of two or more of our directors or supervisors as long as more than 30% of our outstanding shares are held by a single shareholder. Cumulative voting allows shareholders to cast a number of votes for a candidate equal to the number of shares held multiplied by the number of directors being elected at the shareholders’ meeting. If a shareholder attempts to cast more votes than he is entitled to under this system, all of the shareholder’s votes will be invalid and will be deemed an abstention.

More than one third of our directors of board must be independent from our shareholders and not hold any office with us (each, “Independent Director”). At least one Independent Director must be an accounting professional and all Independent Directors must possess a basic knowledge of the operations of a listed company and be familiar with relevant laws and rules and have at least five years working experience in law, economics or other area required for the fulfillment of responsibilities as an Independent Director. Independent Directors may not serve for terms exceeding six years. In addition, there are specific persons who are disqualified from acting as Independent Director. These include:

• immediate family members of persons who work for us or our associated entities;

• persons or their immediate family who hold one percent or more of our shares or are among our ten largest shareholders;

• any persons that satisfied the foregoing conditions within the past one year;

• persons providing financial, legal, consultation or other services to us or our associated entities;

• persons who already serve as Independent Director for five other listed companies; and

• anyone identified by the CSRC as unsuitable for serving as an Independent Director.

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If the resignation of an Independent Director would cause our Board of Directors to have less than one third Independent Directors, the resignation will only become effective after a new Independent Director has been appointed.

Our Board will be required to meet at least four times each year. Directors who miss two consecutive Board meetings without appointing an alternate director to attend on their behalf will be proposed for removal at the next shareholders’ meeting, provided that Independent Directors may miss three consecutive meetings in person before being proposed for removal.

Directors may not vote on any matter in which he has a material interest, nor will he be counted for purposes of forming a quorum on such a matter.

Board resolutions are passed by a simple majority of the Directors except for the following matters which require the consent of more than two thirds of the Directors:

• proposals for our financial policies;

• the increase or reduction of our registered capital;

• the issue of securities of any kind and their listing;

• any repurchase of our shares;

• significant acquisitions or disposals;

• our merger, division or dissolution; and

• any amendment to our Articles of Association.

Our Board of Directors or Supervisory Committee may nominate candidates for our Board of Directors and Supervisory Committee. In addition, shareholders holding one percent or more of our shares have the right to nominate candidates for Independent Director or Independent Supervisor and shareholders holding three percent or more of our shares have the right to nominate other candidates for Director or Supervisor. For candidates for Director, the nominator and candidates will be responsible for providing truthful and complete information about the candidate for disclosure. Candidates for Independent Director must publicly declare that there does not exist any relationship between himself and us that may influence his independent, objective judgment. The CSRC may veto any candidate for Independent Director.

Any material connected transactions are subject to prior approval by our Independent Directors. Connected transactions are those defined by the HKSE and by Chinese rules and regulations, but would generally include transactions with any of the following:

• any company that, directly or indirectly, controls us or is under common control with us;

• any shareholders owning 5% or more of our shares;

• our directors, supervisors and other senior management;

• any of our key technical personnel or key technology suppliers; and

• any close relative or associate of any of the above.

Our Independent Directors can also propose to the Board of Directors the appointment or removal of our auditors, the convening of a Board meeting, independently appoint external auditors, solicit votes from shareholders and report circumstances directly to shareholders, Chinese securities regulatory authorities or other government departments. Two or more may request that the Board convene an extraordinary meeting of shareholders.

Our Independent Directors will have to express their opinion on specified matters to the Board or to the shareholders at a shareholders’ meeting, either by a single unanimous statement or individually. These matters are:

• the nomination, removal and remuneration of directors or senior management;

• any major loans or financial transactions with our shareholders or related enterprises and whether we have taken adequate steps to ensure repayment;

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• matters that the Independent Director believes may harm the rights and interests of minority shareholders; and

• any other matter that they are required to opine on by applicable law or rules.

These opinions must be expressed as either, agree, qualified agreement, opposition or unable to form an opinion. All but agreement must also be accompanied by a supporting explanation. If public disclosure of the matter is required, we must also disclose the opinions of our Independent Directors.

Any Independent Director may engage independent institutions to provide independent opinions as the basis of their decision. We must arrange the engagement and bear any costs.

Supervisory Committee

The Supervisory Committee is responsible for supervising our directors and senior officers and preventing them from abusing their positions and powers or infringing upon the rights and interests of our company or those of our shareholders and employees. The Supervisory Committee has no power over the decisions or actions of our directors or officers except for requesting the directors or officers to correct any acts that are harmful to our interests. The Supervisory Committee is composed of seven members appointed for a three year term. It has the right to:

• attend the meetings of our Board of Directors;

• inspect our financial affairs;

• supervise and evaluate the conduct of our directors, general manager and other senior officers in order to determine whether they violate any laws, regulations or the Articles of Association in performing their duties;

• require our directors, general manager or other senior officers to correct any act harmful to our interests and those of our shareholders and employees;

• verify financial reports, accounting reports, business reports, profit distribution plans and other financial information proposed to be tabled at the shareholders’ general meeting, and entrust registered accountants and practicing accountants to re-review such documents upon its discovery of any problems;

• require the Board of Directors to convene an extraordinary general meeting of shareholders;

• represent us in negotiations with directors or in initiating legal proceedings against a director on our company’s behalf;

• conduct investigation into any identified irregularities in our operations, and where necessary, to engage accountants, legal advisers or other professionals to assist in the investigation; and

• any other matters authorized by the Articles of Association.

One third of our Supervisory Committee members must be employee representatives appointed by our employees. The remaining members are appointed by the shareholders in a general meeting, provided that our directors, general manager and senior officers are not eligible to serve as supervisors. The Supervisory Committee must meet at least four times a year. Decisions of the Supervisory Committee can be passed by the consents of over two thirds of all the supervisors. We will pay all reasonable expenses incurred by the Supervisory Committee in appointing professional advisors, such as lawyers, accountants or auditors.

Liquidation Rights

In the event of our liquidation, payment of borrowings out of our remaining assets will be made in the order of priority prescribed by applicable laws and regulations. After payment of borrowings, we will distribute the remaining property to shareholders according to the class and proportion of their shareholdings. For this purpose, the H Shares will rank equally with the A Shares.

Obligation of Shareholders

Shareholders are not obligated to make any further contributions to our share capital other than as agreed by the subscriber of the relevant shares on subscription. This provision means that holders of ADSs will also not be obligated to make further contributions to our share capital.

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Duration

We are organized as a stock limited company of indefinite duration.

Increase in Share Capital

The Articles of Association require that approval by a resolution of the shareholders be obtained prior to issuing new shares. New issues of shares must also be approved by the relevant Chinese authorities.

Reduction of Share Capital and Purchase by Us of Our Shares

We may reduce our registered share capital only upon obtaining the approval of the shareholders and, when applicable, relevant Chinese authorities. Repurchases may be made either by way of a general offer to all shareholders in proportion to their shareholdings, by purchasing our shares on a stock exchange or by an off-market contract with shareholders.

Restrictions on Large or Controlling Shareholders

Our Articles of Association provide that, in addition to any obligation imposed by laws and administrative regulations or required by the listing rules of the stock exchanges on which our shares are listed, a controlling shareholder cannot exercise voting rights in a manner prejudicial to the interests of the shareholders generally or of some part of the shareholders:

• to relieve a director or supervisor from his or her duty to act honestly in our best interest;

• to approve the expropriation by a director or supervisor (for his or her own benefit or for the benefit of another person) of our assets in any way, including, without limitation, opportunities which may benefit us; or

• to approve the expropriation by a director or supervisor (for his or her own benefit or for the benefit of another person) of the individual rights of other shareholders, including, without limitation, rights to distributions and voting rights (but not according to a restructuring of our company which has been submitted for approval by the shareholders in a general meeting in accordance with our Articles of Association).

A controlling shareholder, however, will not be precluded by our Articles of Association or any laws and administrative regulations or the listing rules of the stock exchanges on which our shares are listed from voting on these matters.

A controlling shareholder is defined by our Articles of Association as any person who, acting alone or together with others:

• has the power to elect more than one-half of the Board of Directors;

• has the power to exercise, or to control the exercise of, 30% or more of our voting rights;

• holds 30% or more of our issued and outstanding shares; or

• has de facto control of us in any other way.

Minutes, Accounts and Annual Report

Our shareholders may inspect copies of the minutes of the shareholders’ general meetings during our business hours free of charge. Shareholders are also entitled to receive copies of these minutes within seven days of receipt of the reasonable charges we may require.

Our fiscal year is the calendar year ending December 31. Each fiscal year, we must mail our financial report to shareholders not less than 21 days before the date of the shareholders’ annual general meeting. These and any interim financial statements must be prepared in accordance with Chinese accounting standards and, for so long as H Shares are listed on the HKSE, must also be prepared in accordance with or reconciled to either Hong Kong accounting standards or international accounting standards. The financial statements must be approved by an ordinary resolution of the shareholders at the annual general meeting.

Independent auditors are appointed each year by the shareholders at the annual meeting.

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C. Material Contracts.

We have not entered into any material contracts in the last two years other than in the ordinary course of business and other than those described in Item 4. Information on the Company or elsewhere in this annual report on Form 20-F.

D. Exchange Controls.

Our Articles of Association require that cash dividends on our H Shares be declared in Renminbi and paid in HK Dollars. The Articles of Association further stipulate that unless otherwise provided in law and administrative regulations, such dividends must be converted to HK Dollars at a rate equal to the average of the closing exchange rates for HK Dollars as announced by the Chinese Foreign Exchange Trading Center for the calendar week preceding the date on which the dividends are declared.

The Renminbi currently is not a freely convertible currency. SAFE, under supervision of the People’s Bank of China (“PBOC”), controls the conversion of Renminbi into foreign currency. Chinese governmental policies were introduced in 1996 to reduce restrictions on the convertibility of Renminbi into foreign currency for current account items. In recent years, the Chinese government has gradually simplified and improved the foreign exchange administration policies in relation to capital items, such as the cancellation of foreign exchange registration and approval for domestic and overseas foreign direct investment. However, foreign exchange control over the capital items is not completely abolished. The limitations on foreign exchange could affect our ability to obtain foreign exchange through borrowings or equity financing, or to obtain foreign exchange for capital expenditures.

On July 21, 2005, the Chinese government changed its policy of pegging the Renminbi to the U.S. Dollar. Under the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. Since the adoption of this new policy, the value of the Renminbi has fluctuated daily within a narrow band, but overall has appreciated against the U.S. Dollar. Nevertheless, the Chinese government continues to receive significant international pressure to further liberalize its currency policy which could result in a further and more significant appreciation in the value of the Renminbi against the U.S. Dollar. The value of the Renminbi depreciated by 5.15% against the U.S. Dollar in the year of 2018.

While the impact of the foregoing developments is not entirely clear, it appears that the trend in the Chinese government’s foreign exchange policy is toward easier convertibility of the Renminbi.

The holders of the ADSs will receive the HK Dollar dividend payments in U.S. Dollars at conversion rates related to market rates and subject to fees as set forth in our Deposit Agreement with The Bank of New York Mellon, as Depositary. The HK Dollar is currently linked to and trades within a narrow band against the U.S. Dollar at a rate that does not deviate significantly from HK$7.80 = U.S.$1.00. The Hong Kong government has stated its intention to maintain such link, although there can be no guarantee that such link will be maintained.

E. Taxation

PRC Taxation

The following is a summary of those taxes, including withholding provisions, to which United States security holders are subject under existing Chinese laws and regulations. The summary is subject to changes in Chinese law, including changes that could have retroactive effect. The summary does not take into account or discuss the tax laws of any country other than China, nor does it take into account the individual circumstances of a security holder. This summary does not purport to be a complete technical analysis or an examination of all potential tax effects under such laws and regulations.

Tax on Dividends

For an Individual Investor

According to the Individual Income Tax Law of the People’s Republic of China, as amended on August 31, 2018 and effective on January 1, 2019 (the “Individual Income Tax Law”) dividends paid by Chinese companies to individual investors are subject to Chinese withholding tax at a flat rate of 20%. As for a foreign individual investor that neither has a domicile nor resides in China, or that has no domicile and has resided in China for no more than one year, the dividends received by such an investor in China are generally subject to a withholding tax at a flat rate of 20% under the individual income tax law, subject to exemption or reduction by an applicable income tax treaty. According to the State Administration of Taxation’s tax treatments with regard to the dividends of H Shares paid by onshore non-foreign invested enterprises listed on the HKSE, we will withhold and pay the individual income tax at the tax rate of 10% for individual shareholders who are residents of Hong Kong, Macau, or countries which have entered into tax treaties with mainland China, which provide for a

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10% dividends tax rate, and we will temporarily withhold and pay the individual income tax at the tax rate of 10% for individual shareholders who are residents of countries which have entered into tax treaties with mainland China, which provide for a less than 10% dividends tax rate. Shareholders of H Shares may directly or through our Company apply to the in-charge tax authority for the preferential treatments provided by the relevant tax treaties. Upon the approval by the in-charge tax authority, the excessive amount being paid will be refunded. For individual shareholders who are residents of countries which have entered into tax treaties with mainland China providing for a more than 10% but less than 20% dividends tax rate, we will withhold and pay the individual income tax at the specific tax rate required therein. We will withhold and pay the individual income tax at the dividends tax rate of 20% for individual shareholders who are residents of countries which have not entered into any forms of tax treaties with mainland China or in circumstances other than above described.

For a Corporation

According to the Enterprise Income Tax Law of the People’s Republic of China (“Enterprise Income Tax Law”) and its implementation rules, as amended on December 29, 2018, dividends by Chinese resident enterprises to non-resident enterprises are ordinarily subject to a Chinese withholding tax levied at a flat rate of 10%. For purposes of the Enterprise Income Tax Law, a “Chinese resident enterprise” is an enterprise which is either (i) set up in China in accordance with PRC laws or (ii) set up in accordance with the laws of a foreign country (region) but whose actual administrative headquarters is in China. For purposes of the Enterprise Income Tax Law, a “non-resident enterprise” is an enterprise which is set up in accordance with the laws of a foreign country (region) and whose actual administrative headquarters is located outside China but which has either (i) set up a legal presence in China or (ii) has income originating from China despite not having formally set up a legal presence in China. The State Administration of Taxation issued a Circular on Issues Relating to the Withholding of Enterprise Income Tax for Dividends Distributed by Resident Enterprises in China to Non-resident Enterprises Holding H-shares of the Enterprises (Guo Shui Han [2008] No. 897) on November 6, 2008, which further clarifies that Chinese resident enterprises should, in distributing dividends for 2008 or any year hereafter to non-resident enterprises holding H-shares of the Chinese resident enterprise, withhold enterprise income tax for such dividends at a tax rate of 10%. After receiving dividends, non-resident enterprises holding H-shares of any Chinese resident enterprise can, on their own or through an agent, file an application to the relevant taxation authorities for such dividends to be covered by any applicable tax treaty (or other arrangement). The relevant taxation authorities should, upon reviewing and verifying the application and supporting materials to be correct, refund the difference between the tax levied and the tax payable calculated at a tax rate specified by the applicable tax treaty (or other arrangement).

Capital Gains Tax

For an Individual Investor

So far as we are aware, in practice, capital gains derived by a foreign individual investor from the sale of overseas-listed shares are temporarily exempted from individual income tax.

For a Corporation

According to the Enterprise Income Tax Law and its implementation rules, a non-resident enterprise is subject to a 10% withholding tax for capital gains derived from the disposal of overseas-listed shares unless such payment is exempted or deducted pursuant to applicable double taxation treaties or otherwise. According to the Circular issued by the State Administration of Taxation on Issues regarding Income Tax Payable by Foreign Invested Enterprises, Foreign Enterprises and Individuals for Capital Gains Derived from the Disposal of Shares (Equity Interests) and Dividends (Guoshuifa [1993] No. 45), capital gains derived by a non-resident enterprise from the disposal of overseas-listed shares are temporarily exempted from withholding tax in China. However, this circular has been revoked in 2011. Therefore, technically, PRC withholding tax should be applied to non-resident enterprises on capital gains derived from the disposal of overseas-listed shares unless it is tax exempted under the applicable double tax treaty. So far as we are aware, practically, there is no consistent enforcement of the collection of such withholding tax in China at current stage. However, we are aware of cases where the PRC tax authorities try to levy PRC withholding tax when they became aware of the disposal of the overseas-listed shares that the profits from the disposal of shares are derived from China.

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Tax Treaties

China has an income tax treaty with the United States that currently limits the rate of Chinese withholding tax to 10% for dividends paid to individuals and corporations that qualify for treaty benefits. However, this treaty does not offer reduced tax rates for capital gains.

However, if certain conditions under the double tax treaty are satisfied (e.g., the shareholding in H-shares is less than 25% and the H-share company is not ‘land rich’), the capital gains may be exempted from the 10% PRC withholding tax.

Stamp Tax

While no express exemption exists for the imposition of Chinese stamp tax on transfers of Overseas Shares pursuant to the Provisional Regulations of the People’s Republic of China Concerning Stamp Tax, as amended on January 8, 2011, we are not aware of any circumstance under which Chinese stamp tax has actually been imposed on the transfer of Overseas Shares.

Estate or Gift Tax

China does not currently impose any estate or gift tax.

U.S. Taxation

The following is a summary of the material U.S. federal income tax consequences of the ownership and disposition of H Shares or ADSs to U.S. Holders (as defined below). The following discussion is not exhaustive of all possible tax considerations. This summary is based upon the Internal Revenue Code of 1986, as amended (the “Code”), regulations promulgated under the Code by the U.S. Treasury Department (including proposed and temporary regulations), rulings, current administrative interpretations and official pronouncements of the Internal Revenue Service (“IRS”), and judicial decisions, all as currently available and all of which are subject to differing interpretations or to change, possibly with retroactive effect. Such change could materially and adversely affect the tax consequences described below. No assurance can be given that the IRS will not assert, or that a court will not sustain, a position contrary to any of the tax consequences described below.

This discussion does not address state, local, or foreign tax consequences, or the net investment income tax consequences, of the ownership and disposition of H Shares or ADSs. (See “PRC Taxation” above).

This summary is for general information only and does not address all aspects of U.S. federal income taxation that may be important to a particular holder in light of its investment or tax circumstances or to holders subject to special tax rules, such as: banks; financial institutions; insurance companies; dealers in stocks, securities, or currencies; entities treated as partnerships for U.S. federal income taxes or partners therein; traders in securities that elect to use a mark-to-market method of accounting for their securities holdings; tax-exempt organizations; real estate investment trusts; regulated investment companies; qualified retirement plans, individual retirement accounts, and other tax-deferred accounts; expatriates of the United States; individuals subject to the alternative minimum tax; persons holding H Shares or ADSs as part of a straddle, hedge, conversion transaction, or other integrated transaction; persons who acquired H Shares or ADSs pursuant to the exercise of any employee stock option or otherwise as compensation for services; persons actually or constructively holding 10% or more of the voting power or value of our stock; U.S. Holders (as defined below) whose functional currency is other than the U.S. Dollar; and persons holding our H Shares or ADSs in connection with a trade or business conducted outside the United States.

This discussion is not a comprehensive description of all of the U.S. federal tax consequences that may be relevant with respect to the ownership and disposition of H Shares or ADSs. We urge you to consult your own tax advisor regarding your particular circumstances and the U.S. federal income and estate tax consequences to you of owning and disposing of H Shares or ADSs, as well as any tax consequences arising under the laws of any state, local, or foreign or other tax jurisdiction and the possible effects of changes in U.S. federal or other tax laws.

This summary is directed solely to U.S. Holders (defined below) who hold their H Shares or ADSs as capital assets within the meaning of Section 1221 of the Code, which generally means as property held for investment. For purposes of this discussion, the term “U.S. Holder” means a beneficial owner of H Shares or ADSs that is any of the following:

• a citizen or resident of the United States or someone treated as a U.S. citizen or resident for U.S. federal income tax purposes;

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• a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof, or the District of Columbia; or

• a trust or estate, the income of which is subject to U.S. federal income taxation regardless of its source.

ADSs

As it relates to the ADSs, this discussion is based in part upon the representations of the depositary and the assumption that each obligation in the Deposit Agreement and any related agreement will be performed in accordance with its terms.

Generally, a holder of ADSs will be treated as the owner of the underlying H Shares represented by those ADSs for U.S. federal income tax purposes. Accordingly, no gain or loss will be recognized if the holder exchanges ADSs for the underlying H Shares represented by those ADSs. The holder’s adjusted tax basis in the H Shares will be the same as the adjusted tax basis of the ADSs surrendered in exchange therefor, and the holding period for the H Shares will include the holding period for the surrendered ADSs.

TAXATION OF U.S. HOLDERS

The discussion in “Distributions on H Shares or ADSs” and “Dispositions of H Shares or ADSs” below assumes that we will not be treated as a PFIC for U.S. federal income tax purposes. For a discussion of the rules that apply if we are treated as a PFIC, see the discussion in “Passive Foreign Investment Company” below.

Distributions on H Shares or ADSs

General. Subject to the discussion in “Passive Foreign Investment Company” below, if you actually or constructively receive a distribution on H Shares or ADSs, you must include the distribution in gross income as a taxable dividend on the date of your (or in the case of ADSs, the depositary’s) receipt of the distribution, but only to the extent of our current or accumulated earnings and profits, as calculated under U.S. federal income tax principles. Such amount must be included without reduction for any foreign taxes withheld. Dividends paid by us will not be eligible for the dividends received deduction allowed to corporations with respect to dividends received from certain domestic corporations. Dividends paid by us may or may not be eligible for preferential rates applicable to qualified dividend income, as described below.

To the extent a distribution exceeds our current and accumulated earnings and profits, it will be treated first as a non-taxable return of capital to the extent of your adjusted tax basis in the H Shares or ADSs, and thereafter as capital gain. Preferential tax rates for long term capital gain may be applicable to non-corporate U.S. Holders.

We do not intend to calculate our earnings and profits under U.S. federal income tax principles. Therefore, you should expect that a distribution generally will be reported as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above.

Qualified Dividend Income. With respect to non-corporate U.S. Holders (i.e., individuals, trusts, and estates), dividends that are treated as qualified dividend income (“QDI”) are taxable at a maximum tax rate of 20%. Among other requirements, dividends generally will be treated as QDI if either (i) our H Shares or ADSs are readily tradable on an established securities market in the United States, or (ii) we are eligible for the benefits of a comprehensive income tax treaty with the United States which includes an information exchange program and which is determined to be satisfactory by the U.S. Treasury. It is expected that our ADSs will be “readily tradable” as a result of being listed on the NYSE.

In addition, for dividends to be treated as QDI, we must not be a PFIC (as discussed below) for either the taxable year in which the dividend was paid or the preceding taxable year. We do not believe that we were a PFIC for the preceding taxable year or will be a PFIC for the current taxable year. However, please see the discussion under “Passive Foreign Investment Company” below. Additionally, in order to qualify for QDI treatment, you generally must have held the H Shares or ADSs for more than 60 days during the 121-day period beginning 60 days prior to the ex-dividend date. However, your holding period will be reduced for any period during which the risk of loss is diminished.

Moreover, a dividend will not be treated as QDI to the extent you are under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property. Since the QDI rules are complex, you should consult your own tax advisor regarding the availability of the preferential tax rates for dividends paid on H Shares or ADSs.

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Foreign Currency Distributions. A dividend paid in foreign currency (e.g., Hong Kong Dollars or Chinese Renminbi) must be included in your income as a U.S. Dollar amount based on the exchange rate in effect on the date such dividend is received, regardless of whether the payment is in fact converted to U.S. Dollars. If the dividend is converted to U.S. Dollars on the date of receipt, you generally will not recognize a foreign currency gain or loss. However, if you convert the foreign currency to U.S. Dollars on a later date, you must include in income any gain or loss resulting from any exchange rate fluctuations. The gain or loss will be equal to the difference between (i) the U.S. Dollar value of the amount you included in income when the dividend was received and (ii) the amount that you receive on the conversion of the foreign currency to U.S. Dollars. Such gain or loss generally will be ordinary income or loss and U.S. source for U.S. foreign tax credit purposes.

Foreign Tax Credits. Subject to certain conditions and limitations, any foreign taxes paid on or withheld from distributions from us and not refundable to you may be credited against your U.S. federal income tax liability or, alternatively, may be deducted from your taxable income. This election is made on a year-by-year basis and applies to all foreign taxes paid by you or withheld from you that year.

Distributions will constitute foreign source income for foreign tax credit limitation purposes. The foreign tax credit limitation is calculated separately with respect to specific classes of income. For this purpose, distributions characterized as dividends distributed by us generally will constitute “passive category income” or, in the case of certain U.S. Holders, “general category income.” Special limitations may apply if a dividend is treated as QDI (as defined above).

Since the rules governing foreign tax credits are complex, you should consult your own tax advisor regarding the availability of foreign tax credits in your particular circumstances.

Dispositions of H Shares or ADSs

Subject to the discussion in “Passive Foreign Investment Company” below, you generally will recognize taxable gain or loss realized on the sale or other taxable disposition of H Shares or ADSs equal to the difference between the U.S. Dollar value of (i) the amount realized on the disposition (i.e., the amount of cash plus the fair market value of any property received), and (ii) your adjusted tax basis in the H Shares or ADSs. Such gain or loss will be a capital gain or loss. Capital gain from the sale or other taxable disposition of H Shares or ADSs held by certain non-corporate U.S. Holders will be taxed at preferential rates if such H Shares or ADSs have been held for more than one year and certain other requirements are met. The deductibility of capital losses is subject to limitations. Any gain or loss recognized generally will be treated as gain or loss from sources within the United States for U.S. foreign tax credit limitation purposes.

If you receive currency other than U.S. Dollars upon the disposition of H Shares or ADSs, the tax consequences will generally be as described under “—Foreign Currency Distributions” above.

Passive Foreign Investment Company

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

Certain “look through” rules apply for purposes of the income and asset tests described above. If we own, directly or indirectly, 25% or more of the total value of the outstanding shares of another corporation, we generally will be treated as if we (a) held directly a proportionate share of the other corporation’s assets, and (b) received directly a proportionate share of the other corporation’s income. In addition, passive income does not include any interest, dividends, rents, or royalties that are received or accrued by us from a “related person” (as defined in Section 954(d)(3) of the Code), to the extent such items are properly allocable to income of such related person that is not passive income.

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Under the income and asset tests, our PFIC status must be determined annually at the end of each year based upon the composition of our income and the composition and valuation of our assets, all of which are subject to change. In determining that we are not a PFIC, we are relying on a current valuation of our assets including goodwill, not reflected in our financial statements, and our projection of our income for the current year. We determine the value of our assets in large part by reference to the market value of our ordinary shares at the end of each quarter. We believe this valuation approach is reasonable. However, if the IRS successfully challenged our valuation of our assets, or if the market price of our ordinary shares were to fluctuate, it could result in our classification as a PFIC.

We do not believe that we have been a PFIC for any prior year and we do not anticipate that we will be a PFIC for the current year. However, because the PFIC determination is highly fact intensive and made at the end of each taxable year, there can be no assurance that we will not be a PFIC for the current or any future taxable year or that the IRS will not challenge our determination concerning our PFIC status.

If we are a PFIC for any taxable year during which a U.S. Holder holds H Shares or ADSs, we generally will continue to be treated as a PFIC with respect to such holder for all succeeding years during which such holder holds H Shares or ADSs, regardless of whether we continue to meet the income or asset test. If we are classified as a PFIC, U.S. Holders could be subject to additional taxes and a special interest charge in respect of gain recognized on the sale or other disposition of such holder’s H Shares or ADSs and upon the receipt of “excess distributions” (as defined in the Code). In addition, no distribution that U.S. Holders receive from us would qualify for taxation at the preferential rate discussed in “—Distributions on H Shares or ADSs” above, if we were a PFIC for the taxable year of such distribution or for the preceding taxable year. Moreover, U.S. Holders may be required to file annual tax returns (including on Form 8621) containing such information as the U.S. Treasury requires.

Information reporting regarding specified foreign financial assets

Certain U.S. Holders who are individuals (and under proposed regulations, certain entities) may be required to report information relating to an interest in our H Shares or ADSs, subject to certain exceptions (including an exception for shares held in accounts maintained by U.S. financial institutions). U.S. Holders are urged to consult their tax advisors regarding their information reporting obligations, if any, with respect to their ownership and disposition of our H Shares or ADSs. In the event a U.S. Holder does not file such required reports, the statute of limitations on the assessment and collection of U.S. federal income taxes of such U.S. holder for the related tax year will not close before such report is filed.

If you are a U.S. Holder, you are urged to consult with your own tax advisor regarding the application of the specified foreign financial assets information reporting requirements and related statute of limitations tolling provisions with respect to our H Shares and ADSs.

Information Reporting and Backup Withholding

Generally, information reporting requirements will apply to distributions on H Shares or ADSs or proceeds from the disposition of H Shares or ADSs paid within the United States (and, in certain cases, outside the United States) to a U.S. Holder unless such U.S. Holder is an exempt recipient, such as a corporation. Furthermore, backup withholding (currently at 24%) may apply to such amounts unless such U.S. Holder (i) is an exempt recipient that, if required, establishes its right to an exemption, or (ii) provides its taxpayer identification number, certifies that it is not currently subject to backup withholding, and complies with other applicable requirements.

A U.S. Holder may generally avoid backup withholding by furnishing a properly completed IRS Form W-9.

Backup withholding is not an additional tax. Rather, amounts withheld under the backup withholding rules may be credited against your U.S. federal income tax liability. Furthermore, you may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS and furnishing any required information in a timely manner.

F. Dividends and Paying Agents.

Not applicable.

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G. Statement by Experts.

Not applicable.

H. Documents on Display.

We are subject to the periodic reporting and other informational requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Under the Exchange Act, we are required to file reports and other information with the Securities and Exchange Commission. Specifically, we are required to file annually a Form 20-F no later than four months after the close of each fiscal year, which is December 31 of each year. The SEC also maintains a Web site at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short- swing profit recovery provisions contained in Section 16 of the Exchange Act.

I. Subsidiary Information.

Not applicable.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Our market risk exposures primarily consist of fluctuations in oil and gas prices, exchange rates and interest rates.

Commodity Price Risk

We are exposed to commodity price risk related to price volatility of crude oil and refined oil products. We had no program of commodity price hedging activities and did not engage in any such activities in 2018 or 2019. See Item 3. Key Information – D. Risk Factors—Our operations may be adversely affected by the cyclical nature of the petroleum and petrochemical markets and by the volatility of prices of crude oil and petrochemical products.

Interest Rate Risk

We are subject to risk resulting from fluctuations in interest rates. Our borrowings are fixed and variable rate bank and other borrowings, with original maturities ranging from 1 to 5 years. Accordingly, fluctuations in interest rates can lead to significant fluctuations in the fair value of such debt instruments. We had no program of interest rate hedging activities and did not engage in any such activities in 2018 or 2019.

The following table provides information, by maturity date, regarding our interest rate sensitive financial instruments, which consist of fixed and variable rate short term and long term debt obligations, as of December 31, 2019 and 2018.

	As of December 31, 2019
	2020			2021		2022		2023		2024		Total Recorded Amount			Fair Value
	(RMB equivalent in thousands, except interest rates)
Fixed rate bank and other loans
In U.S. Dollars		—			—		—		—		—		—			—
Average interest rate		—			—		—		—		—		—			—
In RMB		1,500,000			—		—		—		—		1,500,000			1,500,000
Average interest rate(1)		3.30	%		—		—		—		—		3.30	%		3.30	%
Variable rate bank and other loans
In U.S. Dollars		—			—		—		—		—		—			—
Average interest rate(1)		—			—		—		—		—		—			—
In RMB		47,600			—		—		—		—		47,600			47,600
Average interest rate(1)		4.52	%		—		—		—		—		4.52	%		4.52	%

(1) The average interest rates for variable rate bank and other loans are calculated based on the year end indices.

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	As of December 31, 2018
	2019			2020		2021		2022		2023		Total Recorded Amount			Fair Value
	(RMB equivalent in thousands, except interest rates)
Fixed rate bank and other loans
In U.S. Dollars		—			—		—		—		—		—			—
Average interest rate		—			—		—		—		—		—			—
In RMB		—			—		—		—		—		—			—
Average interest rate(1)		—			—		—		—		—		—			—
Variable rate bank and other loans
In U.S. Dollars		—			—		—		—		—		—			—
Average interest rate(1)		—			—		—		—		—		—			—
In Euro		—			—		—		—		—		—			—
Average interest rate(1)		—			—		—		—		—		—			—
In RMB		497,249			—		—		—		—		497,249			497,249
Average interest rate(1)		3.63	%		—		—		—		—		3.63	%		3.63	%

(1) The average interest rates for variable rate bank and other loans are calculated based on the year end indices.

Exchange Rate Risk

We are also exposed to foreign currency exchange rate risk as a result of our foreign currency denominated short term borrowing and, to a limited extent, cash and cash equivalents denominated in foreign currencies. The following table provides information, by maturity date, regarding our foreign currency exchange rate sensitive financial instruments, which consist of cash and cash equivalents, short term debt obligations as of December 31, 2019 and 2018.

	As of December 31, 2019
	2020		2021		2022		2023		2024		Thereafter		Total Recorded Amount		Fair Value
	(RMB equivalent in thousands, except interest rates)
On-balance sheet financial instruments
Cash and cash equivalents:
In Hong Kong Dollars		—		—		—		—		—		—		—		—
In U.S. Dollars		336,078		—		—		—		—		—		336,078		336,078
In Euro		—		—		—		—		—		—		—		—
In Japanese Yen		—		—		—		—		—		—		—		—
In Swiss Frank		—		—		—		—		—		—		—		—
Debt:
Fixed rate bank and other loans in U.S. Dollars		—		—		—		—		—		—		—		—
Average interest rate(1)		—		—		—		—		—		—		—		—
Variable rate bank and other loans in U.S. Dollars		—		—		—		—		—		—		—		—
Average interest rate(1)		—		—		—		—		—		—		—		—

(1) The average interest rates for variable rate bank and other loans are calculated based on the year end indices.

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	As of December 31, 2018
	2019			2020		2021		2022		2023		Thereafter		Total Recorded Amount			Fair Value
	(RMB equivalent in thousands, except interest rates)
On-balance sheet financial instruments
Cash and cash equivalents:
In Hong Kong Dollars		—			—		—		—		—		—		—			—
In U.S. Dollars		351,931			—		—		—		—		—		351,931			351,931
In Euro		—			—		—		—		—		—		—			—
In Japanese Yen		—			—		—		—		—		—		—			—
In Swiss Frank		—			—		—		—		—		—		—			—
Debt:
Fixed rate bank and other loans in U.S. Dollars		—			—		—		—		—		—		—			—
Average interest rate(1)		—			—		—		—		—		—		—			—
Variable rate bank and other loans in U.S. Dollars		431,649			—		—		—		—		—		431,649			431,649
Average interest rate(1)		3.34	%		—		—		—		—		—		3.34	%		3.34	%
Variable rate bank and other loans in EURO		—			—		—		—		—		—		—			—
Average interest rate(1)		—			—		—		—		—		—		—			—

(1) The average interest rates for variable rate bank and other loans are calculated based on the year end indices.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.

A. Debt Securities.

Not applicable.

B. Warrants and Rights.

Not applicable.

C. Other Securities.

Not applicable.

D. American Depositary Shares.

In connection with our ADR program, a holder of our ADSs may have to pay, either directly or indirectly, certain fees and charges, as described in Item 12.D.3. In addition, we receive fees and other direct and indirect payments from The Bank of New York Mellon that are related to our ADS as described in Item 12.D.4.

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12.D.3 Fees and Charges that a holder of our ADSs May Have to Pay

The Bank of New York Mellon collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The Bank of New York Mellon also collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The Bank of New York Mellon may collect its annual fee for depositary services by deductions from cash distributions.

Persons depositing or withdrawing shares must pay:	For:
$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)	Issuance and withdrawal of ADSs, including issuances resulting from a distribution of shares or rights or other property
A fee equivalent to the fee that would be payable if securities distributed to you had been shares and the shares had been deposited for issuance of ADSs	Distribution of securities distributed to holders of deposited securities which are distributed by The Bank of New York Mellon to ADS registered holders
A fee of $.05 (or less) per ADS (or portion thereof)	Any cash distribution made pursuant to the Deposit Agreement
Registration or transfer fees	Transfer and registration of shares on our share register to or from the name of the depositary or its agent when you deposit or withdraw shares
Expenses of The Bank of New York Mellon	Cable, telex and facsimile transmissions (when expressly provided in the Deposit Agreement); Converting foreign currency to U.S. Dollars
Taxes and other governmental charges The Bank of New York Mellon or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes	As necessary
Any charges incurred by The Bank of New York Mellon or its agents for servicing the deposited securities	As necessary

12.D.4 Fees and Other Payments Made by the Bank of New York Mellon

From January 1, 2019 through March 31, 2020, a total of U.S.$0 was paid by the Bank of New York Mellon on our behalf for our ADSs program. The standard out-of-pocket maintenance costs for our ADSs program were U.S.$145,327.17, which have been waived by the Bank of New York Mellon.

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.

None.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.

On May 11, 2011, we entered into an Amended and Restated Deposit Agreement with The Bank of New York Mellon, as Depositary (the “ Restated Deposit Agreement”), and updated the form of American Depositary Receipt (the “ADR”) evidencing the ADSs issued under the terms of the Restated Deposit Agreement. The Restated Deposit Agreement restates our original Deposit Agreement with The Bank of New York (the predecessor of The Bank of New York Mellon), dated as of July 23, 1993 (as amended, the “1993 Deposit Agreement”), in its entirety.

We and The Bank of New York Mellon entered into the Restated Deposit Agreement to modify the ADSs voting process and to bring our arrangements with The Bank of New York Mellon in line with the current customary market practice regarding depositary arrangements.

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By the Restated Deposit Agreement, subject to the Depositary’s obligation to notify the owner of ADSs of any meeting of holders of our shares or other deposited securities, and subject further to certain exceptions as provided therein, to the extent that no instructions are received by the Depositary from an owner of ADSs on or before the date established by the Depositary, the Depositary may deem instructions by the owner of the ADS have been given to give a discretionary proxy to a person designated by us to exercise voting rights in the meeting of holders of our shares or other deposited securities.

In addition, the Restated Deposit Agreement amends the 1993 Deposit Agreement, among other things, to (i) provide the American Depositary Shares may be uncertificated securities or certificated securities evidenced by ADRs, and (ii) change the fees and charges of the Depositary, see Item 12D.3 Fees and Charges that a holder of our ADSs May Have to Pay.

The foregoing descriptions of the Restated Deposit Agreement and the ADR do not purport to be complete and are qualified in their entirety by reference to the complete Restated Deposit Agreement and ADR which are incorporated herein by reference to Exhibit 2 and the forms filed on Form F-6 (File number 033-65616) on May 4, 2011.

ITEM 15. CONTROLS AND PROCEDURES.

(a). Disclosure Controls And Procedures.

The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. These rules refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. This includes controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to our management, including our principal executive officer or officers and principal financial officer or officers, to allow timely decisions regarding required disclosure.

We maintain a written policy adopted by our Board of Directors that governs the collection, coordination and disclosure of information to our shareholders, the public and to governmental and other regulatory bodies. All such disclosures are coordinated by the Secretary to our Board of Directors and subject to execution by either the Chairman of our Board of Directors or, for disclosures by our Supervisory Committee, the Chairman of the Supervisory Committee. Under the policy, all material issues must be disclosed and our disclosures must be true, accurate, complete and timely without any false or misleading statements. Each of our departments and subsidiaries has their own supplemental policies which may be both written and unwritten.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-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 Chief Executive Officer 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 effective to ensure that information required to be disclosed in the reports we file under the Exchange Act is accumulated and communicated to the management to allow timely decisions to be made regarding required disclosures, and is recorded, processed, summarized and reported as and when required.

(b). Management’s Report on Internal Control over Financial Reporting.

Our management is accountable for establishing and maintaining effective 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 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.

Because of its inherent limitations, internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives and 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 ineffective 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 (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as of December 31, 2019. Based on that evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2019 based on these criteria.

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PricewaterhouseCoopers Zhong Tian LLP (“PwC”), 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 the effectiveness of our internal control over financial reporting.

(c). Report of Independent Registered Public Accounting Firm.

Our independent auditors have issued an audit report on the effectiveness of our internal control over financial reporting. This report appears on page F-2.

(d). Changes in Internal Control over Financial Reporting.

For the year ended December 31, 2019, there have been no changes to our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT.

Our Board of Directors has determined that Ms. Li Yuanqin who is currently serving on our audit committee, is an audit committee financial expert and is an Independent Director (under the standards set forth in the NYSE rules and Rule 10A-3 of the Exchange Act).

ITEM 16B. CODE OF ETHICS.

Sinopec Group, the controlling shareholder of Sinopec Corp., adopted a Staff Code in 2014 to provide disciplines and requirements for its staff’s conducts, including legal and ethical matters as well as the sensitivities involved in reporting illegal and unethical matters. The Staff Code covers such areas as health, safety and environment, conflict of interests, anti-corruption, protection and proper use of our assets and properties, as well as reporting requirements. The Staff Code also applies to all directors, officers and employees of each subsidiary of Sinopec Group, including us. We have provided all our directors and senior officers with a copy of the Staff Code and required them to comply with in it order to ensure our operations are proper and lawful. We have posted the Staff Code on the following website: http://www.sinopec.com/listco/en/Resource/Pdf/ygsz2014b.pdf.

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The following table summarizes the fees charged by PwC, our principal accountant, for certain services rendered to us during 2018 and 2019.

	For the year ended December 31,
	(in thousands of RMB)
	2018		2019
Audit fees (1)		7,800		7,800
All other fees (2)		150		—
Total		7,950		7,800

(1) “Audit fees” means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal auditors for the audit of our annual financial statements.

(2) “All other fees” means the aggregate fees billed in each of the fiscal years listed for products and services provided by the our principal accountant, other than the services reported under audit fees, audit-related fees and tax fees.

Audit Committee Pre-approval Policies and Procedures

Our audit committee has adopted procedures which set forth the manner in which the committee will review and approve all audit and non-audit services to be provided by PwC. The pre-approval procedures are as follows:

• Any audit or non-audit service to be provided to us by the independent accountant must be (i) pre-approved by the audit committee; or (ii) pre-approved by one or several committee members designated by the committee and rectified by the audit committee.

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ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.

Not applicable.

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.

None.

ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT.

Not applicable.

ITEM 16G. CORPORATE GOVERNANCE.

Set forth below is a summary of the significant differences between the corporate governance rules of the NYSE and those of the People’s Republic of China for listed companies:

	NYSE Corporate Governance Rules	The Company’s Corporate Governance Practices (which conform with the corporate governance rules for companies organized and listed in the People’s Republic of China)
Director Independence	A listed company must have a majority of independent directors on its board of directors. The board of directors needs to affirmatively determine that the director has no material relationship with the listed company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the company). In addition, a director must meet certain standards to be deemed independent.	It is required in China that no less than 1/3rd of the board members of any listed company must be independent directors, and the listed company must set forth specific requirements for the qualification and election of independent directors in compliance with PRC laws. For example, an independent director shall not hold any other position in the listed company other than being a director and shall not be influenced by the main shareholders or the controlling persons of the listed company, or by any other entities or persons with whom the listed company has a significant relationship. The Company has complied with the relevant Chinese corporate governance rules and has implemented internal rules governing the independence and responsibilities of independent directors. The Company determines the independence of independent directors every year.
	The non-management directors of each listed company must meet at regularly scheduled executive sessions without management.	No similar requirements.

92

Nominating/Corporate Governance Committee	Listed companies must have a nominating/corporate governance committee composed entirely of independent directors.	The board of directors can establish a nominating committee if the shareholders pass resolutions to establish such a committee. A majority of the directors on the committee shall be independent directors, who shall act as the convener. The board of directors, which formulates relevant written guidelines with respect to the nomination of directors, has established a nominating committee with a majority of the members being independent directors.
	The nominating/corporate governance committee must have a written charter that addresses: (i) the committee’s purpose and responsibilities—which, at minimum, must be to: identify individuals qualified to become board members, consistent with criteria approved by the board, and to select, or to recommend that the board select, the director nominees for the next annual meeting of shareholders; develop and recommend to the board a set of corporate governance guidelines applicable to the corporation; and oversee the evaluation of the board and management; and (ii) an annual performance evaluation of the committee.	Relevant responsibilities of the nominating committee are similar to those stipulated by the NYSE rules, but the main responsibilities do not include the research and recommendation of corporate governance guidelines, the supervision of the evaluation of the board of directors and management, or the annual evaluation of the committee.
Compensation Committee	Listed companies must have a compensation committee composed entirely of independent directors.	The board of directors can establish a compensation and assessment committee if the shareholders pass resolutions to establish such a committee. A majority of the directors on the committee shall be independent directors, who shall act as the convener.

93

	The purposes and responsibilities of the compensation committee stated in its charter must include: (1) reviewing and approving the corporate goals and objectives associated the with the CEO’s compensation, evaluate the performance of the CEO in fulfilling these goals and objectives, and, either as a committee or together with the other independent directors (as directed by the board), determine and approve the CEO’s compensation level based on such evaluation; (2) making recommendations to the board with respect to non-CEO executive officer compensation, and incentive-compensation and equity-based plans that are subject to board approval; and (3) producing a committee report on executive compensation as required by the SEC to be included in the annual proxy statement or annual report filed with the SEC. The charter must also include the requirement for an annual performance evaluation of the compensation committee.	The responsibilities of the compensation and assessment committee include: (1) reviewing the standards for the evaluation of directors and management, evaluate directors and management and report the results of such evaluation to the board of directors; and (2) reviewing compensation policies and benefit plans for directors and executive officers. Unlike the NYSE rules, the PRC rules do not require the committee to produce a report on the executive compensation or make an annual performance evaluation of the committee. In addition, the compensation committee evaluates and reviews the compensation of directors as well as executive officers. The board of directors of the Company has established a compensation evaluation committee with a majority of the members being independent directors who act as the convener, and the committee has established a written charter complying with the domestic corporate governance rules.
Audit Committee	Listed companies must have an audit committee that satisfies the requirements of Rule 10A-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). It must have a minimum of three members, and all audit committee members must satisfy the requirements for independence set forth in Section 303A.02 of the NYSE Corporate Governance Rules and , in the absence of an applicable exemption, Rule 10A-3b(1) of the Exchange Act. The written charter of the audit committee must specify that the purpose of the audit committee is to assist the board oversight of the integrity of financial statements, the company’s compliance with legal and regulatory requirements, the qualifications and independence of the independent auditors, the performance of the listed company’s internal audit function and independent auditors. The written charter must also require the audit committee to prepare an audit committee report as required by the SEC to be included in the listed company’s annual proxy statement as well as an annual performance evaluation of the audit committee. The written charter must also address the duties and responsibilities of the audit committee as required under Section 303A.07 of the NYSE Corporate Governance Rules.	The board of directors of a listed company must, through the resolution of the shareholders’ meeting, establish an audit committee composed entirely of directors, of which the independent directors are the majority and act as the convener, and, at minimum, one independent director is an accounting professional. The purpose, authority and responsibilities of the audit committee are similar to those stipulated by the NYSE rules, but according to customary practices in China, the Company is not required to make an annual performance evaluation of the audit committee, and the audit committee is not required to prepare an audit report to be included in the Company’s annual proxy statement. The board of directors of the Company has established an audit committee that satisfies Rule 10A-3 under the Securities Exchange Act of 1934, as amended and relevant domestic requirements. The audit committee has a written charter.

94

Strategy Committee	N/A	The board of directors of a listed company can, through the resolution of the shareholders’ meeting, establish a strategy committee composed entirely of directors. We formed a strategy committee on June 15, 2017. The key responsibility of the Strategy Committee is to conduct researches and give recommendations to the Board on major investment decisions, projects and major issues that affect our development, and monitor our long-term development strategic plan.
	Each listed company must maintain an internal audit function to provide management and the audit committee with ongoing assessments of the listed company’s risk management processes and system of internal controls.	China has a similar regulatory provision, and the Company has an internal audit department.
Equity Compensation	Shareholders must be given the opportunity to vote on all equity compensation plans and material revisions thereto, except for employment inducement awards, certain grants, plans and amendments in the context of mergers and acquisitions, and certain specific types of plans as described under Section 303A.08 of the NYSE Corporate Governance Rules.	The relevant regulations of China require the board of directors propose plans on the amount and types of director compensation for the shareholders’ meeting to approve. The compensation plan of executive officers shall be approved by the board and announced at the shareholders’ meeting and disclosed to the public upon the approval of the board of directors.
Corporate Governance Guidelines	Listed companies must adopt and disclose corporate governance guidelines involving director qualification standards, director responsibilities, director compensation, director access to management and, as necessary and appropriate, independent advisors, director orientation and continuing education and management succession. The board should conduct a self-evaluation at least annually to determine whether it and its committees are functioning effectively. A listed company must make its corporate governance guidelines available on or through its website.	The CSRC has issued the Corporate Governance Rules, prescribing detailed guidelines on directors of the listed companies, including director selection, the structure of the board of directors and director performance evaluation. The Company has complied with the above mentioned rules.
Code of Ethics for Directors, Officers and Employees	Listed companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. Each listed company may determine its own policies, but all listed companies should address the most important topics, including, among others, conflicts of interest, corporate opportunities, confidentiality, fair dealing, protection and proper use of listed company assets, compliance with laws, rules and regulations (including insider trading laws), and encouraging the reporting of any illegal or unethical behavior.	There is no such requirement for a code for ethics in China. As the directors and officers of the Company have all signed a Director Service Agreement, however, they are bound by their fiduciary duties to the Company. In addition, the directors and officers must perform their legal duties in accordance with the PRC Company Law, relevant requirements of CSRC and Mandatory Provisions to the Charter of Companies Listed Overseas.

95

Each listed company CEO must certify to the NYSE each year that he or she is not aware of any violation by the company of NYSE corporate governance listing standards and he or she must promptly notify the NYSE in writing of any non-compliance with any applicable provisions of Section 303A. No similar requirements.

ITEM 16H. MINE SAFETY DISCLOSURE.

Not applicable.

PART III

ITEM 17. FINANCIAL STATEMENTS.

SECCO was deemed a significant equity investee under Rule 3-09 of Regulation S-X for the fiscal year ended December 31, 2019. As such, the financial statements of SECCO required by Rule 3-09 of Regulation S-X are provided as Exhibit 99.1 to this Annual Report on Form 20-F.

ITEM 18. FINANCIAL STATEMENTS.

See pages F1 to F96.

96

ITEM 19. EXHIBITS.

No.	Exhibit
1.1	Translation of the amended and restated Articles of Association of Sinopec Shanghai Petrochemical Company Limited as approved in the First Extraordinary General Meeting of Sinopec Shanghai Petrochemical Company Limited for 2018 on November 8, 2018 (incorporated by reference to our Form 6-K (File No.001-12158) filed with the Commission on November 8, 2018).
2.	Amended and Restated Deposit Agreement between Sinopec Shanghai Petrochemical Company Limited and The Bank of New York Mellon dated May  11, 2011(incorporated by reference to Exhibit 2 of our annual report on Form 20-F (File No. 001-12158) filed with the Commission on April 30, 2012).
4.1	Translation of the renewed Product Supply and Sales Services Framework Agreement among Sinopec Shanghai Petrochemical Company Limited, China Petroleum & Chemical Corporation and China Petrochemical Corporation as approved in the First Extraordinary General Meeting of Sinopec Shanghai Petrochemical Company Limited for 2016 on October 18, 2016 (incorporated by reference to Exhibit 4.1 of our annual report on Form 20-F Amendment No.1 (File No.001-12158) filed with the Commission on September 14, 2017).
4.2	Translation of the renewed Comprehensive Services Framework Agreement between Sinopec Shanghai Petrochemical Company Limited and China Petrochemical Corporation as approved in the First Extraordinary General Meeting of Sinopec Shanghai Petrochemical Company Limited for 2016 on October 18, 2016 (incorporated by reference to Exhibit 4.2 of our annual report on Form 20-F Amendment No.1 (File No.001-12158) filed with the Commission on September 14, 2017).
4.3	Translation of the Property Right Transaction Agreement with Sinopec Sales Company Limited as approved in the eighteenth meeting of the seventh session of the board of directors of Sinopec Shanghai Petrochemical Company Limited on December 5, 2013 (incorporated by reference to Exhibit 4.3 of our annual report on Form 20-F (File No.001-12158) filed with the Commission on April 30, 2014).
4.4	English summary of principal terms of the Share Option Scheme as adopted at the second meeting of the eighth session of the board of directors of Sinopec Shanghai Petrochemical Company Limited on August 15, 2014 (incorporated by reference to Appendix I of our Form 6-K (File No.001-12158) filed with the Commission on November 6, 2014).
8*	A list of subsidiaries of Sinopec Shanghai Petrochemical Company Limited.
12.1*	Certification of President Required by Rule 13a-14(a).
12.2*	Certification of Chief Financial Officer Required by Rule 13a-14(a).
13.1*	Certification of President Required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code.
13.2*	Certification of Chief Financial Officer Required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code.
99.1*	Financial statements of SECCO and Report of Independent Auditor
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF *	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

*Filed with this annual report on Form 20-F

97

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on Form 20-F on its behalf.

	SINOPEC SHANGHAI PETROCHEMICAL COMPANY LIMITED
Date: April 28, 2020	/s/ ZHOU MEIYUN
	Zhou Meiyun, Director, Chief Financial Officer

98

Table of Contents

	Page
Report of independent registered public accounting firm		F-2
Consolidated income statement		F-5
Consolidated statement of comprehensive income		F-6
Consolidated balance sheet		F-7
Consolidated statement of changes in equity		F-9
Consolidated statement of cash flows		F-11
Notes to the consolidated financial statements		F-12

F-1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Sinopec Shanghai Petrochemical Company Limited

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Sinopec Shanghai Petrochemical Company Limited and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated income statements, statements of comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2019, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 3 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 15(b). Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

F-2

Basis for Opinions (Continued)

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

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 (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) 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 (iii) 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.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

F-3

Critical Audit Matters (Continued)

Net realizable value (NRV) of raw materials, work in progress and finished goods

As described in Notes 2.16, 5 and 22 to the consolidated financial statements, the gross balances of raw materials, work in progress and finished goods were RMB 6,662,023 thousands, against which NRV provisions of RMB 112,744 thousands were set aside as at December 31, 2019. The Company is principally engaged in processing of crude oil into petroleum products and other chemical products. The crude oil can be processed into various finished goods by different processing procedures. Inventories are stated at the lower of cost and NRV. The NRV was determined based on the estimated selling prices less the estimated costs to completion, if relevant, other costs necessary to make the sale, and related taxes. Determination of estimated selling prices of work in progress and finished goods, estimated costs to completion, other costs necessary to make the sale and related taxes required significant management judgements, taking into consideration of historical information and future market trend.

The principal considerations for our determination that performing procedures relating to the NRV of raw materials, work in progress and finished goods is a critical audit matter are there were significant judgments by management in the determination of estimated selling prices of work in progress and finished goods, estimated costs to completion, and other costs necessary to make the sale and the related taxes. This in turn led to a high degree of auditor judgement, subjectivity and audit effort in performing procedures and evaluating audit evidence related to the estimated selling prices, estimated costs to completion, other costs necessary to make the sale and the related taxes, taking into consideration of management’s judgements and estimates on historical information and future market trend factors.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the determination of net realizable value of the raw materials, work in progress and finished goods. These procedures also included, among others, testing management’s process for determining the NRV of raw materials, work in progress and finished goods; evaluating the reasonableness of management’s estimates of costs to completion, other costs necessary to make the sale and related taxes by considering the relevant historical actual performance; and evaluating the reasonableness of management’s significant assumptions in determining estimated selling prices. Evaluating management’s assumptions in determining estimated selling prices on a test basis involved comparing the estimated selling prices to applicable actual selling prices and market price information; evaluating the assumptions relating to future market trend considering changes in market supplies, customer demands, technology developments and relevant regulators by corroborating with public data or research information and referencing to the industry knowledge.

/s/ PricewaterhouseCoopers Zhong Tian LLP

Shanghai, the People’s Republic of China

April 28, 2020

We have served as the Company’s auditor since 2013.

F-4

Sinopec Shanghai Petrochemical Company Limited

Consolidated Income Statement

For the year ended 31 December 2017, 2018 and 2019

		Year ended 31 December
	Note	2017			2018			2019
		RMB’000			RMB’000			RMB’000
Revenue	6		91,962,415			107,688,907			100,269,667
Taxes and surcharges			(12,744,088	)		(12,075,424	)		(12,213,927	)
Net sales			79,218,327			95,613,483			88,055,740
Cost of sales	11		(72,398,288	)		(89,838,977	)		(86,467,995	)
Gross profit			6,820,039			5,774,506			1,587,745
Selling and administrative expenses	11		(535,259	)		(536,114	)		(549,885	)
Net impairment losses on financial assets	4		-			(39	)		59
Other operating income	7		119,010			202,617			150,714
Other operating expenses	8		(21,379	)		(32,548	)		(21,925	)
Other gains - net	9		19,462			176,690			153,864
Operating profit			6,401,873			5,585,112			1,320,572
Finance income	10		268,379			443,661			416,747
Finance expenses	10		(61,047	)		(106,249	)		(53,784	)
Finance income – net			207,332			337,412			362,963
Share of net profit of associates and joint ventures accounted for using the equity method	21		1,243,693			885,597			972,593
Profit before income tax			7,852,898			6,808,121			2,656,128
Income tax expense	13		(1,698,739	)		(1,471,903	)		(428,963	)
Profit for the year			6,154,159			5,336,218			2,227,165
Profit attributable to:
- Owners of the Company			6,143,222			5,336,331			2,215,728
- Non-controlling interests			10,937			(113	)		11,437
			6,154,159			5,336,218			2,227,165
Earnings per share attributable to owners of the Company for the year (expressed in RMB per share)
Basic earnings per share	14		RMB 0.569			RMB 0.493			RMB 0.205
Diluted earnings per share	14		RMB 0.568			RMB 0.493			RMB 0.205
Earnings per ADS attributable to owners of the Company for the year (expressed in RMB per ADS)
Basic earnings per ADS	14		RMB 56.862			RMB 49.303			RMB 20.452
Diluted earnings per ADS	14		RMB 56.830			RMB 49.303			RMB 20.452

The above consolidated income statement should be read in conjunction with the accompanying notes.

Wu Haijun	Zhou Meiyun
Chairman	Director, Vice General Manager and Chief Financial Officer

F-5

Sinopec Shanghai Petrochemical Company Limited

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2017, 2018 and 2019

		Year ended 31 December
	Note	2017			2018			2019
		RMB’000			RMB’000			RMB’000
Profit for the year			6,154,159			5,336,218			2,227,165
Other comprehensive (loss)/income
Items that may be reclassified to profit or loss Share of other comprehensive (loss)/income of associates and joint ventures accounted for using the equity method	28		(810	)		(7,014	)		7,449
Other comprehensive (loss)/income for the year, net of tax			(810	)		(7,014	)		7,449
Total comprehensive income for the year			6,153,349			5,329,204			2,234,614
Attributable to:
– Owners of the Company			6,142,412			5,329,317			2,223,177
– Non-controlling interests			10,937			(113	)		11,437
Total comprehensive income for the year			6,153,349			5,329,204			2,234,614

The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes.

Wu Haijun	Zhou Meiyun
Chairman	Director, Vice General Manager and Chief Financial Officer

F-6

Sinopec Shanghai Petrochemical Company Limited

Consolidated Balance Sheet

As at 31 December 2018 and 2019

			As at 31 December
	Note		2018		2019
			RMB’000		RMB’000
Assets
Non-current assets
Lease prepayments and other non-current assets		15		858,283		481,414
Property, plant and equipment		17		11,646,390		11,300,797
Right-of-use assets		3, 16		—		343,860
Investment properties		18		376,739		367,468
Construction in progress		19		1,559,401		1,815,549
Investments accounted for using the equity method		21		4,527,133		5,208,758
Deferred income tax assets		13		119,075		150,832
Financial assets at fair value through other comprehensive income		23(d)		-		5,000
Time deposits with banks		23(c)		-		3,511,234
				19,087,021		23,184,912
Current assets
Inventories		22		8,120,875		6,754,434
Financial assets at fair value through other comprehensive income		23(d)		1,672,431		1,540,921
Financial assets at fair value through profit or loss		23(e)		2,727,279		3,318,670
Trade receivables		23(a)		81,990		120,739
Other receivables		23(a)		105,803		26,101
Prepayments		24		38,025		23,767
Amounts due from related parties		23(a), 30(c)		2,286,249		1,565,993
Cash and cash equivalents		23(b)		8,741,893		7,449,699
Time deposits with banks		23(c)		1,500,000		1,508,839
Assets classified as held for sale		24		24,331		-
				25,298,876		22,309,163
Total assets				44,385,897		45,494,075

F-7

Sinopec Shanghai Petrochemical Company Limited

Consolidated Balance Sheet (Continued)

As at 31 December 2018 and 2019

			As at 31 December
	Note		2018		2019
			RMB’000		RMB’000
Equity and liabilities
Equity attributable to owners of the Company
Share capital		27		10,823,814		10,823,814
Reserves		28		19,522,249		19,039,474
				30,346,063		29,863,288
Non-controlling interests				116,378		130,560
Total equity				30,462,441		29,993,848
Liabilities
Non-current liabilities
Lease liabilities		16		—		10,593
Deferred income		26		10,442		10,005
				10,442		20,598
Current liabilities
Borrowings		23(f)		497,249		1,547,600
Lease liabilities		16		—		11,450
Financial liabilities at fair value through profit or loss				11,005		799
Contract liabilities		25		446,702		655,117
Trade and other payables		23(g)		8,090,228		7,330,000
Amounts due to related parties		23(g), 30(c)		4,567,814		5,708,394
Income tax payable				300,016		226,269
				13,913,014		15,479,629
Total liabilities				13,923,456		15,500,227
Total equity and liabilities				44,385,897		45,494,075

The above consolidated balance sheet should be read in conjunction with the accompanying notes.

Wu Haijun	Zhou Meiyun
Chairman	Director, Vice General Manager and Chief Financial Officer

F-8

Sinopec Shanghai Petrochemical Company Limited

Consolidated Statement of Changes in Equity

For the year ended 31 December 2017, 2018 and 2019

			Attributable to owners of the Company
	Note		Share capital		Other reserves			Retained earnings			Total			Non-controlling interests			Total equity
			RMB’000		RMB’000			RMB’000			RMB’000			RMB’000			RMB’000
Balance at 1 January 2017				10,800,000		4,237,276			9,684,689			24,721,965			281,270			25,003,235
Profit for the year				-		-			6,143,222			6,143,222			10,937			6,154,159
Other comprehensive loss		28		-		(810	)		-			(810	)		-			(810	)
Total comprehensive (loss)/ income for the year				-		(810	)		6,143,222			6,142,412			10,937			6,153,349
Dividends proposed and approved				-		-			(2,700,000	)		(2,700,000	)		-			(2,700,000	)
Employees share option scheme		28,29		-		(10,640	)		-			(10,640	)		-			(10,640	)
Exercise of share option		28,29		14,177		62,319			-			76,496			-			76,496
Dividends paid by subsidiaries to non-controlling interests				-		-			-			-			(6,900	)		(6,900	)
Utilization of safety production fund		28		-		(346	)		346			-			-			-
Balance at 31 December 2017				10,814,177		4,287,799			13,128,257			28,230,233			285,307			28,515,540

		Attributable to owners of the Company
	Note	Share capital		Other reserves			Retained earnings			Total			Non-controlling interests			Total equity
		RMB’000		RMB’000			RMB’000			RMB’000			RMB’000			RMB’000
Balance at 1 January 2018			10,814,177		4,287,799			13,128,257			28,230,233			285,307			28,515,540
Profit/(loss) for the year			-		-			5,336,331			5,336,331			(113	)		5,336,218
Other comprehensive loss	28		-		(7,014	)		-			(7,014	)		-			(7,014	)
Total comprehensive (loss)/income for the year			-		(7,014	)		5,336,331			5,329,317			(113	)		5,329,204
Dividends proposed and approved			-		-			(3,247,144	)		(3,247,144	)		-			(3,247,144	)
Forfeit of share option scheme	28,29		-		(13,004	)		-			(13,004	)		-			(13,004	)
Exercise of share option	28,29		9,637		27,465			-			37,102			-			37,102
Dividends paid by subsidiaries to non-controlling interests			-		-			-			-			(6,457	)		(6,457	)
Appropriation of safety production fund	28		-		57,135			(57,135	)		-			-			-
Transactions with non-controlling interests	28		-		9,559			-			9,559			(162,359	)		(152,800	)
Balance at 31 December 2018			10,823,814		4,361,940			15,160,309			30,346,063			116,378			30,462,441

F-9

Sinopec Shanghai Petrochemical Company Limited

Consolidated Statement of Changes in Equity (Continued)

For the year ended 31 December 2017, 2018 and 2019

		Attributable to owners of the Company
	Note	Share capital		Other reserves		Retained earnings			Total			Non-controlling interests			Total equity
		RMB’000		RMB’000		RMB’000			RMB’000			RMB’000			RMB’000
Balance at 1 January 2019			10,823,814		4,361,940		15,160,309			30,346,063			116,378			30,462,441
Profit for the year			-		-		2,215,728			2,215,728			11,437			2,227,165
Other comprehensive income	28		-		7,449		-			7,449			-			7,449
Total comprehensive income for the year			-		7,449		2,215,728			2,223,177			11,437			2,234,614
Dividends proposed and approved	31		-		-		(2,705,952	)		(2,705,952	)		-			(2,705,952	)
Dividends paid by subsidiaries to non-controlling interests			-		-		-			-			(3,266	)		(3,266	)
Appropriation of safety production fund	28		-		2		(2	)		-			-			-
Non-controlling interests of disposed subsidiary			-		-		-			-			6,011			6,011
Balance at 31 December 2019			10,823,814		4,369,391		14,670,083			29,863,288			130,560			29,993,848

The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes.

Wu Haijun	Zhou Meiyun
Chairman	Director, Vice General Manager and Chief Financial Officer

F-10

Sinopec Shanghai Petrochemical Company Limited

Consolidated Statement of Cash Flows

For the year ended 31 December 2017, 2018 and 2019

			Year ended 31 December
	Note		2017			2018			2019
			RMB’000			RMB’000			RMB’000
Cash flows from operating activities
Cash generated from operations		32		8,784,496			8,501,499			5,655,676
Interest paid to related parties				-			(1,326	)		(2,126	)
Interest paid				(17,664	)		(34,339	)		(61,304	)
Income tax paid				(1,706,014	)		(1,806,400	)		(534,467	)
Net cash generated from operating activities				7,060,818			6,659,434			5,057,779
Cash flows from investing activities
Dividends received from joint ventures and associates				479,633			811,473			594,868
Interest received from related parties				5,147			610			1,295
Interest received from banks excluded structured deposits				221,835			393,671			445,105
Interest received from structured deposits				-			23,149			86,848
Net proceeds/(losses) from settlement of derivative financial instrument				-			16,540			(15,316	)
Net proceeds from disposal of property, plant and equipment		32		3,407			210,122			67,503
Net proceeds from disposal of joint ventures				10,339			-			-
Proceeds from disposal of a subsidiary		21		-			9,600			-
Cash received from entrusted lending				88,000			12,000			-
Cash received from structured deposits				-			-			3,200,000
Cash received from time deposits within one year				500,000			4,000,000			4,100,000
Cash payment for time deposits above one year				-			-			(3,500,000	)
Cash payment for time deposits within one year				(2,500,000	)		(3,500,000	)		(4,100,000	)
Cash payment for structured deposits				-			(2,700,000	)		(3,800,000	)
Cash payment for acquisition of associate		21		-			-			(248,184	)
Cash payment of entrusted lending				(12,000	)		-			-
Cash payment for equity instruments				-			-			(5,000	)
Payments for sale of financial assets at fair value through other comprehensive income				-			-			(19,513	)
Cash held by the subsidiary before disposal		20		-			(18,529	)		(404	)
Purchases of property, plant and equipment and other long-term assets from related parties				(172,154	)		(143,554	)		(83,447	)
Purchases of property, plant and equipment and other long-term assets from third parties				(1,024,909	)		(1,043,451	)		(1,346,964	)
Net cash used in investing activities				(2,400,702	)		(1,928,369	)		(4,623,209	)
Cash flows from financing activities
Proceeds from borrowings from related parties				-			50,000			-
Proceeds from borrowings from banks				2,119,147			2,486,759			4,755,100
Proceeds from exercising share option scheme				54,580			37,102			-
Repayments of borrowings to related parties				-			(50,000	)		-
Repayments of borrowings to banks				(2,059,422	)		(2,596,157	)		(3,695,208	)
Cash payment of acquisition of non-controlling interests				-			(152,800	)		-
Dividends paid to the Company’s shareholders				(2,697,188	)		(3,275,656	)		(2,704,864	)
Dividends paid by subsidiaries to non-controlling interests				(6,900	)		(6,457	)		(3,266	)
Principal elements of lease payments				—			—			(89,124	)
Net cash used in financing activities				(2,589,783	)		(3,507,209	)		(1,737,362	)
Net increase/(decrease) in cash and cash equivalents				2,070,333			1,223,856			(1,302,792	)
Cash and cash equivalents at beginning of the year		23(b)		5,440,623			7,504,266			8,741,893
Exchange gains on cash and cash equivalents				(6,690	)		13,771			10,598
Cash and cash equivalents at end of the year		23(b)		7,504,266			8,741,893			7,449,699

The above consolidated statement of cash flows should be read in conjunction with the accompanying notes.

Wu Haijun	Zhou Meiyun
Chairman	Director, Vice General Manager and Chief Financial Officer

F-11

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2019

1 General information

Sinopec Shanghai Petrochemical Company Limited (“the Company”), formerly known as Shanghai Petrochemical Company Limited, was established in the People’s Republic of China (“the PRC”) on 29 June 1993 as a joint stock limited company to hold the assets and liabilities of the production divisions and certain other units of Shanghai Petrochemical Complex (“SPC”), a state-owned enterprise. The Company was under the direct supervision of China Petrochemical Corporation (“Sinopec Group”) at that time.

The Company completed its initial public offerings in 1993. Its shares were listed on the Stock Exchange of Hong Kong Limited (“H shares”) and the New York Stock Exchange in the form of American Depositary Shares (“ADS”) on 26 July 1993, and were also listed on the Shanghai Stock Exchange (“ordinary A shares”) on 8 November 1993.

Sinopec Group completed its reorganization on 25 February 2000. After the reorganization, China Petroleum & Chemical Corporation (“Sinopec Corp.”) was established. As part of the reorganization, Sinopec Group transferred its 4,000,000,000 of the Company’s state-owned legal shares, which represented 55.56 percent of the issued share capital of the Company, to Sinopec Corp.

The Company changed its name to Sinopec Shanghai Petrochemical Company Limited on 12 October 2000, and Sinopec Corp. was the largest shareholder of the Company.

Pursuant to the “Approval on matters relating to the Share Segregation Reform of Sinopec Shanghai Petrochemical Company Limited” issued by the State-owned Assets Supervision and Administration Commission of the State Council (State Owned Property [2013] No.443), a General Meeting of A share shareholders was held on 8 July 2013 and passed the resolution of “Share Segregation Reform of Sinopec Shanghai Petrochemical Company Limited (Amendment)” (“the Share Segregation Reform Resolution”) which was published by the Company on Shanghai Stock Exchange (“SSE”) website on 20 June 2013.

According to the Share Segregation Reform Resolution, the controlling shareholder of the Company, Sinopec Corp., offered shareholders of circulating A shares 5 shares for every 10 circulating A shares they held on 16 August 2013, aggregating 360,000,000 A shares, for the purpose of obtaining the listing rights of its non-circulating shares in the A Shares market. From 20 August 2013 (“the circulation date”), all the Company’s non-circulating A shares have been granted circulating rights on Shanghai Stock Exchange (“SSE”). As part of the restricted conditions, Sinopec Corp. committed that all the 3,640,000,000 A shares held were not allowed to be traded on SSE or transferred within 12 months from the circulation date (“the restriction period”). After the restriction period, Sinopec Corp. can only sell no more than 5 and 10 percent of its total shares within 12 and 24 months, respectively. The former 150,000,000 non-circulating A shares held by social legal persons were also prohibited to be traded on SSE or transferred within 12 months from the circulation date. Meanwhile, Sinopec Corp. also committed in the Share Segregation Reform Resolution that a scheme of converting surplus to share capital (no less than 4 shares for every 10 shares) will be proposed on the board of directors and shareholders meetings within 6 months after the circulation date.

The 15th meeting of the 7th term of Board of Directors was held on 28 August 2013 and the Company proposed and passed a resolution regarding interim cash dividend for the first half of 2013 and the conversion of share premium and surplus reserve to share capital. The resolution included a distribution of 5 shares and a cash dividend distribution of RMB 0.5 (tax included) for every 10 shares based on the 7,200,000 thousands ordinary shares as at 30 June 2013. Among the 5 shares distributed, 3.36 shares were converted from share premium of RMB 2,420,841 thousands and 1.64 shares were converted from surplus reserves of RMB 1,179,159 thousands. The resolution was approved by the extraordinary general meeting of shareholders, A share class shareholders meeting and H share class shareholders meeting on 22 October 2013, respectively.

The first tranche of the Share Option Incentive Scheme was exercised on 29 August 2017, and the Company received cash payment of RMB 54,580 thousands from 199 grantees. As a result, ordinary A shares of 14,177 thousands were registered on 27 September 2017.

F-12

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

1 General information (continued)

The second tranche of the Share Option Incentive Scheme was exercised on 12 January 2018, and the Company received cash payment of RMB 37,102 thousands from 185 grantees, led to an increase of RMB 9,637 thousands in share capital.

According to the board resolution of the Company on 28 December 2018, the third tranche was not exercised due to the failure on satisfying the non-market exercise conditions.

As at 31 December 2019, total shares of the Company were 10,823,814 thousands (31 December 2018: 10,823,814 thousands).

The Company and its subsidiaries (“the Group”) are principally engaged in processing crude oil into synthetic fibers, resins and plastics, intermediate petrochemicals and petroleum products.

These consolidated financial statements are presented in thousands of Renminbi Yuan (RMB), unless otherwise stated. These financial statements have been approved for issue by the Board of Directors on 28 April 2020.

2 Summary of significant accounting policies

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

2.1 Basis of preparation

The consolidated financial statements of the Group have been prepared in accordance with all applicable International Financial Reporting Standards (“IFRS”) as issued by International Accounting Standards Board (“IASB”). The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and financial liabilities measured at fair value.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 5.

2.1.1 Changes in accounting policy and disclosures

(a) New and amended standards adopted by the Group

The Group has applied the following standards and amendments for the first time for their annual reporting period commencing 1 January 2019:

• IFRS 16 ‘Leases’

• IFRIC 23 ‘Uncertainty over Income Tax Treatments’

• Annual Improvements to IFRS Standards 2015-2017 cycle

• Amendments to IFRS 9 ‘Prepayment Features with Negative Compensation’

• Amendments to IAS 28 ‘Long-team interests in Associates and Joint Ventures’, and

• Amendments to IAS 19 ‘Plan Amendment, Curtailment or Settlement’.

The Group had to change its accounting policies as a result of adopting IFRS 16. The Group elected to adopt the new rules retrospectively but recognized the cumulative effect of initially applying the new standard on 1 January 2019, which was disclosed in Note 3. The other amendments listed above did not have any significant impact on the amounts recognized in prior periods and are not expected to significantly affect the current or future periods.

F-13

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

2 Summary of significant accounting policies (continued)

2.1 Basis of preparation (continued)

2.1.1 Changes in accounting policy and disclosures (continued)

(b) New standards and interpretations not yet adopted

Certain new accounting standards and interpretations have been published that are not mandatory for 31 December 2019 reporting periods and have not been early adopted by the Group:

• Amendments to IFRS 3 ‘Business Combinations’, effective for the accounting period beginning on or after 1 January 2020;

• Amendments to conceptual Framework of IASB, effective for the accounting period beginning on or after 1 January 2020;

• Amendments to IAS 1 ‘Presentation of Financial Statements’ and IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’, effective for the accounting period beginning on or after 1 January 2020;

• IFRS 17 ‘Insurance Contracts’, effective for the accounting period beginning on or after 1 January 2021;

• Amendments to IFRS 10 and IAS 28 ‘Sale or contribution of assets between an investor and its associate or joint venture’.

The new standards and interpretations that are not yet effective are not expected to have a material impact on the Group in the current or future reporting periods and on foreseeable future transactions.

2.2 Subsidiaries

2.2.1 Consolidation

A subsidiary is an entity (including a structured entity) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.

(a) Business combinations

The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date.

The Group recognizes any non-controlling interest in the acquiree on an acquisition-by-acquisition basis. Non-controlling interests in the acquiree that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation are measured at either fair value or the present ownership interests’ proportionate share in the recognized amounts of the acquiree’s identifiable net assets. All other components of non-controlling interests are measured at their acquisition date fair value, unless another measurement basis is required by IFRS.

F-14

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

2 Summary of significant accounting policies (continued)

2.2 Subsidiaries (continued)

2.2.1 Consolidation (continued)

(a) Business combinations (continued)

Acquisition-related costs are expensed as incurred.

If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognized in profit or loss.

Any contingent consideration to be transferred by the Group is recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognized in profit or loss. Contingent consideration that is classified as equity is not remeasured, and its subsequent settlement is accounted for within equity.

The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired, is recorded as goodwill. If the total consideration transferred, non-controlling interest recognized and previously held interest measured is less than the fair value of the identifiable net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognized directly in the income statement.

Intra-Group transactions, balances and unrealized gains on transactions between group companies are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. When necessary, amounts reported by subsidiaries have been adjusted to conform with the Group’s accounting policies.

(b) Changes in ownership interests in subsidiaries without change of control

Transactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions – that is, as transactions with the owners of the subsidiary in their capacity as owners. The difference between fair value of any consideration paid and the relevant share acquired of the carrying amount of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity.

(c) Disposal of subsidiaries

When the Group ceases to have control, any retained interest in the entity is re-measured to its fair value at the date when control is lost, with the change in carrying amount recognized in profit or loss. The fair value is the initial carrying amount for the purposes of subsequent accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognized in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. It means the amounts previously recognized in other comprehensive income are reclassified to profit or loss or transferred to another category of equity as specified by applicable IFRSs.

F-15

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

2 Summary of significant accounting policies (continued)

2.2 Subsidiaries (continued)

2.2.2 Separate financial statements

Investments in subsidiaries are accounted for at cost less impairment. Cost includes direct attributable costs of investment. The results of subsidiaries are accounted for by the Company on the basis of dividend received and receivable.

Impairment testing of the investments in subsidiaries is required upon receiving a dividend from these investments if the dividend exceeds the total comprehensive income of the subsidiary in the period the dividend is declared or if the carrying amount of the investment in the separate financial statements exceeds the carrying amount in the consolidated financial statements of the investee’s net assets including goodwill.

Investments in joint ventures and associates are accounted for using the equity method of accounting.

2.3 Associates

An associate is an entity over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting. Under the equity method, the investment is initially recognized at cost, and the carrying amount is increased or decreased to recognize the investor’s share of the profit or loss of the investee after the date of acquisition. The Group’s investments in associates include goodwill identified on acquisition. Upon the acquisition of the ownership interest in an associate, any difference between the cost of the associate and the Group’s share of the net fair value of the associate’s identifiable assets and liabilities is accounted for as goodwill.

If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognized in other comprehensive income is reclassified to profit or loss where appropriate.

The Group’s share of post-acquisition profit or loss is recognized in the income statement, and its share of post-acquisition movements in other comprehensive income is recognized in other comprehensive income with a corresponding adjustment to the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognize further losses, unless it has incurred legal or constructive obligations or made payments on behalf of the associate.

The Group determines at each reporting date whether there is any objective evidence that the investment in the associate is impaired. If this is the case, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognizes the amount adjacent to share of net profit of associates and joint ventures accounted for using the equity method in the income statement.

Profits and losses resulting from upstream and downstream transactions between the Group and its associates are recognized in the Group’s financial statements only to the extent of unrelated investor’s interests in the associates. Unrealized losses are eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group.

Gain or losses on dilution of equity interest in associates are recognized in the income statement.

F-16

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

2 Summary of significant accounting policies (continued)

2.4 Joint arrangements

The Group has applied IFRS 11 to all joint arrangements. Under IFRS 11, investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations of each investor. The Group has assessed the nature of its joint arrangements and determined them to be joint ventures. Joint ventures are accounted for using the equity method.

Under the equity method of accounting, interests in joint ventures are initially recognized at cost and adjusted thereafter to recognize the Group’s share of the post-acquisition profits or losses and movements in other comprehensive income. The Group’s investments in joint ventures include goodwill identified on acquisition. Upon the acquisition of the ownership interest in a joint venture, any difference between the cost of the joint venture and the Group’s share of the net fair value of the joint venture’s identifiable assets and liabilities is accounted for as goodwill. When the Group’s share of losses in a joint venture equals or exceeds its interests in the joint ventures, including any other unsecured receivables, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the joint ventures.

Unrealized gains on transactions between the Group and its joint ventures are eliminated to the extent of the Group’s interest in the joint ventures. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of the joint ventures have been changed where necessary to ensure consistency with the policies adopted by the Group.

2.5 Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board of Directors that makes strategic decisions.

2.6 Foreign currency translation

(a) Functional and presentation currency

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in RMB, which is the Company’s functional and the Group’s presentation currency.

(b) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement, except when deferred in other comprehensive income as qualifying cash flow hedges and qualifying net investment hedges.

Foreign exchange gains and losses that relate to borrowings and cash and cash equivalents are presented in the income statement within finance income or expenses. All other foreign exchange gains and losses are presented in the income statement within Other gains – net.

F-17

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

2 Summary of significant accounting policies (continued)

2.7 Property, plant and equipment

Property, plant and equipment is stated at historical cost less depreciation and impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred.

Depreciation on property, plant and equipment is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows:

Buildings	12-40 years
Plant and machinery	12-20 years
Vehicles and other equipment	4-20 years

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 2.11).

Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized within Other gains – net in the income statement.

2.8 Construction in progress

Construction in progress represents buildings, various plant and equipment under construction and pending installation, and is stated at cost less government grants that compensate the Company for the cost of construction, and impairment losses. Cost 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 period 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.

2.9 Investment properties

Investment properties are properties which are owned either to earn rental income and/or for capital appreciation.

Investment properties are stated in the balance sheet at cost less accumulated depreciation and impairment losses (Note 2.11). Depreciation is provided over their estimated useful lives on a straight-line basis, after taking into account their estimated residual values. Estimated useful lives of the Group’s investment properties are 30-40 years.

F-18

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

2 Summary of significant accounting policies (continued)

2.10 Lease prepayments and other non-current assets

From 1 January 2019, lease prepayments and other non-current assets mainly include catalysts used in production and patents. These assets are carried at cost less accumulated amortization and impairment losses. Lease prepayments and other non-current assets are amortized on a straight-line basis over the respective periods of the rights and the estimated useful lives of the catalysts and patents, as follows:

Patents	10-28 years
Catalyst	2-5 years

Accounting polices applied until 1 January 2019

Lease prepayments and other non-current assets mainly represent prepayments for land use rights and catalysts used in production. These assets are carried at cost less accumulated amortization and impairment losses. Lease prepayments and other non-current assets are amortized on a straight-line basis over the respective periods of the rights and the estimated useful lives of the catalysts, as follows:

Land use rights	30-50 years
Patents	10-28 years
Catalyst	2-5 years

2.11 Impairment of non-financial assets

Intangible assets that have an indefinite useful life or intangible assets not ready to use are not subject to amortization and are tested annually for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.

2.12 Investments and financial assets

2.12.1 Classification

From 1 January 2018, the Group classifies its financial assets in the following measurement categories:

• those to be measured subsequently at fair value (either through other comprehensive income or through profit or loss), and

• those to be measured at amortized cost.

The classification depends on the Group’s business model for managing the financial assets and the contractual terms of the cash flows.

For assets measured at fair value, gains and losses will either be recorded in profit or loss or other comprehensive income (“OCI”). For investments in equity instruments that are not held for trading, this will depend on whether the Group has made an irrevocable election at the time of initial recognition to account for the equity investment at fair value through other comprehensive income (“FVOCI”).

The Group reclassifies debt investments when and only when its business model for managing those assets changes.

F-19

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

2 Summary of significant accounting policies (continued)

2.12 Investments and financial assets (continued)

2.12.2 Recognition and derecognition

Regular way purchases and sales of financial assets are recognized on trade-date, the date on which the Group commits to purchase or sell the asset. Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership.

2.12.3 Measurement

At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss (“FVPL”), transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at FVPL are expensed in profit or loss.

Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payment of principal and interest.

Debt instruments

Subsequent measurement of debt instruments depends on the Group’s business model for managing the asset and the cash flow characteristics of the asset. There are three measurement categories into which the Group classifies its debt instruments:

• Amortized cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortized cost. Interest income from these financial assets is included in finance income using the effective interest rate method. Any gain or loss arising on derecognition is recognized directly in profit or loss and presented in Other gains—net, together with foreign exchange gains and losses. Impairment losses are presented as separate line item in the consolidated income statement.

• FVOCI: Assets that are held for collection of contractual cash flows and for selling the financial assets, where the assets’ cash flows represent solely payments of principal and interest, are measured at FVOCI. Movements in the carrying amount are taken through OCI, except for the recognition of impairment gains or losses, interest revenue and foreign exchange gains and losses which are recognized in profit or loss. When the financial asset is derecognized, the cumulative gains or losses previously recognized in OCI is reclassified from equity to profit or loss and recognized in Other gains—net. Interest income from these financial assets is included in finance income using the effective interest rate method. Foreign exchange gains and losses are presented in Other gains—net and impairment expenses are presented as separate line item in the consolidated income statement.

• FVPL: Assets that do not meet the criteria for amortized cost or FVOCI are measured at FVPL. A gain or loss on a debt investment that is subsequently measured at FVPL is recognized in profit or loss and presented net within Other gains—net in the period in which it arises.

Equity instruments

The Group subsequently measures all equity investments at fair value. Where the Group’s management has elected to present fair value gains and losses on equity investments in OCI, there is no subsequent reclassification of fair value gains and losses to profit or loss following the derecognition of the investment. Dividends from such investments continue to be recognized in profit or loss when the Group’s right to receive payments is established.

Changes in the fair value of financial assets at FVPL are recognized in Other gains—net in the consolidated income statement as applicable. Impairment losses (and reversal of impairment losses) on equity investments measured at FVOCI are not reported separately from other changes in fair value.

F-20

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

2 Summary of significant accounting policies (continued)

2.12 Investments and financial assets (continued)

2.12.4 Impairment

From 1 January 2018, the Group assesses on a forward-looking basis the expected credit losses associated with its debt instruments carried at amortized cost and FVOCI. The impairment methodology applied depends on whether there has been a significant increase in credit risk.

For financial instruments that have low credit risk at the balance sheet date, except for receivables related to revenue, the Group assumes that there is no significant increase in credit risk since the initial recognition, on first stage, and measures the loss allowance at an amount equal to 12-month expected credit losses. If there has been a significant increase in credit risk or credit impairment has occurred since the initial recognition of a financial instrument, on second stage, the Group recognizes a loss allowance at an amount equal to lifetime expected credit losses. If credit impairment has occurred since the initial recognition of a financial instrument, on third stage, the Group recognizes a loss allowance at an amount equal to lifetime expected credit losses.

For trade receivables, the Group applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognized from initial recognition of the receivables, see Note 4.1(b) for further details.

2.12.5 Accounting policies applied until 31 December 2017

Classification

The Group classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables and available for sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.

(a) Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are also categorized as held for trading unless they are designated as hedges. Assets in this category are classified as current assets if expected to be settled within 12 months; otherwise, they are classified as non-current.

(b) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for the amounts that are settled or expected to be settled more than 12 months after the end of the reporting period. These are classified as non-current assets. The Group’s loans and receivables comprise trade receivables, bills receivable and other receivables and cash and cash equivalents in the balance sheet.

(c) Available-for-sale financial assets

Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless the investment matures or management intends to dispose of it within 12 months of the end of the reporting period.

F-21

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

2 Summary of significant accounting policies (continued)

2.12.5 Accounting policies applied until 31 December 2017 (continued)

(c) Available-for-sale financial assets (continued)

Recognition and measurement

Regular way purchases and sales of financial assets are recognized on the trade-date – the date on which the Group commits to purchase or sell the asset. Investments are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognized at fair value, and transaction costs are expensed in the income statement. Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are subsequently carried at amortized cost using the effective interest method.

Gains or losses arising from changes in the fair value of the financial liabilities at fair value through profit or loss category are presented in the income statement within Other (losses)/gains – net in the period in which they arise. Dividend income from financial assets at fair value through profit or loss is recognized in the income statement as part of other income when the Group’s right to receive payments is established.

Changes in the fair value of monetary and non-monetary securities classified as available for sale are recognized in other comprehensive income.

When securities classified as available for sale are sold or impaired, the accumulated fair value adjustments recognized in equity are included in the income statement as gains and losses from investment securities.

2.13 Offsetting financial instruments

Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the asset and settle the liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the company or the counterparty.

2.14 Derivative financial instruments

Derivative financial instruments of the Group are foreign exchange forward contracts, which are not designated as hedges.

Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at the end of each reporting period.

Fair values are obtained from quoted market prices in active markets, including recent market transactions, and through the use of valuation techniques, including discounted cash flow models and options pricing models, as appropriate. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative.

The best evidence of the fair value of a derivative at initial recognition is the transaction price (i.e., the fair value of the consideration given or received) unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets. When such evidence exists, the Group recognizes profits (losses) on that day.

F-22

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

2 Summary of significant accounting policies (continued)

2.15 Assets classified as held for sale

Assets, including non-current assets (or disposal groups) are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use and a sale is considered highly probable within 12 months. They are measured at the lower of their carrying amount and fair value less costs to sell, except for assets such as deferred tax assets, assets arising from employee benefits, financial assets and investment property that are carried at fair value and contractual rights under insurance contracts, which are specifically exempt from this requirement.

An impairment loss is recognized for any initial or subsequent write-down of the asset (or disposal group) to fair value less costs to sell. A gain is recognized for any subsequent increases in fair value less costs to sell of an asset (or disposal group), but not in excess of any cumulative impairment loss previously recognized. A gain or loss not previously recognized by the date of the sale of the asset that is classified as held for sale (or disposal group) is recognized at the date of derecognition.

The assets (including those that are part of a disposal group) are not depreciated or amortized while they are classified as held for sale. Interest and other expenses attributable to the liabilities of a disposal group classified as held for sale continue to be recognized.

Assets classified as held for sale are presented separately in current assets of the balance sheet.

2.16 Inventories

Inventories are stated at the lower of cost and net realizable value. Cost is determined using the weighted average cost method. The cost of finished goods and work in progress comprises raw materials, direct labor, other direct costs and related production overheads (based on normal operating capacity). It excludes borrowing costs. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion, the estimated costs necessary to make the sale and the related taxes.

2.17 Trade receivables, bills receivable and other receivables

Trade receivables and bills receivable are amounts due from customers for merchandise sold or services performed in the ordinary course of business. If collection of trade receivables, bills receivable and other receivables is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as non-current assets.

Trade receivables, bills receivable and other receivables are recognized initially at fair value plus transaction costs and subsequently measured at amortized cost using the effective interest method, less allowance for impairment. See Note 2.12.4 for a description of the Group’s impairment policies.

2.18 Cash and cash equivalents

In the consolidated statement of cash flows, cash and cash equivalents include cash in hand, deposits held at call with banks, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Bank overdrafts are presented within borrowings in current liabilities in the balance sheet.

F-23

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

2 Summary of significant accounting policies (continued)

2.19 Share capital

Ordinary shares are classified as equity.

Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds.

2.20 Safety production fund

Under China’s law and regulation, the Group is required to accrue safety production fund at a certain percentage of the sales of dangerous goods. The fund is earmarked for improving the safety of production. The fund is accrued from retained earnings to other reserves and converted back to retained earnings when used.

2.21 Trade and other payables

Trade and other payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Trade and other payables are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities.

Trade and other payables are recognized initially at fair value plus transaction costs and subsequently measured at amortized cost using the effective interest method.

2.22 Borrowings

Borrowings are initially recognized at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognized in the income statement over the period of the borrowings using the effective interest method.

Fees paid on the establishment of loan facilities are recognized as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalized as a pre-payment for liquidity services and amortized over the period of the facility to which it relates.

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period.

2.23 Borrowing costs

General and specific borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.

Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization.

All other borrowing costs are recognized in profit or loss in the period in which they are incurred.

Borrowing costs include interest expense, finance charges in respect of exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. The exchange gains and losses that are an adjustment to interest costs include the interest rate differential between borrowing costs that would be incurred if the entity had borrowed funds in its functional currency, and the borrowing costs actually incurred on foreign currency borrowings.

F-24

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

2 Summary of significant accounting policies (continued)

2.24 Current and deferred income tax

The tax expense for the period comprises current and deferred tax. Tax is recognized in the income statement, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively.

(a) Current income tax

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company’s subsidiaries, associates and joint ventures operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

(b) Deferred income tax

Inside basis differences

Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognized if they arise from the initial recognition of goodwill, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled.

Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.

Outside basis differences

Deferred income tax liabilities are provided on taxable temporary differences arising from investments in subsidiaries, associates and joint arrangements, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Generally the Group is unable to control the reversal of the temporary difference for associates. Only when there is an agreement in place that gives the Group the ability to control the reversal of the temporary difference in the foreseeable future, deferred tax liability in relation to taxable temporary differences arising from the associate’s undistributed profits is not recognized.

Deferred income tax assets are recognized on deductible temporary differences arising from investments in subsidiaries, associates and joint arrangements only to the extent that it is probable the temporary difference will reverse in the future and there is sufficient taxable profit available against which the temporary difference can be utilized.

(c) Offsetting

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

F-25

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

2 Summary of significant accounting policies (continued)

2.25 Employee benefits

(a) Pension obligations

The PRC employees of the Group are covered by various PRC government-sponsored defined-contribution pension plans under which the employees are entitled to a monthly pension based on certain formulas. The relevant government agencies are responsible for the pension liability to these employees when they retire. The Group contributes on a monthly basis to these pension plans for the employees which are determined at a certain percentage of their salaries. Under these plans, the Group has no obligation for post-retirement benefits beyond the contribution made. Contributions to these plans are expensed as incurred and contributions paid to the defined contribution pension plans for a staff are not available to reduce the Group’s future obligations to such defined-contribution pension plans even if the staff leaves the Group.

(b) Termination benefits

Termination benefits are payable when employment is terminated by the Group before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognizes termination benefits at the earlier of the following dates: when Group demonstrably commits itself to terminate employment or to provide benefits as a result of voluntary redundancy by having a detailed formal plan which is without realistic possibility of withdrawal. Benefits falling due more than 12 months after the end of the reporting period are discounted to their present value.

2.26 Share-based payment

(a) Equity-settled share-based payment transactions

The Group operates a number of equity-settled, share-based compensation plans, under which the entity receives services from employees as consideration for equity instruments (options) of the Group. The fair value of the employee services received in exchange for the grant of the options is recognized as an expense. The total amount to be expensed is determined by reference to the fair value of the options granted:

• including any market performance conditions such as an entity’s share price;

• excluding the impact of any service and non-market performance vesting conditions such as profitability, sales growth targets and remaining an employee of the entity over a specified time period; and

• including the impact of any non-vesting conditions such as the requirement for employees to save or holding shares for a specified period of time.

At the end of each reporting period, the Group revises its estimates of the number of options that are expected to vest based on the non-marketing performance and service conditions. It recognizes the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity.

In addition, in some circumstances employees may provide services in advance of the grant date and therefore the grant date fair value is estimated for the purposes of recognizing the expense during the period between service commencement period and grant date.

When the options are exercised, the Company issues new shares. The proceeds received net of any directly attributable transaction costs are credited to share capital.

(b) Share-based payment transactions among Group entities

The grant by the Company of options over its equity instruments to the employees of subsidiary undertakings in the Group is treated as a capital contribution. The fair value of employee services received, measured by reference to the grant date fair value, is recognized over the vesting period as an increase to investment in subsidiary undertakings, with a corresponding credit to equity in the parent entity accounts.

F-26

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

2 Summary of significant accounting policies (continued)

2.27 Provisions

Provisions for environmental restoration, restructuring costs and legal claims are recognized when: the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Restructuring provisions comprise lease termination penalties and employee termination payments. Provisions are not recognized for future operating losses.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense.

2.28 Revenue recognition

(a) Accounting policies applied by the Group has been modified according to the adoption of IFRS 15‘Revenue from Contracts with Customers’ from 1 January 2018 as follows:

(i) Sales of petroleum and chemical products

The Group manufactures and sells petroleum and chemical products. Sales are recognized when control of the products has transferred, being when the products are delivered to and accepted by the customer. Delivery occurs when the products have been shipped to the specific location, the risks of obsolescence and loss have been transferred to the customer, and either the customer has accepted the products in accordance with the sales contract, or the Group has objective evidence that all criteria for acceptance have been satisfied. Advance from customers but goods not yet delivered is recorded as contract liabilities and is recognized as revenues when a customer obtains control over the relevant goods.

Revenue excludes value added tax and is after deduction of any estimated trade discounts.

The Group has elected to apply the practical expedient that contract costs incurred related to contracts with an amortization period of less than one year have been expensed as incurred. The Group also applies the practical expedient in paragraph 121 of IFRS 15 and does not disclose information about remaining performance obligations that have original expected durations of one year or less.

(ii) Rental income

Rental income from investment property is recognized in the income statement on a straight-line basis over the term of the lease.

(iii) Overseas shipping services

The Group arranges overseas shipping services for the customer and revenue is recognized over time and based on the actual shipping service provided to the end of the reporting period as a proportion of the total services to be provided, because the customer receives and uses the benefits simultaneously. This is determined based on the actual passages of time (days) relative to the total expected shipping days.

F-27

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

2 Summary of significant accounting policies (continued)

2.28 Revenue recognition (continued)

(b) Accounting policies applied until 31 December 2017

Revenue is measured at the fair value of the consideration received or receivable, and represents amounts receivable for goods supplied, stated net of discounts and value added taxes. The Group recognizes revenue when the amount of revenue can be reliably measured; when it is probable that future economic benefits will flow to the entity; and when specific criteria have been met for each of the Group’s activities, as described below.

(i) Sales of petroleum and chemical products

Revenues associated with the sale of petroleum and chemical products are recognized in the income statement when the significant risks and rewards of ownership have been transferred to the buyer. Revenue excludes value added tax and is after deduction of any trade discounts and returns. No revenue is recognized if there are significant uncertainties regarding recovery of the consideration due to 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.

(ii) Pipeline transportation services

Revenues associated with pipeline transportation services are recognized by reference to the stage of completion (that is, when the services are rendered) of the transaction at the end of the reporting period and when the outcome of the transaction can be estimated reliably. The outcome of the transaction can be estimated reliably when the amount of revenue, the costs incurred and the stage of completion can be measured reliably and it is probable that the economic benefits associated with the transaction will flow to the Group.

(iii) Rental income

Rental income from investment property is recognized in the income statement on a straight-line basis over the term of the lease.

F-28

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

2 Summary of significant accounting policies (continued)

2.29 Interest income

Interest income from financial assets at FVPL is included in Other gains—net, see Note 9 below. Interest income on financial assets at amortized cost and financial assets at FVOCI calculated using the effective interest method is recognized in the consolidated income statement as part of other income.

Interest income is calculated by applying the effective interest rate to the gross carrying amount of a financial asset except for financial assets that subsequently become credit-impaired. For credit-impaired financial assets the effective interest rate is applied to the net carrying amount of the financial asset (after deduction of the loss allowance).

Interest income is presented as finance income where it is earned from financial assets that are held for cash management purposes, see Note 10 below.

2.30 Dividend income

Dividend income is recognized when the right to receive payment is established.

2.31 Government grants

Grants from the government are recognized at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions.

Government grants relating to costs are deferred and recognized in the income statement over the period necessary to match them with the costs that they are intended to compensate.

Grants that compensate the Group for the cost of an asset are deducted from the carrying amount of the asset and consequently are effectively recognized in the income statement over the useful life of the asset by way of reduced depreciation expense.

2.32 Leases

As explained in Note 2.1.1(a) above, the Group has changed its accounting policy for leases. The new policy and the impact of the change are described in Note 3.

Until 31 December 2018, leases in which a significant portion of the risks and rewards of ownership were not transferred to the Group as lessee were classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) were charged to the income statement on a straight-line basis over the period of the lease.

Lease income from operating leases where the Group is a lessor is recognized in income on a straight-line

basis over the lease term. Initial direct costs incurred in obtaining an operating lease are added to the carrying amount of the underlying asset and recognized as expense over the lease term on the same basis as lease income. The respective leased assets are included in the balance sheet based on their nature. The Group did not need to make any adjustments to the accounting for assets held as lessor as a result of adopting the new leasing standard. The respective leased assets are included in the balance sheet bases on their nature.

F-29

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

2 Summary of significant accounting policies (continued)

2.33 Dividend distribution

Dividend distribution to the Company’s shareholders is recognized as a liability in the Group’s financial statements in the period in which the dividends are approved by the Company’s shareholders.

2.34 Research and development costs

Research and development costs comprise all costs that are directly attributable to research and development activities or that can be allocated on a reasonable basis to such activities. Research and development costs are recognized as intangible assets when the following criteria are met:

• it is technically feasible to complete the research and development project so that it will be available for use or sale;

• management intends to complete the research and development project, and use or sell it;

• it can be demonstrated how the research and development project will generate economic benefits;

• there are adequate technical, financial and other resources to complete the development and the ability to use or sell the research and development project; and

• the expenditure attributable to the research and development project during its development phase can be reliably measured.

Other research and development expenditure that do not meet these criteria are recognized as an expense as incurred. Research and development costs previously recognized as an expense are not recognized as an asset in a subsequent period.

2.35 Related parties

(a) A person, or a close member of that person’s family, is related to the Group if that person:

(1) has control or joint control over the Group;

(2) has significant influence over the Group; or

(3) is a member of the key management personnel of the Group or the Group’s parent.

(b) An entity is related to the Group if any of the following conditions applies:

(1) The entity and the Group are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others).

(2) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member).

(3) Both entities are joint ventures of the same third party.

(4) One entity is a joint venture of a third entity and the other entity is an associate of the third entity.

(5) The entity is a post-employment benefit plan for the benefit of employees of either the Group or an entity related to the Group.

(6) The entity is controlled or jointly controlled by a person identified in (i).

(7) A person identified in (i)(1) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).

Close members of the family of a person are those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity.

F-30

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

3 Changes in accounting policies

This note explains the impact of the adoption of IFRS 16 ‘Leases’ on the Group’s financial statements.

As indicated in Note 2.1.1(a) above, the Group has adopted IFRS 16 ‘Leases’ retrospectively from 1 January 2019, but has not restated comparatives for the 2018 reporting period, as permitted under the specific transition provisions in the standard. The reclassifications and the adjustments arising from the new leasing rules are therefore recognized in the opening balance sheet on 1 January 2019. The new accounting policies are disclosed in Note 3.3 below.

3.1 Impact of adoption

On adoption of IFRS 16, the Group recognized lease liabilities in relation to leases which had previously been classified as ‘operating leases’ under the principles of IAS 17 ‘Leases’. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate as of 1 January 2019. The lessee’s incremental borrowing rate applied to the lease liabilities on 1 January 2019 was from 4.35% to 4.90%.

(a) Measurement of lease liabilities

	RMB’000
Operating lease commitments disclosed as at 31 December 2018		84,746
Discounted using the lessee’s incremental borrowing rate of at the date of initial application		77,046
(Less): short-term leases recognized on a straight-line basis as expense		(315	)
Lease liability recognized as at 1 January 2019		76,731
Of which are:
Current lease liabilities		74,093
Non-current lease liabilities		2,638

(b) Measurement of right-of-use assets

Right-of use assets were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognized in the balance sheet as at 31 December 2018. There were no onerous lease contracts that would have required an adjustment to the right-of-use assets at the date of initial application.

(c) Adjustments recognized in the balance sheet on 1 January 2019

The change in accounting policy affected the following items in the balance sheet on 1 January 2019:

• right-of-use assets – increase by RMB 411,878 thousands (Note 16)

• lease prepayment and other non-current assets – decreased by RMB 335,026 thousands (Note 15)

• prepayments – decrease by RMB 121 thousands

• lease liabilities – increase by RMB 76,731 thousands

F-31

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

3 Changes in accounting policies (continued)

3.1 Impact of adoption (continued)

(d) Impact on segment disclosures

As at 31 December 2019, allocated assets and allocated liabilities increased as a result of the change in accounting policy. Right-of-use assets and lease liabilities are now included in segment assets and liabilities. The following segments were affected by the change in policy:

	Addition to allocated assets RMB’000		Addition to allocated liabilities RMB’000
Synthetic fibres		9,047		536
Resins and plastics		50,006		5,177
Intermediate petrochemicals		46,320		2,738
Petroleum products		236,531		13,371
Trading of petrochemical products		13		-
Others		1,943		221
		343,860		22,043

(e) Practical expedients applied

In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard:

• applying a single discount rate to a portfolio of leases with reasonably similar characteristics, and

• accounting for operating leases with a remaining lease term of less than 12 months as at 1 January 2019 as short-term leases.

The Group has also elected not to reassess whether a contract is, or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date the Group relied on its assessment made applying IAS 17 and IFRIC 4 ‘Determining whether an Arrangement contains a Lease’.

3.2 Lessor accounting

The Group did not need to make any adjustments to the accounting for assets held as lessor under operating leases as a result of the adoption of IFRS 16.

3.3 The Group’s leasing activities and how these are accounted for

The Group leases various land, buildings, equipment, vehicles and others. Rental contracts of buildings, equipment, vehicles and others are typically made for fixed periods of 1 to 30 years. Rental contracts of land use rights are typically made for fixed periods of 30 to 50 years. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants, but leased assets may not be used as security for borrowing purposes.

F-32

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

3 Changes in accounting policies (continued)

3.3 The Group’s leasing activities and how these are accounted for (continued)

Until the 2018 financial year, leases were classified as either finance leases or operating leases. From 1 January 2019, leases are recognized as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group.

Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments:

• fixed payments (including in-substance fixed payments), less any lease incentives receivable,

• variable lease payment that are based on an index or a rate, initially measured using the index or rate as at the commencement date,

• amounts expected to be payable by the Group under residual value guarantees,

• the exercise price of a purchase option if the Group is reasonably certain to exercise that option, and

• payments of penalties for terminating the lease, if the lease term reflects the Group exercising that option.

The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, which is generally the case for leases in the Group, the lessee’s incremental borrowing rate is used, being the rate that the individual lessee would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security and conditions.

To determine the incremental borrowing rate, the Group:

• where possible, uses recent third-party financing received by the individual lessee as a starting point, adjusted to reflect changes in financing conditions since third party financing was received

• uses a build-up approach that starts with a risk-free interest rate adjusted for credit risk for leases held by the Group, which does not have recent third party financing, and

• makes adjustments specific to the lease, eg term, country, currency and security.

Lease payments are allocated between principal and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.

Right-of-use assets are measured at cost comprising the following:

• the amount of the initial measurement of lease liability,

• any lease payments made at or before the commencement date less any lease incentives received,

• any initial direct costs, and

• restoration costs.

Right-of-use assets are generally depreciated over the shorter of the asset’s useful life and the lease term on a straight-line basis, as follows:

Land use rights	30-50 years
Buildings	1-30 years
Equipment	1-2 years
Vehicles and others	1-5 years

Payments associated with short-term leases of equipment and vehicles are recognized on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less.

F-33

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

4 Financial risk management

4.1 Financial risk factors

The Group’s activities exposed it to a variety of financial risks: market risk (including foreign exchange risk, cash flow and fair value interest rate risk and commodity price risk), credit risk and liquidity risk. The Group’s overall risk management programmer focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance.

(a) Market risk

(i) Foreign exchange risk

The Group’s major operational activities are carried out in Mainland China and a majority of the transactions are denominated in RMB. Nevertheless the Group is exposed to foreign exchange risk arising from the recognized assets and liabilities (mainly trade payables), and future transactions denominated in foreign currencies, primarily with respect to US dollar. The Group’s finance department at its headquarter is responsible for monitoring the amount of assets and liabilities, and transactions denominated in foreign currencies to minimize the foreign exchange risk. For the year ended 31 December 2019, 31 December 2018 and 31 December 2017, the Group uses forward foreign exchange contracts and foreign exchange option contracts to mitigate its exposure to foreign exchange risk respect to US dollar. The forward and option contracts the Group used are not designed as hedging instrument. As at 31 December 2019, the nominal amount of US dollar foreign exchange options were amounted to RMB 40,754 thousands (31 December 2018: RMB 571,476 thousands), which would be matured within six months.

As at 31 December 2019, if the foreign currencies had weakened/strengthened by 5% against RMB with all other variables held constant, the Group’s net profit for the year would have been RMB 13,699 thousands increased/decreased before considering the impact of forward and option contracts as a result of foreign exchange gains/losses on translation of foreign currencies denominated trade payables and borrowings (31 December 2018: RMB 30,713 thousands).

(ii) Cash flow and fair value interest rate risk

The Group’s interest rate risk arises from short-term interest bearing borrowings. Borrowings obtained at variable rates expose the Group to cash flow interest rate risk. Borrowings obtained at fixed rates expose the Group to fair value interest rate risk. The Group determines the relative proportions of its fixed rate and floating rate contracts depending on the prevailing market conditions. As at 31 December 2019, the Group’s short-term borrowings denominated with floating rates amounted to RMB 47,600 thousands, which represented 3% of total borrowing balance (31 December 2018: RMB 497,249 thousands, representing 100% of total borrowing balance).

The Group’s finance department at its headquarter continuously monitors the interest rate position of the Group. Increases in interest rates will increase the cost of new borrowing and the interest expenses with respect to the Group’s outstanding floating rate borrowings, and therefore could have a material adverse effect on the Group’s financial position. The Group makes adjustments timely with reference to the latest market conditions and may enter into interest rate swap agreements to mitigate its exposure to interest rate risk. For the years ended 31 December 2019 and 31 December 2018, the Group did not enter into any interest rate swap agreements.

As at 31 December 2019, if interest rates on the floating rate borrowings had risen/fallen by 50 basis points while all other variables had been held constant, the Group’s net profit would have decreased/increased by approximately RMB 179 thousands (31 December 2018: RMB 1,865 thousands), mainly as a result of higher/lower interest expense on floating rate borrowings.

F-34

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

4 Financial risk management (continued)

4.1 Financial risk factors (continued)

(a) Market risk (continued)

(iii)	Commodity price risk
	The Group principally engages in processing crude oil into synthetic fibers, resins and plastics, intermediate petrochemicals and petroleum products. The selling price of petroleum products is periodically adjusted by government department based on the market price adjustment mechanism, and generally in connection with the crude oil price. The selling prices of synthetic fibers, resins and plastics and intermediate petrochemicals are market prices. The Group didn’t have any derivative financial instrument such as commodity futures and swaps, therefore the fluctuation of crude oil price could have significant impact on the Group.
(b)	Credit risk
(i)	Risk management
	Credit risk is managed on group basis. It mainly arises from cash and cash equivalents, time deposits with banks, structured deposits, trade receivables, other receivables, bills receivable, etc.
	Group expects that there is no significant credit risk associated with cash at bank (including time deposits and structured deposits) and bills receivable since they are deposits and bank acceptance bills at state-owned banks and other medium or large size listed banks. Management does not expect that there will be any significant losses from non-performance by these counterparties.
	In addition, the Group has policies to limit the credit exposure on trade receivables, other receivables and bills receivable. The Group assesses the credit quality of and sets credit limits on its customers by taking into account their financial position, the availability of guarantee from third parties, their credit history and other factors such as current market conditions. The credit history of the customers is regularly monitored by the Group. In respect of customers with a poor credit history, the Group will use written payment reminders, or shorten or cancel credit periods, to ensure the overall credit risk of the Group is limited to a controllable extent.
	The Group considers the probability of default upon initial recognition of a financial asset and whether there has been a significant increase in credit risk on an ongoing basis throughout each reporting period. To assess whether there is a significant increase in credit risk the Group compares the risk of a default occurring on the asset as at the reporting date with the risk of default as at the date of initial recognition. It considers available reasonable and supportive forward-looking information. Especially the following indicators are incorporated: •   internal credit rating; •   external credit rating (as far as available); •   actual or expected significant adverse changes in business, financial or economic conditions that are expected to cause a significant change to the debtors’ ability to meet its obligations; •   actual or expected significant changes in the operating results of the debtors; •   significant increases in credit risk on other financial instruments of the same debtors; •   significant changes in the value of the collateral supporting the obligation or in the quality of third-party guarantees or credit enhancements; •   significant changes in the expected performance and behavior of the debtors, including changes in the payment status of debtors, etc. Regardless of the analysis above, a significant increase in credit risk is presumed if a debtor is more than 30 days past due in making a contractual payment.

F-35

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

4 Financial risk management (continued)

4.1 Financial risk factors (continued)

(b) Credit risk (continued)

(i) Risk management (continued)

It has other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. In addition, the Group reviews regularly the recoverable amount of each individual trade receivables to ensure that adequate impairment losses are made for irrecoverable amounts. The Group has no significant concentrations of credit risk, with exposure spread over a large number of counterparties and costumers.

For other receivables, management makes periodic collective assessment as well as individual assessment on the recoverability of other receivables based on historical settlement records and forward-looking information. The management believe that there is no material credit risk inherent in the Group’s outstanding balance of other receivable.

(ii) Impairment of financial assets

The Group has three types of financial assets that are subject to the expected credit loss model:

• Trade receivables for sales of goods and from the providing services,

• Other financial assets carried at amortised cost, and

• Debt instruments carried at FVOCI

While cash and cash equivalents, time deposits with banks and bills receivable are also subject to the impairment requirements of IFRS 9, the identified impairment loss was immaterial.

Trade receivables

The Group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables (including trade receivables with related parties and those carried at FVOCI).

To measure the expected credit losses, trade receivables have been grouped based on shared credit risk characteristics and the days past due.

The expected credit loss rates are based on the payment profiles of sales over a period of 36 months before 31 December 2019 and 31 December 2018 respectively and the corresponding historical credit losses experienced within this period. The historical loss rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of the customers to settle the receivables.

F-36

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

4 Financial risk management (continued)

4.1 Financial risk factors (continued)

(b) Credit risk (continued)

(ii) Impairment of financial assets (continued)

The loss allowances for trade receivables as at 31 December 2019 and 31 December 2018 reconcile to the opening loss allowances as follows:

	Trade receivables (including receivables from related parties)
	2018		2019
	RMB’000		RMB’000
Opening loss allowance as at 1 January		37		54
Provision for loss allowance recognized in profit or loss		17		-
Reversal of previous impairment losses		-		(54	)
Closing loss allowance at 31 December		54		-

For the year ended 31 December 2019 and 31 December 2018, the (reversal)/provision for loss allowance were recognized in profit or loss in net impairment losses on financial assets.

Impairment losses on trade receivables are presented as net impairment losses within operating profit. Subsequent recoveries of amounts previously written off are credited against the same line item.

Other financial assets at amortised cost

Other financial assets at amortized cost include other receivables.

As at 31 December 2019 and 31 December 2018, the internal credit rating of other receivables were performing. The Group has assessed that the expected credit losses for these receivables are not material under the 12 months expected losses method.

F-37

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

4 Financial risk management (continued)

4.1 Financial risk factors (continued)

(b) Credit risk (continued)

(ii) Impairment of financial assets (continued)

The loss allowance provision for other receivables as at 31 December 2019 and 31 December 2018 reconciles to the opening loss allowance provision as follows:

	Other receivables (including receivables from related parties)
	2018			2019
	RMB’000			RMB’000
Opening loss allowance as at 1 January		1016			144
Provision for loss allowance recognized in profit or loss		56			-
Reversal of previous impairment losses		(34	)		(5	)
Receivables written off during the year as uncollectible		(894	)		-
Closing loss allowance at 31 December		144			139

Management considered the internal credit risk of other receivable including receivables from related parties were performing as they have a low risk of default and the counterparties have a strong capacity to meet its contractual cash flow obligations in the near term, and thus the impairment provision recognized during the period was limited to 12 months expected losses.

For year ended 31 December 2019, the (reversal)/provision for loss allowance were recognized in profit or loss in net impairment losses on financial assets in relation to the impaired other receivables.

Debt instruments carried at FVOCI

Debt instruments carried at FVOCI include trade receivables and bills receivable with a business model which is achieved both by collecting contractual cash flows and selling of these assets. The loss allowance for debt instruments is recognized in profit or loss and reduces the fair value loss otherwise recognized in OCI.

While bills receivable carried at FVOCI are also subject to the impairment requirements of IFRS 9, the identified impairment loss was immaterial. The above Note 4(b)(ii) provides the details about the loss allowance for trade receivables carried at FVOCI.

As at 31 December 2019 and 31 December 2018, no loss allowance was provided for financial assets at FVOCI.

(iii) Net impairment losses on financial assets recognized in profit or loss

During the year, the following gains/(losses) were recognized in profit or loss in relation to impaired financial assets:

	2018			2019
	RMB’000			RMB’000
Impairment losses
- movement in loss allowance for trade and other receivables		(73	)		-
Reversal of previous impairment losses		34			59
Net impairment losses on financial assets		(39	)		59

F-38

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

4 Financial risk management (continued)

4.1 Financial risk factors (continued)

(b) Credit risk (continued)

(iv) Financial assets at fair value through profit or loss

The Group is also exposed to credit risk in relation to investments such as structured deposits and derivative financial instruments, which are measured at fair value through profit or loss. The maximum exposure at the end of the reporting period is the carrying amount of these investments.

(c) Liquidity risk

Cash flow forecast is performed by the operating entities of the Group and aggregated by Group finance. Group finance monitors rolling forecasts of the Group’s liquidity requirements to ensure it has sufficient cash to meet operational needs while maintaining sufficient headroom on its undrawn committed borrowing facilities from major financial institution so that the Group does not breach borrowing limits or covenants on any of its borrowing facilities to meet the short-term and long-term liquidity requirements.

The liquidity of the Group is primarily dependent on its ability to maintain adequate cash inflow from operations, the renewal of its short-term bank loans and its ability to obtain adequate external financing to support its working capital and meet its debt obligation when they become due. As at 31 December 2019, the Group had credit facilities with several PRC financial institutions which provided the Group to draw down or to guarantee the issuance of the bills of lading to RMB 21,258,288 thousands, within which amounted to RMB 17,601,233 thousands were unused. The maturity dates of the unused facility amounted to RMB 15,101,233 thousands will be after 31 December 2020 as disclosed in Note 23(f). Management assessed that all the facilities could be renewed upon the expiration dates.

Surplus cash held by the operating entities over and above balance required for working capital management are transferred to the Group treasury. As at 31 December 2019, the Group held cash and cash equivalents of RMB 7,449,699 thousands (31 December 2018: RMB 8,741,893 thousands) (Note 23(b)) and trade receivables (including trade receivables with related parties and those carried at FVOCI) of RMB 2,376,098 thousands (31 December 2018: RMB 3,181,196 thousands), that are expected to readily generate cash inflows for managing liquidity risk.

The table below analyses the Group’s financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows.

F-39

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

4 Financial risk management (continued)

4.1 Financial risk factors (continued)

(c) Liquidity risk (continued)

Contractual maturities of financial liabilities	Less than 1 year		Between 1 and 2 years		Between 2 and 5 years		Over 5 years		Total
31 December 2018	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000
Non-derivatives
Borrowings		606,157		-		-		-		606,157
Trade payables		1,908,457		-		-		-		1,908,457
Other payables		789,567		-		-		-		789,567
Amounts due to related parties		3,725,278		-		-		-		3,725,278
		7,029,459		-		-		-		7,029,459
Derivatives				-		-		-
Derivative financial instruments		1,516		-		-		-		1,516

Contractual maturities of financial liabilities	Less than 1 year		Between 1 and 2 years		Between 2 and 5 years		Over 5 years		Total
31 December 2019	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000
Non-derivatives
Borrowings		1,575,176		-		-		-		1,575,176
Lease liabilities		11,700		8,846		2,435		495		23,476
Bills payables		673,900		-		-		-		673,900
Trade payables		2,142,402		-		-		-		2,142,402
Other payables		747,133		-		-		-		747,133
Amounts due to related parties		5,702,728		-		-		-		5,702,728
		10,853,039		8,846		2,435		495		10,864,815
Derivatives
Derivative financial instruments		799		-		-		-		799

F-40

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

4 Financial risk management (continued)

4.2 Capital management

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

Consistent with others in the industry, the Group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including current and non-current borrowings as shown in the consolidated balance sheet) less cash and cash equivalents. Total capital is calculated as equity as shown in the consolidated balance sheet plus net debt.

As cash and cash equivalents exceed total borrowings, which was resulted primarily from profitability, there was no net debt as at 31 December 2019 and 31 December 2018.

4.3 Fair value estimation

The table below analyses the Group’s financial instruments carried at fair value as at 31 December 2019 and 31 December 2018 by level of the inputs to valuation techniques used to measure fair value. Such inputs are categorized into three levels within a fair value hierarchy as follows:

• The fair value of financial instruments traded in active markets (such as publicly traded derivatives, and equity securities) is based on quoted market prices at the end of the reporting period. The quoted market price used for financial assets held by the Group is the current bid price. These instruments are included in level 1.

• The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined using valuation techniques which maximize the use of observable market data and rely as little as possible on entity-specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2.

• If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3. This is the case for unlisted equity securities.

F-41

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

4 Financial risk management (continued)

4.3 Fair value estimation (continued)

Recurring fair value measurements As at 31 December 2018	Level 1 RMB’000		Level 2 RMB’000		Level 3 RMB’000		Total RMB’000
Financial assets
Financial assets at fair value through other comprehensive income		-		1,672,431		-		1,672,431
Structured deposits		-		-		2,719,811		2,719,811
Foreign exchange options		-		7,468		-		7,468
		-		1,679,899		2,719,811		4,399,710
Financial liabilities
Foreign exchange options		-		11,005		-		11,005

Recurring fair value measurements As at 31 December 2019	Level 1 RMB’000		Level 2 RMB’000		Level 3 RMB’000		Total RMB’000
Financial assets
Financial assets at fair value through other comprehensive income
Trade and bill receivables		-		1,540,921		-		1,540,921
Equity investments		-		-		5,000		5,000
Structured deposits		-		-		3,318,407		3,318,407
Foreign exchange options		-		263		-		263
		-		1,541,184		3,323,407		4,864,591
Financial liabilities
Foreign exchange options		-		799		-		799

The Group uses discounted cash flow model with inputted interest rate, which were influenced by historical fluctuation and the probability of market fluctuation, to evaluate the fair value of the structured deposits classified as Level 3 financial assets.

Fair value measurements using significant unobservable inputs (level 3).

The following table presents the changes in level 3 items for the periods ended 31 December 2019:

	Equity investments RMB’000		Structured deposits RMB’000			Total RMB’000
Closing balance 31 December 2018		-		2,719,811			2,719,811
Acquisitions		5,000		3,800,000			3,805,000
Disposals		-		(3,200,000	)		(3,000,000	)
Fair value change		-		(1,404	)		(1,404	)
Closing balance 31 December 2019		5,000		3,318,407			3,323,407

F-42

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

4 Financial risk management (continued)

4.3 Fair value estimation (continued)

Financial assets and financial liabilities not measured at fair value mainly represent time deposits, trade receivables and other receivables, trade and other payables (except for the staff salaries and welfare payables and taxes payables) and borrowings. As at 31 December 2019 and 31 December 2018, these financial assets are expected to be collected in one year or less and these financial liabilities are due within one year or less. As a result, the carrying amounts of these financial assets and liabilities not measured at fair value are a reasonable approximation of their fair value.

5 Critical accounting estimates and assumptions

Estimates and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below.

(a) Net realizable value (“NRV”) of inventories

The NRV is determined based on the estimated selling prices less the estimated costs to completion, if relevant, other costs necessary to make the sale, and the related taxes. Determination of estimated selling prices requires significant management judgement, taking into consideration of historical selling prices and future market trend. If the actual selling prices were to be lower or the costs of completion were to be higher than estimated, the actual allowance for diminution in value of inventories could be higher than the estimate.

(b) Impairments for non-financial assets

In determining the value in use, expected cash flows generated by the non-financial assets or the cash-generating unit are discounted to their present value. Management 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.

(c) Useful life and residual value of property, plant and equipment

Property, plant and equipment, are depreciated on a straight-line basis over the estimated useful lives of the assets, after taking into account the estimated residual value. Management reviews the estimated useful lives of the assets annually in order to determine the amount of depreciation expense to be recorded during any reporting period. The useful lives are based on the Group’s historical experience with similar assets, taking into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates.

F-43

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

6 Segment information

The Group manages its business by divisions, which are organized by business lines. In view of the fact that the Company and its subsidiaries operate mainly in the PRC, no geographical segment information is presented.

In a manner consistent with the way in which information is reported internally to the Group’s chief operating decision maker, Board of Directors, for the purposes of resource allocation and performance assessment, the Group has identified the following five reportable segments. No operating segments have been aggregated to form the following reportable segments.

Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items mainly comprise investments accounted for using the equity method, deferred income tax assets, cash and cash equivalents, time deposits, structured deposits, entrusted lending and incomes relating to these assets (such as share of profit of investments accounted for using equity method and interest income) and borrowings and interest expenses.

The Group principally operates in five operating segments: synthetic fibers, resins and plastics, intermediate petrochemicals, petroleum products and trading of petrochemical products. Synthetic fibers, resins and plastics, intermediate petrochemicals and petroleum products are produced through intermediate steps from the principal raw material of crude oil. The specific products of each segment are as follows:

(i) The synthetic fibers segment produces primarily polyester, acrylic fibers and carbon fibers, which are mainly used in the textile and apparel industries.

(ii) The resins and plastics segment produces primarily polyester chips, polyethylene resins, polypropylene resins and PVA granules. The polyester chips are used to produce polyester fibers, coating and containers. Polyethylene resins and plastics are used to produce insulated cable, mulching films and molded products such as housewares and toys. Polypropylene resins are used for films, sheets and molded products such as housewares, toys, consumer electronics and automobile parts.

(iii) The intermediate petrochemicals segment primarily produces p-xylene, benzene and ethylene oxide. The intermediate petrochemicals produced by the Group are both served as raw materials in the production of other petrochemicals, resins, plastics and synthetic fibers, and sold to external customers.

(iv) The petroleum products segment is equipped with crude oil refinery facilities used to produce qualified refined gasoline, fuel, diesel oil, heavy oil and liquefied petroleum gas, and provide raw materials for the Group’s downstream petrochemical processing facilities.

(v) The trading of petrochemical products segment is primarily engaged in importing and exporting of petrochemical products. The products are sourced from international and domestic suppliers.

(vi) Other operating segments represent the operating segments which do not meet the quantitative threshold for determining reportable segments. These include investment property leasing, service provision and a variety of other commercial activities.

F-44

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

6 Segment information (continued)

2017	Synthetic fibers			Resins and plastics			Intermediate petrochemicals			Petroleum products			Trading of petrochemical products			Other segments			Total
	RMB’000			RMB ’000			RMB ’000			RMB ’000			RMB ’000			RMB ’000			RMB’000
Total segment revenue		2,061,765			10,596,844			23,302,939			53,259,378			24,953,285			1,364,977			115,539,188
Inter-segment revenue		-			(123,824	)		(12,949,321	)		(8,737,935	)		(1,240,250	)		(525,443	)		(23,576,773	)
Revenue from external customers		2,061,765			10,473,020			10,353,618			44,521,443			23,713,035			839,534			91,962,415
Total gross (loss)/profit		(440,925	)		1,539,196			2,378,581			3,147,627			162,801			32,759			6,820,039

2018	Synthetic fibers			Resins and plastics			Intermediate petrochemicals			Petroleum products			Trading of petrochemical products			Other segments			Total
	RMB’000			RMB ’000			RMB ’000			RMB ’000			RMB ’000			RMB ’000			RMB’000
Total segment revenue		2,225,594			10,868,758			26,327,039			66,009,608			27,650,410			1,488,856			134,570,265
Inter-segment revenue		-			(138,481	)		(13,923,959	)		(11,037,010	)		(1,090,056	)		(691,852	)		(26,881,358	)
Revenue from external customers		2,225,594			10,730,277			12,403,080			54,972,598			26,560,354			797,004			107,688,907
Timing of revenue recognition At a point in time		2,225,594			10,730,277			12,403,080			54,972,598			26,537,983			797,004			107,666,536
Over time		-			-			-			-			22,371			-			22,371
		2,225,594			10,730,277			12,403,080			54,972,598			26,560,354			797,004			107,688,907
Total gross (loss)/profit		(537,590	)		1,081,206			2,135,060			2,936,678			149,236			9,916			5,774,506

2019	Synthetic fibers			Resins and plastics			Intermediate petrochemicals			Petroleum products			Trading of petrochemical products			Other segments			Total
	RMB’000			RMB ’000			RMB ’000			RMB ’000			RMB ’000			RMB ’000			RMB’000
Total segment revenue		2,200,229			10,304,812			24,698,643			66,754,731			21,881,214			1,502,840			127,342,469
Inter - segment revenue		-			(141,101	)		(14,187,500	)		(11,868,026	)		(175,200	)		(700,975	)		(27,072,802	)
Revenue from external customers		2,200,229			10,163,711			10,511,143			54,886,705			21,706,014			801,865			100,269,667
Timing of revenue recognition At a point in time		2,200,229			10,163,711			10,511,143			54,886,705			21,695,864			801,865			100,259,517
Over time		-			-			-			-			10,150			-			10,150
		2,200,229			10,163,711			10,511,143			54,886,705			21,706,014			801,865			100,269,667
Total gross (loss)/profit		(501,062	)		542,015			649,435			750,850			121,193			25,314			1,587,745

F-45

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

6 Segment information (continued)

	2017			2018			2019
	RMB’000			RMB’000			RMB’000
Segment result-profit/(loss) from operations
Petroleum products		3,120,024			2,910,063			705,469
Resins and plastics		1,355,908			900,440			401,454
Intermediate petrochemicals		2,206,128			1,934,926			413,914
Trading of petrochemical products		60,583			104,900			53,214
Synthetic fibers		(475,266	)		(573,503	)		(540,280	)
Others		134,496			308,286			286,801
Profit from operations		6,401,873			5,585,112			1,320,572
Net finance income		207,332			337,412			362,963
Share of profit of investments accounted for using the equity method		1,243,693			885,597			972,593
Profit before income tax		7,852,898			6,808,121			2,656,128

Other profit and loss disclosures

	2017									2018									2019
	Depreciation and amortisation			Impairment loss			Inventory write down			Depreciation and amortisation			Impairment loss			Inventory write down			Depreciation and amortisation			Impairment loss			Inventory write- down
	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000
Synthetic fibers		(79,658	)		(49,107	)		(38,287	)		(68,428	)		(47,937	)		(35,945	)		(68,589	)		7			(48,844	)
Resins and plastics		(163,618	)		(9	)		(5,177	)		(139,447	)		(9	)		(19,219	)		(125,464	)		6			(12,073	)
Intermediate petrochemicals		(538,435	)		(50,210	)		(4,487	)		(575,025	)		(34,695	)		(8,630	)		(497,469	)		(478	)		(9,094	)
Petroleum products		(922,670	)		(44	)		(12,399	)		(862,659	)		(50	)		(22,209	)		(972,688	)		38			(167	)
Trading of petrochemical products		(171	)		-			-			(111	)		-			-			(211	)		-			-
Others		(129,577	)		(18,875	)		(111	)		(161,943	)		-			-			(174,367	)		-			-
		(1,834,129	)		(118,245	)		(60,461	)		(1,807,613	)		(82,691	)		(86,003	)		(1,838,788	)		(427	)		(70,178	)

F-46

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

6 Segment information (continued)

	As at 31 December
	2018 Total assets RMB’000		2019 Total assets RMB’000
Allocated assets
Synthetic fibers		1,114,911		997,650
Resins and plastics		1,924,863		1,802,681
Intermediate petrochemicals		4,176,850		3,721,337
Petroleum products		15,567,239		14,014,403
Trading of petrochemical products		1,807,433		1,492,405
Others		2,067,698		2,294,668
Allocated assets		26,658,994		24,323,144
Unallocated assets
Investments accounted for using the equity method		4,527,133		5,208,758
Cash and cash equivalents		8,741,893		7,449,699
Time deposits with banks		1,500,000		5,020,073
Deferred income tax assets		119,075		150,832
Financial assets at fair value through profit or loss		2,727,279		3,318,670
Others		111,523		22,899
Unallocated assets		17,726,903		21,170,931
Total assets		44,385,897		45,494,075

F-47

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

6 Segment information (continued)

	As at 31 December
	2018 Total liabilities RMB’000		2019 Total liabilities RMB’000
Allocated liabilities
Synthetic fibers		427,005		340,034
Resins and plastics		1,404,499		1,372,574
Intermediate petrochemicals		1,767,232		1,736,967
Petroleum products		7,813,381		8,482,596
Trading of petrochemical products		1,923,373		1,946,530
Others		79,712		73,127
Allocated liabilities		13,415,202		13,951,828
Unallocated liabilities
Borrowings		497,249		1,547,600
Financial liabilities at fair value through profit or loss		11,005		799
Unallocated liabilities		508,254		1,548,399
Total liabilities		13,923,456		15,500,227

	2017 RMB’000		2018 RMB’000		2019 RMB’000
Additions to property, plant and equipment, construction in progress, right-of-use assets, lease prepayments and other non-current assets
Synthetic fibers		130,908		124,188		294,515
Resins and plastics		156,189		112,638		74,633
Intermediate petrochemicals		525,828		246,857		204,021
Petroleum products		1,076,212		806,833		1,024,626
Trading of petrochemical products		-		-		89
Others		20,738		98,737		103,418
		1,909,875		1,389,253		1,701,302

Entity-wide information

The Group’s revenue from external customers are mainly within Mainland China in 2019, 2018 and 2017. As at 31 December 2018 and 31 December 2019, assets are also mainly within Mainland China.

Revenue of approximate RMB 42,657,975 thousands (2018: RMB 42,492,816 thousands, 2017: RMB 39,804,025 thousands) are derived from a single customer. These revenues are attributable to the petroleum products and others segments.

F-48

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

7 Other operating income

	2017 RMB’000		2018 RMB’000		2019 RMB’000
Government grants (i)		65,703		116,330		69,678
Rental income from investment property (Note 18)		46,700		76,001		76,381
Others		6,607		10,286		4,655
		119,010		202,617		150,714

(i) Government grants

Grants related to R&D, other tax refund and subsidies of RMB 69,241 thousands (2018: RMB 115,893 thousands, 2017: RMB 65,266 thousands) are included in the government grants line item. There are no unfulfilled conditions or other contingencies attaching to these grants. The Group did not benefit directly from any other forms of government assistance.

Deferral and presentation of government grants

Government grants relating to the purchase of property, plant and equipment are included in non-current liabilities as deferred income and are credited to profit or loss on a straight-line basis over the expected lives of the related assets. See Note 26 for further details. For the year ended 31 December 2019, RMB 437 thousands were included in the government grants line item (2018: RMB 437 thousands, 2017: RMB 437 thousands).

8 Other operating expenses

	2017 RMB’000			2018 RMB’000			2019 RMB’000
Cost related to lease of investment properties		(13,738	)		(19,367	)		(16,199	)
Others		(7,641	)		(13,181	)		(5,726	)
		(21,379	)		(32,548	)		(21,925	)

9 Other gains – net

	2017 RMB’000			2018 RMB’000			2019 RMB’000
Net (losses)/gains on disposal of land, property, plant and equipment (i)		(13,017	)		172,508			158,551
Income from structured deposits		-			19,811			85,444
Fair value (losses)/gains on foreign exchange option and forward exchange contracts		(1,516	)		(2,021	)		3,001
Gains/(losses) from disposal of subsidiaries (Note 20)		-			1,622			(60,951	)
Net foreign exchange gains/(losses)		23,656			(31,770	)		2,648
Net gains/(losses) on settlement of foreign exchange option and forward foreign exchange contracts		-			16,540			(15,316	)
Gains from disposal of joint venture		10,339			-			-
Others		-			-			(19,513	)
		19,462			176,690			153,864

(i) The net gains on disposal of land, property, plant and equipment were mainly composed of gains on disposal of land of Zhejiang Jin Yong Acrylic Fiber Company Limited (“Jinyong”) which amounted to RMB 126,817 thousands.

F-49

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

10 Finance income and expenses

	2017 RMB’000			2018 RMB’000			2019 RMB’000
Net foreign exchange gains		-			-			18,571
Interest income		268,379			443,661			398,176
Finance income		268,379			443,661			416,747
Interest on bank and other borrowings		(55,188	)		(84,425	)		(59,378	)
Less: amounts capitalized on qualifying assets		804			5,179			5,594
Net interest expense		(54,384	)		(79,246	)		(53,784	)
Net foreign exchange loss		(6,663	)		(27,003	)		-
Finance expenses		(61,047	)		(106,249	)		(53,784	)
Finance income - net		207,332			337,412			362,963

11 Expense by nature

	2017 RMB’000			2018 RMB’000			2019 RMB’000
Cost of raw material		42,075,096			56,601,977			57,101,961
Cost of trading products		23,531,983			26,392,366			21,566,364
Employee benefit expenses (Note 12)		2,752,996			2,888,572			3,147,372
Depreciation and amortization (Note 15, 17, 18)		1,834,129			1,807,613			1,736,790
Repairs and maintenance expenses		1,136,379			1,265,919			1,089,829
Change of goods in process and finished goods		(58,784	)		(277,403	)		446,779
Transportation costs		306,654			326,553			297,416
External processing fee		193,757			185,164			215,288
Sales commissions (Note 30)		116,616			139,954			125,641
Depreciation charge of right-of-use assets (Note 16)		—			—			101,998
Inventory write-down (Note 22)		60,461			86,003			70,178
Auditors’ remuneration - audit services		7,800			7,800			7,800
Leasing expenses		79,438			96,520			2,961
Impairment loss (Note 19)		118,245			82,652			486
Other expenses		778,777			771,401			1,107,017
Total cost of sales, selling and administrative expenses		72,933,547			90,375,091			87,017,880

12 Employee benefit expenses

	2017 RMB’000		2018 RMB’000			2019 RMB’000
Wages and salaries		1,769,535		1,814,991			1,931,121
Social welfare costs		622,854		712,556			782,789
Others		349,331		374,029			433,462
Share-based payments granted to directors and employees (Note 28, 29)		11,276		(13,004	)		-
Total employee benefit expense		2,752,996		2,888,572			3,147,372

(i) Five highest paid individuals

For the years ended 31 December 2017, 2018 and 2019, all 5 individuals with the highest emoluments are directors and supervisors whose emoluments are disclosed in Note 36(i).

F-50

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

13 Income tax

	2017 RMB’000			2018 RMB’000		2019 RMB’000
- Current income tax		1,714,955			1,471,671		460,720
- Deferred taxation		(16,216	)		232		(31,757	)
Income tax expense		1,698,739			1,471,903		428,963

A reconciliation of the expected income tax calculated at the applicable tax rate and total profit, with the actual income tax is as follows:

	2017 RMB’000			2018 RMB’000			2019 RMB’000
Profit before income tax		7,852,898			6,808,121			2,656,128
Expected PRC income tax at the statutory tax rate of 25%		1,963,225			1,702,032			664,032
Tax effect of share of profit of investments accounted for using the equity method		(307,547	)		(218,024	)		(239,562	)
Tax effect of other non-taxable income		(8,733	)		(17,270	)		(14,959	)
Tax effect of non-deductible loss, expenses and costs		7,268			20,123			42,906
True up for final settlement of enterprise income taxes in respect of previous years		(15,121	)		12,678			(2,618	)
Tax losses for which no deferred income tax asset was recognized		60,832			10,017			9,578
Utilization of previously unrecognized tax losses		(1,185	)		(37,653	)		(30,414	)
Actual income tax		1,698,739			1,471,903			428,963

The provision for PRC income tax is calculated at the rate of 25% (2018 and 2017: 25%) on the estimated taxable income of the year ended 31 December 2019 determined in accordance with relevant income tax rules and regulations. The Group did not carry out business overseas and therefore does not incur overseas income taxes.

(i) The analysis of deferred tax assets and deferred tax liabilities is as follows:

	As at 31 December
	2018 RMB’000			2019 RMB’000
Deferred tax assets:
– Deferred tax asset to be recovered after more than 12 months		72,875			25,195
– Deferred tax asset to be recovered within 12 months		50,049			133,187
		122,924			158,382
Deferred tax liabilities:
– Deferred tax liabilities to be recovered after more than 12 months		(2,611	)		(2,946	)
– Deferred tax liabilities to be recovered within 12 months		(1,238	)		(4,604	)
		(3,849	)		(7,550	)
Deferred tax assets - net		119,075			150,832

F-51

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

13 Income tax (continued)

(ii) Movements in deferred tax assets and liabilities are as follows:

	Balance as at 1 January 2018 RMB’000			Deducted/(charged) to profit or loss RMB’000			Balance as at 31 December 2018 RMB’000
Deferred tax assets
Impairment for bad and doubtful debts and provision for inventories		24,507			15,099			39,606
Provision for impairment losses in fixed assets and construction in progress		202,988			16,622			219,610
Difference in depreciation		(115,495	)		(30,214	)		(145,709	)
Share-based payments		3,816			(3,816	)		-
Others		8,578			839			9,417
		124,394			(1,470	)		122,924
Deferred tax liabilities
Capitalization of borrowing costs and others		(5,087	)		1,238			(3,849	)
Deferred tax assets - net		119,307			(232	)		119,075
	Balance as at 1 January 2019			(Charged)/deducted to profit or loss			Balance as at 31 December 2019
	RMB’000			RMB’000			RMB’000
Deferred tax assets
Impairment for bad and doubtful debts and provision for inventories		39,606			(705	)		38,901
Provision for impairment losses in fixed assets and construction in progress		219,610			(11,978	)		207,632
Difference in depreciation		(145,709	)		(33,091	)		(178,800	)
Others		9,417			81,232			90,649
		122,924			35,458			158,382
Deferred tax liabilities
Gains of financial assets at fair value		-			(4,604	)		(4,604	)
Capitalization of borrowing costs and others		(3,849	)		903			(2,946	)
Deferred tax assets - net		119,075			31,757			150,832

F-52

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

13 Income tax (continued)

(ii) Movements in deferred tax assets and liabilities are as follows (continued):

The Group recognizes deferred tax assets only to the extent that it is probable that future taxable income will be available against which the assets can be utilized. Based on the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets will be utilized, management believes that it is probable the Group will realize the benefits of these temporary differences for which deferred tax assets have been recognized.

(iii) Deferred tax assets not recognized

As at 31 December 2019, certain subsidiaries of the Company did not recognize the deferred tax assets in respect of the impairment losses on property, plant and equipment amounting to RMB 29,969 thousands (31 December 2018: RMB 29,969 thousands), because it was not probable that the related tax benefit would be realized.

As at 31 December 2019, certain subsidiaries of the Company did not recognize the deferred tax assets in respect of unused tax losses of RMB 121,723 thousands (31 December 2018: RMB 89,713 thousands) carried forward for PRC income tax purpose because it was not probable that the related tax benefit would be realized.

Tax losses carried forward that are not recognized as deferred tax assets will expire in the following years:

	2018 RMB’000		2019 RMB’000
2019		6,132		-
2020		17,945		17,775
2021		12,880		12,880
2022		12,687		12,687
2023		40,069		40,069
2024		-		38,312
		89,713		121,723

14 Earnings per share

(a) Basic

Basic earnings per share is calculated by dividing the profit attributable to owners of the Company by the weighted average number of ordinary shares in issue during the year.

	2017 RMB’000		2018 RMB’000		2019 RMB’000
Net profit attributable to owners of the Company		6,143,222		5,336,331		2,215,728
Weighted average number of ordinary shares in issue (thousands of shares)		10,803,690		10,823,497		10,823,814
Basic earnings per share (RMB per share)		RMB 0.569		RMB 0.493		RMB 0.205
Basic earnings per ADS (RMB per ADS)		RMB 56.862		RMB 49.303		RMB 20.452

F-53

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

14 Earnings per share (continued)

(b) Diluted

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares.

As at 31 December 2017, The Company has dilutive potential ordinary shares from share options. The number of shares that would have been issued assuming the exercise of the share options less the number of shares that could have been issued at fair value (determined as the average market price per the Company’s A share for year ended 31 December 2017) for the same total proceeds is the number of shares issued for no consideration. The resulting number of shares issued for no consideration is included in the weighted average number of ordinary shares as the denominator for calculating diluted earnings per share. As at 31 December 2019 and 31 December 2018, there was no potential dilutive ordinary share from share options due to the forfeit of the third tranche of share option incentive scheme.

The calculation of the diluted earnings per share for the years ended 31 December 2017, 2018 and 2019 was shown as:

	2017 RMB’000		2018 RMB’000		2019 RMB’000
Earnings
Profit attributable to owners of the Company		6,143,222		5,336,331		2,215,728
Weighted average number of ordinary shares in issue (thousands of shares)		10,803,690		10,823,497		10,823,814
Adjustments for share options granted (thousands of shares)		6,179		-		-
Weighted average number of ordinary shares for diluted earnings per share (thousands of shares)		10,809,869		10,823,497		10,823,814
Diluted earnings per share (RMB per share)		RMB 0.568		RMB 0.493		RMB 0.205
Diluted earnings per ADS (RMB per ADS)(i)		RMB 56.830		RMB 49.303		RMB 20.452

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

F-54

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

15 Lease prepayments and other non-current assets

	Land use rights RMB’000			Other Intangible assets RMB’000			Long-term prepaid expense RMB’000			Total RMB’000
As at 1 January 2018
Cost		725,152			81,085			349,588			1,155,825
Accumulated amortization		(350,980	)		(57,596	)		—			(408,576	)
Net book amount		374,172			23,489			349,588			747,249
Year ended 31 December 2018
Opening net book amount		374,172			23,489			349,588			747,249
Additions		-			3,008			374,519			377,527
Charge for the year		(14,815	)		(5,929	)		(221,418	)		(242,162	)
Transferred to assets classified as held for sale		(24,331	)		-			-			(24,331	)
Closing net book amount		335,026			20,568			502,689			858,283
As at 31 December 2018		335,026			20,568			502,689			858,283
Change in accounting policy (Note 3)		(335,026	)		-			-			(335,026	)
Restated opening amount as at 1 January 2019		-			20,568			502,689			523,257
Cost		-			84,093			502,689			586,782
Accumulated amortization		-			(63,525	)		—			(63,525	)
Net book amount		-			20,568			502,689			523,257
Year ended 31 December 2019
Opening net book amount		-			20,568			502,689			523,257
Additions		-			1,762			170,687			172,449
Charge for the year		-			(4,695	)		(209,597	)		(214,292	)
Closing net book amount		-			17,635			463,779			481,414
As at 31 December 2019
Cost		-			85,855			463,779			549,634
Accumulated amortization		-			(68,220	)		-			(68,220	)
Net book amount		-			17,635			463,779			481,414

For the year ended 31 December 2019, the amortization of RMB 214,292 thousands (2018: RMB 242,162 thousands, 2017: RMB 245,635 thousands) has been charged in Cost of sales.

F-55

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

16 Leases

(a) Amounts recognized in the balance sheet

The balance sheet shows the following amounts relating to leases:

	As at 31 December 2019 RMB’000		As at 1 January 2019 RMB’000
Right-of-use assets
Land use rights		320,212		335,026
Buildings		22,205		12,233
Equipment		168		63,471
Others		1,275		1,148
		343,860		411,878
Lease liabilities
Current		11,450		74,093
Non-current		10,593		2,638
		22,043		76,731

For the year ended 31 December 2019, additions to the right-of-use assets were RMB 33,980 thousands.

(b) Amounts recognized in the income statement

The income statement shows the following amounts relating to leases:

	2019 RMB’000
Depreciation charge of right-of-use assets
Land use rights		(14,814	)
Buildings		(12,541	)
Equipment		(74,025	)
Others		(618	)
		(101,998	)
Interest expense (included in finance cost)		(2,570	)
Expense relating to short-term leases (included in Cost of sales)		(2,961	)

The total cash outflow for leases in 2019 was RMB 94,441 thousands.

F-56

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

17 Property, plant and equipment

	Buildings			Plant and machinery			Vehicles and other equipment			Total
	RMB’000			RMB’000			RMB’000			RMB’000
As at 1 January 2018
Cost		3,641,220			41,661,819			1,907,177			47,210,216
Accumulated depreciation		(2,239,728	)		(29,299,129	)		(1,516,564	)		(33,055,421	)
Impairment loss		(279,099	)		(948,041	)		(61,227	)		(1,288,367	)
Net book amount		1,122,393			11,414,649			329,386			12,866,428
Year ended 31 December 2018		-
Opening net book amount		1,122,393			11,414,649			329,386			12,866,428
Additions					58,906			25,602			84,508
Disposals		(10,069	)		(25,141	)		(2,404	)		(37,614	)
Disposal of subsidiaries		-			-			(2,291	)		(2,291	)
Reclassification		775			(13,904	)		13,129			-
Transferred from construction in progress (Note 19)		7,260			309,346			28,329			344,935
Charge for the year		(87,129	)		(1,398,681	)		(65,114	)		(1,550,924	)
Impairment loss		-			(58,652	)		-			(58,652	)
Closing net book amount		1,033,230			10,286,523			326,637			11,646,390
As at 31 December 2018
Cost		3,229,642			41,007,229			1,785,889			46,022,760
Accumulated depreciation		(2,142,540	)		(29,905,377	)		(1,451,131	)		(33,499,048	)
Impairment loss		(53,872	)		(815,329	)		(8,121	)		(877,322	)
Net book amount		1,033,230			10,286,523			326,637			11,646,390
Year ended 31 December 2019
Opening net book amount		1,033,230			10,286,523			326,637			11,646,390
Additions		-			99,041			15,578			114,619
Disposals		(4,114	)		(60,503	)		(5,988	)		(70,605	)
Reclassification		16,395			(82,604	)		66,209			-
Transferred from construction in progress (Note 19)		26,655			999,412			97,553			1,123,620
Transferred from investment properties (Note 18)		6,924			-			-			6,924
Transferred to investment properties (Note 18)		(12,347	)		-			-			(12,347	)
Charge for the year		(92,123	)		(1,346,725	)		(68,956	)		(1,507,804	)
Closing net book amount		974,620			9,895,144			431,033			11,300,797
As at 31 December 2019
Cost		3,336,375			41,455,159			1,871,684			46,663,218
Accumulated depreciation		(2,310,970	)		(30,793,083	)		(1,432,530	)		(34,536,583	)
Impairment loss		(50,785	)		(766,932	)		(8,121	)		(825,838	)
Net book amount		974,620			9,895,144			431,033			11,300,797

For the year ended 31 December 2019, the amount of depreciation expense charged to cost of sales and selling and administrative expense were RMB 1,498,625 thousands and RMB 9,179 thousands, respectively (2018: RMB 1,541,799 thousands and RMB 9,125 thousands, respectively; 2017: RMB 1,565,465 thousands and RMB 9,377 thousands, respectively).

F-57

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

17 Property, plant and equipment (continued)

For the year ended 31 December 2019, the written off of impairment loss of the Group amounted to RMB 51,484 thousands due to the disposal of property, plant and equipment.

For the year ended 31 December 2018, the Group made impairment provision of RMB 58,652 thousands against these property, plant and equipment with schemes of technology upgrades and replacement in the coming years (2017: RMB 118,179 thousands).

18 Investment properties

	RMB’000
As at 1 January 2018
Cost		594,135
Accumulated depreciation		(202,869	)
Net book amount		391,266
Year ended 31 December 2018
Opening net book amount		391,266
Charge for the year		(14,527	)
Closing net book amount		376,739
As at 31 December 2018
Cost		594,135
Accumulated depreciation		(217,396	)
Net book amount		376,739
Year ended 31 December 2019
Opening net book amount		376,739
Transferred from property plant and equipment (Note 17)		12,347
Transferred to property plant and equipment (Note 17)		(6,924	)
Charge for the year		(14,694	)
Closing net book amount		367,468
As at 31 December 2019
Cost		602,659
Accumulated depreciation		(235,191	)
Net book amount		367,468

As at 31 December 2019, the Group had no contractual obligations for future repairs and maintenance

(31 December 2018: Nil).

Investment properties represent certain floors of an office building leased to other entities including related parties.

(a) The fair value of the investment properties of the Group as at 31 December 2019 was estimated by the directors to be approximately RMB 1,230,191 thousands by reference to market values of similar properties in the nearby area (31 December 2018: RMB 1,436,852 thousands). This fair value estimation was at level 3 of fair value hierarchy by using market observable inputs. The investment properties have not been valued by external independent appraisers.

(b) Rental income of RMB 76,381 thousands was recognized by the Group for the year ended 31 December 2019 (2018: RMB 76,001 thousands, 2017: RMB 46,700 thousands).

F-58

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

18 Investment properties (continued)

(c) Leasing arrangements

The investment properties are leased to tenants under operating leases with rentals payable monthly. There are no variable lease payments that depend on an index or rate. Where considered necessary to reduce credit risk, the Group may obtain bank guarantees for the term of the lease.

Although the Group is exposed to changes in the residual value at the end of the current leases, the Group typically enters into new operating leases and therefore will not immediately realize any reduction in residual value at the end of these leases. Expectations about the future residual values are reflected in the fair value of the properties.

Minimum lease payments receivable on leases of investment properties are as follows:

	As at 31 December
	2018 RMB’000		2019 RMB’000
Within 1 year		48,386		43,322
Between 1 and 2 years		3,715		1,517
Above 2 years		-		-

19 Construction in progress

	As at 31 December
	2018 RMB’000			2019 RMB’000
As at 1 January		1,001,118			1,559,401
Additions		927,218			1,380,254
Transferred to property plant and equipment (Note 17)		(344,935	)		(1,123,620	)
Impairment loss		(24,000	)		(486	)
As at 31 December		1,559,401			1,815,549

As at 31 December 2019, the impairment loss in construction in progress were RMB 34,661 thousands (31 December 2018: RMB 34,175 thousands).

For the year ended 31 December 2019, the Group capitalized borrowing costs amounting to RMB 5,594 thousands (2018: RMB 5,179 thousands, 2017: RMB 804 thousands) on qualifying assets. Borrowing costs were capitalized at the weighted average rate of its general borrowings of 3.35% (2018: 3.63%, 2017: 2.93%).

F-59

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

20 Subsidiaries

The following list contains the particulars of major subsidiaries of the Group, all of which are limited companies established and operated in the PRC.

Company	Registered capital ’000		Percentage of equity directly held by the Company %		Percentage of equity held by the Group %		Percentage of equity held by non-controlling interests %		Principal activities
As at 31 December 2019
Shanghai Petrochemical Investment Development Company Limited		RMB 1,000,000		100.00		100.00		-	Investment management
China Jinshan Associated Trading Corporation		RMB 25,000		67.33		67.33		32.67	Import and export of petrochemical products and equipment
Shanghai Jinchang Engineering Plastics Company Limited		USD 9,154		-		74.25		25.75	Production of polypropylene compound products
Shanghai Golden Phillips Petrochemical Company Limited		USD 50,000		-		100.00		-	Production of polyethylene products
Shanghai Jinshan Trading Corporation		RMB 100,000		-		67.33		32.67	Import and export of petrochemical products

Company	Registered capital ’000		Percentage of equity directly held by the Company %		Percentage of equity held by the Group %		Percentage of equity held by non-controlling interests %		Principal activities
As at 31 December 2018
Shanghai Petrochemical Investment Development Company Limited		RMB 1,000,000		100.00		100.00		-	Investment management
China Jinshan Associated Trading Corporation		RMB 25,000		67.33		67.33		32.67	Import and export of petrochemical products and equipment
Shanghai Jinchang Engineering Plastics Company Limited		USD 9,154		-		74.25		25.75	Production of polypropylene compound products
Shanghai Golden Phillips Petrochemical Company Limited (b)		USD 50,000		-		100.00		-	Production of polyethylene products
Jinyong (a)		RMB 250,000		75.00		75.00		25.00	Production of acrylic fibre products
Shanghai Jinshan Trading Corporation		RMB 100,000		-		67.33		32.67	Import and export of petrochemical products

The total comprehensive income attributable to non-controlling interests for the year ended 31 December 2019 is RMB 11,437 thousands (2018: comprehensive loss amounted RMB 113 thousands, 2017: comprehensive income amounted RMB 10,937 thousands).

F-60

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

20 Subsidiaries (continued)

(a) On 23 August 2019, the Group disposed 75% share of Jinyong, a former subsidiary of the Group, due to its bankruptcy and liquidation. The disposal loss amounted RMB 60,951 thousands was included in Other gains – net (Note 9).

	2019 RMB’000
Carrying amount of net assets at the date of disposal		54,940
Non-controlling interests derecognized		6,011
Loss on disposal of subsidiary		60,951

The carrying amounts of total assets and liabilities as at the date of disposal were:

	As at 23 August 2019 RMB’000
Total assets		141,121
Total liabilities		(86,181	)
Net assets		54,940

(b) In July 2018, the Company’s subsidiary, Shanghai Petrochemical Investment Development Company Limited (“Toufa”), reached an agreement with the other investor, Philips Petroleum International Investment Company (“Philips Petroleum”), to acquire the remaining 40% share from Philips Petroleum in Shanghai Golden Phillips Petrochemical Company Limited (“Golden Phillips”), at a cash consideration of RMB 152,800 thousands. The transaction was approved and completed in October 2018. Upon completion, Golden Phillips became a wholly owned subsidiary of Toufa.

	2018 RMB’000
Carrying amount of non-controlling interests acquired		162,359
Consideration paid to non-controlling interests		(152,800	)
Gains recognized in the transactions with non-controlling interests within equity – other reserves		9,559

21 Investments accounted for using the equity method

The amounts recognized in the balance sheet are as follows:

	As at 31 December
	2018 RMB’000		2019 RMB’000
Associates
-Share of net assets		4,297,265		4,973,464
Joint ventures
-Share of net assets		229,868		235,294
		4,527,133		5,208,758

F-61

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

21 Investments accounted for using the equity method (continued)

Investment in associates (continued)

The amounts recognized in the share of profit of investments accounted for using the equity method are as follows:

	2017 RMB’000		2018 RMB’000		2019 RMB’000
Associates		1,200,141		839,425		927,814
Joint ventures		43,552		46,172		44,779
		1,243,693		885,597		972,593

Investment in associates

	2018			2019
	RMB’000			RMB’000
As at 1 January		4,239,795			4,297,265
Additions (Note 30)		-			320,000
Share of profit		839,425			904,265
Other comprehensive income/(loss)		(7,014	)		7,449
Cash dividends distribution		(774,941	)		(555,515	)
As at 31 December		4,297,265			4,973,464

Set out below are the material associates of the Group as at 31 December 2019. The associates as listed below have share capital consisting solely of ordinary shares, which are held directly by the Group; the country of incorporation or registration is also their principal place of business.

Principal activities of material associates as at 31 December 2019.

Name of entity	Place of business/country of incorporation		% of ownership interest		Principal activities		Measure -ment method
Shanghai Secco Petrochemical Company Limited (“Shanghai Secco”)		PRC		20.00		Manufacturing and distribution of chemical products		Equity
Shanghai Chemical Industry Park Development Company Limited (“Chemical Industry”)		PRC		38.26		Planning, development and operation of the Chemical Industry Park in Shanghai, PRC		Equity
Shanghai Jinsen Hydrocarbon Resins Company Limited (“Jinsen”)		PRC		40.00		Production of resins products		Equity
Shanghai Azbil Automation Company Limited (“Azbil”)		PRC		40.00		Service and maintenance of building automation systems and products		Equity
Shanghai Shidian Energy Company Limited (“Shidian Energy”) (i)		PRC		40.00		Electric power supply		Equity

F-62

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

21 Investments accounted for using the equity method (continued)

Investment in associates (continued)

Principal activities of material associates as at 31 December 2018.

Name of entity	Place of business/country of incorporation		% of ownership interest		Principal activities		Measure -ment method
Shanghai Secco		PRC		20.00		Manufacturing and distribution of chemical products		Equity
Chemical Industry		PRC		38.26		Planning, development and operation of the Chemical Industry Park in Shanghai, PRC		Equity
Jinsen		PRC		40.00		Production of resins products		Equity
Azbil		PRC		40.00		Service and maintenance of building automation systems and products		Equity

Shanghai Secco, Chemical Industry, Jinsen, Azbil and Shidian Energy are private companies and there are no quoted market prices available for their shares.

There are no contingent liabilities relating to the Group’s interest in the associates.

(i) In 2019, Toufa invested RMB 320,000 thousands to acquire 40% share of Shidian Energy, of which RMB 71,816 thousands was contributed by property, plant and equipment at fair market price.

F-63

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

21 Investments accounted for using the equity method (continued)

Investment in associates (continued)

Summarized financial information for material associates

Set out below are the summarized financial information for the above associates.

Summarized balance sheet for material associates

As at 31 December 2018				Shanghai Secco RMB’000			Chemical Industry RMB’000			Jinsen RMB’000			Azbil RMB’000
Current
- Current assets					9,537,354			3,785,819			100,065			189,514
- Current liabilities					(2,232,583	)		(1,433,001	)		(14,855	)		(68,106	)
Non-current
- Non-current assets					5,517,999			3,219,257			68,128			2,586
- Non-current liabilities					-			(514,254	)		-			-
Net Assets					12,822,770			5,057,821			153,338			123,994
As at 31 December 2019	Shanghai Secco RMB’000			Chemical Industry RMB’000			Jinsen RMB’000			Azbil RMB’000			Shidian Energy RMB’000
Current
- Current assets		11,858,124			4,356,339			85,302			204,965			745,425
- Current liabilities		(3,196,334	)		(1,468,162	)		(18,114	)		(75,572	)		(9,849	)
Non-current
- Non-current assets		5,020,292			3,153,858			69,154			3,049			69,588
- Non-current liabilities		(12,730	)		(485,735	)		-			-			-
Net Assets		13,669,352			5,556,300			136,342			132,442			805,164

Summarized statement of comprehensive income for material associates

2017	Shanghai Secco RMB’000		Chemical Industry RMB’000			Jinsen RMB’000			Azbil RMB’000
Revenue		29,186,371		2,664,866			193,007			234,852
Post-tax profit/(loss) from continuing operations		5,179,254		407,709			(17,069	)		26,182
Other comprehensive loss		-		(2,116	)		-			-
Total comprehensive income/(loss)		5,179,254		405,593			(17,069	)		26,182
Dividends declared by associate		2,105,600		53,001			-			17,000
2018	Shanghai Secco RMB’000		Chemical Industry RMB’000			Jinsen RMB’000			Azbil RMB’000
Revenue		26,319,957		1,880,004			208,901			255,554
Post-tax profit/(loss) from continuing operations		3,228,682		472,804			(12,845	)		30,119
Other comprehensive loss		-		(18,331	)		-			-
Total comprehensive income/(loss)		3,228,682		454,473			(12,845	)		30,119
Dividends declared by associate		3,675,840		61,001			-			25,900

F-64

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

21 Investments accounted for using the equity method (continued)

Investment in associates (continued)

Summarized statement of comprehensive income for material associates (continued)

2019	Shanghai Secco RMB’000		Chemical Industry RMB’000		Jinsen RMB’000			Azbil RMB’000		Shidian Energy RMB’000
Revenue		28,341,032		1,936,537		197,199			297,694		112,143
Post-tax profit/(loss) from continuing operations		3,383,582		609,540		(16,996	)		38,448		5,166
Other comprehensive income		-		19,470		-			-		-
Total comprehensive income/(loss)		3,383,582		629,010		(16,996	)		38,448		5,166
Dividends declared by associate		2,537,000		79,000		-			30,000		-

The information above reflects the amounts presented in the financial statements of the associates (and not the Group’s share of those amounts) adjusted for differences in accounting policies between the Group and the associates.

Reconciliation of summarized financial information

Reconciliation of the summarized financial information presented to the carrying amount of its interest in material associates

2018				Shanghai Secco RMB’000			Chemical Industry RMB’000			Jinsen RMB’000			Azbil RMB’000
Opening net assets 1 January					13,269,928			4,664,349			166,183			119,775
Profit/(loss) for the year					3,228,682			472,804			(12,845	)		30,119
Other comprehensive loss					-			(18,331	)		-			-
Declared dividends					(3,675,840	)		(61,001	)		-			(25,900	)
Closing net assets					12,822,770			5,057,821			153,338			123,994
% of ownership interest					20.00	%		38.26	%		40.00	%		40.00	%
Interest in associates					2,564,556			1,935,122			61,335			49,598
Unrealized upstream and downstream transaction					(9,512	)		-			-			-
Unentitled portion (Note a)					-			(348,346	)		-			-
Carrying value					2,555,044			1,586,776			61,335			49,598
2019	Shanghai Secco RMB’000			Chemical Industry RMB’000			Jinsen RMB’000			Azbil RMB’000			Shidian Energy RMB’000
Opening net assets 1 January		12,822,770			5,057,821			153,338			123,994			—
Profit/(loss) for the year		3,383,582			609,540			(16,996	)		38,448			5,166
Increase in share capital		-			-			-			-			800,000
Other comprehensive Income		-			19,470			-						-
Decrease in reserves		-			(51,535	)		-			-			-
Declared dividends		(2,537,000	)		(79,000	)		-			(30,000	)		-
Closing net assets		13,669,352			5,556,296			136,342			132,442			805,166
% of ownership interest		20.00	%		38.26	%		40.00	%		40.00	%		40.00	%
Interest in associates		2,733,872			2,125,839			54,537			52,977			322,066
Unrealized upstream and downstream transaction		(9,512	)		-			-			-			(22,708	)
Unentitled portion (Note a)		-			(328,629	)		-			-			-
Carrying value		2,724,360			1,797,210			54,537			52,977			299,358

Note a: Unentitled portion represented the earnings from sales of the lands injected by Government in Chemical Industry that cannot be shared by other shareholders.

F-65

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

21 Investments accounted for using the equity method (continued)

Investment in associates (continued)

Summarized financial information for other associates

	2018 RMB’000		2019 RMB’000
Aggregate carrying value of investments at 31 December		44,512		45,022
Aggregate amounts of the group’s share of:
Profit for the year		5,884		6,400
Total comprehensive income		5,884		6,400

Investment in joint ventures

	2018 RMB’000			2019 RMB’000
As at 1 January		212,249			229,868
Investment addition		7,979			-
Share of profit		46,172			44,779
Cash dividends distribution		(36,532	)		(39,353	)
As at 31 December		229,868			235,294

The joint venture listed below has share capital consisting solely of ordinary shares, which is held directly by the Group as at 31 December 2019 and 31 December 2018.

As at 31 December 2019 and 31 December 2018	Place of business/country of incorporation		% of ownership interest		Principal activities		Measure -ment method
BOC		PRC		50.00		Production and sales of industrial gases		Equity
Shanghai Petrochemical Pressure Vessel Testing Center(“JYJC”)		PRC		50.00		Provide inspection and testing service		Equity
Shanghai Petrochemical Yangu Gas Development Company Limited (“Yangu Gas”)		PRC		50.00		Production and sales of industrial gases		Equity

BOC, JYJC and Yangu Gas are private companies and there are no quoted market prices available for their shares.

F-66

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

21 Investments accounted for using the equity method (continued)

Investment in joint ventures (continued)

Summarized financial information for joint ventures

Set out below are the summarized financial information for joint ventures which are accounted for using the equity method.

Summarized balance sheet for joint ventures

As at 31 December 2018	BOC RMB’000			JYJC RMB’000			Yangu Gas RMB’000
Current
Cash and cash equivalents		137,505			8,086			42,415
Other current assets (excluding cash)		68,454			11,441			14,164
Total current assets		205,959			19,527			56,579
Total current liabilities		(41,962	)		(4,607	)		(3,745	)
Non-current
Total non-current assets		198,555			2,357			44,589
Total non-current liabilities		-			-			-
Net assets		362,552			17,277			97,423
As at 31 December 2019	BOC RMB’000			JYJC RMB’000			Yangu Gas RMB’000
Current
Cash and cash equivalents		182,548			11,200			51,386
Other current assets (excluding cash)		64,837			9,557			12,565
Total current assets		247,385			20,757			63,951
Total current liabilities		(37,444	)		(3,993	)		(3,460	)
Non-current
Total non-current assets		181,372			1,937			36,972
Total non-current liabilities		(26,378	)		-			-
Net assets		364,935			18,701			97,463

F-67

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

21 Investments accounted for using the equity method (continued)

Investment in joint ventures (continued)

Summarized statement of comprehensive income for joint ventures

2017	BOC RMB’000			Jinpu RMB’000			Yangu Gas RMB’000
Revenue		410,254			13,848			59,883
Depreciation and amortization		(45,680	)		(7,452	)		(9,829	)
Interest income		503			-			360
Interest expense		(190	)		(533	)		-
Profit/(loss) from continuing operations		108,072			(6,605	)		(1,172	)
Income tax expense		(26,803	)		-			-
Post-tax profit/(loss) from continuing operations		81,269			(6,605	)		(1,172	)
Other comprehensive income		-			-			-
Total comprehensive income/(loss)		81,269			(6,605	)		(1,172	)
Dividends declared by joint venture		44,000			-			-
2018	BOC RMB’000			JYJC RMB’000			Yangu Gas RMB’000
Revenue		423,160			21,542			58,679
Depreciation and amortization		(46,456	)		-			(2,245	)
Interest income		1,154			27			541
Interest expense		-			-			-
Profit/(loss) from continuing operations		114,275			1,833			(2,518	)
Income tax expense		(27,799	)		(450	)		-
Post-tax profit/(loss) from continuing operations		86,476			1,383			(2,518	)
Other comprehensive income		-			-			-
Total comprehensive income/(loss)		86,476			1,383			(2,518	)
Dividends declared by joint venture		73,000			64			-
2019	BOC RMB’000			JYJC RMB’000			Yangu Gas RMB’000
Revenue		414,374			29,290			55,302
Depreciation and amortization		(50,199	)		-			(11,272	)
Interest income		636			308			1,119
Interest expense		-			-			-
Profit from continuing operations		108,565			3,107			40
Income tax expense		(28,382	)		(777	)		-
Post-tax profit from continuing operations		80,183			2,330			40
Other comprehensive income		-			-			-
Total comprehensive income		80,183			2,330			40
Dividends declared by joint venture		77,800			906			-

The information above reflects the amounts presented in the financial statements of the joint ventures (and not the Group’s share of those amounts) adjusted for differences in accounting policies between the Group and the joint ventures.

F-68

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

21 Investments accounted for using the equity method (continued)

Investment in joint ventures (continued)

Reconciliation of summarized financial information

Reconciliation of the summarized financial information presented to the carrying amount of its interest in material joint ventures

2018	BOC RMB’000			JYJC RMB’000			Yangu Gas RMB’000
Opening net assets 1 January		349,076			—			99,941
Net assets as at 31 March		—			15,958			—
Profit/(loss) for the year		86,476			1,383			(2,518	)
Other comprehensive income		-			-			-
Declared dividends		(73,000	)		(64	)		-
Closing net assets (a)		362,552			17,277			97,423
% of ownership interest		50.00	%		50.00	%		50.00	%
Interest in joint ventures		181,276			8,638			48,713
Unrealized downstream transactions		(8,759	)		-			-
Carrying value		172,517			8,638			48,713
2019	BOC RMB’000			JYJC RMB’000			Yangu Gas RMB’000
Opening net assets 1 January		362,552			17,277			97,423
Profit for the year		80,183			2,330			40
Other comprehensive income		-			-			-
Declared dividends		(77,800	)		(906	)		-
Closing net assets		364,935			18,701			97,463
% of ownership interest		50.00	%		50.00	%		50.00	%
Interest in joint ventures		182,467			9,350			48,733
Unrealized downstream transactions		(5,256	)		-			-
Carrying value		177,211			9,350			48,733

(a) JYJC was a former wholly owned subsidiary of Toufa. On 31 March 2018, a third party investor injected RMB 9,600 thousands to acquire 50% share of JYJC, and JYJC became a joint venture of Toufa upon completion. For the year ended 31 December 2018, the related disposal gain of RMB 1,622 thousands was included in Other gains – net.

22 Inventories

	As at 31 December 2018							As at 31 December 2019
	Gross carrying amount RMB’000		Provision for declines in the value of inventories RMB’000			Carrying amount RMB’000		Gross carrying amount RMB’000		Provision for declines in the value of inventories RMB’000			Carrying amount RMB’000
Raw materials		5,529,241		-			5,529,241		4,567,648		-			4,567,648
Work in progress		1,099,235		(55,098	)		1,044,137		1,072,040		(78,981	)		993,059
Finished goods		1,440,721		(56,448	)		1,384,273		1,022,335		(33,763	)		988,572
Spare parts and consumables		209,907		(46,683	)		163,224		247,873		(42,718	)		205,155
		8,279,104		(158,229	)		8,120,875		6,909,896		(155,462	)		6,754,434

F-69

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

22 Inventories (continued)

The cost of inventories recognized in Cost of sales amounted to RMB 78,595,380 thousands for the year ended 31 December 2019 (2018: RMB 82,981,590 thousands, 2017: RMB 65,607,079 thousands) which excluded an inventory provision of RMB 70,178 thousands (2018: RMB 86,003 thousands, 2017: RMB 60,461 thousands).

As at 31 December 2019, the provision for inventory write-down was RMB 155,462 thousands (31 December 2018: RMB 158,229 thousands). For the year ended 31 December 2019, the Group sold certain finished goods and utilized certain spare parts and consumables which were previously provided for. The related provision of RMB 72,945 thousands was reversed and included in Cost of sales in the consolidated income statement (2018: RMB 73,266 thousands, 2017: RMB 44,591 thousands).

23 Financial assets and financial liabilities

The Group holds the following financial instruments:

			As at 31 December
Financial assets	Note		2018 RMB’000		2019 RMB’000
Financial assets at amortized cost
Trade receivables		(a)		81,990		120,739
Other receivables		(a)		105,803		26,101
Amounts due from related parties excluded prepayments		(a), 30(c)		2,219,007		1,521,187
Cash and cash equivalents		(b)		8,741,893		7,449,699
Time deposits with financial banks		(c)		1,500,000		5,020,073
Financial assets at fair value through other comprehensive income		(d)		1,672,431		1,545,921
Financial assets at fair value through profit or loss		(e)		2,727,279		3,318,670
				17,048,403		19,002,390

			As at 31 December
Financial liabilities	Note		2018 RMB’000		2019 RMB’000
Financial liabilities at amortized cost
Borrowings		(f)		497,249		1,547,600
Trade payables		(g)		2,922,998		2,142,402
Other payables		(g)		5,167,230		4,513,698
Bills payables		(g)		-		673,900
Amounts due to related parties		(g), 30(c)		4,567,814		5,708,394
Lease liabilities		16		—		22,043
Financial liabilities at fair value through profit or loss				11,005		799
				13,166,296		14,608,836

The Company’s exposure to various risks associated with the financial instruments is discussed in Note 4. The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of financial assets mentioned above.

F-70

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

23 Financial assets and financial liabilities (continued)

(a) Trade and other receivables

	As at 31 December
	2018 RMB’000			2019 RMB’000
Trade receivables		82,044			120,739
Less: impairment provision		(54	)		-
		81,990			120,739
Amounts due from related parties excluded prepayments		2,219,007			1,521,187
		2,300,997			1,641,926
Other receivables		105,803			26,101
		2,406,800			1,668,027

For the year ended 31 December 2019, certain associates and joint ventures of the Group declared dividends with total amount of RMB 594,868 thousands to the Group (2018: RMB 811,473 thousands, 2017: RMB 479,633 thousands). As at 31 December 2019 and 31 December 2018, all these declared dividends had been received by the Group.

As at 31 December 2019, interest receivable amounted RMB 10,927 thousands was included in the balance of other receivables (31 December 2018: RMB 79,224 thousands).

Amounts due from related parties mainly represent trade-related balances, unsecured in nature and bear no interest.

The aging analysis based on invoice date of trade receivables and amounts due from related parties excluded prepayments (net of allowance for doubtful debts) is as follows:

	As at 31 December
	2018 RMB’000		2019 RMB’000
Within 1 year		2,300,957		1,641,926
1-2 year		29		-
2-3 year		11		-
		2,300,997		1,641,926

Movements of the Group’s impairment provision for trade and other receivables are as follows:

	2018			2019
	RMB’000			RMB’000
As at 1 January		1,053			198
Provision/(reversal) for receivables impairment		39			(59	)
Receivables written off during the year as uncollectible		(894	)		-
As at 31 December		198			139

As at 31 December 2019 and 31 December 2018, no trade receivable was pledged as collateral.

Sales to third parties are generally on cash basis or on letter of credit. Subject to negotiation, credit is generally only available for major customers with well-established trading records.

F-71

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

23 Financial assets and financial liabilities (continued)

(b) Cash and cash equivalents

	As at 31 December
	2018 RMB’000		2019 RMB’000
Cash deposits with a related party (i)		22,082		67,015
Cash at bank and on hand		8,719,811		7,382,684
		8,741,893		7,449,699

(i) Cash deposits with a related party were cash deposits at Sinopec Finance Company Limited (“Sinopec Finance”), which is a financial institution.

(c) Time deposits with banks

	As at 31 December
	2018 RMB’000		2019 RMB’000
Time deposits with banks within one year		1,500,000		1,508,839
Time deposits with banks above one year		-		3,511,234
		1,500,000		5,020,073

As at 31 December 2019, time deposits with banks within one year were time deposits within six months with the interest rates from 3.95% to 4.10% per annum (31 December 2018: 4.5% per annum), which were presented as current assets. Time deposits with banks above one year were time deposits of three years with the interest rates from 4.13% to 4.18% per annum, which were presented as non-current assets in the balance sheet(31 December 2018: Nil).

(d) Financial assets at fair value through other comprehensive income

	As at 31 December
	2018 RMB’000		2019 RMB’000
Trade and bill receivables (i)		1,672,431		1,540,921
Equity investments (ii)		-		5,000
		1,672,431		1,545,921

(i) As at 31 December 2019, certain trade receivables and bills receivable were classified as financial assets at FVOCI, as the Group’s business model is achieved both by collecting contractual cash flows and selling of these assets.

(ii) In July 2019, Toufa invested RMB 5,000 thousands in Shanghai Carbon Fiber Composites Innovation Research Institute Co. Ltd to acquire 16.67% of its share.

(e) Financial assets at fair value through profit or loss

	As at 31 December
	2018 RMB’000		2019 RMB’000
Structured deposits		2,719,811		3,318,407
Foreign exchange options		7,468		263
		2,727,279		3,318,670

As at 31 December 2019, financial assets at fair value through profit or loss are mainly structured deposits with banks, which are presented as current assets since they are expected to be collected within six months from the end of the reporting period.

F-72

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

23 Financial assets and financial liabilities (continued)

(f) Borrowings

	As at 31 December
	2018		2019
	RMB’000		RMB’000
Credit loans due within one year - Short term bank loans		497,249		1,547,600

The weighted average interest rate for the Group’s borrowings was 3.35% for the year ended 31 December 2019 (2018: 3.63%).

As at 31 December 2019, no borrowings were secured by property, plant and equipment (31 December 2018: Nil).

(g) Trade and other payables

	As at 31 December
	2018		2019
	RMB’000		RMB’000
Trade payables		2,922,998		2,142,402
Bills payables		-		673,900
Amounts due to related parties		4,567,814		5,708,394
		7,490,812		8,524,696
Staff salaries and welfares payable		128,861		189,547
Taxes payable (exclude income tax payable)		4,342,676		3,577,018
Interest payable		5,952		1,686
Dividends payable		26,488		29,144
Construction payable		334,249		277,184
Other liabilities		329,004		439,119
		5,167,230		4,513,698
		12,658,042		13,038,394

As at 31 December 2019 and 31 December 2018, all trade and other payables of the Group were non-interest bearing, and their fair value approximated their carrying amounts due to their short maturities.

F-73

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

23 Financial assets and financial liabilities (continued)

(g) Trade and other payables (continued)

Majority of amount due to related parties were trade payable for purchasing crude oil from related parties.

As at 31 December 2019 and 2018, the aging analysis of the trade payables (including bills payables and amounts due to related parties with trading nature) based on invoice date was as follows:

	As at 31 December
	2018		2019
	RMB’000		RMB’000
Within one year		7,451,168		8,509,327
Between one and two years		25,231		11,209
Over two years		14,413		4,160
		7,490,812		8,524,696

24 Other assets and assets classified as held for sale

	As at 31 December
	2018		2019
	RMB’000		RMB’000
Other current assets
Prepayments		38,025		23,767
Prepayments to related parties		67,242		44,806
		105,267		68,573
Assets classified as held for sale		24,331		-

F-74

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

25 Contract liabilities

	As at 31 December
	2018		2019
	RMB’000		RMB’000
Contract liabilities		446,702		655,117

The contract liabilities of the Group are advance for goods from customers. Revenue amounted to RMB 446,702 thousands has been recognized in the current year relates to carried – forward contract liabilities (2018: RMB 465,706 thousands).

26 Deferred income

	2018			2019
	RMB’000			RMB’000
As at 1 January		5,679			10,442
Government grants received during the year to compensate the cost related to the project of energy efficiency renovations of thermoelectric unit		5,200			-
Amortization		(437	)		(437	)
As at 31 December		10,442			10,005

27 Share capital

	Ordinary A shares listed in PRC RMB’000		Foreign invested H shares listed overseas RMB’000		Total RMB’000
As at 1 January 2018		7,319,177		3,495,000		10,814,177
Exercise of employee share options—proceeds received (Note 29)		9,637		-		9,637
As at 31 December 2018		7,328,814		3,495,000		10,823,814
As at 1 January 2019 and 31 December 2019		7,328,814		3,495,000		10,823,814

F-75

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

28 Reserves

	Legal surplus RMB’000		Capital surplus RMB’000		Surplus reserve RMB’000		Other reserve RMB’000			Share premium RMB’000		Safety production fund RMB’000		Retained earnings RMB’000			Total RMB’000
Balance at 1 January 2018		4,072,476		4,180		101,355		47,469			62,319		-		13,128,257			17,416,056
Net profit attributable to shareholders of the Company		-		-		-		-			-		-		5,336,331			5,336,331
Dividends proposed and approved		-		-		-		-			-		-		(3,247,144	)		(3,247,144	)
Appropriation of safety production fund		-		-		-		-			-		57,135		(57,135	)		-
Forfeit of share option scheme (Note 29)		-		-		-		(13,004	)		-		-		-			(13,004	)
Exercise of share option		-		-		-		(17,062	)		44,527		-		-			27,465
Share of other comprehensive loss of investments accounted for using the equity method		-		-		-		(7,014	)		-		-		-			(7,014	)
Transactions with non-controlling interests		-		9,559		-		-			-		-		-			9,559
Balance at 31 December 2018		4,072,476		13,739		101,355		10,389			106,846		57,135		15,160,309			19,522,249
Net profit attributable to shareholders of the Company		-		-		-		-			-		-		2,215,728			2,215,728
Dividends proposed and approved		-		-		-		-			-		-		(2,705,952	)		(2,705,952	)
Appropriation of safety production fund		-		-		-		-			-		2		(2	)		-
Share of other comprehensive income of investments accounted for using the equity method		-		-		-		7,449			-		-		-			7,449
Balance at 31 December 2019		4,072,476		13,739		101,355		17,838			106,846		57,137		14,670,083			19,039,474

F-76

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

29 Share-based payments

Pursuant to the resolution of the fifth meeting of the eighth session of the Board of Directors of the Company on 6 January 2015, the proposal regarding the list of participants and the number of share options under the share option incentive scheme was approved.

According to the Company’s share option incentive scheme, the grant date of share options was 6 January 2015, and there were a total of 38,760 thousand share options granted to 214 participants (0.359% of the total ordinary share capital issued). Each share option has a right to purchase an ordinary A share listed in PRC on vesting date at the exercise price under vesting conditions. The options were divided by three tranches of 40%, 30% and 30% of the total share options granted, respectively. Each tranche had independent vesting conditions relevant to year 2015, 2016 and 2017, respectively, which were listed as following:

• weighted average rate of return on equity of the Group should be no less than 9% for 2015, 9.5% for 2016 and 10% for 2017 in respect to the three tranche;

• for each year of 2015, 2016 and 2017, the compound annual growth rate in net profit based on the net profit of 2013 should achieve 5%;

• for each year of 2015, 2016 and 2017, proportion of the main business revenue in the total revenue should be no less than 99%;

• for each year of 2015, 2016 and 2017, each of the above three conditions should be no lower than the 75% level of peer companies; and

• achieving the target budget set by the Sinopec Corp. in 2015, 2016 and 2017, respectively.

The participant should serve the Group at the required position from the grant date. Exercisable amount of each tranche depended on the time for which the participant served the Group during each year of 2015, 2016 and 2017. Upon the fulfilment of relevant vesting conditions, the share options of each tranche shall become exercisable at its exercisable date.

The fair value of the employee services received in exchange for the grant of this equity-settled, share-based compensation plan is recognized as an expense on a straight-line basis over the vesting period of each tranche. The total amount to be expensed is determined by reference to the fair value of the options granted excluding the impact of any service and non-market performance vesting conditions. When the options are exercised, the Company issues new shares. The proceeds received net of any directly attributable transaction costs are credited to share capital and share premium.

As at the grand date, the exercise price of each option was RMB 4.2. During the vesting period, the exercise price would be adjusted according to the declaration of dividends or any changes of total shares.

The total fair value of share options at the grant date was RMB 65,412 thousands, which has been estimated by the Company using Black-Scholes valuation model with the support from an external valuation expert.

The significant inputs into the model were as follows:

	Granting date
Spot share price		RMB 4.51
Exercise price		RMB 4.20
Expected volatility		41.20%
Maturity (years)		5.00
Risk-free interest rate		3.39%~3.67%
Dividend yield		1.00%

The options of first tranche and second tranche were exercised at RMB 3.85 in August 2017 and January 2018. According to the Group’s board resolution on 28 December 2018, the third tranche was not exercised due to the failure on satisfying the non-market exercise conditions.

F-77

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

29 Share-based payments (continued)

Set out below are summaries of options granted under the plan:

	Number of share options 2018
As at 1 January		19,104,500
Exercised during the year		(9,636,900	)
Forfeited during the year		(9,467,600	)
As at 31 December		-

The first tranche of the Share Option Incentive Scheme was exercised at RMB 3.85 per share option on 29 August 2017, and the Company received cash payment of RMB 54,580 thousands from 199 grantees, out of which, RMB 14,177 thousands were in share capital and RMB 40,403 thousands were in reserve as share premium.

The second tranche of the Share Option Incentive Scheme was exercised at RMB 3.85 per share option on 12 January 2018, and the Company received cash payment of RMB 37,102 thousands from 185 grantees, out of which, RMB 9,637 thousands were in share capital (Note 27) and RMB 27,465 thousands were in reserve as share premium (Note 28).

Due to the forfeit of the third tranche of Share Option Incentive Scheme, share option expenses of RMB 13,004 thousands was reversed in Selling and administrative expenses of the consolidated income statement for the year ended 31 December 2018.

As at 31 December 2019 and 31 December 2018, there were no outstanding share options.

F-78

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

30 Related party transactions

The following is a list of the Group’s major related parties:

Names of related parties	Relationship with the Company
Sinopec Group	Ultimate parent company
JYJC	Joint venture of the Group
BOC	Joint venture of the Group
Jinpu	Joint venture of the Group
Yangu Gas	Joint venture of the Group
Azbil	Associate of the Group
Chemical Industry	Associate of the Group
Jinsen	Associate of the Group
Secco	Associate of the Group
Shanghai Carbon Fiber Composites Innovation Research Institute Energy	Associate of the Group
Shanghai Chemical Industry Park Logistics Company Limited	Associate of the Group
Shanghai Jinhuan Petroleum Naphthalene Development Company Limited	Associate of the Group
Shanghai Nam Kwong Petro-Chemical Company Limited	Associate of the Group
Shidian Energy	Associate of the Group
Anqing Refinery Shuguang Oxo Company Limited	Subsidiary of the immediate parent company
BASF Gao-Qiao Performance Chemicals(Shanghai) Company Limited	Subsidiary of the immediate parent company
China International United Petroleum and Chemical Company Limited	Subsidiary of the immediate parent company
China Petrochemical International (Nanjing) Company Limited	Subsidiary of the immediate parent company
China Petrochemical International Beijing Company Limited	Subsidiary of the immediate parent company
China Petrochemical International Ningbo Company Limited	Subsidiary of the immediate parent company
China Petrochemical International Tianjin Company Limited	Subsidiary of the immediate parent company
China Petrochemical International Wuhan Company Limited	Subsidiary of the immediate parent company
China Petrochemical Technology Company Limited	Subsidiary of the immediate parent company
Dalian Frip Science and Technology Company Limited	Subsidiary of the immediate parent company
Epec Commercial Factoring Company Limited	Subsidiary of the immediate parent company
Fujian Gulei Petrochemical Company Limited	Subsidiary of the immediate parent company
Fujian Refining & Petrochemical Company Limited (FREP)	Subsidiary of the immediate parent company
Nanjing Yangzi Petrochemical Rubber Company Limited	Subsidiary of the immediate parent company
Ningbo Eastsea Linefan Technology Company Limited	Subsidiary of the immediate parent company
PetroChina International (Singapore) Pte. Ltd	Subsidiary of the immediate parent company
Petro-CyberWorks Information Technology Company Limited	Subsidiary of the immediate parent company
Qingdao Sinosun Management System Certification Center Company Limited	Subsidiary of the immediate parent company
Shanghai Jinshan Trading Corporation	Subsidiary of the immediate parent company
Shanghai KSD Bulk Solids Engineering Company Limited	Subsidiary of the immediate parent company
Shanghai Leader Catalyst Company Limited	Subsidiary of the immediate parent company
Shengli Oil Field Exploration And Development Research Institute	Subsidiary of the immediate parent company
Sinopec Beijing Research Institute of Chemical Industry	Subsidiary of the immediate parent company
Sinopec Catalyst Company Limited	Subsidiary of the immediate parent company

F-79

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

30 Related party transactions (continued)

Names of related parties	Relationship with the Company
Sinopec Chemical Commercial Holding (Hong Kong) Company Limited	Subsidiary of the immediate parent company
Sinopec Chemical Commercial Holding Company Limited	Subsidiary of the immediate parent company
Sinopec Dalian (Fushun) Research Institute of Petroleum and Petrochemicals	Subsidiary of the immediate parent company
Sinopec Europe Company Limited	Subsidiary of the immediate parent company
Sinopec Group Beijing Yanshan Petrochemical Company Limited	Subsidiary of the immediate parent company
Sinopec Honeywell(Tianjin) Company Limited	Subsidiary of the immediate parent company
Sinopec Japan Company Limited	Subsidiary of the immediate parent company
Sinopec Lubricating Oil Shanghai Research Institute Company Limited	Subsidiary of the immediate parent company
Sinopec Materials & Equipment (East China) Company Limited	Subsidiary of the immediate parent company
Sinopec Refinery Product Sales Company Limited	Subsidiary of the immediate parent company
Sinopec Research Institute of Petroleum Processing	Subsidiary of the immediate parent company
Sinopec Safety Engineering Institute	Subsidiary of the immediate parent company
Sinopec Shanghai Research Institute of Petrochemical Technology	Subsidiary of the immediate parent company
Sinopec Shanghai Gaoqiao Petrochemical Company Limited	Subsidiary of the immediate parent company
Sinopec Yangzi Petrochemical Company Limited	Subsidiary of the immediate parent company
Sinopec Yizheng Chemical Fibre Company Limited	Subsidiary of the immediate parent company
Sinopec International Company Limited	Subsidiary of the immediate parent company
Sinopec Nanjing valve supply reserve centers	Subsidiary of the immediate parent company
Sinopec Qingdao Refining&Chemical Company Limited	Subsidiary of the immediate parent company
Storage And Transportation Installation Company of Ningbo Engineering Company Limited	Subsidiary of the immediate parent company
Unipec (Ningbo) International Logistics Company Limited	Subsidiary of the immediate parent company
Unipec America, Inc	Subsidiary of the immediate parent company
Unipec Singapore	Subsidiary of the immediate parent company
Zhoushan Shihua Crude Oil Terminal Company Limited	Subsidiary of the immediate parent company
BASF-YPC Company Limited	Joint venture of the immediate parent company
Zhejiang Baling Hengyi Caprolactam Limited Company	Joint venture of the immediate parent company
Beijing Petrochemical Engineering Consulting Company Limited	Subsidiary of the ultimate parent company
Beijing Shihua Hotel	Subsidiary of the ultimate parent company
Beijing Victory Hotel Company Limited	Subsidiary of the ultimate parent company
China Petrochemical Press Company Limited	Subsidiary of the ultimate parent company
Jiangsu Jinling Opta Polymer Company Limited	Subsidiary of the ultimate parent company
National Petrochemical Project Risk Assessment Technology Center	Subsidiary of the ultimate parent company
Petrochemical Engineering Quality Supervision Centre	Subsidiary of the ultimate parent company
Shanghai Petrochemical Machinery Manufacture Limited Company	Subsidiary of the ultimate parent company
Shanghai Petrochemical Seawall Management Office	Subsidiary of the ultimate parent company
Shanghai Sanopec Company Limited	Subsidiary of the ultimate parent company
Sinopec Assets Management Corporation	Subsidiary of the ultimate parent company

F-80

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

30 Related party transactions (continued)

Names of related parties	Relationship with the Company
Sinopec Consulting Company Limited	Subsidiary of the ultimate parent company
Sinopec Economics & Development Research Institute	Subsidiary of the ultimate parent company
Sinopec Energy Saving Technology Service Company Limited	Subsidiary of the ultimate parent company
Sinopec Engineering Incorporation	Subsidiary of the ultimate parent company
Sinopec Finance	Subsidiary of the ultimate parent company
Sinopec Group Shanghai Training Center	Subsidiary of the ultimate parent company
Sinopec International Travel Service Company Limited	Subsidiary of the ultimate parent company
Sinopec Luoyang Engineering Company Limited	Subsidiary of the ultimate parent company
Sinopec Management Institute	Subsidiary of the ultimate parent company
Sinopec Nanjing Chemical Industries Company Limited	Subsidiary of the ultimate parent company
Sinopec Nanjing Engineering Company Limited	Subsidiary of the ultimate parent company
Sinopec News	Subsidiary of the ultimate parent company
Sinopec Ningbo Engineering Company Limited	Subsidiary of the ultimate parent company
Sinopec Petroleum Commercial Reserve Company Limited	Subsidiary of the ultimate parent company
Sinopec Shanghai Engineering Company Limited	Subsidiary of the ultimate parent company
Sinopec Shared Services Company Limited	Subsidiary of the ultimate parent company
Sinopec Tendering Company Limited	Subsidiary of the ultimate parent company
Sinopec Zhongyuan Oilfield	Subsidiary of the ultimate parent company
Sinopec (Shenzhen) E-Commerce Company Limited	Subsidiary of the ultimate parent company
The Fifth Construction Company of Sinopec	Subsidiary of the ultimate parent company
The Fourth Construction Company of Sinopec	Subsidiary of the ultimate parent company
The Tenth Construction Company of Sinopec	Subsidiary of the ultimate parent company
Yihua Tory Polyester Film Company Limited	Subsidiary of the ultimate parent company

F-81

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

30 Related party transactions (continued)

The following is a summary of significant balances and transactions between the Group and its related parties except for the dividends received as disclosed in the forgoing Note 23.

(a) Most of the transactions undertaken by the Group during the year ended 31 December 2019 have been affected on such terms as determined by Sinopec Corp. and relevant PRC authorities.

Sinopec Corp. negotiates and agrees the terms of crude oil supply with suppliers on a group basis, which is then allocated among its subsidiaries, including the Group, on a discretionary basis. Sinopec Corp. also owns a widespread petroleum products sales network and possesses a fairly high market share in domestic petroleum products market, which is subject to extensive regulation by the PRC government.

The Group has entered into a mutual product supply and sales services framework agreement with Sinopec Corp. Pursuant to the agreement, Sinopec Corp. provides the Group with crude oil, other petrochemical raw materials and agent services. On the other hand, the Group provides Sinopec Corp. with petroleum products, petrochemical products and property leasing services.

The pricing policy for these services and products provided under the agreement is as follows:

If there are applicable State (central and local government) tariffs, the pricing shall follow the State tariffs;

If there are no State tariffs, but there are applicable State’s guidance prices, the pricing shall follow the State’s guidance prices; or

If there are no State tariffs or State’s guidance prices, the pricing shall be determined in accordance with the prevailing market prices (including any bidding prices).

Transactions between the Group and Sinopec Corp., its subsidiaries and joint ventures were as follows:

	2017		2018		2019
	RMB’000		RMB’000		RMB’000
Sales of petroleum products		39,992,682		49,209,765		50,354,162
Sales other than petroleum products		6,708,955		7,112,332		8,642,514
Purchases of crude oil		34,819,936		44,175,644		43,886,966
Purchases other than crude oil		4,987,955		8,996,814		9,579,239
Sales commissions		116,616		139,837		125,619
Rental income		28,368		29,551		31,972

F-82

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

30 Related party transactions (continued)

(b) Other transactions between the Group and Sinopec Group and its subsidiaries, associates and joint ventures of the Group were as follows:

	2017		2018		2019
	RMB’000		RMB’000		RMB’000
Sales of goods and service fee income
- Sinopec Group and its subsidiaries		10,531		11,486		7,724
- Associates and joint ventures of the Group		3,043,689		4,130,295		2,843,909
		3,054,220		4,141,781		2,851,633
Purchase
- Sinopec Group and its subsidiaries		378,111		2,253,446		1,918,873
- Associates and joint ventures of the Group		4,034,448		3,982,729		4,579,969
		4,412,559		6,236,175		6,498,842
Insurance premiums expenses
- Sinopec Group and its subsidiaries		126,405		121,329		108,223
Lease expenses
- Sinopec Group and its subsidiaries		53,960		59,160		-
Depreciation of right-of-use assets
- Sinopec Group and its subsidiaries		—		—		80,552
- Joint ventures of the Group		—		—		88
		—		—		80,640
Interest expense of lease liabilities
- Sinopec Group and its subsidiaries		—		—		2,285
- Joint ventures of the Group		—		—		19
		—		—		2,304
Loans borrowed
- Sinopec Finance		-		50,000		-
Interest income
- Sinopec Finance		5,147		610		1,295
Loans repayment
- Sinopec Finance		-		50,000		-
Interest expense
- Sinopec Finance		-		1,326		-
Construction and installation cost
- Sinopec Group and its subsidiaries		172,404		109,146		143,560
Rental income
- Associates and joint ventures of the Group		-		-		11,370
- Sinopec Group and its subsidiaries		-		-		461
		-		-		11,831

F-83

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

30 Related party transactions (continued)

(b) Other transactions between the Group and Sinopec Group and its subsidiaries, associates and joint ventures of the Group were as follows (continued):

The directors of the Company are of the opinion that the transactions with Sinopec Corp., its subsidiaries and joint ventures, Sinopec Group and its subsidiaries, associates and joint ventures of the Group as disclosed in Note 30(a) and 30(b) were conducted in the ordinary course of business, on normal commercial terms and in accordance with the agreements governing such transactions.

(c) The relevant amounts due from/to Sinopec Corp., its subsidiaries and joint venture, Sinopec Group and its subsidiaries, associates and joint ventures of the Group, arising from purchases, sales and other transactions as disclosed in Note 30(a) and 30(b), are summarized as follows:

	As at 31 December
	2018		2019
	RMB’000		RMB’000
Amounts due from related parties
- Sinopec Corp., its subsidiaries and joint ventures		2,142,731		1,505,836
- Sinopec Group and its subsidiaries		457		-
- Associates and joint ventures of the Group		143,061		60,157
		2,286,249		1,565,993
Amounts due to related parties
- Sinopec Corp., its subsidiaries and joint ventures		4,238,963		4,756,382
- Associates and joint ventures of the Group		283,717		749,459
- Sinopec Group and its subsidiaries		45,134		202,553
		4,567,814		5,708,394
Lease liabilities
- Sinopec Group and its subsidiaries		—		15,571
- Joint ventures of the Group		—		698
		—		16,269
Cash deposits, maturing within 3 months
- Sinopec Finance		22,082		67,015

(d) As at 31 December 2019 and 31 December 2018, cash deposits with Sinopec Finance were at an interest rate of 0.35% per annum.

(e) Key management personnel compensation and post-employment benefit plans

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 personnel compensations are as follows:

	Year ended 31 December
	2017		2018		2019
	RMB’000		RMB’000		RMB’000
Short-term employee benefits		5,926		7,561		9,120
Post-employment benefits		143		159		225
Share-based payments		505		-		-
		6,574		7,720		9,345

F-84

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

30 Related party transactions (continued)

(f) Contributions to defined contribution retirement plans

The Group participates in defined contribution retirement plans organized by municipal governments for its staff. The contributions to defined contribution retirement plans are as follows:

	Year ended 31 December
	2017		2018		2019
	RMB’000		RMB’000		RMB’000
Municipal retirement scheme costs		249,578		262,728		258,328
Supplementary retirement scheme costs		66,546		75,312		125,370

As at 31 December 2019 and 31 December 2018, there was no material outstanding contribution to the above defined contribution retirement plans.

(g) Transactions with other state-owned entities in the PRC

The Group is a state-controlled enterprise and operates in an economic regime currently dominated by entities directly or indirectly controlled by the PRC government (collectively referred to as “state-controlled entities”) through its government authorities, agencies, affiliations and other organizations.

Apart from transactions with related parties, the Group has transactions with other state-controlled entities which include, but are not limited to, the following:

• sales and purchases of goods and ancillary materials;

• rendering and receiving services;

• lease of assets, purchase of property, plant and equipment;

• placing deposits and obtaining finance; and

• 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.

F-85

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

30 Related party transactions (continued)

(h) Commitments with related parties

Construction and installation cost

	As at 31 December
	2018		2019
	RMB’000		RMB’000
Sinopec Group and its subsidiaries		16,011		156,309

(i) Investment commitments with related parties

	As at 31 December
	2018		2019
	RMB’000		RMB’000
Capital contribution to Shanghai Secco (i)		111,263		111,263
Capital contribution to Shidian Energy (ii)		-		80,000
		111,263		191,263

(i) Pursuant to the resolution of the 18th meeting of the 7th term of Board of Directors on 5 December 2013, the Group was approved to make capital contribution of USD 30,017 thousands (RMB 182,804 thousands equivalent) to Shanghai Secco, an associate of the Group. As at 31 December 2019, the Company has contributed RMB 71,541 thousands to Shanghai Secco. According to the approval by Shanghai Municipal Commission of Commerce as issued on 19 October 2015, the rest of the capital contribution to Shanghai Secco should be within 50 years starting from its registration date.

(ii) Pursuant to the articles of association of Shidian Energy in August 2019, Toufa agreed to make capital contribution of RMB 400,000 thousands to acquire 40% share of Shidian Energy. As at 31 December 2019, Toufa has contributed RMB 320,000 thousands to Shidian Energy, and the rest of the capital contribution to Shidian Energy should be paid before January 2022 in accordance with the agreement.

Except for the above disclosed in Note 30(h) and 30(i), the Group had no other material commitments with related parties as at 31 December 2019, which are contracted, but not included in the financial statements.

31 Dividend

An annual dividend in respect of the year ended 31 December 2019 of RMB 0.12 per share, amounting to a total dividend of RMB 1,298,858 thousands, was approved by the Board of Directors on 25 March 2020. This financial statement has not reflected such dividend payable.

An annual dividend in respect of the year ended 31 December 2018 of RMB 0.25 per share, amounting to a total dividend of RMB 2,705,952 thousands, was approved by the Board of Directors on 19 March 2019.

F-86

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

32 Cash generated from operations

Reconciliation of profit before income tax to cash used in operation:

	Year ended 31 December
	2017			2018			2019
	RMB’000			RMB’000			RMB’000
Profit before income tax		7,852,898			6,808,121			2,656,128
Adjustment items:
Interest income		(268,379	)		(443,661	)		(398,176	)
Share of profit of investments accounted for using the equity method		(1,243,693	)		(885,597	)		(972,593	)
Gains on disposal of joint venture		(10,339	)		-			-
(Gains)/losses on disposal of subsidiary		-			(1,622	)		60,951
Fair value losses/(gains) of foreign exchange option and forward exchange contracts		1,516			2,021			(3,001	)
Gains from structured deposits		-			(19,811	)		(85,444	)
Payments for sale of financial assets at fair value through other comprehensive income		-			-			19,513
Interest expense		17,259			35,574			53,784
Foreign exchange losses/(gains)		7,091			18,034			(18,571	)
Depreciation of property, plant and equipment		1,574,842			1,550,924			1,507,804
Depreciation of investment property		13,652			14,527			14,694
Depreciation of right-of-use assets		—			—			101,998
Amortization of lease prepayments and other non-current assets		245,635			242,162			214,292
Impairment loss on property, plant, equipment and construction in progress		118,179			82,652			486
Losses/(gains) on disposal of property, plant and equipment and other long-term assets—net		13,017			(172,508	)		(158,551	)
Gains on exercise of foreign exchange option		-			(6,411	)		(1,155	)
Net (losses)/gains on settlement of foreign exchange contracts		-			(10,129	)		16,471
Share-based payment		11,276			(13,004	)		-
Profit on operation before change of working capital		8,332,954			7,201,272			3,008,630
(Increase)/decrease in inventories		(438,125	)		(1,523,277	)		1,366,441
Increase in operation receivables		(116,580	)		(469,339	)		(92,354	)
Increase/(decrease) in operation payables		1,003,653			2,767,557			(487,877	)
Increase in balances to related parties—net		2,594			525,286			1,860,836
Cash generated from operating activities		8,784,496			8,501,499			5,655,676

F-87

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

32 Cash generated from operations (continued)

(a) Reconciliation of liabilities arising from financing activities

	As at 1 January 2018	Financing cash flows			Foreign exchange movements		As at 31 December 2018
	RMB’000	RMB’000			RMB’000		RMB’000
Bank loans	606,157		(109,398	)		490		497,249

	As at 1 January 2019		Financing cash flows			Addition of lease liabilities		Foreign exchange movements			As at 31 December 2019
	RMB’000		RMB’000			RMB’000		RMB’000			RMB’000
Bank loans		497,249		1,059,892			-		(9,541	)		1,547,600
Lease liabilities		76,731		(89,124	)		34,436		-			22,043

(b) In the statement of cash flows, proceeds from sale of property, plant and equipment comprise:

	2017			2018		2019
	RMB’000			RMB’000		RMB’000
Net book amount		16,424			37,614		23,113
(Losses)/gains on disposal of property, plant and equipment — net		(13,017	)		172,508		44,390
Net proceeds from disposal of property, plant and equipment		3,407			210,122		67,503

(c) Non-cash investing activities

	2017		2018		2019
	RMB’000		RMB’000		RMB’000
Purchase of non-current assets settled by bills		-		50,110		73,812

33 Commitments

Capital commitments

	As at 31 December
	2018		2019
	RMB’000		RMB’000
Property, plant and equipment
Contracted but not provided for		69,210		247,220

F-88

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

34 Subsequent event

A dividend in respect of the year ended 31 December 2019 of RMB 0.12 per share, amounting to a total dividend of RMB 1,298,858 thousands, was proposed by the Board of Directors on 25 March 2020.

Following the outbreak of Coronavirus Disease 2019 (“the COVID-19 outbreak”) in early 2020, a series of precautionary and control measures have been and continued to be implemented across the country, including extension of the Chinese New Year holiday nationwide, postponement of work resumption after the Chinese New Year holiday in some regions, certain level of restrictions and controls over the travelling of people and traffic arrangements, quarantine of certain residents, heightening of hygiene and epidemic prevention requirements in factories and offices and encouraged social distancing.

Due to the outbreak of COVID-19 and the relevant precautionary and control measures taken place, the resumption of business by the Group’s customers has been delayed, which has resulted in the refinery processing volumes of the Group up to date of this report dropped compared with same period of prior year. Due to the failure to reach an agreement to reduce production by Petroleum Production Reduction Alliance, coupled with the unfavorable outlook of the world economy affected by the COVID-19, international crude oil prices have fallen sharply. The decline in international crude oil prices has adversely affected the Group’s revenue and profits, resulted in the Group making losses for the three-month period ended 31 March 2020.

The Group will pay sustained attention to the follow-up status of COVID-19 outbreak and future fluctuation of global crude oil price, and take corresponding measures to further assess the impact on financial position and operating result.

F-89

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

35 Balance sheet and reserve movement of the Company

	As at 31 December
	2018		2019
	RMB’000		RMB’000
Assets
Non-current assets
Lease prepayments and other non-current assets		813,119		455,391
Property, plant and equipment		11,435,270		11,101,389
Right-of-use assets		—		319,434
Investment properties		408,366		397,573
Construction in progress		1,559,401		1,814,985
Investments in subsidiaries		1,718,007		1,848,328
Investments in associates		3,869,433		4,476,683
Deferred income tax assets		109,137		138,648
Time deposits with banks		-		3,511,234
		19,912,733		24,063,665
Current assets
Inventories		7,500,683		6,368,389
Financial assets at fair value through other comprehensive income		714,599		669,889
Financial assets at fair value through profit or loss		2,526,053		3,318,407
Trade receivables		170,205		2,114
Other receivables		92,999		12,627
Prepayments		1,862		3,099
Amounts due from related parties		1,953,459		1,354,793
Cash and cash equivalents		7,619,013		5,754,440
Time deposits with banks		1,500,000		1,508,839
		22,078,873		18,992,597
Total assets		41,991,606		43,056,262
Equity and liabilities
Equity attributable to owners of the Company
Share capital		10,823,814		10,823,814
Reserves (a)		19,318,245		18,620,152
Total equity		30,142,059		29,443,966

F-90

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

35 Balance sheet and reserve movement of the Company (continued)

	As at 31 December
	2018		2019
	RMB’000		RMB’000
Liabilities
Non-current liabilities
Deferred income		10,442		10,005
Lease liabilities		—		8,860
		10,442		18,865
Current liabilities
Borrowings		431,649		1,500,000
Lease liabilities		—		10,059
Financial liabilities at fair value through profit or loss		9,799		-
Contract liabilities		403,967		597,688
Bills payables		-		655,000
Trade payables and other payables		6,388,081		5,508,265
Amounts due to related parties		4,310,659		5,104,639
Income tax payable		294,950		217,780
		11,839,105		13,593,431
Total liabilities		11,849,547		13,612,296
Total equity and liabilities		41,991,606		43,056,262

The balance sheet of the Company was approved by the Board of Directors on 28 April 2020 and were signed on its behalf.

Wu Haijun	Zhou Meiyun
Chairman	Director, Vice General Manager and Chief Financial Officer

F-91

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

35 Balance sheet and reserve movement of the Company (continued)

(a) Reserve movement of the Company

	Legal Surplus RMB’000		Capital surplus RMB’000		Surplus reserve RMB’000		Other reserve RMB’000			Share premium RMB’000		Safety production fund RMB’000		Retained earnings RMB’000			Total RMB’000
Balance at 1 January 2018		4,072,476		4,180		101,355		47,469			62,319		-		13,115,540			17,403,339
Net profit attributable to shareholders of the Company		-		-		-		-			-		-		5,154,603			5,154,603
Dividends proposed and approved		-		-		-		-			-		-		(3,247,144	)		(3,247,144	)
Appropriation of safety production fund		-		-		-		-			-		57,135		(57,135	)		-
Forfeit of share option scheme (Note 29)		-		-		-		(13,004	)		-		-		-			(13,004	)
Exercise of share option		-		-		-		(17,062	)		44,527		-		-			27,465
Share of other comprehensive loss of investments accounted for using the equity method		-		-		-		(7,014	)		-		-		-			(7,014	)
Balance at 31 December 2018		4,072,476		4,180		101,355		10,389			106,846		57,135		14,965,864			19,318,245
Net profit attributable to shareholders of the Company		-		-		-		-			-		-		2,000,410			2,000,410
Dividends proposed and approved		-		-		-		-			-		-		(2,705,952	)		(2,705,952	)
Share of other comprehensive income of investments accounted for using the equity method		-		-		-		7,449			-		-		-			7,449
Balance at 31 December 2019		4,072,476		4,180		101,355		17,838			106,846		57,135		14,260,322			18,620,152

F-92

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

36 Benefits and interests of directors and supervisors

(i) Directors’ and supervisors’ emoluments:

	2017
	Salaries and other benefits		Retirement scheme contributions		Discretionary bonus		Share option		Total
	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000
Executive Directors
Gao Jinping		201		18		540		157		916
Jin Qiang		241		18		470		135		864
Guo Xiaojun		177		18		465		135		795
Wang Zhiqing (a)		184		16		525		-		725
Zhou Meiyun (b)		148		15		125		-		288
Ye Guohua (c)		15		2		13		-		30
Independent non- executive directors
Zhang Yimin		150		-		-		-		150
Liu Yunhong		150		-		-		-		150
Du Weifeng		150		-		-		-		150
Cai Tingji (d)		75		-		-		-		75
Li Yuanqin (e)		63		-		-		-		63
Pan Fei (f)		19		-		-		-		19
Supervisors
Zuo Qiang		128		15		348		-		491
Li Xiaoxia		127		14		313		-		454
Ma Yanhui (g)		63		3		43		-		109
Zheng Yunrui (h)		100		-		-		-		100
Pan Fei(i)		50		-		-		-		50
Cai Tingji (j)		50		-		-		-		50
		2,091		119		2,842		427		5,479

(a) Resigned in November 2017.

(b) Appointed in March 2017.

(c) Resigned in January 2017.

(d) Resigned in June 2017.

(e) Appointed in July 2017.

(f) Appointed in July 2017 and resigned in August 2017.

(g) Appointed in October 2017.

(h) Appointed in January 2017.

(i) Appointed in January 2017 and resigned in June 2017.

(j) Appointed in July 2017.

F-93

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

36 Benefits and interests of directors and supervisors (continued)

(i) Directors’ and supervisors’ emoluments (continued):

	2018
	Salaries and other benefits		Retirement scheme contributions		Discretionary bonus		Fees		Total
	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000
Executive Directors
Wu Haijun (a)		393		19		910		-		1,322
Shi Wei (b)		84		6		58		-		148
Jin Qiang		226		19		523		-		768
Guo Xiaojun		216		19		518		-		753
Zhou Meiyun		185		19		498		-		702
Jin Wenmin (c)		187		19		528		-		734
Gao Jinping (d)		215		12		549		-		776
Independent non- executive directors
Zhang Yimin		-		-		-		150		150
Liu Yunhong		-		-		-		150		150
Du Weifeng		-		-		-		150		150
Li Yuanqin		-		-		-		150		150
Supervisors
Ma Yanhui		274		14		288		-		576
Zuo Qiang		135		17		411		-		563
Li Xiaoxia		143		16		418		-		577
Zheng Yunrui		100		-		-		-		100
Cai Tingji		100		-		-		-		100
		2,258		160		4,701		600		7,719

(a) Resigned general manager in September 2018 while other titles remained.

(b) Appointed in September 2018.

(c) Appointed in June 2018.

(d) Resigned in September 2018.

F-94

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

36 Benefits and interests of directors and supervisors (continued)

(i) Directors’ and supervisors’ emoluments (continued):

	2019
	Salaries and other benefits		Retirement scheme contributions		Discretionary bonus		Fees		Total
	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000
Executive Directors
Wu Haijun		343		26		557		-		926
Shi Wei (a)		329		26		797		-		1,152
Jin Qiang		289		26		745		-		1,060
Guo Xiaojun (b)		283		26		751		-		1,060
Zhou Meiyun		248		26		709		-		983
Jin Wenmin		260		26		721		-		1,007
Independent non- executive directors
Zhang Yimin		-		-		-		150		150
Liu Yunhong		-		-		-		150		150
Du Weifeng		-		-		-		150		150
Li Yuanqin		-		-		-		150		150
Supervisors
Ma Yanhui		267		22		685		-		974
Zuo Qiang (c)		102		15		324		-		441
Li Xiaoxia (d)		102		14		529		-		645
Zhang Feng (e)		31		9		107		-		147
Chen Hongjun (f)		34		9		110		-		153
Zheng Yunrui		100		-		-		-		100
Cai Yanji		100		-		-		-		100
		2,488		225		6,035		600		9,348

(a) Resigned in December 2019.

(b) Resigned in December 2019.

(c) Resigned in September 2019.

(d) Resigned in September 2019.

(e) Appointed in October 2019.

(f) Appointed in October 2019.

F-95

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2019

36 Benefits and interests of directors and supervisors (continued)

(ii) Directors’ retirement benefits

No specific retirement benefits were paid to directors in respect of services in connection with the management of the affairs of the company or its subsidiary undertaking (2018 and 2017: Nil).

(iii) Directors’ material interests in transactions, arrangements or contracts

No significant transactions, arrangements and contracts in relation to the Group’s business to which the Company was a party and in which a director of the Company had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year.

F-96