SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of
The Securities Exchange Act of 1934
For the month of November, 2005
CHINA PETROLEUM & CHEMICAL CORPORATION
A6, Huixindong Street,
Chaoyang District Beijing, 100029
People's Republic of China
Tel: (8610) 6499-0060
(Indicate by check mark whether the registrant files or will file
annual reports under cover of Form 20-F or Form 40-F.)
Form 20-F ___X___ Form 40-F _____
(Indicate by check mark whether the registrant by furnishing the
information contained in this form is also thereby furnishing the information
to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act
of 1934. )
Yes ____ No ___X___
(If "Yes" is marked, indicate below the file number assigned to
registrant in connection with Rule 12g3-2(b): 82-__________. )
N/A
This Form 6-K consists of:
The announcement on proposed privatization of Sinopec Zhenhai Refining &
Chemical Company Limited ("ZRCC") by China Petroleum & Chemical Corporation
(the "Registrant") through Ningbo Yonglian and amendment of articles of
association of ZRCC, jointly made by the Registrant and ZRCC in English on
November 28, 2005.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
China Petroleum & Chemical Corporation
By: /s/ Chen Ge
Name: Chen Ge
Title: Secretary to the Board of Directors
Date: November 28, 2005
-------------------------------------------------------------------------------
THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION
-------------------------------------------------------------------------------
If you are in any doubt as to any aspect of this document, you should consult a
licensed securities dealer, a bank manager, solicitor, professional accountant
or other professional adviser.
If you have sold or transferred all your shares in ZRCC, you should at once
hand this document and the accompanying form of proxy to the purchaser or
transferee or to the bank, licensed securities dealer or other agent through
whom the sale or transfer was effected for transmission to the purchaser or
transferee.
The Stock Exchange of Hong Kong Limited takes no responsibility for the
contents of this document, makes no representation as to its accuracy or
completeness and expressly disclaims any liability whatsoever for any loss
howsoever arising from or in reliance upon the whole or any part of the
contents of this document.
PROPOSED PRIVATISATION OF
[ZRCC GRAPHIC OMITTED]
[CHINESE CHARACTERS OMITTED]
SINOPEC ZHENHAI REFINING & CHEMICAL COMPANY LIMITED
(a joint stock limited company incorporated in the People's Republic of China)
(Stock code: 1128)
BY
[SINOPEC GRAPHIC OMITTED]
[CHINESE CHARACTERS OMITTED]
(a joint stock limited company incorporated in the
People's Republic of China with limited liability)
(Stock code: 0386)
THROUGH NINGBO YONGLIAN BY WAY OF MERGER BY
ABSORPTION OF ZRCC UNDER
ARTICLE 184 OF THE PRC COMPANY LAW
AT THE CANCELLATION PRICE OF HK$10.60 PER ZRCC H SHARE
AND
AMENDMENT OF ZRCC ARTICLES OF ASSOCIATION
Financial adviser to Sinopec Corp.
[CICC GRAPHIC OMITTED]
CHINA INTERNATIONAL CAPITAL
CORPORATION (HONG KONG) LIMITED
Financial adviser to ZRCC[
LEHMAN BROTHERS
LEHMAN BROTHERS ASIA LIMITED
Independent financial adviser to the
Independent Board Committee of ZRCC
[ROTHSCHILD GRAPHIC OMITTED]
________________________________________________________________________________
This document is issued jointly by Sinopec Corp. and ZRCC to the ZRCC
Shareholders. A letter from the ZRCC Board is set out on pages 6 to 17 of this
document. A summary of the Proposal (as defined herein) is set out on pages 8
to 11 of this document. A letter from the Independent Board Committee
containing its advice to the Independent ZRCC Shareholders in relation to the
Proposal is set out on pages 18 to 19 of this document. A letter from the
independent financial adviser containing its advice to the ZRCC Independent
Board Committee in relation to the Proposal is set out on pages 20 to 47 of
this document.
Notices convening the Special General Meeting and the Special General Meeting
of the Independent ZRCC Shareholders as required by (i) the relevant PRC laws
and (ii) the Takeovers Code and the Listing Rules for approving the Proposal
and the Merger Agreement and the Proposed Amendment to be held at the
conference room on the 1st Floor, Donghai Hotel at Zhenhai District, Ningbo
Municipality, Zhejiang Province, the People's Republic of China at 9:30 a.m.
and 10:30 a.m. on Thursday, 12 January, 2006 respectively are set out in
Appendices III and IV of this document. Whether or not you are able to attend
such meetings, you are requested to complete and return the enclosed proxy
forms in accordance with the instructions printed thereon as soon as possible
and in any event not less than 24 hours before the time appointed for holding
such meetings.
28 November, 2005
-------------------------------------------------------------------------------
CONTENT
-------------------------------------------------------------------------------
Page
EXPECTED TIMETABLE .........................................................iii
DEFINITIONS ..................................................................1
LETTER FROM THE BOARD OF ZRCC ................................................6
LETTER FROM THE INDEPENDENT BOARD COMMITTEE .................................18
LETTER FROM ROTHSCHILD ......................................................20
ADDITIONAL INFORMATION REGARDING THE MERGER .................................48
GENERAL ...............................................................48
BACKGROUND OF THE MERGER ..............................................48
SOURCE OF FUNDS FOR THE PAYMENT OF MERGER CONSIDERATION ...............48
STRATEGIC REASONS FOR THE MERGER ......................................49
RECENT ZRCC H SHARE TRADED SHARE PRICE AND LIQUIDITY ..................49
INFORMATION ON ZRCC ...................................................50
INFORMATION ON SINOPEC CORP. ..........................................53
INFORMATION ON NINGBO YONGLIAN ........................................54
FUTURE INTENTIONS OF SINOPEC CORP. ....................................54
SHARE CERTIFICATES, DEALINGS AND LISTING ..............................55
REGISTRATION AND PAYMENT ..............................................55
OVERSEAS ZRCC SHAREHOLDERS ............................................56
SPECIAL GENERAL MEETINGS ..............................................56
ACTION TO BE TAKEN BY THE INDEPENDENT ZRCC SHAREHOLDERS AND
THE ZRCC SHAREHOLDERS ................................................56
TAXATION ..............................................................57
FURTHER INFORMATION ...................................................57
CERTAIN PROVISIONS OF THE MERGER AGREEMENT ..................................58
INTRODUCTION ..........................................................58
DELISTING AND EFFECTIVE DATE OF THE MERGER ............................58
MERGER CONSIDERATION ..................................................58
DISSENTING ZRCC SHARES ................................................58
PAYMENT OF THE MERGER CONSIDERATION ...................................59
REPRESENTATIONS AND WARRANTIES ........................................59
CONDITIONS TO THE COMPLETION OF THE MERGER ............................61
DELISTING AND DE-REGISTRATION OF ZRCC .................................63
CONVERSION OF ZRCC DOMESTIC SHARES ....................................63
TERMINATION OF THE MERGER .............................................64
EXPENSES ..............................................................64
CONDUCT OF BUSINESS BY ZRCC ...........................................65
AMENDMENTS, MODIFICATIONS AND WAIVER .................................66
NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES ........................67
INDEMNIFICATION .......................................................67
APPENDIX I - FINANCIAL INFORMATION .................................68
APPENDIX II - GENERAL INFORMATION...................................127
APPENDIX III - NOTICE OF SPECIAL GENERAL MEETING.....................135
APPENDIX IV - NOTICE OF SPECIAL GENERAL MEETING OF
THE INDEPENDENT ZRCC SHAREHOLDERS ....................138
-------------------------------------------------------------------------------
EXPECTED TIMETABLE
-------------------------------------------------------------------------------
Latest time for lodging transfers of the ZRCC
H Shares in order to be entitled to attend
and vote at the Special General Meeting and
the Special General Meeting of the
Independent ZRCC Shareholders......................................4:00 p.m. on
Friday, 9 December, 2005
Closure of the Registers for the
determination of entitlements of the
Independent ZRCC Shareholders to attend and
vote at the Special General Meeting of the
Independent ZRCC Shareholders and of the ZRCC
Shareholders to attend and vote at the
Special General Meeting............................Monday, 12 December, 2005 to
Thursday, 12 January, 2006
Latest time for receiving reply slips for the
Special General Meeting and Special General
Meeting of the Independent ZRCC Shareholders(1)......Thursday, 22 December, 2005
Latest time for lodging forms of proxy in respect
of the Special General Meeting.......................................9:30a.m. on
Wednesday, 11 January, 2006
Latest time for lodging forms of proxy in
respect of the Special General Meeting of the
Independent ZRCC Shareholders.....................................10:30a.m. on
Wednesday, 11 January, 2006
Suspension of dealings in ZRCC H Shares.............................9:30 a.m. on
Thursday, 12 January, 2006
Special General Meeting.............................................9:30 a.m. on
Thursday, 12 January, 2006
Special General Meeting of the Independent ZRCC Shareholders......10:30 a.m. on
Thursday, 12 January, 2006
Press announcements of the results of the
Special General Meetings in the South China
Morning Post and Hong Kong Economic Times .............Friday, 13 January, 2006
Resumption of dealings in ZRCC H Shares ............................9:30a.m. on
Friday, 13 January, 2006
Each of ZRCC and Ningbo Yonglian notifies its
creditors of the Proposal pursuant to the PRC
Company Law ...........................................Friday, 13 January, 2006
End of the period during which creditors may
request ZRCC and Ningbo Yonglian to pay off
their respective indebtedness(2) ........................Friday, 14 April, 2006
Expected date for all Conditions to be
satisfied (or waived, if applicable), except
for the withdrawal of ZRCC Listing ......................Friday, 14 April, 2006
Application to the Hong Kong Stock Exchange for
withdrawal of ZRCC Listing..............................Tuesday, 18 April, 2006
Press announcement that all Conditions (save
for the withdrawal of ZRCC Listing) are
satisfied (or waived, as applicable),
including the expected date of withdrawal of
the ZRCC Listing, and details regarding the
Record Time and closure of ZRCC's Registers
in the South China Morning Post and
Hong Kong Economic Times. .............................Wednesday, 19 April, 2006
Last day for dealings in ZRCC H Shares.....................Thursday, 4 May, 2006
Suspension of dealings in ZRCC H Shares.............................9:30a.m. on
Monday, 8 May, 2006
Latest time for lodging transfers of ZRCC H
Shares in order to qualify for the Cancellation
Price/Record Time .4:00p.m. on .........................Wednesday, 10 May, 2006
Closure of ZRCC's Registers (until ZRCC's
deregistration occurs) ...................................Thursday, 11 May, 2006
Expected date of withdrawal of ZRCC Listing................Friday, 12 May, 2006
Press announcement that all Conditions are
satisfied (or waived, as applicable) in the
South China Morning Post and Hong Kong
Economic Times..............................................Friday, 12 May, 2006
Cheques for payment of the Cancellation Price
to be despatched on or before .............................Monday, 22 May, 2006
Shareholders should note that this expected timetable is subject to change. In
addition, all the Conditions will have to be fulfilled (or waived, as
applicable) on or before 31 December, 2006 (or such other date as ZRCC and
Ningbo Yonglian may agree). Otherwise, the Merger will lapse. Further
announcements will be made in the event that there are any changes.
1. The late submission of the reply slips for the Special General Meeting and
the Special General Meeting of the Independent ZRCC Shareholders will not
preclude the rights of eligible ZRCC Shareholders to attend and vote at
the respective Special General Meetings.
2. The creditor notice period for ZRCC will be reduced from 90 days to 45
days if ZRCC Shareholders approve the Proposed Amendment (as defined
herein) at the Special General Meeting, and in such event, the expected
time for the fulfillment (or waiver, if applicable) of the Conditions and
the other events that follow, including the payment of the Cancellation
Price, may be changed accordingly.
-------------------------------------------------------------------------------
DEFINITIONS
-------------------------------------------------------------------------------
In this document, unless the context otherwise requires, the following
expressions shall have the following meanings:
"Announcement" the joint announcement dated 12 November,
2005 issued jointly by ZRCC and Sinopec
Corp. relating to the Proposal and
published in the South China Morning Post
and Hong Kong Economic Times on 14
November, 2005
"Authorisations" all necessary authorisations,
registrations, filings rulings, consents,
permissions and approvals in connection
with the Proposal
"Cancellation Price" the cancellation price of HK$10.60
per ZRCC H Share payable in cash by
Ningbo Yonglian to the ZRCC H
Shareholders whose names appear on the
Registers at the Record Time (other than
the Dissenting ZRCC Shareholders), also
referred as "Merger Consideration" in the
Merger Agreement
"CICC" China International Capital Corporation
(Hong Kong) Limited which is licensed for
Type 1 regulated activity (dealing in
securities), Type 4 regulated activity
(advising on securities), Type 6
regulated activity (advising on corporate
finance) and Type 9 regulated activity
(asset management) under the SFO
"Conditions" the conditions to which the Proposal is
subject and "Condition" means any of them
"CPC" China Petrochemical Corporation, a PRC
state-owned enterprise organised in 1998
and the ultimate parent company of
Sinopec Corp., Ningbo Yonglian and ZRCC,
with its legal address at A6 Huixindong
Street, Chaoyang District, Beijing, the
PRC
"CSRC" China Securities Regulatory Commission
"Delisting Date" the date on which the withdrawal of ZRCC
Listing at the Hong Kong Stock Exchange
has become effective
"Disclosure Period" the period beginning six months
prior to the date of the Announcement and
ending with the Latest Practicable Date,
both dates inclusive
"Dissenting ZRCC Shareholders" any ZRCC Shareholder
who has voted against the Proposal and
requested ZRCC and/or other ZRCC
Sharheolders who have voted for the
Proposal to purchase their Dissenting
ZRCC Shares at a "fair price" in
accordance with Article 178 of the ZRCC
Articles and as of the Record Time has
neither effectively withdrawn nor lost
his right thereto
"Dissenting ZRCC Shares" the ZRCC Shares held by the Dissenting
ZRCC Shareholders
"Effective Date" the date all the Conditions are fulfilled
(unless waived, as applicable) and the
de-registration of ZRCC is completed
"HK$" Hong Kong dollars, the lawful currency of
Hong Kong
"Hong Kong" the Hong Kong Special Administrative
Region of the PRC
"Hong Kong Stock Exchange" The Stock Exchange of Hong Kong Limited
"IFRS" International Financial Reporting
Standards
"Independent Board Committee" an independent committee of the ZRCC
Board comprising all of the independent
non-executive ZRCC Directors, being Ms.
Qiu Yun, Messrs. Sun Yongsen, Cen Kefa
and Li Linghong
"Independent ZRCC Shareholders" ZRCC Shareholders other than Sinopec
Corp. and parties acting in concert with
Sinopec Corp.
"Independent Financial Adviser" Rothschild, the independent financial
adviser to the Independent Board
Committee appointed pursuant to Rule 2.1
of the Takeovers Code in connection with
the Proposal
"Latest Practicable Date" 25 November, 2005, being the latest
practicable date prior to the issue of
this document for the purpose of
ascertaining certain information
contained in this document
"Lehman Brothers" Lehman Brothers Asia Limited, a company
incorporated in Hong Kong, is licensed
for Type 1 regulated activity (dealing in
securities), Type 2 regulated activity
(dealing in futures contracts), Type 4
regulated activity (advising on
securities) and Type 6 regulated activity
(advising on corporate finance) under the
SFO
"Listing Rules" the Rules Governing the Listing of
Securities on The Stock Exchange of Hong
Kong Limited (as amended from time to
time)
"London Stock Exchange" London Stock Exchange plc
"Merger" the proposed merger by absorption of ZRCC
by Ningbo Yonglian
"Merger Agreement" the agreement entered into between Ningbo
Yonglian and ZRCC on 12 November, 2005 in
relation to the Merger
"NAV" net asset value
"New York Stock Exchange" New York Stock Exchange, Inc.
"Ningbo SAIC" the Administration of Industry and
Commerce of Ningbo
"Ningbo Yonglian" Ningbo Yonglian Petrochemical Co., Ltd.,
a limited liability company established
on 3 November, 2005 in the PRC and a
wholly owned subsidiary of Sinopec Corp.
"Ningbo Yonglian Board" the board of Ningbo Yonglian Directors
"Ningbo Yonglian Director(s)" director(s) of Ningbo Yonglian
"Overseas ZRCC Shareholders" ZRCC Shareholders who are not resident
in Hong Kong
"PRC" the People's Republic of China
"PRC Approvals" the approvals from the
relevant PRC governmental and regulatory
bodies (including approvals of, inter
alia, SASAC and CSRC (if applicable))
"PRC Company Law" the Company Law of the PRC, as amended,
supplemented or otherwise modified from
time to time
"Proposal" the proposal for the privatisation of
ZRCC by Sinopec Corp. through Ningbo
Yonglian by way of merger by absorption
of ZRCC by Ningbo Yonglian pursuant to
Article 184 of the PRC Company Law
"Proposed Amendment" the proposed amendment of
article 179 of the ZRCC Articles to
reduce the period within which a creditor
may claim against a company in a merger
from 90 days to 45 days from the date the
company announces its merger after the
merger is approved by its shareholders
"Record Time" the record time for determination
of the entitlement of the ZRCC H
Shareholders to receive the Cancellation
Price, which time is expected to be 4:00
p.m. on Wednesday, 10 May, 2006 as set
out in the section headed "Expected
Timetable"
"Registers" registers of members of ZRCC
"Registrar" Hong Kong Registrars Limited, being
ZRCC's branch share registrar in Hong
Kong
"Rothschild" N M Rothschild & Sons (Hong Kong)
Limited, a corporation licensed by the
SFO to conduct Type 1 (dealing in
securities), Type 4 (advising on
securities) and Type 6 (advising on
corporate finance) regulated activity as
defined under the SFO and the Independent
Financial Adviser
"RMB" Renminbi, the lawful currency of the PRC
"SASAC" State Assets Supervision and
Administration Commission of the State
Council of the PRC
"SAFE" State Administration of Foreign Exchange
"SFO" Securities and Futures Ordinance (Cap.
571 of the Laws of Hong Kong)
"Sinopec Board" the board of Sinopec Directors
"Sinopec Corp." China Petroleum & Chemical Corporation, a
joint stock company incorporated in the
PRC with limited liability, the H shares
of which are listed on the Hong Kong
Stock Exchange
"Sinopec Director(s)" director(s) of Sinopec Corp.
"Sinopec United" China International United Petroleum &
Chemical Co., Ltd., a company
incorporated in the PRC with limited
liability and a wholly owned subsidiary
of Sinopec Corp.
"Special General Meeting" the special general meeting of the ZRCC
Shareholders proposed to be convened and
held in respect of the approval of the
Proposal and the Proposed Amendment
"Special General Meeting of the the special general meeting of the
Independent ZRCC Shareholders" Independent ZRCC Shareholders proposed to
be convened and held in respect of the
approval of the Proposal
"Special General Meetings" the Special General Meeting and the
Special General Meeting of the
Independent ZRCC Shareholders
"Takeovers Code" the Hong Kong Code on Takeovers and
Mergers
"US$" United States dollars, the lawful
currency of the United States of America
"ZRCC" Sinopec Zhenhai Refining & Chemical
Company Limited, a joint stock limited
company incorporated in the PRC with
limited liability, the H shares of which
are listed on the Hong Kong Stock
Exchange
"ZRCC Articles" the articles of association of ZRCC
"ZRCC Board" the board of ZRCC Directors
"ZRCC Director(s)" director(s) of ZRCC
"ZRCC Domestic Share(s)" state-owned shares of RMB1.00 each in
the share capital of ZRCC
"ZRCC Group" ZRCC and its subsidiaries
"ZRCC H Shareholder(s)" registered holder(s) of ZRCC H Shares
"ZRCC H Share(s)" H share(s) of RMB1.00 each in the share
capital of ZRCC which are listed on the
Hong Kong Stock Exchange
"ZRCC Listing" the listing of ZRCC H Shares on the Hong
Kong Stock Exchange
"ZRCC Shareholders" ZRCC H Shareholders and Sinopec Corp.
"ZRCC Shares" ZRCC Domestic Shares and ZRCC H Shares
Unless otherwise specified, amounts denominated in RMB have been
translated into HK$ at the exchange rate of RMB1.06 to HK$1.00. No
representation is made that the HK$ amounts could have been or could be
converted into RMB at such rate or at other rate or at all.
-------------------------------------------------------------------------------
LETTER FROM THE BOARD OF ZRCC
-------------------------------------------------------------------------------
[GRAPHIC OMITTED](R)
[GRAPHIC OMITTED]
SINOPEC ZHENHAI REFINING & CHEMICAL COMPANY LIMITED
(a joint stock limited company incorporated in the
People's Republic of China)
(Stock code: 1128)
Executive ZRCC Directors Legal Address:
Mr. Sun Weijun Zhenhai District,
Mr. Zhan Juping Ningbo Municipality
Mr. Xu Liqiao Zhejiang Province,
Mr. Sun Jianli the Peoples' Republic of China
Mr. Yu Renming Postcode: 315 207
Non-executive ZRCC Directors:
Ms. Wang Lisheng
Mr. Hu Weiqing
Independent non-executive ZRCC Directors:
Mr. Sun Yongsen
Mr. Cen Kefa
Mr. Li Linghong
Ms. Qiu Yun
28 November, 2005
To the ZRCC Shareholders
Dear Sir or Madam,
Proposed Privatisation of ZRCC
by Sinopec Corp. through Ningbo Yonglian
by way of merger by absorption of ZRCC
under Article 184 of the PRC Company Law
at the cancellation price of HK$10.60 per ZRCC H Share
and
Amendment of ZRCC Articles of Association
INTRODUCTION
On 12 November, 2005, the Ningbo Yonglian Board and the ZRCC Board
respectively approved and Ningbo Yonglian and ZRCC entered into the Merger
Agreement. The Merger Agreement provides for the merger by absorption of ZRCC
with and into Ningbo Yonglian under Article 184 of the PRC Company Law at the
cancellation price of HK$10.60 per ZRCC H Share, with Ningbo Yonglian as the
surviving company.
-------------------------------------------------------------------------------
LETTER FROM THE BOARD OF ZRCC
-------------------------------------------------------------------------------
Ningbo Yonglian was incorporated in the PRC for the purposes of the
Proposal and Merger and is wholly owned by Sinopec Corp.. Sinopec Corp. is a
joint stock company incorporated in the PRC with limited liability, and is
owned as to approximately 67.9% by CPC, which is a PRC state-owned enterprise,
approximately 9.5% by shareholders of domestic non-public shares of Sinopec
Corp. (other than CPC), approximately 3.2% by public shareholders of A shares
of Sinopec Corp. and approximately 19.4% by public shareholders of H shares of
Sinopec Corp. Sinopec Corp. is the controlling shareholder of ZRCC, being
interested in approximately 71.3% of the issued share capital of ZRCC
(representing 100% of the ZRCC Domestic Shares). A chart showing the
shareholding structure of Sinopec Corp., Ningbo Yonglian and ZRCC is set out
below:
[GRAPHIC OMITTED][GRAPHIC OMITTED]
The Merger cannot be completed unless the Merger is, amongst others,
approved by ZRCC Shareholders.
On the Delisting Date, the ZRCC Listing will be withdrawn from the Hong
Kong Stock Exchange. Sinopec Corp. and Ningbo Yonglian have no intention to
make significant changes to the existing businesses of ZRCC upon completion of
the Merger.
For the purposes of the Proposal, the shareholdings of ZRCC as at the
Latest Practicable Date are set out below in the section of this letter headed
"Shareholding Structure of ZRCC."
Sinopec Corp. and parties acting in concert with Sinopec Corp. will count
towards the quorum but they will not be eligible to vote in their capacity as
ZRCC Shareholders at the Special General Meeting of the Independent ZRCC
Shareholders, as required under Rule 2.10 of the Takeovers Code.
ZRCC has appointed Lehman Brothers as its financial adviser in connection
with the Proposal.
The Independent Board Committee comprises Ms. Qiu Yun, Messrs. Sun
Yongsen, Cen Kefa and Li Linghong. The two non-executive ZRCC Directors, namely
Ms. Wang Lisheng and Mr. Hu Weiqing, also hold positions at Sinopec Corp. and,
as such, they are not considered to be independent under the Takeovers Code for
the purpose of advising the Independent ZRCC Shareholders on the Proposal and
the Merger. As a result, Ms. Qiu Yun, Messrs. Sun Yongsen, Cen Kefa and Li
Linghong, the independent non-executive ZRCC Directors, who have no interest in
the Proposal and the Merger, have been appointed as members of the Independent
Board Committee to advise the Independent ZRCC Shareholders on the Proposal.
The Independent Board Committee has approved the appointment of
Rothschild as the independent financial adviser to the Independent Board
Committee pursuant to Rule 2.1 of the Takeovers Code in connection with the
Proposal.
The purpose of this document is to provide you with further information
regarding the Proposal and the Merger and the Proposed Amendment and to give
you notices of the Special General Meetings. Your attention is also drawn to
the letter from the Independent Board Committee, the letter from Rothschild,
and the sections on "Additional Information regarding the Merger" and "Certain
Provisions of the Merger Agreement", all of which form part of this document.
-------------------------------------------------------------------------------
LETTER FROM THE BOARD OF ZRCC
-------------------------------------------------------------------------------
SUMMARY OF THE PROPOSAL
General
It is proposed that, subject to the Conditions being fulfilled or, where
applicable, waived, the Proposal will be implemented by way of merger by
absorption.
The Proposal is made pursuant to and in accordance with Article 184 of
the PRC Company Law.
Pursuant to the Proposal, Ningbo Yonglian will (i) pay the Cancellation
Price per ZRCC H Share in cash to the ZRCC H Shareholders for the cancellation
of all ZRCC H Shares and (ii) issue RMB1,800,000,000 of new registered capital
of Ningbo Yonglian to Sinopec Corp. (representing an amount equal to
approximately 71.3% of the total registered capital of ZRCC), being the sole
holder of all the ZRCC Domestic Shares. The Cancellation Price represents a
premium of approximately 12.2% over the closing price of HK$9.45 per ZRCC H
Share as quoted on Hong Kong Stock Exchange on 2 November, 2005 (being the last
date of trading prior to the suspension of trading in the ZRCC H Shares pending
the issue of the Announcement).
Under the Merger Agreement, on the date of de-registration of ZRCC which
will take place after the fulfilment (or waiver, as applicable) of all the
Conditions, (i) ZRCC will be merged into Ningbo Yonglian and will cease to
exist as a separate legal entity, with Ningbo Yonglian as the surviving
corporation; and (ii) the assets and liabilities (together with the rights and
obligations attached to such assets) and the employees of ZRCC will be assumed
by Ningbo Yonglian. This "merger by absorption" is provided for under the PRC
Company Law and the ZRCC Articles.
Arrangements for Dissenting Shareholders
According to the ZRCC Articles, any ZRCC Shareholder who disapproves the
Merger may request ZRCC and/or other ZRCC Shareholders who have voted for the
Proposal to purchase its Dissenting ZRCC Shares at a "fair price".
The Merger Agreement provides that if any such dissenting ZRCC
Shareholder elects to request ZRCC or other ZRCC Shareholders who have voted
for the Proposal to purchase its Dissenting ZRCC Shares at a "fair price",
Ningbo Yonglian or its successor shall, at the request of ZRCC or such ZRCC
Shareholders, assume any obligations which ZRCC and/or such ZRCC Shareholders
who have received such a request may have towards the Dissenting ZRCC
Shareholder.
ZRCC Shareholders who have voted for the Merger and have received the
relevant demand from Dissenting ZRCC Shareholders may at any time after
receiving such demand send a notice (by fax or by mail) to Ningbo Yonglian at
the following address: Secretary of Ningbo Yonglian, A6 Huixindong Street,
Chaoyang District, Beijing, the PRC; Facsimile: (8610) 64990477. This will
ensure that Ningbo Yonglian can assume all obligations that are owed by the
ZRCC Shareholders who have approved the Merger to the Dissenting ZRCC
Shareholders in a timely manner, and pursuant to the Merger Agreement, the ZRCC
Shareholders will be released from their obligations towards the Dissenting
ZRCC Shareholders after completing the above notification procedure.
Given that the ZRCC Articles and the Merger Agreement do not provide for
a time limit for the Dissenting ZRCC Shareholders to assert their right of
requesting ZRCC and/or other ZRCC Shareholders to purchase the Dissenting ZRCC
Shares held by the Dissenting ZRCC Shareholders, no time limit has been set for
the above notification procedure. The Dissenting ZRCC Shareholders may make
their claim in any manner they see fit.
The provisions regarding the right of shareholders opposing the Proposal
to be bought out at a "fair price" are contained only in the articles of
association of PRC companies with shares listed on overseas markets and are not
otherwise stipulated in any PRC law or regulations. There is no administrative
guidance on the substantive as well as procedural rules as to how the "fair
price" will be determined. Thus, no assurance can be given as to how long the
process will take.
Notification of Creditors
ZRCC is also required by the PRC Company Law and the ZRCC Articles to
notify their creditors of the Proposal. ZRCC's creditors may require ZRCC to
pay off their indebtedness or provide a satisfactory guarantee for such
indebtedness. Under the PRC Company Law and the ZRCC Articles, if ZRCC fails to
so pay or guarantee such indebtedness, the Proposal may not proceed. If the
shareholders of ZRCC and Ningbo Yonglian approve the Merger, ZRCC and Ningbo
Yonglian will each publish an announcement on the day immediately after the
Special General Meetings, giving notice to their respective creditors of the
Proposal. If any creditor requests repayment of the indebtedness owed by ZRCC
or Ningbo Yonglian (as appropriate) or requests for any guarantee in relation
to such indebtedness, such request will have to be made within a 45-day period
(provided that ZRCC Shareholders approve the Proposed Amendment at the Special
General Meeting) from the date of such announcement. Upon the expiry of the
relevant period specified in the above announcement, such creditor's right to
claim against ZRCC or Ningbo Yonglian (as appropriate) shall lapse under PRC
law.
Payment of Cancellation Price
Payment of the Cancellation Price will be effected by way of cheque and
implemented in full in accordance with the terms of the Proposal without regard
to any lien, right of set-off, counterclaim or other analogous right which ZRCC
may have or claim to have against any ZRCC Shareholder.
After all the Conditions have been fulfilled (or waived, if applicable),
the Merger will become unconditional. Upon all the Conditions specified in (i)
to (vii) under the section headed "Certain Provisions of the Merger Agreement -
Conditions to the Completion of the Merger" being fulfilled (or waived, as
applicable), ZRCC will apply for the ZRCC Listing to be withdrawn. Payment of
the Cancellation Price will be made to ZRCC H Shareholders (other than the
Dissenting ZRCC Shareholders) as soon as possible but in any event no later
than 10 days after all the Conditions have been fulfilled (or waived, as
applicable). After payment of the Cancellation Price has been made to all the
eligible ZRCC Shareholders, the relevant ZRCC H Shares shall be deemed as
cancelled thereafter, and the share certificates for such ZRCC H Shares will
thereafter cease to have effect as documents or evidence of title. The register
of ZRCC H Shareholders will remain closed after the Record Time until ZRCC is
de-registered. After all the Conditions have been fulfilled (or waived, if
applicable), ZRCC will apply to the Ningbo SAIC for its de-registration. After
the de-registration process of ZRCC is completed, ZRCC will cease to exist as a
legal entity and all the ZRCC Shares will be legally cancelled.
Funding for the Proposal
Sinopec Corp. and Ningbo Yonglian intend to finance the cash
consideration of approximately HK$7,672 million required for the Proposal from
existing banking facilities of Sinopec Corp. granted by Industrial and
Commercial Bank of China and Bank of China and made available to Sinopec Corp.
and its subsidiaries. CICC, being the financial adviser to Sinopec Corp., is
satisfied that sufficient financial resources are available to Sinopec Corp.
and Ningbo Yonglian for the satisfaction of Ningbo Yonglian's obligations under
the Proposal. Under PRC law, an approval from SAFE as set out in the section
headed "Certain Provisions of the Merger Agreement - Conditions to the
Completion of the Merger" on page 62 of this document is required for
exchanging RMB into foreign currencies to pay the Cancellation Price and other
fees incurred in connection with the Merger. In-principle approvals from SAFE
have been obtained by Sinopec Corp. and Ningbo Yonglian but Sinopec Corp. and
Ningbo Yonglian will apply for the formal SAFE approval after the Proposal has
been approved by the requisite votes of the ZRCC Shareholders at the Special
General Meetings.
Regulatory Approval
The Proposal requires approvals from the relevant PRC governmental or
regulatory bodies (including approvals of, inter alia, SASAC, SAFE and the CSRC
(if applicable)).
Conditions
The implementation of the Proposal is subject to the Conditions being
fulfilled (or waived, as applicable), a summary of the Conditions is set out in
the section headed "Certain Provisions of the Merger Agreement - Conditions to
the Completion of the Merger" on pages 61 to 63 of this document.
FINANCIAL EFFECTS OF THE PROPOSAL
Share Price
The Cancellation Price represents:
(i) a premium of approximately 12.2% over the closing price of HK$9.450
per ZRCC H Share, as quoted on the Hong Kong Stock Exchange on 2
November, 2005 (being the last traded price prior to the suspension
of trading in the ZRCC H Shares pending the issue of the
Announcement);
(ii) a premium of approximately 17.5% over the average closing price of
approximately HK$9.020 per ZRCC H Share, based on the daily closing
prices as quoted on the Hong Kong Stock Exchange over the 5 trading
days up to and including 2 November, 2005;
(iii) a premium of approximately 22.9% over the average closing price of
approximately HK$8.623 per ZRCC H Share, based on the daily closing
prices as quoted on the Hong Kong Stock Exchange over the 1-month
period up to and including 2 November, 2005;
(iv) a premium of approximately 26.7% over the average closing price of
approximately HK$8.369 per ZRCC H Share, based on the daily closing
prices as quoted on the Hong Kong Stock Exchange over the 3-month
period up to and including 2 November, 2005;
(v) a premium of approximately 33.1% over the average closing price of
approximately HK$7.965 per ZRCC H Share, based on the daily closing
prices as quoted on the Hong Kong Stock Exchange over the 6-month
period up to and including 2 November, 2005;
(vi) a premium of approximately 29.9% over the average closing price of
approximately HK$8.159 per ZRCC H Share, based on the daily closing
prices as quoted on the Hong Kong Stock Exchange over the 12-month
period up to and including 2 November, 2005; and
(vii) a premium of approximately 3.9% over the closing price of HK$10.20
per ZRCC H Share, as quoted on the Hong Kong Stock Exchange on the
Latest Practicable Date.
The Cancellation Price was arrived at based on the principle of fairness
after taking into consideration, among other things, prevailing and historical
market prices of the ZRCC H Shares, the NAV per ZRCC H Share as at 31 December,
2004 and the unaudited NAV per ZRCC H Share as at 30 June, 2005. On 15
November, 2005, Sinopec Corp. announced that Sinopec Corp. and Ningbo Yonglian
did not intend to increase the Cancellation Price and accordingly ZRCC
Shareholders should note that the Cancellation Price is final.
Net Asset Value
The Cancellation Price per ZRCC H Share represents a premium of
approximately 148.8% to the NAV per ZRCC H Share of approximately HK$4.26 as at
31 December, 2004 (based on the figures in the 2004 annual report of ZRCC) and
a premium of approximately 133.0% to the unaudited NAV per ZRCC H Share of
approximately HK$4.55 as at 30 June, 2005 (based on the figures in the 2005
interim report of ZRCC).
Earnings
ZRCC's published audited profit attributable to the ZRCC Shareholders for
the two years ended 31 December, 2004 and 31 December, 2003 prepared under IFRS
was approximately RMB2,613 million (or HK$2,465 million) and RMB1,088 million
(or HK$1,026 million) respectively, representing earnings per ZRCC Share of
approximately RMB1.04 (or HK$0.98) and RMB0.43 (or HK$0.41) respectively.
Based on ZRCC's unaudited interim report prepared in accordance with
International Accounting Standard 34, ZRCC's published unaudited profit
attributable to ZRCC Shareholders for the six months ended 30 June, 2005, was
approximately RMB1,261 million (or HK$1,190 million). The earnings per ZRCC
Share was approximately RMB0.50 (or HK$0.47).
Dividend Yield
Based on the Cancellation Price and the dividends for the year ended 31
December, 2004, the dividend yield for the ZRCC Shares would be approximately
2.67%.
SHAREHOLDING STRUCTURE OF ZRCC
As at the Latest Practicable Date, ZRCC had 2,523,754,468 ZRCC Shares in
issue, with 1,800,000,000 ZRCC Domestic Shares and 723,754,468 ZRCC H Shares.
Sinopec Corp. owned 1,800,000,000 ZRCC Domestic Shares, representing
approximately 71.3% of the issued share capital of ZRCC, and ZRCC H
Shareholders were interested in 723,754,468 ZRCC H Shares, representing
approximately 28.7% of the issued share capital of ZRCC. The rights of the
holders of ZRCC Domestic Shares and ZRCC H Shares rank pari passu to each
others, including voting rights, the right to participate in the distribution
of the assets of ZRCC in the event of termination or liquidation of ZRCC and
the right to receive dividend payment, except that payment of dividend will be
made in RMB to ZRCC Domestic Shareholders and in Hong Kong dollars to ZRCC H
Shareholders.
There was no movement in the share capital of ZRCC for the period between
31 December, 2004 and the Latest Practicable Date. There were no outstanding
options, warrants or convertible securities issued by ZRCC.
The table below sets out the shareholding structure of ZRCC as at the
Latest Practicable Date:
As at the Latest Practicable Date
Percentage over the
entire issued share
Number of Class of capital
ZRCC Shares ZRCC Shares of ZRCC
(%)
Sinopec Corp. 1,800,000,000 Domestic Shares 71.3
Ningbo Yonglian 0 - 0
Total number of ZRCC Shares held by Sinopec Corp., 1,800,000,000 Domestic Shares 71.3
associates of Sinopec Corp. and parties acting in concert
with them
Independent ZRCC Shareholders (including 679,000 ZRCC H 723,754,468 H Shares 28.7
Shares held by Lehman Brothers Finance S.A. and Lehman
Brothers (International) Europe, affiliates of Lehman
Brothers, for the purposes of hedging their positions
arising from derivatives transactions entered into by them)
Total number of ZRCC Shares 2,523,754,468 100
================= =====
(i) Save as disclosed above, Sinopec Corp. does not own any ZRCC Shares and
has not dealt for value in any ZRCC Shares during the Disclosure Period.
(ii) None of the ZRCC Directors or the Sinopec Corp. Directors had any
interest in any ZRCC Shares or dealt for value in any ZRCC Shares during
the Disclosure Period.
(iii) Save in relation to dealings for the account of non-discretionary clients
by the brokerage division of a subsidiary of CICC, none of the parties
acting in concert with Sinopec Corp., or parties which are presumed to be
acting in concert with Sinopec Corp. under the Takeovers Code, owned or
controlled any ZRCC Shares as at the Latest Practicable Date or had dealt
for value in any ZRCC Shares during the Disclosure Period.
(iv) Save as disclosed above, no pension fund of any member of the Sinopec
Corp. or any of its subsidiaries, or any professional adviser to ZRCC as
specified in class (2) of the definition of associate in the Takeovers
Code, owned or controlled any ZRCC Shares as at the Latest Practicable
Date or has dealt for value in any ZRCC Shares either on a proprietary
basis or on account of clients for whom they have discretionary
management mandate during the period commencing from the date of the
Announcement and ending on the Latest Practicable Date.
(v) No arrangement of the kind referred to in Note 8 to Rule 22 of the
Takeovers Code existed between any person and Sinopec Corp. or ZRCC or
any person acting in concert with Sinopec Corp. or any person who is an
associate of Sinopec Corp. or of ZRCC by virtue of classes (1), (2), (3)
or (4) of the definition of "associate" under the Takeovers Code during
the period commencing from the date of the Announcement and ending on the
Latest Practicable Date.
(vi) No interest in ZRCC H Shares was managed on a discretionary basis by fund
managers (other than exempt fund managers) connected with ZRCC during the
period commencing from the date of the Announcement and ending on the
Latest Practicable Date.
BACKGROUND TO AND REASONS FOR THE MERGER
Your attention is drawn to the sections headed "Additional Information
Regarding the Merger - Background of the Merger" and "- Strategic Reasons for
the Merger" on pages 48 and 49 of this document.
INFORMATION RELATING TO ZRCC
Your attention is also drawn to the section headed "Additional
Information Regarding the Merger - Information on ZRCC" on pages 50 to 53 of
this document.
FUTURE INTENTIONS OF SINOPEC CORP.
Your attention is drawn to the section headed "Additional Information
Regarding the Merger - Future Intentions of Sinopec Corp." on pages 54 to 55 of
this document.
The ZRCC Board believes that the business and employees of ZRCC would not
be adversely affected in any material respects after the completion of the
Merger.
AMENDMENT TO ZRCC ARTICLES
Incidental to the promulgation of the new PRC Company Law on 27 October,
2005, which will become effective on 1 January, 2006, the statutory right of a
creditor to claim against a company in a merger has been changed to lapse on
the expiry of 45 days instead of 90 days from the date the company announces
its merger after the merger is approved by its shareholders. ZRCC Directors
believe it to be in the interest of the ZRCC to make the Proposed Amendment to
reduce the relevant period provided in ZRCC Articles from 90 days to 45 days so
as to bring them in line with the latest PRC Company Law to be in force on 1
January, 2006.
MEETINGS AND ACTION TO BE TAKEN BY THE INDEPENDENT SHAREHOLDERS AND THE
SHAREHOLDERS
As you will see from the notice of the Special General Meeting and the
notice of the Special General Meeting of the Independent ZRCC Shareholders in
Appendices III and IV to this document, the Special General Meetings will be
held at 9:30 a.m. and 10:30 a.m., respectively, on Thursday, 12 January, 2006.
As required under the PRC Company Law, the Merger requires the approval
of not less than two-thirds of the ZRCC Shareholders attending the Special
General Meeting. According to the PRC Company Law and the ZRCC Articles,
Sinopec Corp. is eligible to vote in the Special General Meeting. Sinopec Corp.
intends to vote for the Proposal in the Special General Meeting.
In addition, under Rule 2.10 of the Takeovers Code, which is deemed to be
applicable to the Proposal, the Merger also requires the approval of the
Independent ZRCC Shareholders. The resolution of the Independent ZRCC
Shareholders will be voted on by way of a poll and will only be considered to
have been passed if (i) the Proposal is approved by at least 75% of the votes
attaching to the ZRCC H Shares of the Independent ZRCC Shareholders that are
cast by poll either in person or by proxy at the Special General Meeting of the
Independent ZRCC Shareholders; and (ii) the number of votes cast against the
resolution by poll at the Special General Meeting of the Independent ZRCC
Shareholders is not more than 10% of the votes attaching to all the ZRCC H
Shares held by all of the Independent ZRCC Shareholders (that is, not more than
72,375,446 ZRCC H Shares, based on 723,754,468 ZRCC H Shares issued and held by
the Independent ZRCC Shareholders as at the Latest Practicable Date).
Accordingly, both the Special General Meeting and the Special General
Meeting of the Independent ZRCC Shareholders will be convened to consider,
among other things, the Proposal and the Proposal will only proceed upon
obtaining the requisite votes of shareholders in the respective Special General
Meetings as described above. Sinopec Corp., and parties acting in concert with
Sinopec Corp., will not be entitled to vote in the Special General Meeting of
the Independent ZRCC Shareholders.
Whether or not they are able to attend the Special General Meeting or the
Special General Meeting of the Independent ZRCC Shareholders (where applicable)
in person, the ZRCC Shareholders are strongly urged to complete and sign the
enclosed pink form of proxy in respect of the Special General Meeting and the
Independent ZRCC Shareholders are strongly urged to complete and sign the
enclosed white form of proxy in respect of the Special General Meeting of the
Independent ZRCC Shareholders in accordance with the instructions respectively
printed thereon and to return them to the office of the Registrar, on the 46th
Floor, Hopewell Centre, 183 Queen's Road East, Hong Kong as soon as possible,
but in any case not later than the following respective times:
(a) in the case of the pink form of proxy for use at the Special
General Meeting, the ZRCC Shareholders are requested to deposit
such form of proxy not later than 9:30 a.m. on Wednesday, 11
January, 2006; and
(b) in the case of the white form of proxy for use at the Special
General Meeting of the Independent ZRCC Shareholders, the
Independent ZRCC Shareholders are requested to deposit such form of
proxy not later than 10:30 a.m. on Wednesday, 11 January, 2006.
The completion and return of a form of proxy for any of the Special
General Meetings will not preclude you from attending and voting in person at
the relevant Special General Meetings (or any adjournment thereof) if you so
wish. In the event that you attend and vote at any of the Special General
Meetings after having deposited the relevant form of proxy, that form of proxy
will be deemed to have been revoked.
For the purpose of determining the entitlements of the Independent ZRCC
Shareholders to attend and vote at the Special General Meeting of the
Independent ZRCC Shareholders and the ZRCC Shareholders to attend and vote at
the Special General Meeting, the Registers will be closed from Monday, 12
December, 2005 to Thursday, 12 January, 2006 (both dates inclusive). During
such period, no transfer of ZRCC Shares will be effected.
Only holders of record of ZRCC Shares at 4:00 p.m. on Friday, 9 December,
2005 are entitled to vote at, the Special General Meetings. Each ZRCC
Shareholder on the Registers at 4:00 p.m. on Friday, 9 December, 2005 is
entitled to cast one vote per ZRCC Share on the Proposal in the Special General
Meeting. Each Independent ZRCC Shareholder on the Registers at 4:00 p.m. on
Friday, 9 December, 2005 is entitled to cast one vote per ZRCC H Share on the
Proposal in the Special General Meeting of Independent ZRCC Shareholders.
Assuming that all of the Conditions are fulfilled or, where applicable,
waived, the Merger will become effective on the Effective Date. Further
announcements will be issued giving details of the results of the Special
General Meetings and, if all the resolutions are duly passed at the Special
General Meetings, the last day for dealing in the ZRCC H Shares, the Record
Time, the Delisting Date and the proposed Effective Date.
If the Proposal lapses on or before 31 December, 2006, the ZRCC H
Shareholders will be notified accordingly by press announcement. Further
announcements regarding the Proposal will be made as and when appropriate.
RECOMMENDATIONS
Your attention is drawn to the recommendations of Rothschild to the
Independent Board Committee in relation to the Proposal set out in its letter
on pages 20 to 47 of this document and to the recommendations of the
Independent Board Committee to the Independent ZRCC Shareholders in relation to
the Proposal set out in their letter on pages 18 to 19 of this document.
The ZRCC Board considers the Proposed Amendment to be in the interests of
ZRCC and recommends that the ZRCC Shareholders approve the Proposed Amendment.
DEALINGS, ZRCC LISTING, REGISTRATION AND PAYMENT
Your attention is drawn to the sections headed "Additional Information
Regarding the Merger - Share Certificates, Dealings and Listing" and "-
Registration and Payment" on pages 55 to 56 of this document.
FURTHER INFORMATION
In considering what action to take in connection with the Proposal, you
should consider your own tax position and, if you are in any doubt, you should
consult your professional advisors.
You are also urged to read carefully all the appendices to this document.
Yours faithfully,
For and on behalf of the board of
Sinopec Zhenhai Refining & Chemical Company Limited
Mr. Sun Weijun
Chairman of the board of Director
-------------------------------------------------------------------------------
LETTER FROM THE INDEPENDENT BOARD COMMITTEE
-------------------------------------------------------------------------------
[GRAPHIC OMITTED](R)
[GRAPHIC OMITTED]
SINOPEC ZHENHAI REFINING & CHEMICAL COMPANY LIMITED
(a joint stock limited company incorporated in the
People's Republic of China)
(Stock code: 1128)
28 November, 2005
To the Independent ZRCC Shareholders
Dear Sir or Madam,
Proposed Privatisation of ZRCC
by Sinopec Corp. through Ningbo Yonglian
by way of merger by absorption of ZRCC
under Article 184 of the PRC Company Law
at the cancellation price of HK$10.60 per ZRCC H Share
BACKGROUND
Terms used in this letter have the same meanings as those defined in the
document of which this letter forms part.
On 12 November, 2005, Ningbo Yonglian and ZRCC entered into the Merger
Agreement. The Merger Agreement provides for the Merger by absorption of ZRCC
with and into Ningbo Yonglian, with Ningbo Yonglian as the surviving company.
The Merger cannot be completed unless the Merger Agreement and the Merger are
approved by ZRCC Shareholders. Details of the Proposal are set out in the
section headed "Letter from the Board of ZRCC" on pages 6 to 17 of this
document and in the sections headed "Additional Information Regarding the
Merger" and "Certain Provisions of the Merger Agreement" on pages 48 to 67 of
this document. Each of us is not interested in the Proposal and for the purpose
of the Proposal, we have been appointed to form the Independent Board Committee
to give a recommendation to the Independent ZRCC Shareholders as to how they
should vote on the Proposal. Rothschild has been appointed as the independent
financial adviser to advise the Independent Board Committee in connection with
the Proposal.
ADVICE FROM THE INDEPENDENT FINANCIAL ADVISER
We have considered carefully the terms of the Proposal and the advice
from Rothschild, including the principal factors and reasons as well as their
recommendations. Your attention is drawn to the advice from Rothschild to the
ZRCC Independent Board Committee set out in their letter of advice, which is
reproduced on pages 20 to 47 of this document and to the "Letter from the Board
of ZRCC", the sections headed "Additional Information Regarding the Merger" and
"Certain Provisions of the Merger Agreement" and the appendices which form part
of this document, in particular, the financial information set out in Appendix
I.
In deciding the course of action to take, the Independent ZRCC
Shareholders should have regard to their own personal circumstances and, in so
doing, they may have regard to the opinion of Rothschild.
RECOMMENDATIONS
Having taken into account the terms of the Proposal and the terms of the
Merger Agreement and the opinion of Rothschild mentioned above, we consider
that the terms of the Proposal and the Merger Agreement are fair and reasonable
in so far as the Independent ZRCC Shareholders are concerned. Accordingly, we
recommend that the Independent ZRCC Shareholders vote in favour of the
resolution in relation to the Proposal at the Special General Meetings.
Yours faithfully,
For and on behalf of
the Independent Board Committee
Ms. Qiu Yun Mr. Sun Yongsen
Independent Non-executive Independent Non-executive
ZRCC Director ZRCC Director
Mr. Li Linghong Mr. Cen Kefa
Independent Non-executive Independent Non-executive
ZRCC Director ZRCC Director
-------------------------------------------------------------------------------
LETTER FROM ROTHSCHILD
-------------------------------------------------------------------------------
Set out below is the text of the letter from Rothschild to the
Independent Board Committee prepared for inclusion in this document.
[GRAPHIC OMITTED]
28 November, 2005
To the Independent Board Committee of
Sinopec Zhenhai Refining & Chemical Company Limited
Dear Sirs,
Proposed privatisation of ZRCC
through Ningbo Yonglian
by way of merger by absorption of ZRCC
under article 184 of the PRC Company Law
at the Cancellation Price of HK$10.60 per ZRCC H Share
We refer to our engagement to advise the Independent Board Committee with
respect to the Proposal, details of which are contained in the privatisation
document of ZRCC dated 28 November, 2005 (the "Document") of which this letter
forms a part. Rothschild has been appointed as the independent financial
adviser to advise the Independent Board Committee as to whether or not the
terms of the Proposal are fair and reasonable so far as the Independent ZRCC
Shareholders are concerned.
The terms used in this letter shall have the same meanings as defined
elsewhere in the Document unless the context otherwise requires.
The ZRCC Board comprises 11 directors of whom five are executive
directors, two are non-executive directors and four are independent
non-executive directors. Ms. Qiu Yun, Messrs. Sun Yongsen, Cen Kefa and Li
Linghong, the independent non-executive ZRCC Directors, who have no interest in
the Proposal and the Merger, have been appointed as members of the Independent
Board Committee to advise the Independent ZRCC Shareholders on the Proposal.
N M Rothschild & Sons (Hong Kong) Limited Telephone +852 2525 5333
16th Floor, Alexandra House Facsimile+852 2868 1728
18 Chater Road, Central
Hong Kong SAR
-------------------------------------------------------------------------------
LETTER FROM ROTHSCHILD
-------------------------------------------------------------------------------
[GRAPHIC OMITTED]
In formulating our recommendations, we have relied on the information and
facts supplied to us by ZRCC and have assumed that any information and
representations made to us are true, accurate and complete in all material
respects as at the date hereof and that they may be relied upon. We have also
assumed that all information, representations and opinions contained or
referred to in the Document are fair and reasonable and have relied on them.
In the Document, information relating to ZRCC is provided by the ZRCC
Directors and information relating to Sinopec Corp. and Ningbo Yonglian is
provided by the Sinopec Directors. We have been advised by the ZRCC Directors
that no material facts have been omitted and we are not aware of any facts or
circumstances which would render the information provided and the
representations made to us untrue, inaccurate, incomplete or misleading. We
have no reason to doubt the truth, accuracy and completeness of the information
and representations provided to us by the ZRCC Board. The ZRCC Directors (in
respect of the information other than that relating to Sinopec Corp. and/or the
Sinopec Directors and/or Ningbo Yonglian and/or Ningbo Yonglian Directors) and
the Sinopec Directors (in respect of information other than that relating to
ZRCC and/or the ZRCC Directors) have jointly and severally accepted full
responsibility for the accuracy of the information contained in the Document
and have confirmed, having made all reasonable enquiries, that, to the best of
their knowledge and belief, opinions expressed in the Document have been
arrived at after due and careful consideration and there are no other facts the
omission of which would make any statement in the Document misleading. We
believe that we have reviewed sufficient information to reach an informed view
in order to provide a reasonable basis for our advice. We have not, however,
conducted any independent in-depth investigation into the business and affairs
of ZRCC or any of its subsidiaries or associated companies.
TERMS OF THE PROPOSAL
For details of the terms of the Proposal, your attention is drawn to the
section headed "Letter from the Board of ZRCC" in the Document. In summary, the
Proposal involves the following principal steps:
1. Ningbo Yonglian proposes to pay the Cancellation Price of HK$10.60
per ZRCC H Share in cash to all the ZRCC H Shareholders for the
cancellation of all ZRCC H Shares. Sinopec Corp. announced on 15
November, 2005 that Sinopec Corp. and Ningbo Yonglian did not
intend to increase the Cancellation Price, and as such, ZRCC H
Shareholders should note that the Cancellation Price is final;
2. Ningbo Yonglian proposes to issue RMB1,800,000,000 of its new
registered capital, representing an amount equal to approximately
71.3% of the total registered capital of ZRCC to Sinopec Corp.,
being the sole holder of all the ZRCC Domestic Shares;
3. On the date of de-registration of ZRCC from Ningbo SAIC, (i) ZRCC
will be merged into Ningbo Yonglian and will cease to exist as a
separate legal entity, with Ningbo Yonglian as the surviving
corporation, and (ii) the assets and liabilities (together with the
rights and obligations attached to such assets) and the employees
of ZRCC will be assumed by Ningbo Yonglian;
4. On the Delisting Date, the ZRCC Listing will be withdrawn from the
Hong Kong Stock Exchange.
The Merger will be implemented by way of merger by absorption in
accordance with Article 184 of the PRC Company Law. According to the ZRCC
Articles, any ZRCC Shareholder who disapproves the Merger may request ZRCC
and/or other ZRCC Shareholders who have voted for the Proposal to purchase its
Dissenting ZRCC Shares at a "fair price". The Merger Agreement provides that if
any such dissenting ZRCC Shareholder elects to request ZRCC or other ZRCC
Shareholders who have voted for the Proposal to purchase its Dissenting ZRCC
Shares at a "fair price", Ningbo Yonglian or its successor shall, at the
request of ZRCC or such ZRCC Shareholders, assume any obligations which ZRCC
and/or such ZRCC Shareholders who have received such a request may have towards
the Dissenting ZRCC Shareholder. With regard to the "fair price", ZRCC H
Shareholders should note that there is no administrative guidance on the
substantive as well as procedural rules under the PRC law and regulations as to
how the "fair price" will be determined and thus, no assurance can be given as
to how long the process will take.
ZRCC is also required by the PRC Company Law and the ZRCC Articles to
notify its creditors of the Proposal. ZRCC's creditors may require ZRCC to pay
off their indebtedness or provide a satisfactory guarantee for such
indebtedness. Under the PRC Company Law and the ZRCC Articles, if ZRCC fails to
so pay or guarantee such indebtedness, the Proposal may not proceed.
The Merger is conditional upon the fulfilment (unless waived, as
applicable) of all of the Conditions as described in the section headed
"Certain Provisions of the Merger Agreement - Conditions to the Completion of
the Merger" in the Document on or before 31 December, 2006 (or such other date
as ZRCC and Ningbo Yonglian may agree). Otherwise, the Merger will lapse.
According to the Merger Agreement, 31 December, 2006 is the latest time by
which all the Conditions for the Merger Agreement should be satisfied (or
waived by mutual agreement, as appropriate). ZRCC Independent Shareholders
should note that, as indicated in the section headed "Expected Timetable" in
the Document, it is expected that all the Conditions would be satisfied by 14
April, 2006. As such, the long-stop date of 31 December, 2006 as set out in the
Merger Agreement, should not affect the Independent ZRCC Shareholders' voting
decisions at the Special General Meetings.
PRINCIPAL FACTORS AND REASONS
In arriving at our opinion, we have taken into consideration the
following principal factors and reasons:
1. Background and rationale of the Merger
ZRCC was incorporated as a joint stock limited company in accordance with
the PRC Company Law on 28 June, 1994. ZRCC H Shares started trading on the Hong
Kong Stock Exchange on 2 December, 1994.
We noted that in connection with its initial public offering, Sinopec
Corp. stated in its prospectus dated 13 October, 2000 that Sinopec Corp. and
its subsidiaries may integrate their operations and capital structure by
seeking to reduce over time, through purchase, exchange or other means, the
portion of shares of their subsidiaries that are held by minority shareholders,
including publicly held shares of their listed subsidiaries. ZRCC is one of the
listed subsidiaries of Sinopec Corp. with Sinopec Corp. holding 1,800,000,000
ZRCC Domestic Shares, representing approximately 71.3% of the issued share
capital of ZRCC as at the Latest Practicable Date. As at the Latest Practicable
Date, the ZRCC H Shareholders were interested in 723,754,468 ZRCC H Shares,
representing approximately 28.7% of the issued share capital of ZRCC. We
consider that the Proposal is in line with Sinopec Corp.'s stated business
strategy as mentioned above.
ZRCC is principally engaged in the production and sale of petroleum
products (including gasoline, diesel, kerosene, naphtha, liquefied petroleum
gas, solvent oil and fuel oil), intermediate petrochemical products, asphalt,
urea and petrochemical products such as aromatics (including benzene, toluene,
orthoxylene and paraxylene) and polypropylene. ZRCC possesses oil refinery
plants and facilities in the PRC with a scale of operation up to international
standards and sells its products primarily in the PRC. It is also one of the 10
largest refineries in the Asia Pacific region. Sinopec Corp.'s principal
operations include exploring for and developing, producing and trading crude
oil and natural gas, processing crude oil into refined oil products, producing
refined oil products and trading, transporting, distributing and marketing
refined oil products and producing, distributing and trading petrochemical
products. At present, both ZRCC and Sinopec Corp. are engaged in the oil
refining business with similar products and competing sales channels. As such,
we concur with ZRCC that the Proposal and the Merger should:
(i) eliminate connected party transactions and intra-group competition
between ZRCC and Sinopec Corp.;
(ii) reinforce the business value chain by becoming a part of an integrated
operator with both crude oil exploration and production and sale of
petrochemical and oil products to end-use customers;
(iii) improve the risk resistance ability of ZRCC as a result of reduction of
exposure to price fluctuations from the upstream suppliers and downstream
customers of its business value chain, through the vertical integration
of ZRCC's oil refining business with the upstream crude oil and
downstream petrochemical operations of Sinopec Corp., as well as improve
the production, management and sales efficiency of ZRCC and Sinopec
Corp.
Sinopec Corp. and Ningbo Yonglian have no intention to make significant
changes to the existing businesses of ZRCC upon completion of the Merger.
Independent ZRCC Shareholders should note that the rationale and expected
benefits discussed above in relation to the Merger would only be realised upon
the completion of the Merger and the integration of the businesses of Sinopec
Corp. and ZRCC and if the Merger were not effected, the ZRCC Directors intend
to continue the existing businesses of ZRCC. As such, if the Merger were not
effected, the expected benefits that could be enjoyed by ZRCC from the Merger
would not actualise.
We note in the section headed "Additional Information Regarding the
Merger - Strategic Reasons for the Merger" in the Document, the decision of
Sinopec Corp. to proceed with the Proposal and the Merger was made in
accordance with its internal investment policy, assuming an average long-term
refinery margin of approximately US$4.00 per barrel for Sinopec Corp. and an
average long-term refinery margin of approximately US$6.00 per barrel for ZRCC.
We note further that such assumption was made for the purpose of assessing
Sinopec Corp.'s internal investment return and on the basis of the historical
refinery margins of Sinopec Corp. and the difference of the refinery margins
between ZRCC and Sinopec Corp. for the year ended 31 December, 2004. Given that
this is an assumption used by Sinopec Corp. in connection with its investment
decision, we have not considered this assumption or the basis for this
assumption in formulating our opinion on the Proposal and the Merger, however,
we have discussed in further details the historical financial performance of
the ZRCC Group (including the historical refinery margins of ZRCC), please
refer to paragraph 2(i) below.
In view of the above and in particular, ZRCC's controlling shareholder's
strategy to integrate their operations and capital structure, we are of the
view that the Proposal offers an unique opportunity for ZRCC H Shareholders to
realise their investments in ZRCC at a cash consideration which represents a
premium over the prevailing market price of ZRCC H Shares and there is no
assurance that the share price of the ZRCC H Shares will remain at the current
level if the Proposal lapses.
2. Valuation considerations
In analysing the valuation of the ZRCC H Shares, we have taken into
consideration the following principal factors: (i) historical financial
performance of the ZRCC Group; (ii) future prospects of the ZRCC Group; and
(iii) analysis of the Cancellation Price.
(i) Historical financial performance of the ZRCC Group
The following is a summary of the audited financial statements for
the three years ended 31 December, 2004 and unaudited financial
statements for the six months ended 30 June, 2004 and 2005 for ZRCC as
extracted from the annual reports and interim reports of ZRCC.
Table 1 - Consolidated income statements of ZRCC
Audited
Year ended 31 December
2002 2003 2004
RMB'000 HK$'000 RMB'000 HK$'000 RMB'000 HK$'000
Net sales 21,494,497 20,277,827 27,908,978 26,329,225 40,337,982 38,054,700
Gross profit 2,010,113 1,896,333 2,280,319 2,151,244 4,369,395 4,122,071
Gross profit margin 9.4% 9.4% 8.2% 8.2% 10.8% 10.8%
Other operating income 54,520 51,434 59,593 56,220 76,820 72,472
Selling and
administrative
expenses (498,348) (470,140) (511,645) (482,684) (531,995) (501,882)
Other operating (54,123) (51,059) (40,178) (37,904) (100,008) (94,347)
expenses
Net loss on (54,278) (51,206) (22,506) (21,232) (28,202) (26,606)
disposal of
property, plant
and equipment
Employee 0 0 (69,184) (65,268) 0 0
reduction expenses
------------ ---------- ---------- ---------- ---------- -----------
Operating profit 1,457,884 1,375,362 1,696,399 1,600,376 3,786,010 3,571,708
Operating profit 6.8% 6.8% 6.1% 6.1% 9.4% 9.4%
margin
Net financing (74,650) (70,425) (81,907) (77,271) (73,653) (69,484)
costs
Share of profits 9,832 9,276 (4,898) (4,620) 53,077 50,072
less (losses)
from associates
and jointly
controlled entity
------------ ---------- ---------- ---------- ---------- -----------
Profit before tax 1,393,066 1,314,213 1,609,594 1,518,485 3,765,434 3,552,296
Income tax expense (419,809) (396,046) (521,565) (492,042) (1,152,075) (1,086,863)
Minority interests 0 0 (42) (40) (71) (67)
------------ ---------- ---------- ---------- ---------- -----------
Profit 973,257 918,167 1,087,987 1,026,403 2,613,288 2,465,366
attributable to
equity holders of
the parent ("Net
profit")
============ ========== ========== ========== ========== ===========
Net profit margin 4.5% 4.5% 3.9% 3.9% 6.5% 6.5%
Earnings per ZRCC RMB0.39 HK$0.37 RMB0.43 HK$0.41 RMB1.04 HK$0.98
Share
Dividends per RMB0.12 HK$0.11 RMB0.14 HK$0.13 RMB0.30 HK$0.28
ZRCC Share
TABLE 1 - CONTINUED
Unaudited
Six months ended 30 June
2004 2005
RMB'000 HK$'000 RMB'000 HK$'000
Net sales 18,580,125 17,528,420 24,992,827 23,578,139
Gross profit 2,052,138 1,935,979 1,806,786 1,704,515
Gross profit margin 11.0% 11.0% 7.2% 7.2%
Other operating income 37,833 35,692 63,436 59,845
Selling and
administrative
expenses (221,604) (209,060) (253,086) (238,760)
Other operating (45,978) (43,376) (32,715) (30,863)
expenses
Net loss on 0 0 0 0
disposal of
property, plant
and equipment
Employee 0 0 0 0
reduction expenses
----------- ---------- ---------- -----------
Operating profit 1,822,389 1,719,235 1,584,421 1,494,737
Operating profit 9.8% 9.8% 6.3% 6.3%
margin
Net financing (42,309) (39,914) (29,789) (28,103)
costs
Share of profits 20,982 19,794 21,433 20,220
less (losses)
from associates
and jointly
controlled entity
----------- ---------- ---------- -----------
Profit before tax 1,801,062 1,699,115 1,576,065 1,486,854
Income tax expense (524,575) (494,882) (314,892) (297,068)
Minority interests 113 107 (25) (24)
----------- ---------- ---------- -----------
Profit 1,276,600 1,204,340 1,261,148 1,189,762
attributable to
equity holders of
the parent ("Net
profit")
=========== ========== =========== ===========
Net profit margin 6.9% 6.9% 5.0% 5.0%
Earnings per ZRCC RMB0.51 HK$0.48 RMB0.50 HK$0.47
Share
Dividends per RMB0.09 HK$0.08 RMB0.09 HK$0.08
ZRCC Share
Source: ZRCC's annual and interim reports.
Note: For illustrative purposes, an exchange rate of HK$1.00:RMB1.06 was used.
(a) Analysis of net sales and gross profit margin
ZRCC is principally engaged in the production and sale of petroleum
products (including gasoline, diesel, kerosene, naphtha, liquefied
petroleum gas, solvent oil and fuel oil), intermediate petrochemical
products, asphalt, urea and petrochemical products such as aromatics
(including benzene, toluene, orthoxylene and paraxylene) and
polypropylene. The following table sets out a breakdown of the ZRCC
Group's net sales for the three years ended 31 December, 2004 and the six
months ended 30 June, 2004 and 2005.
Table 2 - Net sales breakdown
Year ended 31 December
2002 2003 2004
RMB'000 HK$'000 % RMB'000 HK$'000 % RMB'000 HK$'000 %
Gasoline 3,508,047 3,309,478 16.3% 4,815,426 4,542,855 17.3% 5,701,390 5,378,670 14.1%
Diesel 9,153,915 8,635,769 42.6% 11,380,343 10,736,174 40.8% 17,861,778 16,850,734 44.3%
Kerosene 1,974,748 1,862,970 9.2% 2,390,155 2,254,863 8.6% 3,140,235 2,962,486 7.8%
Paraxylene 0 0 0.0% 321,628 303,423 1.1% 2,046,850 1,930,991 5.1%
("PX")
Polypropylene 0 0 0.0% 63,245 59,665 0.2% 1,270,781 1,198,850 3.1%
("PP")
Others 6,857,787 6,469,610 31.9% 8,938,181 8,432,246 32.0% 10,316,948 9,732,969 25.6%
---------- ---------- ------ ----------- ---------- ------ ---------- ---------- ------
Total 21,494,497 20,277,827 100.0% 27,908,978 26,329,225 100.0% 40,337,932 8,054,700 100.0%
========== ========== ====== =========== ========== ====== ========== ========== ======
Table 2 - Continued
Six months ended 30 June
2004 2005
RMB'000 HK$'000 % RMB'000 HK$'000 %
Gasoline 2,391,251 2,255,897 12.9% 3,669,870 3,462,142 14.7%
Diesel 8,606,204 8,119,060 46.3% 10,316,731 9,732,765 41.3%
Kerosene 1,513,796 1,428,109 8.1% 2,043,521 1,927,850 8.2%
Paraxylene 921,691 869,520 5.0% 1,844,693 1,740,276 7.4%
("PX")
Polypropylene 452,644 427,023 2.4% 955,930 901,821 3.8%
("PP")
Others 4,694,539 4,428,811 25.3% 6,162,082 5,813,285 24.6%
---------- ---------- ------- ---------- ---------- ------
Total 18,580,125 17,528,420 100.0% 24,992,827 23,578,139 100.0%
========== ========== ======= ========== ========== ======
Source: ZRCC's annual and interim reports.
Note: For illustrative purposes, an exchange rate of HK$1.00:RMB1.06 was used.
Net sales increased from approximately RMB21,494.5 million
(equivalent to approximately HK$20,277.8 million) for the year ended 31
December, 2002 to approximately RMB40,338.0 million (equivalent to
approximately HK$38,054.7 million) for the year ended 31 December, 2004
primarily as ZRCC increased its annual throughput from approximately 11.9
million tonnes in 2002 to approximately 16.1 million tonnes in 2004. For
the six months ended 30 June, 2005, net sales reached approximately
RMB24,992.8 million (equivalent to approximately HK$23,578.1 million) as
ZRCC's throughput increased to approximately 8.5 million tonnes from
approximately 8.1 million tonnes as compared to the corresponding period
in 2004. The increase in net sales was also attributable to adjustments
made to its product mix from the year ended 31 December, 2003 to
capitalise on the increase in prices of petroleum products, which was
driven by increased demand in the PRC, with the timely completion of a
450,000 tonnes per annum ("tpa") PX unit in 2003 which was subsequently
increased by a further 200,000 tpa in 2004.
Notwithstanding the increase in net sales, gross profit margin
declined from approximately 9.4% for the year ended 31 December, 2002 to
approximately 8.2% for the year ended 31 December, 2003 but increased to
approximately 10.8% for the year ended 31 December, 2004. Gross profit
margin for the six months ended 30 June, 2005 was approximately 7.2%.
Based on our discussion with the management of ZRCC and our analysis of
the price movements in the average international Brent crude oil and
ZRCC's products in Table 3 below, we concur with the management's view
that the decline in gross profit margin was primarily due to the increase
in the cost of its feedstock resulting from the increase in international
crude oil prices exceeding the increase in its product prices, as
adjustments to the prices of gasoline and diesel, the two largest
products of ZRCC in terms of sales, are regulated and determined by the
PRC Government. The increase in gross profit margin for the year ended 31
December, 2004 was primarily attributable to higher gross profit margin
generated from the sale of petroleum products such as PX which has offset
the decline in gross profit margin generated from the sales of gasoline
and diesel. The table below sets out the average international Brent
crude oil price and the average gasoline and diesel sales price of ZRCC,
as well as the refinery margins of ZRCC for the three years ended 31
December, 2004 and the six months ended 30 June, 2004 and 2005. As noted
from the table below, the increase in ZRCC's sales price of gasoline and
diesel from the year 2004 was not adequate to compensate for the increase
in international crude oil price and as a result, the refinery margin of
ZRCC reduced from approximately US$5.84 per barrel for the year ended 31
December, 2004 to approximately US$4.91 per barrel for the six months
ended 30 June, 2005.
Table 3 - Average international Brent crude oil and ZRCC's product prices
2002 2003 2004 1H2004 1H2005
Average international Brent US$25.1 per US$28.5 per US$38.0 per US$33.3 per US$50.2 per
crude oil price(1) barrel barrel barrel barrel barrel
(equivalent to (equivalent to (equivalent to (equivalent to (equivalent to
RMB208.3 RMB236.6 RMB315.4 RMB276.4 RMB416.7
per barrel or per barrel or per barrel or per barrel or per barrel or
RMB1,520.6 RMB1,727.2 RMB2,302.4 RMB2,017.7 RMB3,041.9
per tonne) per tonne) per tonne) per tonne) per tonne)
% increase from prior year/period - 13.5% 33.3% - 50.8%
ZRCC's average gasoline sales RMB2,051.5 RMB2,336.5 RMB2,689.3 RMB2,470.3 RMB3,158.2
price(2) per tonne per tonne per tonne per tonne per tonne
% increase from prior year/period - 13.9% 15.1% - 27.8%
ZRCC's average diesel sales RMB1,977.1 RMB2,245.5 RMB2,740.4 RMB2,571.3 RMB3,087.0
price(2) per tonne per tonne per tonne per tonne per tonne
% increase from prior year/period - 13.6% 22.0% - 20.1%
Refinery margin(3) US$4.50 per US$4.88 per US$5.84 per US$5.75 per US$4.91 per
barrel barrel barrel barrel barrel
(equivalent to (equivalent to (equivalent to (equivalent to (equivalent to
RMB37.35 RMB40.50 RMB48.47 RMB47.73 RMB40.75
per barrel) per barrel) per barrel) per barrel) per barrel)
% increase from prior year/period - 8.4% 19.7% - (14.6%)
Source: ZRCC's annual and interim reports and Bloomberg.
Notes:
(1) There are approximately 7.3 barrels of Brent crude oil in a tonne.
(2) This price excludes consumption tax and surcharges.
(3) Refinery margin of ZRCC for all its products.
(4) For illustrative purposes, an exchange rate of US$1.00:RMB8.3 was used.
(b) Analysis of operating profit and net profit
Operating profit increased from approximately RMB1,457.9 million
(equivalent to approximately HK$1,375.4 million) for the year ended 31
December, 2002 to approximately RMB3,786.0 million (equivalent to
approximately HK$3,571.7 million) for the year ended 31 December, 2004
primarily due to increase in gross profit and cost control measures
(including streamlining of management structure) implemented by ZRCC. In
2003, ZRCC incurred approximately RMB69.2 million (equivalent to
approximately HK$65.3 million) of employee reduction expenses as a result
of the voluntary resignation of approximately 870 employees (2002 and
2004: Nil). Operating profit for the six months ended 30 June, 2005 was
approximately RMB1,584.4 million, (equivalent to approximately HK$1,494.7
million) representing a decrease of approximately 13.1% from the
corresponding period in 2004, which was mainly attributable to the
decrease in gross profit of approximately 12.0%.
The fluctuation of operating profit margin from approximately 6.8%
for the year ended 31 December, 2002 to approximately 6.3% for the six
months ended 30 June, 2005 was generally in line with the fluctuation in
gross profit margin over the corresponding period. The fluctuation of
operating profit margin was also attributable to the reduction in selling
and administrative expenses as a percentage of net sales due to
implementation of cost control measures.
Net profit increased from approximately RMB973.3 million
(equivalent to approximately HK$918.2 million) for the year ended 31
December, 2002 to approximately RMB2,613.3 million (equivalent to
approximately HK$2,465.4 million) for the year ended 31 December, 2004,
primarily due to the increase in operating profit but slightly reduced by
the increase in tax expense due to higher taxable income over the period,
as well as higher net financing expenses in 2003 when capitalisation of
interest expenses on long-term borrowings ceased upon completion of
construction of the fixed assets. Net profit for the six months ended 30
June, 2005 was approximately RMB1,261.1 million (equivalent to
approximately HK$1,189.8 million) which represented a decrease of
approximately 1.2% from the corresponding period in 2004 primarily as a
result of the decrease in operating profit but slightly increased by the
decline in net financing cost as a result of the repayment of the
principal amounts of outstanding borrowings, as well as the reduction in
tax expense due to the lower taxable income for the period.
The decline in net profit margin from approximately 4.5% for the
year ended 31 December, 2002 to approximately 3.9% for the year ended 31
December, 2003 was in line with the reduction in operating profit margin
while the increase in net profit margin to approximately 6.5% for the
year ended 31 December, 2004 was primarily due to the increase in
operating profit margin of approximately 3.3% but slightly reduced by the
increase in tax expense as a percentage of net sales of approximately
1.0%. For the six months ended 30 June, 2005, net profit margin decreased
from approximately 6.9% to approximately 5.0% as compared to the
corresponding period in 2004 as the decrease in net financing costs and
income tax expense has offset the decline in operating profit margin of
approximately 3.5% over the period.
We note from our review of the historical financial performance of
ZRCC that ZRCC is subject to significant raw material price sensitivity.
As is evident from the historical financial performance of ZRCC,
movements in the raw materials prices have a significant impact on the
gross margins of ZRCC. Given that the sales prices of ZRCC's top two
products, namely gasoline and diesel, are regulated and determined by the
PRC Government, ZRCC was not able to pass on some of the incremental raw
material cost to its customers by raising its sales price. Refinery
margin reduced from approximately US$5.84 per barrel for the year ended
31 December, 2004 to approximately US$4.91 per barrel for the six months
ended 30 June, 2005, when the adjustments made by the PRC Government to
the domestic sales prices for gasoline and diesel were less than the
corresponding increase in international crude oil price.
(ii) Future prospects of the ZRCC Group
In spite of the marked increase in oil prices in the recent past,
global refining margins have seen a period of considerable growth with
the last twelve months being one of the best for the sector. Robust
product demand growth, particularly from the large developing nations,
following a period of industry under investment in refinery capacity has
lead to a tightened supply and demand balance and historically high
capacity utilisation rates. The extent to which further margin increases
are possible remains unclear but there is a consensus that high margins
will remain in the short-term at least before their return to a
normalised level as new capacity catches up with demand growth.
Within the PRC, domestic petroleum product price restrictions have
meant producers have been less able to pass input price increases on to
customers. Continued high oil prices without increases in domestic
product prices will negatively impact company profitability. We note that
there have been ongoing discussions in the market that the PRC Government
is closely monitoring the situation of widening gap between domestic and
international product prices. However, the PRC Government has yet to
announce any definitive measures in relation to this. Further domestic
product price increases and/or government subsidies, to the extent
available, to compensate PRC refiners for product price controls, will
have an impact on ZRCC's financial performance, the quantum of which
could not be ascertained at the current moment. In addition, ZRCC's high
level of efficiency and low cash operating costs are positive factors but
the low level of vertical integration leave it exposed to oil price
movements. As mentioned in ZRCC's interim report for the six months ended
30 June, 2005, ZRCC's processing capacity was approximately 18.5 million
tpa and ZRCC has plans to upgrade and increase its capacity to
approximately 20 million tpa by the end of 2006. We understand from our
discussion with the management of ZRCC that ZRCC has no other plans to
increase its capacity significantly beyond that level.
In the longer-term, (a) domestic price liberalisation, (b) expected
strong product demand, and (c) potential RMB currency appreciation would
be expected to have an impact on ZRCC's future performance.
(iii) Analysis of the Cancellation Price
The Cancellation Price values the entire issued share capital of
ZRCC at approximately HK$26,751.80 million and the 723,754,468 ZRCC H
Shares held by the ZRCC H Shareholders as at the Latest Practicable Date
at approximately HK$7,671.80 million. The Cancellation Price of HK$10.60
per ZRCC H Share represents:
o a premium of approximately 3.9% over the closing price of
HK$10.20 per ZRCC H Share as quoted on the Hong Kong Stock
Exchange as at the Latest Practicable Date;
o a premium of approximately 12.2% over the closing price of
HK$9.45 per ZRCC H Share as quoted on the Hong Kong Stock
Exchange on 2 November, 2005 (being the last trading day of
the ZRCC H Shares prior to the issue of the Announcement);
o a premium of approximately 17.5% over the average closing
price of approximately HK$9.02 per ZRCC H Share as quoted on
the Hong Kong Stock Exchange over the last five trading days
up to and including 2 November, 2005;
o a premium of approximately 22.9% over the average closing
price of approximately HK$8.62 per ZRCC H Share as quoted on
the Hong Kong Stock Exchange over the 1-month period up to
and including 2 November, 2005;
o a premium of approximately 26.7% over the average closing
price of approximately HK$8.37 per ZRCC H Share as quoted on
the Hong Kong Stock Exchange over the 3-month period up to
and including 2 November, 2005;
o a premium of approximately 33.1% over the average closing
price of approximately HK$7.97 per ZRCC H Share as quoted on
the Hong Kong Stock Exchange over the 6-month period up to
and including 2 November, 2005;
o a premium of approximately 29.9% over the average closing
price of approximately HK$8.16 per ZRCC H Share as quoted as
the Hong Kong Stock Exchange over the 12-month period up to
and including 2 November, 2005;
o an implied price earnings ratio ("PER") of approximately
10.8 times the basic earnings per ZRCC Share of RMB1.04
(equivalent to approximately HK$0.98) for the financial year
ended 31 December, 2004;
o an implied enterprise value ("EV")/earnings before interest,
tax, depreciation and amortisation expenses ("EBITDA")
multiple of approximately 5.6 times for the year ended 31
December, 2004;
o an implied price to NAV ("P/NAV") multiple of approximately
2.5 times the NAV per ZRCC Share as at 31 December, 2004 of
approximately RMB4.52 (equivalent to approximately HK$4.26);
and
o an implied dividend yield of approximately 2.7%, based on
the dividend per ZRCC Share of RMB0.30 (equivalent to
approximately HK$0.28) for the year ended 31 December, 2004.
Basis of our analysis
We have analysed the Cancellation Price in this section by
reviewing: (a) the historical share price performance of ZRCC H
Shares; (b) the historical trading multiples of ZRCC H Shares and
the multiples implied by the Cancellation Price; (c) the trading
multiples of companies comparable to ZRCC ("Comparable Companies")
and recent comparable transactions; and (d) recent relevant
privatisations completed in Hong Kong.
(a) Historical share price performance of ZRCC H Shares
The graph below illustrates the daily closing prices
and trading volume of ZRCC H Shares for the period since 2
December, 1994 (the date when ZRCC H Shares were first listed
on the Hong Kong Stock Exchange) and up to and including the
Latest Practicable Date:
Chart 4 - Performance of ZRCC H Share price and trading volume
since 2 December, 1994
[GRAPHIC OMITTED][GRAPHIC OMITTED]
Source: Bloomberg.
As illustrated in the chart above, the price of ZRCC H
Shares has increased significantly since October 2002 and
reached its highest closing price of HK$9.90 on 8 April,
2004. The ZRCC H Shares traded close to historical highs
prior to the Announcement. Independent ZRCC Shareholders
should note that the ZRCC H Shares have never traded at or
above the Cancellation Price since it was first listed on the
Hong Kong Stock Exchange on 2 December, 1994. Although the
historical ZRCC H Share price performance does not
necessarily reflect the future price of the ZRCC H Shares, it
is nevertheless useful to indirectly compare the Cancellation
Price with past share price performance. Therefore, in light
of the historical share price performance since 2 December,
1994, we will focus our analysis on the period starting from
2 October, 2002 and up to and including the Latest
Practicable Date.
Chart 5 - Performance of ZRCC H Share price since 2 October, 2002
[GRAPHIC OMITTED][GRAPHIC OMITTED]
Source: Bloomberg.
The table below is a summary of the highest and lowest
traded prices, the highest and lowest closing prices, the
average closing prices of the ZRCC H Shares and the total
number of trading days which the closing prices of the ZRCC H
Shares were above the Cancellation Price during the one-year
period from 3 November, 2004 to 2 November, 2005, both days
inclusive (the "One-Year Period"), and for the three-year
period from 3 November, 2002 to 2 November, 2005, both days
inclusive (the "Three-Year Period"):
Table 6 - Trading performance
One-Year Period Three-Year Period
Highest traded price HK$9.85 HK$9.95
Lowest traded price HK$6.50 HK$1.61
Highest closing price HK$9.80 HK$9.90
Lowest closing price HK$6.60 HK$1.63
Average closing price HK$8.16 HK$6.13
Number of days closed above the 0 days 0 days
Cancellation Price
Total number of trading days 249 days 744 days
Source: Bloomberg.
As illustrated in Chart 5 and Table 6 above, ZRCC H
Shares have never traded at or above the Cancellation Price
between 2 October, 2002 and up to and including 2 November,
2005, being the last trading day of the ZRCC H Shares prior
to the issue of the Announcement. The Cancellation Price of
HK$10.60 is approximately 7.1% higher than the highest
closing price of HK$9.90 per ZRCC H Share achieved on 8
April, 2004 during the Three-Year Period and approximately
8.2% higher than the highest closing price of HK$9.80 per
ZRCC H Share achieved on 1 March, 2005 during the One-Year
Period.
In addition, we have also compared the closing share
price performance of ZRCC H Shares against the Hang Seng
Index (the "HSI") and the Hang Seng China Enterprises
Index(1) (the "HSCEI") for the same period. We have used the
HSI and the HSCEI in our comparison as they are commonly used
indicators of the general stock market trend in Hong Kong and
the trend of H-share companies listed in Hong Kong
respectively:
Chart 7 - ZRCC H Share price performance
relative to the HSI and the HSCEI
[GRAPHIC OMITTED][GRAPHIC OMITTED]
Source: Bloomberg.
As demonstrated in Chart 7 above, the ZRCC H Shares
have outperformed the HSI and the HSCEI over the Three-Year
Period. The graph implied that an investment in ZRCC H Shares
on 2 October, 2002 would have achieved a better return than
the average return on investments in the HSI and the HSCEI
constituent companies.
(1) ZRCC is a member of the HSCEI and represents approximately 1.2% of the
index as at the Latest Practicable Date.
(b) Historical trading multiples of ZRCC H Shares
The graph below shows the PER of ZRCC H Shares for the
period starting from 2 October, 2002 and up to and including
the Latest Practicable Date, the average PER of ZRCC H Shares
for the same period and the PER implied by the Cancellation
Price:
Chart 8 - PER performance
[GRAPHIC OMITTED][GRAPHIC OMITTED]
Sources: ZRCC's annual reports and Bloomberg.
Based on ZRCC's 2004 earnings per ZRCC Share of RMB1.04
(equivalent to approximately HK$0.98), the PER implied by the
Cancellation Price of 10.8 times is approximately 42.1%
higher than the 3-year average of approximately 7.6 times and
approximately 38.5% higher than the 1-year average of
approximately 7.8 times. The highest historical PER of
approximately 15.8 times was achieved for three days during
the period under review on 24, 29 and 31 December, 2003
respectively.
(c) Trading multiples of Comparable Companies and recent comparable
transactions
In selecting the Comparable Companies, we have taken into
account their primary business focus, the geographic markets in
which they operate, their respective sizes in terms of market
capitalisation, and their profit margins. Based on our review, we
noted that there are currently no pure refinery companies listed on
the Hong Kong Stock Exchange. As such, we have expanded our scope
and reviewed all the refinery and petrochemical companies listed in
Hong Kong and with a primary market focus on the PRC, where
petroleum products and other refinery related intermediate
petrochemical product sales form a substantial part of total
revenues. In addition, given the specific dynamics of the PRC
petroleum product market, we have separately considered other
companies using the same criteria but which have a market focus in
the rest of Asia outside of the PRC.
Any companies with a current market capitalisation of over
US$20 billion have been excluded on the basis that very large
companies within the sector tend to attract additional economies of
scale which are reflected in their market valuations. We have not
considered any US, European or Japanese companies within our
analysis as these companies operate in different markets that have
different underlying business dynamics.
The common valuation methodologies relevant to the refining
sector consist of earnings based (namely, EV/EBITDA and PER) and
asset based (namely, P/NAV) methodologies. During different points
in the business cycle certain methodologies become more or less
relevant. Given the current point in the cycle, we consider
earnings based metrics to be of primary significance in appraising
the Cancellation Price and have conducted our analysis accordingly.
We have also considered asset based multiples for completeness.
Based on the above selection criteria, we set out in Table 9
below the relevant ratios for the selected Comparable Companies
based upon their respective share prices as at the Latest
Practicable Date and their latest published audited full year
financial statements.
Table 9 - Analysis of Comparable Companies
Company Listing Market PER(2)(3) EV(4)/EBITDA(5) P/NAV(2)(6)
place capitalisation(1)
HK$m x x x
ZRCC (at Cancellation Price) Hong Kong 26,752 10.8x 5.6x 2.5x
Hong Kong Stock Exchange listed comparable companies
Sinopec Shanghai Petrochemical Company Hong Kong, 23,463 6.3x 4.4x 1.4x
Limited Shanghai and
New York
Jilin Chemical Industrial Company Limited Hong Kong, 15,308 6.4x 5.4x 3.2x
("Jilin Chemical") Shanghai and
New York
Jilin Chemical (at offer price) Hong Kong, 15,780 6.6x 5.5x 3.3x
Shanghai and
New York
Mean (excluding Jilin Chemical 19,386 6.3x 4.9x 2.3x
(at offer price))
Median (excluding Jilin Chemical 19,386 6.3x 4.9x 2.3x
(at offer price))
Other Asian listed comparable companies
Bharat Petroleum Corporation Limited Mumbai 21,676 8.3x 4.3x 1.7x
Hindustan Petroleum Corporation Limited Mumbai 18,629 8.6x 5.5x 1.3x
SK Corporation Korea 49,205 4.0x 5.4x 1.0x
S-Oil Corporation Korea 63,516 6.8x 6.9x 3.2x
Thai Oil Public Company Limited Bangkok 25,335 8.4x 6.6x 2.5x
Singapore Petroleum Company Limited Singapore 11,039 8.2x 8.9x 2.5x
Formosa Petrochemical Corporation Taipei 128,821 10.3x 10.6x 3.1x
Mean 45,460 7.8x 6.9x 2.2x
Median 25,335 8.3x 6.6x 2.5x
Sources: Bloomberg and annual reports of the Comparable Companies.
Notes:
(1) Market capitalisation is based on the closing price of a comparable
company as quoted on the stock exchange and the total number of shares in
issue on the Latest Practicable Date. For companies which have a H share
listing in Hong Kong and also have an A share listing in the PRC, the
market capitalisation is the sum of the H share market capitalisation
based on the closing price of the H shares of a comparable company as
quoted on the Hong Kong Stock Exchange and the total number of H shares
in issue, and the A share market capitalisation based on the closing
price of the A shares of the same comparable company as quoted on the
relevant stock exchange in the PRC and the total number of A shares in
issue on the Latest Practicable Date.
(2) Price refers to the market capitalisation based on the closing price of a
comparable company as quoted on the stock exchange and the total number
of shares in issue on the Latest Practicable Date. For companies which
have a H share listing in Hong Kong and also have an A share listing in
the PRC, the market capitalisation is the sum of the H share market
capitalisation based on the closing price of the H shares of a comparable
company as quoted on the Hong Kong Stock Exchange and the total number of
H shares in issue, and the A share market capitalisation based on the
closing price of the A shares of the same comparable company as quoted on
the relevant stock exchange in the PRC and the total number of A shares
in issue on the Latest Practicable Date.
(3) Earnings refer to net profit excluding extraordinary items as per the
latest published audited full year financial statements of the relevant
comparable company available on the Latest Practicable Date.
(4) Enterprise value ("EV") of a comparable company refers to the sum of its
market capitalisation on the Latest Practicable Date and its net
indebtedness as per its latest published audited full year financial
statements available on the Latest Practicable Date.
(5) EBITDA refers to the earnings before interest, tax, depreciation and
amortisation expenses as per the latest published audited full year
financial statements of the relevant comparable company available on the
Latest Practicable Date.
(6) NAV refers to net asset value as per the latest published audited full
year financial statements of the relevant comparable company available on
the Latest Practicable Date.
(7) For illustrative purposes, an exchange rate of HK$1.00:RMB1.06 was used
for historical financial numbers whilst the prevailing exchange rate was
used for closing share price.
The PER implied by the Cancellation Price is
approximately 10.8 times 2004 basic earnings per ZRCC H Share
of RMB1.04 (equivalent to approximately HK$0.98). This is
higher than both the Hong Kong Stock Exchange listed
comparable companies and the other Asian listed comparable
companies median PER of approximately 6.3 times and 8.3 times
respectively.
The EV/EBITDA multiple implied by the Cancellation
Price of approximately 5.6 times ZRCC's 2004 EBITDA of
approximately RMB4,862.1 million (equivalent to approximately
HK$4,586.9 million) represents a premium over the mean of the
Hong Kong Stock Exchange listed comparable companies of
approximately 4.9 times as well as the median of the Hong
Kong Stock Exchange listed comparable companies of
approximately 4.9 times and is within the range of the other
Asian listed comparable companies.
The P/NAV implied by the Cancellation Price to NAV is
approximately 2.5 times 2004 NAV per ZRCC H Share of RMB4.52
(equivalent to approximately HK$4.26) and is at a premium
over the median of the Hong Kong Stock Exchange listed
comparable companies of approximately 2.3 times and is the
same as the median of the other Asian listed comparable
companies of approximately 2.5 times.
Independent ZRCC Shareholders should note that
PetroChina Company Limited ("PetroChina") and Jilin Chemical
(one of the Comparable Companies) made a joint announcement
on 28 October, 2005 in respect of a possible voluntary
conditional offer by Citigroup Global Markets Asia Limited on
behalf of PetroChina to acquire all the outstanding H-shares
of Jilin Chemical not already owned by PetroChina and parties
acting in concert with it. It was also announced that upon
the offer becoming unconditional in all respects, the
listings of the H shares of Jilin Chemical on the Hong Kong
Stock Exchange and the American depositary shares of Jilin
Chemical on the New York Stock Exchange will be withdrawn and
the trading in the A shares of Jilin Chemical on the Shenzhen
Stock Exchange will cease. The multiples of Jilin Chemical
(other than P/NAV) implied by the offer price are lower than
the implied multiples of ZRCC (other than P/NAV) implied by
the Cancellation Price.
In addition to the comparable company trading
multiples, we have also analysed the Cancellation Price with
regard to other recent comparable transactions involving
merger and acquisition activities of companies within the
sector. In selecting these comparable transactions, we have
considered transactions where the target was a listed company
with a similar business focus and where the transaction was
successfully completed in the last two years.
Table 10 - Analysis of recent comparable transactions
Previous
listing Transaction EV(4)/
Target place Acquiror Date effective value(1) PER(2)(3) EBITDA(5) P/NAV(2)(6)
HK$m x x x
ZRCC Sinopec Corp. TBD 7,314 10.8x 5.6x 2.5x
(at Cancellation
Price)
Comparable transactions
Premcor Inc. New York Valero Energy 1 September, 62,960 12.9x 7.6x 3.0x
Corporation 2005
Sinopec Beijing Hong Kong Sinopec Corp. 11 May, 2005 4,246 9.1x 4.8x 2.1x
Yanhua
Petrochemical
Company
Limited
Mean 33,603 11.0x 6.2x 2.6x
Median 33,603 11.0x 6.2x 2.6x
Source: Bloomberg and public filings of companies.
Notes:
(1) Transaction value refers to the sum of the equity purchase consideration
paid in an acquisition and the proportional net indebtedness of the
targets as per the latest published unaudited interim financial
statements available or if interim financial statements are not
available, the latest published audited full year financial statements of
the relevant company available as at the time of announcement of the
transaction.
(2) Price refers to the implied equity purchase consideration paid in an
acquisition.
(3) Earnings refers to net profit excluding extraordinary items for the 12
months prior to the announcement of the transaction as per the latest
published unaudited interim financial statements available or if interim
financial statements are not available, the latest published audited full
year financial statements of the relevant company available as at the
time of the announcement of the transaction.
(4) EV refers to the sum of the implied equity purchase consideration paid in
an acquisition and the net indebtedness of the targets as per the latest
published unaudited interim financial statements available or if interim
financial statements are not available, the latest published audited full
year financial statements of the relevant company available as at the
time of announcement of the transaction.
(5) EBITDA refers to the earnings before interest, tax, depreciation and
amortisation expenses for the 12 months prior to the announcement of the
transaction as per the latest published unaudited interim financial
statements available or if interim financial statements are not
available, the latest published audited full year financial statements of
the relevant company available as at the time of announcement of the
transaction.
(6) NAV refers to net asset value of the target as per the latest published
unaudited interim financial statements available or if interim financial
statements are not available, the latest published audited full year
financial statements of the relevant company available as at the time of
the announcement of the transaction.
(7) For illustrative purposes, an exchange rate of HK$1.00:RMB1.06 and
US$1.00:HK$7.78 were used.
The Cancellation Price implied PER, EV/EBITDA multiple
and P/NAV are within the range of those of the comparable
sector transactions.
(d) Recent relevant privatisations completed in Hong Kong
We have reviewed all privatisation proposals for
companies listed on the Hong Kong Stock Exchange announced
and successfully completed since 1 January, 2002 and up to
and including 2 November, 2005, being the last trading day of
the ZRCC H Shares prior to the issue of the Announcement. We
have identified a total of 17 successfully completed
privatisation transactions during such period, of which eight
are property-related companies which we do not believe to be
comparable to ZRCC as the primary valuation methodology for
property-related companies is NAV driven whereas the primary
valuation methodology for ZRCC is earnings driven, we have
therefore excluded the property-related companies from our
analysis. It should be noted that the precedent privatisation
transactions as shown in Table 11 below involved companies
which were engaged in businesses that are different to ZRCC,
these precedent privatisation transactions nevertheless
provide an indication of the averages of the key parameters
for the purpose of comparing the Cancellation Price.
Table 11 - Premium analysis of precedent privatisation transactions
Offer
Date of price per
Company announcement share Premium over average closing share price
Last
trading
day 30 days 90 days 180 days
HK$ % % % %
ZRCC (at Cancellation Price) 12 November, HK$10.60 12.17% 24.85% 31.68% 28.80%
2005
Precedent privatisation transactions
Hutchison Global Communications Holdings 3 May, 2005 HK$0.650 36.84% 44.77% 41.92% 47.06%
Limited ("HGCH") (1)
Sinopec Beijing Yanhua Petrochemical 29 December, HK$3.800 10.95% 22.70% 24.30% 32.40%
Company Limited 2004
Alpha General (Holdings) Limited 13 October, 2004 HK$0.700 125.81% 133.33% 125.81% 112.12%
Chevalier Construction Holdings Limited 31 October, 2003 HK$0.250 16.28% 23.76% 40.37% 75.81%
ILink Holdings Limited 20 August, 2003 HK$0.035 75.00% 66.67% 54.03% 44.79%
SIIC Medical Science and Technology 21 May, 2003 HK$2.150 14.97% 24.28% 35.22% 43.33%
(Group) Ltd.
Winton Holdings (Bermuda) Limited 3 December, 2002 HK$0.650 44.44% 42.86% 46.73% 31.05%
Lam Soon Food Industries Limited 4 April, 2002 HK$2.900 31.82% 31.70% 38.82% 51.04%
IMC Holdings Limited 5 February, 2002 HK$1.600 5.96% 24.19% 31.63% 35.65%
Mean (exclude HGCH)(1) 42.65% 46.19% 49.61% 53.28%
Median (exclude HGCH)(1) 24.05% 27.99% 39.60% 44.06%
Sources: Shareholders circular of respective companies.
Note:
(1) Refer to cash alternative only. For the share alternative, the premium of
the offer price over a 1 day, 30 day, 90 day and 180 day period was
approximately 48.37%, 56.96%, 53.88% and 59.4% respectively. We have
excluded this transaction as it involves a share alternative whereby the
minority shareholders of the offeree company were given an opportunity to
retain their interest in the offeree company and to participate in the
benefit of a successful privatisation proposal.
Out of the nine precedent privatisation transactions as shown
above, we consider the privatisation proposal for Sinopec Beijing
Yanhua Petrochemical Company Limited (the "Yanhua Transaction") to
be the most comparable precedent privatisation transaction to the
Proposal because both target companies are engaged in the
oil-related industry and are H shares issuers. The premium of the
Cancellation Price over a 1 day, 30 day and 90 day period is higher
than the premium paid under the Yanhua Transaction for the same
period but lower than the 180 day average closing price.
Notwithstanding that the premium of the Cancellation Price is
lower than the mean and median premiums paid in recent precedent
privatisation transactions (excluding HGCH), we consider the
Cancellation Price is fair and reasonable on the basis that:
(a) ZRCC H Share price has appreciated significantly over
the past three years and in particular, ZRCC H Share
closing price increased by approximately 8.62% from
HK$8.70 on 28 October, 2005 to HK$9.45 on 2 November,
2005, being the last trading day of ZRCC prior to the
issue of the Announcement, as a result of market
speculation subsequent to the announcement of the
privatisation of Jilin Chemical by PetroChina on 28
October, 2005 that Sinopec Corp. may also undertake
privatisations of its other listed subsidiaries;
(b) majority of the relevant precedent privatisation
transactions were consummated when the target
companies' business were undergoing a cyclical downturn
or were undervalued by the market whereas ZRCC has
achieved strong growth in its financial performance in
recent years;
(c) the ZRCC H Shares have never traded at or above the
Cancellation Price since it was first listed on the
Hong Kong Stock Exchange on 2 December, 1994;
(d) the trading multiples implied by the Cancellation Price
as shown in Table 9 above are higher than or equivalent
to the median of the Hong Kong Stock Exchange listed
comparable companies and the other Asian listed
comparable companies (except for the EV/EBITDA multiple
of the other Asian listed comparable companies); and
(e) the premium of the Cancellation Price is within the
range of those of the precedent privatisation
transactions and higher than the Yanhua Transaction
(which in our view is the most comparable precedent
privatisation transaction).
3. Dividend yield
The following table sets out the dividend per ZRCC Share, dividend payout
ratio and the dividend yield of ZRCC for the three financial years ended 31
December, 2004.
Table 12 - ZRCC dividend payout and dividend yield
Average for
the period
under
Year ended 31 December review(2)
2002 2003 2004
Earnings per ZRCC Share (RMB) 0.39 0.43 1.04 0.62
Dividend per ZRCC Share (RMB) 0.12 0.14 0.30 0.19
Dividend payout ratio(1) 30.8% 32.6% 28.8% 30.7%
ZRCC H Share price at the financial year end date (HK$) 1.96 6.80 8.05 5.60
Dividend yield based on ZRCC H Share price as the financial
year end date 5.6% 1.9% 3.5% 3.7%
Weighted average dividend yield for the HSCEI (as at the year
end date) 5.1% 1.8% 2.5% 3.1%
Sources: Bloomberg, ZRCC's annual reports and HSI Services Limited.
Notes:
(1) These are based on dividend paid for a financial year and divided by
profit attributable to ZRCC Shareholders for that financial year based on
the respective published audited consolidated accounts of ZRCC.
(2) These are the simple average of the figures in respect of each item shown
in the table.
(3) For illustration purposes, an exchange rate of HK$1.00:RMB1.06 was used.
As shown in Table 12 above, the dividend per ZRCC Share has been
relatively constant for 2002 and 2003, and increased significantly in 2004 to
RMB0.30 (equivalent to approximately HK$0.28) per ZRCC Share, with a 3-year
average of RMB0.19 (equivalent to approximately HK$0.18) per ZRCC Share. The
dividend payout ratio has been relatively constant over the last three
financial years, ranging from approximately 28.8% to 32.6% with a 3-year
average of approximately 30.7%. Based on the above comparisons, we note that an
investment in ZRCC H Shares has been offering a higher dividend yield than the
weighted average dividend yield offered by the constituent companies of the
HSCEI for the period under review. However, it should be noted that there is no
assurance that ZRCC will continue to pay a similar dividend and/or its dividend
yield will remain at similar level as shown in the above table in the future.
4. Trading volume
The table below sets out the trading volume of the ZRCC H Shares per
month, the monthly trading volume as a percentage of the issued share capital
of ZRCC and the trading volume as a percentage of the ZRCC H Shares held by the
public respectively for the period from 1 November, 2004 and up to and
including the Latest Practicable Date:
Table 13 - Liquidity analysis of the ZRCC H Shares
Monthly trading volume
of ZRCC H Shares as a Monthly trading volume
Monthly percentage of total of ZRCC H Shares as a
trading volume of ZRCC H issued share percentage
Shares capital of ZRCC(1) of public float(2)
million Shares % %
2004
November 93 3.7% 12.8%
December 57 2.2% 7.8%
2005
January 57 2.2% 7.8%
February 77 3.0% 10.6%
March 63 2.5% 8.7%
April 53 2.1% 7.3%
May 52 2.1% 7.2%
June 124 4.9% 17.1%
July 194 7.7% 26.8%
August 174 6.9% 24.0%
September 127 5.1% 17.6%
October 106 4.2% 14.7%
November (up to and including the
Latest Practicable Date) 141 5.6% 19.5%
Average monthly trading volume
(November 2004 to October 2005) 98 3.9% 13.5%
Source: Bloomberg.
Notes:
(1) Based on 2,523,754,468 ZRCC Shares in issue as at the Latest
Practicable Date.
(2) For the purpose of this letter, public float of ZRCC refers to the
723,754,468 ZRCC H Shares held by the ZRCC H Shareholders as at
the Latest Practicable Date.
From Table 13 above, we note that the monthly trading volume of ZRCC H
Shares ranged from approximately 52 million to approximately 194 million for
the period from November 2004 to October 2005. The average monthly trading
volume of the ZRCC H Shares for the same period was approximately 98 million,
or approximately 3.9% of the total issued share capital of ZRCC, or
approximately 13.5% of the ZRCCH Shares held by the public.
In addition to the above analysis, we have also compared the trading
volume of ZRCC H Shares with the Comparable Companies. A comparison of the
average monthly trading volume for the period from November 2004 to October
2005 is set out in the table below:
Table 14 - Comparable Companies' monthly trading volume
Average monthly trading
volume of the shares as a
percentage of public float(1) from
November 2004 to October 2005
%
ZRCC 13.5%
Hong Kong Stock Exchange listed comparable companies
Sinopec Shanghai Petrochemical Company Limited(2) 20.7%
Jilin Chemical (2) 46.2%
Other Asian listed comparable companies
Bharat Petroleum Corporation Limited 1.1%
Hindustan Petroleum Corporation Limited 1.5%
SK Corporation 15.2%
S-Oil Corporation 4.7%
Thai Oil Public Company Limited 16.4%
Singapore Petroleum Company Limited 5.2%
Formosa Petrochemical Corporation 1.8%
Mean 12.6%
Source: Bloomberg.
Notes:
(1) For the purpose of this letter, public float of the above companies
(except ZRCC) were computed based on their respective number of
tradable shares on the stock markets as at the latest published
financial statements.
(2) For Sinopec Shanghai Petrochemical Co. Ltd and Jilin Chemical,
which are listed on the stock exchanges in Hong Kong, Shanghai and
New York, the trading volume of shares and public float are
computed based on the trading volume of shares and public float on
the Hong Kong Stock Exchange and the American depositary shares on
the New York Stock Exchange only.
As noted in Table 14 above, the trading volume of the ZRCC H Shares as a
percentage of the ZRCC H Shares held by the public is within the range of the
Comparable Companies, but is significantly lower than the range of the two Hong
Kong listed Comparable Companies.
5. Prospect of an alternate offer
As Sinopec Corp. owns 1,800,000,000 ZRCC Domestic Shares, which is
equivalent to approximately 71.3% of the entire issued share capital of ZRCC,
the Independent ZRCC Shareholders will not be able to consummate an alternative
offer without the consent of Sinopec Corp.. The ZRCC Directors have advised
that ZRCC has not received any competing offers from a third party.
SUMMARY
Having considered the above principal factors and reasons, we draw your
attention to the following in arriving at our recommendation:
(i) the Proposal and the Merger will eliminate intra-group competition
between ZRCC and Sinopec Corp. and is in line with ZRCC's
controlling shareholder's strategy to integrate its operations and
capital structure;
(ii) ZRCC has achieved strong growth in its financials performance in
recent years but suffered from a squeeze in gross profit margin and
refinery margin as a result of the inability to pass on the
increase in raw material cost by raising the sales prices of its
key products under the current regulatory regime;
(iii) the Proposal and the Merger will reinforce the business value chain
and improve the risk resistance ability of ZRCC through the
vertical integration of ZRCC's oil refinery plant and facilities
with the upstream crude oil and downstream petrochemical operations
of Sinopec Corp.;
(iv) in assessing the fairness and reasonableness of the Cancellation
Price, we noted that ZRCC H Shares have good investor following and
trading liquidity and the shares were trading at historical highs
immediately prior to the Announcement. The ZRCC H Shares have never
traded at or above the Cancellation Price since it was first listed
on the Hong Kong Stock Exchange on 2 December, 1994. The
Cancellation Price represents:
(a) a premium of approximately 12.2% over the closing price of
HK$9.45 per ZRCC H Share as quoted on the Hong Kong Stock
Exchange on 2 November, 2005 (being the last trading day of
the ZRCC H Shares prior to the issue of the Announcement).
The ZRCC's closing share price increased by approximately
8.62% from HK$8.70 on 28 October, 2005 to HK$9.45 on 2
November, 2005 as a result of market speculation subsequent
to the announcement of the privatisation of Jilin Chemical by
PetroChina on 28 October, 2005 that Sinopec Corp. may also
undertake privatisations of its listed subsidiaries;
(b) an implied PER based on ZRCC's 2004 earnings of approximately
10.8 times which is higher than the 3-year average of
approximately 7.6 times and the 1-year average of
approximately 7.8 times and the median PER of the Hong Kong
Stock Exchange listed comparable companies and the other
Asian listed comparable companies;
(c) an implied EV/EBITDA multiple of 5.6 times which is higher
than the median of the Hong Kong Stock Exchange listed
comparable companies and within the range of the other Asian
listed comparable companies; and
(v) the premium of the Cancellation Price is lower than the median paid
in recent relevant privatisation transactions as shown in Table 11
above. Nevertheless, we consider the Cancellation Price to be fair
and reasonable after taking into account the significant
appreciation in the share price over the past three years.
RECOMMENDATION
Having considered the above principal factors and reasons, we consider
the terms of the Proposal and the Merger Agreement to be fair and reasonable so
far as the Independent ZRCC Shareholders are concerned. Accordingly, we advise
the Independent Board Committee to recommend the Independent ZRCC Shareholders
to vote in favour of the Proposal and the resolution in relation to the
Proposal at the Special General Meetings.
Yours very truly,
For and on behalf of
N M Rothschild & Sons (Hong Kong) Limited
Kelvin Chau
Director
-------------------------------------------------------------------------------
ADDITIONAL INFORMATION REGARDING THE MERGER
-------------------------------------------------------------------------------
GENERAL
Upon completion of the Merger, ZRCC will be merged with and into Ningbo
Yonglian, with Ningbo Yonglian continuing as the surviving corporation. Ningbo
Yonglian will be dissolved following the completion of the Merger.
BACKGROUND OF THE MERGER
Sinopec Corp. completed an initial public offering in October 2000,
pursuant to which its H shares were listed on the Hong Kong Stock Exchange and
American depository shares representing its H shares were listed on the New
York Stock Exchange and the London Stock Exchange. Following its initial public
offering, Sinopec Corp. remained and still remains, majority owned by CPC and
ZRCC remained, and still remains, majority owned by Sinopec Corp..
In its October 2000 prospectus, in connection with its initial public
offering, Sinopec Corp. stated that Sinopec Corp. and its subsidiaries may
integrate their operations and capital structure by seeking to reduce over
time, through purchase, exchange or other means, the portion of shares of their
subsidiaries that are held by minority shareholders, including publicly held
shares of their listed subsidiaries. As part of the aforesaid business
strategies of Sinopec Corp., Ningbo Yonglian and ZRCC entered into a merger
agreement on 12 November, 2005, pursuant to which Ningbo Yonglian will merge
with ZRCC by way of merger by absorption.
Sinopec Corp. and ZRCC have considered various factors in deciding to
privatise ZRCC, details of which are set out in the section headed "Strategic
Reasons for the Merger" below.
SOURCE OF FUNDS FOR THE PAYMENT OF MERGER CONSIDERATION
Sinopec Corp. and Ningbo Yonglian intend to finance the total Merger
Consideration of approximately HK$7,672 million required for the Proposal from
existing banking facilities of Sinopec Corp. granted by Industrial and
Commercial Bank of China and Bank of China and made available to Sinopec Corp.
and its subsidiaries. A total of approximately RMB8 billion would be used to
pay the Merger Consideration and certain costs and expenses relating to the
Merger. The repayment by Ningbo Yonglian of such banking facilities to
Industrial and Commercial Bank of China and Bank of China will not depend to
any significant extent on the business of ZRCC. None of the ZRCC H Shares which
are subject of the Proposal will be transferred, charged or pledged to any
other persons.
CICC, being a financial adviser to Sinopec Corp., is satisfied that
sufficient financial resources are available to Sinopec Corp. and Ningbo
Yonglian for the satisfaction of Ningbo Yonglian's obligations under the
Proposal.
Under PRC law, an approval from SAFE (as set out in Condition (iv) under
the section headed "Certain Provisions of the Merger Agreement - Conditions to
the Completion of the Merger" of this document) is required for exchanging RMB
into foreign currencies to pay the Cancellation Price and other fees incurred
in connection with the Merger.
STRATEGIC REASONS FOR THE MERGER
Sinopec Corp. and ZRCC have identified a number of strategic reasons for
the Proposal and Merger. These include:
1. The Merger can fully integrate ZRCC's oil refining business into
the value chain of Sinopec Corp., enhance the integrated business
structure of Sinopec Corp., improve the risk resistance ability of
ZRCC, and synergize their capital allocation, investment, branding,
resources, marketing and distribution channel.
2. The Merger can reduce management layers and improve the efficiency
of Sinopec Corp. and ZRCC in terms of production, management and
sales.
3. The Merger can effectively eliminate connected party transactions
and intra-group competition between Sinopec Corp. and ZRCC. At
present, both Sinopec Corp. and ZRCC are engaged in the oil
refining business, and they have significant amount of connected
transactions between them. After the Merger, combined production
and sales will effectively eliminate such connected transactions
and intra-group competition.
The decision of Sinopec Corp. to proceed with the Proposal and Merger is
consistent with its internal investment policy, assuming an average long-term
refinery margin of approximately US$4.00 per barrel for Sinopec Corp. and an
average long-term refinery margin of approximately US$6.00 per barrel for ZRCC.
Such assumption, which was adopted by Sinopec Corp. for the purposes of
assessing its internal investment return, was made on the basis of the
historical refinery margins of Sinopec Corp., and the difference of refinery
margins between ZRCC and Sinopec Corp. in 2004.
RECENT ZRCC H SHARE TRADED SHARE PRICE AND LIQUIDITY
The following chart illustrates the daily closing price of ZRCC H Shares
since its listing up to the Latest Practicable Date.
Daily Closing Price of ZRCC H Shares
[GRAPHIC OMITTED][GRAPHIC OMITTED]
(HK$) 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Low 1.79 1.33 1.45 2.50 0.55 0.84 0.77 0.95 1.40 1.96 4.45 6.50
High 2.38 2.08 3.10 5.85 3.13 2.63 1.83 2.15 2.10 7.00 9.95 10.35
Ending 1.97 1.45 2.85 3.23 1.19 1.38 1.06 1.44 1.96 6.80 8.05 10.20
Source: Bloomberg
Note: The low and high prices in the table represent the daily traded prices.
As shown in the chart above, the price of ZRCC H Shares has increased
significantly since 2003, reaching a historical high (prior to the
Announcement) of HK$9.95 on 25 March, 2004. Since then, the trading price has
been at historically high levels, mainly in the range between HK$7.00 and
HK$9.00. However, as the table indicates, ZRCC H Share price has never traded
above the Cancellation Price.
The daily trading volume of ZRCC since its listing in 1994 up to the
Latest Practicable Date is shown in the table below.
Historical Daily Trading Volume of ZRCC H Shares
[GRAPHIC OMITTED][GRAPHIC OMITTED]
(shares in 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
millions)
Low 0.30 0.00 0.01 0.01 0.20 0.15 0.24 0.03 0.04 0.27 0.47 0.16
High 42.61 5.40 15.72 58.20 24.66 34.46 69.15 59.23 19.59 26.86 25.52 54.77
Average 5.15 0.99 1.37 4.15 4.23 4.57 7.27 8.77 3.33 5.67 4.61 5.38
% of Free 0.71% 0.14% 0.19% 0.57% 0.58% 0.63% 1.00% 1.21% 0.46% 0.78% 0.64% 0.74%
Float
Source: Bloomberg
The daily trading volume of ZRCC H Shares has increased since 1997, with
average daily trading volume in 2004 of approximately 4.6 million ZRCC H
Shares. However, this only represents 0.64% of the free float of ZRCC of
723,754,468 ZRCC H Shares.
INFORMATION ON ZRCC
Background
ZRCC was incorporated as a joint stock limited company in accordance with
the PRC Company Law on 28 June, 1994.
ZRCC completed its initial public offering in November 1994, pursuant to
which the ZRCC H Shares were offered and sold. At the completion of its initial
public offering, CPC held the ZRCC Domestic Shares which comprised
approximately 75% of ZRCC Shares. ZRCC H Shares comprised approximately 25% of
the ZRCC Shares. ZRCC H Shares started trading on the Hong Kong Stock Exchange
on 2 December, 1994.
On 19 December, 1996, ZRCC issued unsecured convertible bonds amounting
to US$200,000,000. The bonds were convertible, at the option of the holders,
during the period from 19 January, 1997 to 19 December, 2003, into ZRCC H
Shares at a price of HK$2.80 per share (subject to adjustment) and a
predetermined exchange rate of HK$7.735 to US$1.00. Bonds with a total face
value amounting to US$44,448,000 and US$350,000 were converted into 122,787,593
ZRCC H shares and 966,875 ZRCC H Shares in 1997 and 1998 respectively. ZRCC
began to redeem the bonds in 2001 in stages, and redeemed all outstanding bonds
by 2003.
Principal business of ZRCC
ZRCC is principally engaged in the production and sale of petroleum
products (including gasoline, diesel, kerosene, naphtha, liquefied petroleum
gas, solvent oil and fuel oil), intermediate petrochemical products, asphalt,
urea and petrochemical products such as aromatics (including benzene, toluene,
orthoxylene and paraxylene) and polypropylene.
ZRCC possesses oil refinery plants and facilities with a scale of
operation up to international standards. It is also one of the 10 largest
refineries in the Asia Pacific region. At present, ZRCC has a comprehensive
processing capacity of 18.5 million tones per annum ("tpa") and a processing
capacity of sour crude oil of 12 million tpa. ZRCC is well-equipped for
achieving clean production, with a hydro-treating capacity of 14 million tpa.
ZRCC is also the largest processing base of imported crude oil and sour crude
oil, as well as the largest export base for petroleum products in the PRC.
Shareholding structure of ZRCC
Please refer to the section headed "Shareholding structure of ZRCC" as
set out in the "Letter from the Board of ZRCC" for an overview of the
shareholding structure of ZRCC as at the Latest Practicable Date.
As at the Latest Practicable Date, there were no outstanding options,
warrants or convertible securities issued by ZRCC.
Financial information
Summary financial information
A summary of the published audited results and NAV of ZRCC for each of the
three years ended 31 December, 2004 and the unaudited results and NAV of ZRCC
for the six months ended 30 June, 2005 is set out below:
(unaudited)
(audited) For the six months ended
For the years ended 31 December, 30 June,
2002 2003 2004 2005
RMB'000 HK$'000 RMB'000 HK$'000 RMB'000 HK$'000 RMB'000 HK$'000
Turnover 22,484,667 21,211,950 29,070,343 27,424,852 41,991,481 39,614,605 25,858,192 24,394,521
Operating profit before 1,457,884 1,375,362 1,696,399 1,600,376 3,786,010 3,571,708 1,584,421 1,494,737
financing costs
Profit before taxation 1,393,066 1,314,213 1,609,594 1,518,485 3,765,434 3,552,296 1,576,065 1,486,854
Profit after tax but 973,257 918,167 1,088,029 1,026,442 2,613,359 2,465,433 1,261,173 1,189,786
before minority interests
Profit attributable to 973,257 918,167 1,087,987 1,026,403 2,613,288 2,465,366 1,261,148 1,189,762
ZRCC Shareholders
Earnings per ZRCC Share RMB0.39 HK$0.37 RMB0.43 HK$0.41 RMB1.04 HK$0.98 RMB0.50 HK$0.47
(on a fully-diluted
basis)
Earnings per ZRCC Share RMB0.39 HK$0.37 RMB0.43 HK$0.41 RMB1.04 HK$0.98 RMB0.50 HK$0.47
(on a weighted average
basis)
Net asset value per ZRCC RMB3.35 HK$3.16 RMB3.66 HK$3.45 RMB4.52 HK$4.26 RMB4.82 HK$4.55
Share
Note: Amounts denominated in RMB have been translated into HK$ at the exchange
rate of RMB1.06 to HK$1.00. No representation is made that the HK$
amounts could have been or could be converted into RMB at such rates or
at any other rate or at all.
Net Asset Value
The NAV per ZRCC H Share was approximately HK$4.26 as at 31 December,
2004 (based on the figures in the 2004 annual report of ZRCC) and the unaudited
NAV per ZRCC H Share was approximately HK$4.55 as at 30 June, 2005 (based on
the figures in the 2005 interim report of ZRCC).
Earnings
ZRCC's published audited profit attributable to the ZRCC Shareholders for
the two years ended 31 December, 2004 and 31 December, 2003 prepared under IFRS
was approximately RMB2,613 million (or HK$2,465 million) and RMB1,088 million
(or HK$1,026 million) respectively, representing earnings per ZRCC Share of
approximately RMB1.04 (or HK$0.98) and RMB0.43 (or HK$0.41) respectively.
Based on the ZRCC's unaudited interim report prepared in accordance with
International Accounting Standards 34, ZRCC's published unaudited profit
attributable to ZRCC Shareholders for the six months ended 30 June, 2005 was
approximately RMB1,261 million (or HK$1,190 million). The earnings per ZRCC
Share was approximately RMB0.50 (or HK$0.47). As disclosed in the 2005 interim
report of ZRCC, during the first half of 2005, crude oil prices in the
international market rose drastically whilst the prices of domestic petroleum
products rose in a less than proportionate level as a result of stringent
control; for the second half of 2005, ZRCC will face tremendous pressure on its
production operation, given that, among other things, international crude oil
price may continue to rise in volatility and the cost of crude oil processing
will be pushed up.
Dividend
ZRCC proposed dividends of RMB757 million (or HK$714 million) in respect
of the year ended 31 December, 2004 and RMB353 million (or HK$333 million) in
respect of the year ended 31 December, 2003, representing dividends per ZRCC
Share of RMB0.30 (or HK$0.28) and RMB0.14 (or HK$0.13) respectively.
INFORMATION ON SINOPEC CORP.
Background
Sinopec Corp. is a joint stock limited liability company incorporated on
25 February, 2000 in accordance with the PRC Company Law whose H shares are
listed on Hong Kong Stock Exchange, whose American depositary shares are listed
on the New York Stock Exchange and the London Stock Exchange and whose A shares
are listed on the Shanghai Stock Exchange. Sinopec Corp. is approximately 67.9%
owned by CPC, which is a PRC state-owned enterprise.
Principal business of the Sinopec Corp. and its subsidiaries
The principal operations of Sinopec Corp. include exploring for and
developing, producing and trading crude oil and natural gas, processing crude
oil into refined oil products, producing refined oil products and trading,
transporting, distributing and marketing refined oil products and producing,
distributing and trading petrochemical products.
Set out below is a discussion of Sinopec Corp.'s core activities.
Exploring for and developing, producing and trading crude oil and natural gas
Sinopec Corp. is the second largest crude oil and gas producer in China.
Most of the crude oil and a small portion of the natural gas it produced are
used for its refining and chemical operations. Most of the natural gas and a
small portion of crude oil it produced are sold to refineries that are not
owned by Sinopec Corp. and third party customers.
Processing crude oil into refined oil products, producing refined oil products
and trading, transporting, distributing and marketing refined oil products
Sinopec Corp. is the largest oil refiner in China, producing gasoline,
diesel, jet fuel, lubricants, fuel oil, various petrochemical feedstock and
other refined oil products. Sinopec Corp. also has the largest distribution
network for refined oil products in China.
Producing, distributing and trading petrochemical products
Sinopec Corp. is the largest petrochemical producer and distributor in
China. The major products it produces and sells include intermediate
petrochemicals, synthetic resins, synthetic rubber, chemical fertilizers, and
synthetic fiber and its monomers and polymers.
INFORMATION ON NINGBO YONGLIAN
Ningbo Yonglian is a wholly owned subsidiary of Sinopec Corp. established
on 3 November, 2005 in the PRC. It is 90% owned by Sinopec Corp. and 10% owned
by Sinopec United. Sinopec United is a wholly owned subsidiary of Sinopec
Corp.. Ningbo Yonglian has been established for the purpose of the Merger and
has no substantive business.
FUTURE INTENTIONS OF SINOPEC CORP.
After the Merger, ZRCC will be merged into Ningbo Yonglian, with Ningbo
Yonglian as the surviving corporation. ZRCC will cease to exist as a separate
legal entity on the Effective Date. On the Effective Date, the assets and
liabilities (together with the rights and obligations attached to such assets)
and the employees of ZRCC will be assumed by Ningbo Yonglian.
Sinopec Corp. and Ningbo Yonglian have no intention to make significant
changes to the existing businesses of ZRCC upon completion of the Merger.
If the Merger is effected, Sinopec Corp. and Ningbo Yonglian do not
intend to make any significant redeployment of its fixed assets other than in
the ordinary course of business and do not have any intention to make any
significant changes to the continuing employment of the employees of ZRCC.
If the Merger is not effected, ZRCC intends to continue the existing
business of ZRCC.
If the Merger is approved at the Special General Meetings and if all
necessary PRC Approvals are obtained, the ZRCC will withdraw the ZRCC Listing
and will maintain the ZRCC Listing in the event that the Merger is not approved
by the ZRCC H Shareholders at the Special General Meeting of the Independent
ZRCC Shareholders or the necessary PRC Approvals are not obtained or if the
Proposal is withdrawn or lapse. After the Merger, Sinopec Corp. plans to
de-register Ningbo Yonglian at appropriate time, in order to consolidate its
business into Sinopec Corp.'s business. The consolidation will not involve any
significant changes to the existing business of ZRCC.
ZRCC intends that the ZRCC Listing will be withdrawn if the Proposal is
implemented and be maintained in the event that the Proposal is not approved.
SHARE CERTIFICATES, DEALINGS AND LISTING
Once the Cancellation Price is paid, the relevant ZRCC Shares will be
deemed as cancelled and extinguished and all of the certificates representing
the relevant ZRCC Shares will, accordingly, cease to have effect as document or
evidence of title.
ZRCC will apply to the Stock Exchange for the withdrawal of the ZRCC
Listing pursuant to Rule 6.15(2) of the Listing Rules upon all the Conditions
specified in (i) to (vii) under the section headed "Certain Provisions of the
Merger Agreement - Conditions to the Completion of the Merger" being fulfilled
(or waived, as applicable), on the basis that the Proposal is akin to a scheme
of arrangement, such that general principles of the Takeovers Code, including
Rule 2.10 of the Takeovers Code, are deemed to be applicable. In such event,
ZRCC Listing is expected to be withdrawn from the Hong Kong Stock Exchange on
12 May, 2006. Payment of the Cancellation Price will be made to ZRCC H
Shareholders (other than the Dissenting ZRCC Shareholders) as soon as possible
but in any event no later than 10 days after all the Conditions have been
fulfilled (or waived, as applicable).
Shareholders will be notified of the exact dates on which the Proposal
and the withdrawal of the ZRCC Listing become effective by press announcement.
If the Proposal is not approved, it is intended that the ZRCC Listing
will be maintained.
REGISTRATION AND PAYMENT
If the Proposal becomes effective, cheques for the Cancellation Price
will be issued to the H Shareholders whose names appear on the Registers at the
Record Time (save for the Dissenting ZRCC Shareholders). Such cheques will be
despatched within ten days after all the Conditions are fulfilled (or waived,
as applicable).
It is proposed to close the Registers immediately on Thursday, 11 May,
2006, or such other date as may be notified to the ZRCC H Shareholders by press
announcement, in order to establish entitlements to the Cancellation Price
under the Proposal. The ZRCC H Shareholders or their successors in title should
ensure that their H Shares are registered or lodged for registration in their
names or in the names of their nominees by 4:00 p.m. on Wednesday, 10 May,
2006.
In the absence of any specific instructions to the contrary received in
writing by the Registrar, cheques will be despatched to the ZRCC H Shareholders
whose names appear on the Registers on the Record Time (other than the
Dissenting ZRCC Shareholders) at their respective addresses or, in the case of
joint holders, to the registered address of that joint holder whose name stands
first in the Registers in respect of the joint holding. All such cheques will
be sent at the risk of the persons entitled thereto and neither ZRCC nor
Sinopec Corp. or Ningbo Yonglian will be liable for any loss or delay in
transmission.
Pursuant to the Merger Agreement, at any time following six years after
the Record Time, Ningbo Yonglian or any successor to Ningbo Yonglian shall be
entitled to require the Bank of China (Hong Kong) to deliver to it any funds,
which have not been disbursed to ZRCC H Shareholders (because any cheque has
not been cashed or has been returned uncashed), and thereafter any ZRCC H
Shareholders shall be entitled to look only to Ningbo Yonglian or any successor
to Ningbo Yonglian and only as general creditors thereof with respect to the
Merger Consideration without any interest thereon.
OVERSEAS ZRCC SHAREHOLDERS
Overseas ZRCC Shareholders will be entitled to receive this document and
the notices of the Special General Meetings, as well as to attend and vote at
the Special General Meetings. The making of the Proposal to the Overseas ZRCC
Shareholders may be subject to the laws of the relevant jurisdictions. Overseas
ZRCC Shareholders should observe any applicable legal or regulatory
requirements. It is the responsibility of the Overseas ZRCC Shareholders
wishing to accept the Proposal to satisfy themselves as to the full observance
of the laws of the relevant jurisdiction in connection therewith, including the
obtaining of any governmental, exchange control or other consents which may be
required, or the compliance with other necessary formalities and the payment of
any issue, transfer or other taxes due in such jurisdiction.
SPECIAL GENERAL MEETINGS
Notices of the Special General Meetings are set out in Appendices III and
IV to this document. The Special General Meetings will be held on Thursday, 12
January, 2006 at the respective times specified in such notices at the
conference room on the first floor of Donghai Hotel, Zhenhai District, Ningbo
Municipality, Zhejiang Province, the PRC.
ACTION TO BE TAKEN BY THE INDEPENDENT ZRCC SHAREHOLDERS AND THE ZRCC
SHAREHOLDERS
A pink form of proxy for use at the Special General Meeting and a white
form of proxy for use at the Special General Meeting of the Independent ZRCC
Shareholders are enclosed with this document.
Whether or not they are able to attend the Special General Meeting or the
Special General Meeting of the Independent ZRCC Shareholders (where applicable)
in person, the ZRCC Shareholders are strongly urged to complete and sign the
enclosed pink form of proxy in respect of the Special General Meeting and the
Independent ZRCC Shareholders are strongly urged to complete and sign the
enclosed white form of proxy in respect of the Special General Meeting of the
Independent ZRCC Shareholders in accordance with the instructions respectively
printed thereon and to deposit them with the Registrar at 46th Floor, Hopewell
Centre, 183 Queen's Road East, Hong Kong as soon as possible, but in any case
not later than the following respective times:
(a) in the case of the pink form of proxy for use at the Special
General Meeting, the ZRCC Shareholders are requested to deposit
this form of proxy not later than 9:30 a.m. on Wednesday, 11
January, 2006.
(b) in order to be valid, the white form of proxy for use at the
Special General Meeting of the Independent ZRCC Shareholders must
be deposited by the Independent ZRCC Shareholders not later than
10:30 a.m. on Wednesday, 11 January, 2006.
The completion and return of a form of proxy for any of the Special
General Meetings will not preclude you from attending the relevant Special
General Meetings and voting in person if you so wish. In the event that you
attend the Special General Meetings after having deposited the relevant form of
proxy, that form of proxy will be deemed to have been revoked.
For the purpose of determining the entitlements of the Independent ZRCC
Shareholders to attend and vote at the Special General Meeting of the
Independent ZRCC Shareholders and the ZRCC Shareholders to attend and vote at
the Special General Meeting, the Registers will be closed from Monday, 12
December, 2005 to Thursday, 12 January, 2006 (both dates inclusive). During
such period, no transfer of ZRCC H Shares will be effected. In order to be
entitled to attend and vote at the Special General Meeting of the Independent
ZRCC Shareholders or the Special General Meeting, all transfers accompanied by
the relevant share certificates must be lodged with the Registrar at Shops
1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wanchai, Hong
Kong not later than 4:00 p.m. on Friday, 9 December, 2005.
Assuming that all of the Conditions are fulfilled or, where applicable,
waived, the Proposal will become effective on the Effective Date. Further press
announcements will be made giving details of the results of the Special General
Meetings and, if all the resolutions are passed at the Special General
Meetings, the last day for dealing in ZRCC H Shares, the Record Time and the
date of the withdrawal of the ZRCC Listing.
TAXATION
The ZRCC H Shareholders, whether in Hong Kong or in other jurisdictions,
are recommended to consult their professional advisers if they are in any doubt
as to the taxation implication of the Proposal and, in particular, whether the
receipt of Cancellation Price would make such Shareholders liable to taxation
in the PRC, Hong Kong or in other jurisdiction.
FURTHER INFORMATION
Further information in relation to the Proposal is set out in the
Appendices to this document, all of which form part of this section.
-------------------------------------------------------------------------------
CERTAIN PROVISIONS OF THE MERGER AGREEMENT
-------------------------------------------------------------------------------
The Merger Agreement contemplates the Merger of ZRCC into Ningbo
Yonglian, with Ningbo Yonglian as the surviving entity. This section of the
document describes certain provisions of the Merger Agreement by way of a
summary. As this is a summary, it may not contain all the information of the
Merger Agreement. The Merger Agreement is one of the documents available for
inspection as referred to in the section headed "General Information -
Documents Available for Inspection".
INTRODUCTION
On 12 November, 2005, the Ningbo Yonglian Board and the ZRCC Board
approved and entered into the Merger Agreement. The Merger Agreement provides
for the merger by absorption of ZRCC with and into Ningbo Yonglian, Sinopec
Corp.'s wholly owned subsidiary, with Ningbo Yonglian as the surviving company.
The Merger cannot be completed unless the Merger Agreement and the Merger are
approved by their respective shareholders.
The purpose of this section is to explain the terms and effects of the
Proposal and to give the Shareholders other relevant information.
A letter from the ZRCC Board is set out on pages 6 to 17. A letter from
the Independent Board Committee, together with the letter from Rothschild, in
connection with the Proposal and the Merger are set out on pages 18 to 47 of
this document. A summary of the Proposal is set out on pages 8 to 11 of this
document.
DELISTING AND EFFECTIVE DATE OF THE MERGER
Delisting. Unless the parties agree otherwise, ZRCC will apply for the
ZRCC Listing to be withdrawn upon all the Conditions specified in (i) to (vii)
under the section headed "Certain Provisions of the Merger Agreement -
Conditions to the Completion of the Merger" are fulfilled (or waived, as
applicable).
Effective Date. The Merger will be effective at the time when all the
Conditions have been satisfied or waived (if applicable) and deregistration of
ZRCC has been completed.
MERGER CONSIDERATION
By the Record Time, any of ZRCC H Shareholders (other than the Dissenting
ZRCC Shareholders) whose name appears on the Registers at the Record Time will
be entitled to receive the Cancellation Price for each ZRCC H Share, without
interest.
DISSENTING ZRCC SHARES
ZRCC H Shareholders who have voted against the Merger Agreement and the
Merger and exercised rights to be bought out at a "fair price" in accordance
with the ZRCC Articles will not have their Dissenting ZRCC Shares converted
into cash, unless they withdraw or lose their rights before the Record Time.
The ZRCC Shareholders who have voted against the Merger can exercise their
right from the date when the Merger Agreement and the Merger are approved at
the Special General Meetings.
PAYMENT OF THE MERGER CONSIDERATION
Payment will be made to ZRCC H Shareholders (other than the Dissenting
ZRCC Shareholders) as soon as possible but in any event no later than 10 days
after all the Conditions have been fulfilled (or waived, as applicable), and in
the case of the Dissenting ZRCC Shareholders, no later than 10 days after they
have withdrawn or lost their right to request ZRCC or other ZRCC Shareholders
who have voted for the Proposal to purchase its ZRCC Shares at a fair price.
The register of ZRCC H Shareholders will remain closed until ZRCC is
de-registered. After the payment of the Merger Consideration, the ZRCC H Shares
representing such ZRCC H Shares will be deemed cancelled without any further
action on the part of ZRCC or any of the ZRCC H Shareholders. Pursuant to the
Proposal, Ningbo Yonglian will issue RMB1,800,000,000 of new registered capital
of Ningbo Yonglian to Sinopec Corp., being the sole holder of all the ZRCC
Domestic Shares.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties by
Ningbo Yonglian and ZRCC in relation to:
o the proper organization and valid existence of the companies and
the requisite corporate authority to own their properties and carry
on their business;
o the corporate authority to execute, deliver and perform their
obligations under the Merger Agreement and to complete the Merger,
and the enforceability of the Merger Agreement;
o the approval of the Merger Agreement by the board of directors of
ZRCC (except for members of the Independent Board Committee) and
Ningbo Yonglian, each board of directors' confirmation that the
Merger is fair and in the best interests of its respective
shareholders, and each board of directors recommending that its
respective shareholders vote in favor of adoption of the Merger
Agreement; and
o apart from any consent or approval required under the Listing
Rules, Takeovers Code, the PRC Company Law and other applicable
laws, the absence of breaches or violations of the articles of
association or other organizational documents of the companies or
their subsidiaries, or of material breaches or violations of any
agreements to which the companies are bound by or any rules,
regulations or orders to which the companies or their subsidiaries
are subject to that will be caused by the execution of the Merger
Agreement and the completion of the Merger.
The Merger Agreement contains representations and warranties of Ningbo
Yonglian relating to:
o the sufficiency of funds to pay for the Merger Consideration and
expense related to the Merger.
The Merger Agreement contains representations and warranties of ZRCC
relating to, among other things:
o the ownership and valid existence of the subsidiaries of ZRCC as
disclosed to Ningbo Yonglian, the absence of material claims
against these subsidiaries and the requisite corporate authority to
own their properties and carry on their businesses;
o the capital structure of ZRCC, the absence of any rights or
securities which will oblige ZRCC to issue further shares, the
absence of any obligation to repurchase shares of ZRCC or its
affiliates and that the material debt obligation of ZRCC or its
subsidiaries will not restrict them to repay earlier, assume
further debt or to grant any lien;
o the accuracy and completeness of all filings (including financial
statements) with the Hong Kong Stock Exchange incidental to the
Merger and that such filings materially comply with the provisions
of the Takeovers Code, and that the financial statements comply
with IFRS and fairly reflect the financial condition of ZRCC;
o since the date of the most recent published audited balance sheet,
the business of ZRCC and its subsidiaries has been conducted in the
ordinary and usual course and that there has been no material
adverse event or change to ZRCC or its subsidiaries taken as a
whole;
o the absence of (i) any material litigation or investigation against
ZRCC or its subsidiaries; (ii) breaches by ZRCC or its subsidiaries
of any material contracts to which ZRCC or its subsidiaries is
bound by; and (iii) judgment or order which materially restricts
the ability of ZRCC or any of its subsidiaries to carry on its
business;
o the employee benefit plan of ZRCC and each of its subsidiaries;
o the accuracy of tax returns and the payment of taxes by ZRCC and
each of its subsidiaries, the reflection of tax matters in the
financial statements and the absence of administrative proceedings
against ZRCC or any of its subsidiaries in relation to taxation
matter;
o the ownership and title to all material assets and properties of
ZRCC or its subsidiaries and the absence of encumbrances against
such assets;
o the operating condition of the plants and equipment owned by ZRCC
and its subsidiaries and the absence of any breaches of law or
regulations as a result of the operations of such plants;
o leases entered into by ZRCC or its subsidiaries in relation to
material assets; the absence of breaches of such leases and, to the
extent required, the consent of all lessors under such leases to
the Merger;
o material compliance with environmental laws and the absence of
material proceeding relating to environmental laws;
o the compliance by ZRCC and its subsidiaries with all applicable
laws and regulations in all material aspects and the absence of
notification of breaches of such laws and regulations;
o the absence of any proceedings involving ZRCCi|s intellectual
property rights and the effect of the Merger on such intellectual
property rights;
o the validity of material insurance policies owned or held by ZRCC
and its subsidiaries;
o the absence of any material governmental decree expropriating or
condemning any material assets of ZRCC or its subsidiaries; and
o the absence of any third party consents which are necessary to the
implementation of the Merger, unless PRC laws or regulations
otherwise require. All the necessary consents required by the PRC
laws or the agreements bound to ZRCC have been obtained.
Reasonable Best Efforts
ZRCC and Ningbo Yonglian have agreed to use reasonable best efforts to
complete the Merger by taking the following actions:
o preparing and submitting the necessary filings and notices and
obtaining the necessary approvals from third parties and
governmental organizations;
o satisfying the conditions precedent to completion of the Merger;
and
o consulting with each other in submitting documents relating to the
Merger to any governmental body.
CONDITIONS TO THE COMPLETION OF THE MERGER
Conditions To Obligation Of Each Party To Effect The Merger
The Merger is conditional upon the fulfilment (unless waived, as
applicable) of all of the following conditions on or before 31 December, 2006
(or such other date as ZRCC and Ningbo Yonglian may agree):
(i) approvals of the Merger Agreement by the requisite votes of the
shareholders of ZRCC (a summary of the relevant requirements is set
out in the section headed "Letter from the Board of ZRCC - Meetings
and Actions to be taken by the Independent Shareholders and the
Shareholders") and Ningbo Yonglian (by two-thirds of the
shareholders of Ningbo Yonglian at the special general meeting of
Ningbo Yonglian) have been obtained;
(ii) authorisations have been obtained from all appropriate governmental
bodies and/or regulatory bodies in Hong Kong and/or any other
relevant jurisdiction (except the PRC);
(iii) all necessary PRC Approvals for the Merger Agreement and the Merger
shall have been obtained (and such PRC Approvals must not include
any conditions which may have a material adverse impact on the
business operations on the surviving corporation after the Merger
becoming effective);
(iv) approval from SAFE on exchanging the necessary foreign currencies
to pay the Cancellation Price and other fees or expenses incurred
in connection with the Merger has been obtained by or on behalf of
Ningbo Yonglian (such approvals must not include any conditions
which may have a material adverse impact on the business operation
on the surviving corporation after the Merger becoming effective);
(v) all requisite procedures (including any filing procedures to effect
the same) in connection with the remittance by or on behalf of
Ningbo Yonglian of the aggregate consideration representing the
Merger Consideration and other fees or expenses incurred in
connection with the Merger have been completed;
(vi) an announcement has been published by ZRCC and Ningbo Yonglian in
accordance with the PRC Company Law and their respective articles
of association to give notice to their respective creditors of the
Proposal and the relevant period specified in the announcement for
the creditors to request for repayment of the indebtedness owned by
ZRCC or Ningbo Yonglian (as appropriate) or request for any
guarantee in relation to such indebtedness has expired;
(vii) no statute, rule or regulation shall have been enacted or
promulgated by any governmental authority prohibiting the
completion of the Merger; and there shall be no order or injunction
of a court of competent jurisdiction in effect prohibiting
completion of the Merger;
(viii) upon fulfilment (or waiver, as appropriate) of the Conditions in
(i) to (vii) above, ZRCC having applied to the Hong Kong Stock
Exchange for withdrawal of ZRCC Listing and the withdrawal of ZRCC
Listing from the Hong Kong Stock Exchange in accordance with the
Listing Rules has become effective.
Pursuant to the Merger Agreement, ZRCC and Ningbo Yonglian may, by mutual
agreement and with the consent of the relevant regulatory authorities (or
applicable), waive any of the Conditions in (ii) to (vii).
Additional Conditions To Obligation Of Ningbo Yonglian
The obligation of Ningbo Yonglian to complete the Merger is also subject
to the following additional conditions:
o the representations and warranties made by ZRCC in the Merger
Agreement shall not contain mistakes or omissions which will be of
material significance to the Merger on the Delisting Date; and
o the undertakings given by ZRCC in the Merger Agreement shall have
been complied with in all material respects and, to the extent that
there is failure to comply, such non-compliance shall not be of
material significance to the Merger.
Pursuant to the Merger Agreement, ZRCC and Ningbo Yonglian may, by mutual
agreement, waive these additional conditions.
Additional Conditions To Obligation Of ZRCC
The obligation of ZRCC to complete the Merger is also subject to the
following additional conditions:
o the representations and warranties made by Ningbo Yonglian in the
Merger Agreement shall not contain mistakes or omissions which will
be of material significance to the Merger on the Delisting Date;
and
o the undertakings given by Ningbo Yonglian in the Merger Agreement
shall have been complied with in all material respects and, to the
extent that there is failure to comply, such non-compliance shall
not be of material significance to the Merger.
Pursuant to the Merger Agreement, ZRCC and Ningbo Yonglian may, by mutual
agreement, waive these additional conditions.
Status on fulfilment of the Conditions
As at the Latest Practicable Date, none of the Conditions have been
fulfilled by Ningbo Yonglian or ZRCC (as applicable).
DELISTING AND DE-REGISTRATION OF ZRCC
After all the Conditions have been fulfilled (or waived, if applicable),
the Merger will become unconditional, and upon all the Conditions specified in
(i) to (vii) under the section headed "Certain Provisions of the Merger
Agreement - Conditions to the Completion of the Merger" being fulfilled (or
waived, as applicable), ZRCC will apply for the ZRCC Listing to be withdrawn.
Payment of the Cancellation Price will be made to ZRCC H Shareholders (other
than the Dissenting ZRCC Shareholders) as soon as possible but in any event no
later than 10 days after all the Conditions have been fulfilled (or waived, as
applicable). After payment of the Cancellation Price had been made to all the
eligible ZRCC Shareholders, the relevant ZRCC H Shares shall be deemed as
cancelled thereafter, and the share certificates for such ZRCC H Shares will
thereafter cease to have effect as documents or evidence of title. The register
of ZRCC H Shareholders will remain closed after the Record Time until ZRCC is
de-registered. After all the Conditions have been fulfilled (or waived, if
applicable), ZRCC will apply to the Ningbo SAIC for its de-registration. After
the de-registration process of ZRCC is completed, ZRCC will cease to exist as a
legal entity and all the ZRCC Shares will be legally cancelled.
CONVERSION OF ZRCC DOMESTIC SHARES
Before the Effective Date, Ningbo Yonglian will increase its registered
capital by an amount equal to the registered capital of ZRCC attributable to
Sinopec Corp. (or other sum confirmed by the local Administration of Industry
and Commerce) in accordance with the PRC legal procedures, and will register
Sinopec Corp. as the holder of such new registered capital.
TERMINATION OF THE MERGER
The Merger can be terminated at any time prior to the Delisting Date by:
o either Ningbo Yonglian or ZRCC if:
(i) any governmental body has issued an order, decree or ruling
or taken any other action (which order, decree, ruling or
other action the parties hereto shall use their reasonable
efforts to lift), which permanently restrains, enjoins or
otherwise prohibits the Merger and such order, decree, ruling
or other action shall have become final and non-appealable;
(ii) the Conditions have not been satisfied or waived (if
applicable) by 31 December, 2006; or
(iii) ZRCC has not obtained the requisite votes at the Special
General Meeting or the Special General Meeting of the
Independent ZRCC Shareholders for approving the Proposal.
o by ZRCC: if Ningbo Yonglian has breached any of its
representations, warranties, covenants or other agreements
contained in the Merger Agreement, which breach is of material
significance to the Merger and cannot be or has not been cured
within 30 days after the giving of written notice by ZRCC to Ningbo
Yonglian, if applicable; or
o by Ningbo Yonglian: if ZRCC has breached any of its
representations, warranties, covenants or other agreements
contained in the Merger Agreement which breach is of material
significance to the Merger and cannot be or has not been cured
within 30 days after the giving of written notice by Ningbo
Yonglian to ZRCC, if applicable.
EXPENSES
ZRCC has agreed to pay Ningbo Yonglian its actual expenses incurred in
relation to the Merger, the Merger Agreement and completion of the Merger if:
o the Merger is terminated or abandoned by Ningbo Yonglian because:
(i) ZRCC did not obtain the requisite votes at the Special
General Meetings;
(ii) ZRCC breached any of its representations, warranties,
covenants or other agreements contained in the Merger
Agreement, which breach is of material significance to the
Merger and cannot be or has not been cured within 30 days
after the giving of written notice by Ningbo Yonglian to
ZRCC, as applicable.
o the Merger is terminated or abandoned by ZRCC because ZRCC did not
obtain the requisite votes at the Special General Meetings.
Ningbo Yonglian has agreed to pay ZRCC its actual expenses incurred in
relation to the Merger, the Merger Agreement and completion of the Merger if
the Merger is terminated or abandoned by ZRCC because Ningbo Yonglian breached
any of its representations, warranties, covenants or other agreements contained
in the Merger Agreement which breach is of material significance to the Merger
and cannot be or has not been cured within 30 days after the giving of written
notice by ZRCC to Ningbo Yonglian, as applicable.
Except as discussed above, each party agreed to pay its own costs and
expenses incurred in connection with the Merger Agreement and the completion of
the Merger.
CONDUCT OF BUSINESS BY ZRCC
ZRCC has agreed that, prior to the completion of the Merger except (i) as
expressly contemplated by the Merger Agreement; or (ii) as required by
applicable law, after the date of the Merger Agreement:
o the business of it and its subsidiaries shall be conducted only in
the usual, regular and ordinary course and substantially in the
same manner as heretofore conducted, and each of it and its
subsidiaries shall use its best efforts to preserve its business
organisation intact, keep available the services of its current
officers and employees and maintain its existing relations with
customers, suppliers, creditors, business partners and others
having business dealings with it, to the end that the goodwill and
ongoing business of each of them shall be unimpaired at the
Effective Date;
o it shall not and shall cause each of its subsidiaries not to: (i)
amend its articles of association or similar organizational
documents (save from the Proposed Amendment which is specifically
waived by Ningbo Yonglian), (ii) issue or encumber any shares of
any class or series of its capital stock or voting debt, (iii)
declare, set aside or pay any dividend or other distribution; (iv)
split, combine or reclassify any shares of any class or series of
its stock; or (v) redeem, purchase or otherwise acquire any shares
of any class;
o it shall not and shall cause each of its subsidiaries not to (i)
incur or modify any material indebtedness or other material
liability, other than in the ordinary and usual course of business
and consistent with past practice; or (ii) modify or terminate any
of its material contracts or waive any material rights or claims,
except in the ordinary course of business and consistent with past
practice;
o it shall not and shall cause each of its subsidiaries not to: (i)
incur or assume any material long-term debt, or except in the
ordinary course of business, incur or assume any material
short-term indebtedness in amounts not consistent with past
practice; (ii) modify the terms of any indebtedness or other
material liability, other than modifications of short term debt in
the ordinary and usual course of business and consistent with past
practice; (iii) assume the material obligations of any other
person, except in the ordinary course of business and consistent
with past practice; (iv) make any material loans or investments in
any other person (other those in the ordinary course of business
and consistent with past practice); or (v) enter into any material
commitment or transaction (including, but not limited to, any
capital expenditure or purchase, sale or lease of assets or real
estate);
o it shall not and shall cause each of its subsidiaries not to
transfer, lease or encumber any material assets other than in the
ordinary and usual course of business and consistent with past
practice;
o it shall not and shall cause each of its subsidiaries not to enter
into any contract or transaction relating to the purchase of
material assets other than in the ordinary course of business
consistent with prior practices;
o it shall not and shall cause each of its subsidiaries not to pay or
satisfy any of its material claims, liabilities or obligations,
other than the payment, discharge or satisfaction in the ordinary
course of business and consistent with past practice, of material
claims, liabilities or obligations;
o it shall not and shall cause each of its subsidiaries not to adopt
a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other
reorganization of it or any of its subsidiaries (other than the
Merger);
o it shall not and shall cause each of its subsidiaries not to change
any of the accounting methods issued by it unless required by PRC
or international generally accepted accounting principles; and
o it shall not and shall cause each of its subsidiaries not to enter
into an agreement, contract, commitment or arrangement to do any of
the foregoing, or to authorize, recommend, propose or announce an
intention to do any of the foregoing.
AMENDMENTS, MODIFICATIONS AND WAIVER
The Merger Agreement may be amended, modified or supplemented any time
before the Delisting Date by written agreement and through the ZRCC Board and
Ningbo Yonglian Board before or after the voting by the ZRCC Shareholders
provided that the amount of the Cancellation Price cannot be reduced and the
form of the Cancellation Price cannot be changed after shareholders of both
companies have approved the Merger Agreement. Ningbo Yonglian and ZRCC may
waive any inaccuracies in representations or waive compliance with any
Condition (where applicable) prior to the Effective Date.
NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES
None of the representations and warranties in the Merger Agreement or in
any schedule or other document delivered pursuant to the Merger Agreement shall
survive the Effective Date. The foregoing sentence shall not limit any covenant
or agreement of the parties which by its terms contemplates survival after the
Effective Date.
INDEMNIFICATION
Ningbo Yonglian (or its successor) will for three years after the
Effective Date, defend and hold harmless each officer or director of ZRCC
against all losses, claims, damages, liabilities, costs, fees and expenses,
including reasonable fees and disbursements of counsel and judgments, fines,
losses, claims, liabilities and amounts paid in settlement (provided that any
such settlement is effected with the written consent of the Ningbo Yonglian)
arising out of actions or omissions related to the Merger Agreement or the
Merger occurring at or prior to the completion of the Merger; provided that, in
the event any claim or claims are asserted or made within such three year
period, all rights to indemnification in respect of any such claim or claims
shall continue until disposition of any and all such claims. This provision
shall survive termination of the Merger Agreement.
------------------------------------------------------------------------------
APPENDIX I FINANCIAL INFORMATION
------------------------------------------------------------------------------
I. THREE-YEAR FINANCIAL SUMMARY
Set out below is a summary of the published results and the NAV per ZRCC
Share of ZRCC for each of the three financial years ended 31 December, 2004.
For the years ended 31 December,
2002 2003 2004
RMB'000 RMB'000 RMB'000
Turnover 22,484,667 29,070,343 41,991,481
Operating profit before financing costs 1,457,884 1,696,399 3,786,010
Profit before tax 1,393,066 1,609,594 3,765,434
Income tax expense (419,809) (521,565) (1,152,075)
Profit after tax but before minority interests(1) 973,257 1,088,029 2,613,359
Profit attributable to shareholders 973,257 1,087,987 2,613,288
Dividends 302,850 353,326 757,126
Earnings per share (on a fully-diluted basis) RMB0.39 RMB0.43 RMB1.04
Earnings per share (on a weighted average basis) RMB0.39 RMB0.43 RMB1.04
NAV per share RMB3.35 RMB3.66 RMB4.52
Dividends per share RMB0.12 RMB0.14 RMB0.30
(Notes:
1. One of ZRCC's subsidiaries, Zhenhai Refining & Chemical Haida
Development Company ([GRAPHIC OMITTED]) ("ZRCH"), holds three
subsidiaries with shareholdings of 90% in [GRAPHIC OMITTED], 51% in
[GRAPHIC OMITTED] and 90% in [GRAPHIC OMITTED]. The minority
interests arise from the third parties' shareholding in those three
subsidiaries of ZRCH and the amounts of the minority interests were
nil, RMB42,000 and RMB71,000 respectively for the three years ended
31 December, 2004.
2. ZRCC did not have any extraordinary or exceptional items for each
of the three financial years ended 31 December, 2004. None of the
auditors' reports in respect of the financial statements of ZRCC
for the three financial years ended 31 December 2004 contains any
qualification statements.)
II. FINANCIAL REPORT OF ZRCC FOR THE YEAR ENDED 31 DECEMBER 2004
Set out below is a summary of the income statement, the cash flow
statement and the statement of changes in shareholders' equity for each of the
two years ended 31 December, 2004 and the balance sheets as at 31 December,
2003 and 31 December, 2004 together with the relevant notes as extracted from
the audited financial report of ZRCC for the year ended 31 December, 2004.
CONSOLIDATED INCOME STATEMENT
for the year ended 31 December 2004
2004 2003
Note RMB'000 RMB'000
Turnover 3 41,991,481 29,070,343
Less: Business taxes and surcharges 4 (1,653,499) (1,161,365)
------------- -------------
Net sales 40,337,982 27,908,978
Cost of sales (35,968,587) (25,628,659)
------------- -------------
Gross profit 4,369,395 2,280,319
Other operating income 76,820 59,593
Selling and administrative expenses (531,995) (511,645)
Other operating expenses 5 (100,008) (40,178)
Net loss on disposal of property, plant and equipment (28,202) (22,506)
Employee reduction expenses 6 - (69,184)
------------- -------------
Profit from operations 3,786,010 1,696,399
Net financing costs 7(a) (73,653) (81,907)
Share of profits less (losses) from associates and jointly controlled 53,077 (4,898)
entity
------------- -------------
Profit from ordinary activities before taxation 7 3,765,434 1,609,594
Income tax expense 10(a) (1,152,075) (521,565)
------------- -------------
Profit from ordinary activities after taxation 2,613,359 1,088,029
Minority interests (71) (42)
------------- -------------
Profit attributable to shareholders 11 2,613,288 1,087,987
============= =============
Dividends attributable to the year: 12(a)
Interim dividend declared during the year 227,138 126,188
Final dividend proposed after the balance sheet date 529,988 227,138
------------- -------------
757,126 353,326
============= ============
Basic earnings per share 13(a) RMB1.04 RMB0.43
============= ============
CONSOLIDATED BALANCE SHEET
as at 31 December 2004
2004 2003
Note RMB'000 RMB'000
Non-current assets
Property, plant and equipment 14 8,619,019 8,527,919
Construction in progress 15 840,159 584,400
Lease prepayments 51,954 41,867
Interests in associates 17 189,650 215,167
Interest in jointly controlled entity 18 44,962 8,178
Other investments 19 148,996 143,800
Deferred tax assets 20 127,271 123,435
------------- -------------
Total non-current assets 10,022,011 9,644,766
------------- -------------
Current assets
Inventories 21 2,016,241 1,609,258
Trade receivables - third parties 22 230,017 267,787
Other receivables, deposits and prepayments 23 287,083 376,350
Amounts due from associates and jointly controlled entity 24 32,253 11,560
Amounts due from parent companies and fellow subsidiaries 25 769,834 519,225
Deposits with banks 26 40,806 31,121
Cash and cash equivalents 26 2,094,534 1,028,518
------------- -------------
Total current assets 5,470,768 3,843,819
------------- -------------
Current liabilities
Bank loans 27 430,000 884,200
Trade payables - third parties 28 671,572 1,057,410
Accruals and other payables 742,594 688,035
Amounts due to parent companies and fellow subsidiaries 29 1,191,721 259,165
Income tax payable 373,550 166,441
Other taxes payable 345,887 390,964
Dividends payable 1,344 875
------------- -------------
Total current liabilities 3,756,668 3,447,090
------------- -------------
Net current assets 1,714,100 396,729
------------- -------------
Total assets less current liabilities 11,736,111 10,041,495
============= =============
Non-current liabilities
Bank loans 27 320,000 810,000
------------- -------------
Minority interests 2,351 2,350
------------- -------------
Net assets 11,413,760 9,229,145
============= =============
Shareholders' equity
Share capital 30 2,523,755 2,523,755
Reserves 31 6,404,120 4,857,325
Retained earnings 31 2,485,885 1,848,065
------------- -------------
11,413,760 9,229,145
BALANCE SHEET
as at 31 December 2004
2004 2003
Note RMB'000 RMB'000
Non-current assets
Property, plant and equipment 14 7,742,999 7,644,207
Construction in progress 15 791,036 567,892
Lease prepayments 23,260 12,410
Interests in subsidiaries 16 857,817 989,799
Interests in associates 17 129,420 107,184
Interest in jointly controlled entity 18 44,962 8,178
Other investments 19 126,625 143,800
Deferred tax assets 20 116,170 113,250
------------- -------------
Total non-current assets 9,832,289 9,586,720
Current assets
Inventories 21 1,914,206 1,521,683
Trade receivables - third parties 22 180,346 239,951
Other receivables, deposits and prepayments 23 217,935 326,165
Amounts due from associates and jointly controlled entity 24 11,026 6,780
Amounts due from parent companies and fellow subsidiaries 25 623,001 411,716
Deposits with banks 26 30,000 30,000
Cash and cash equivalents 26 2,043,974 1,001,414
------------- -------------
Total current assets 5,020,488 3,537,709
Current liabilities
Bank loans 27 430,000 884,200
Trade payables - third parties 28 357,736 943,242
Accruals and other payables 590,845 550,832
Amounts due to parent companies and fellow subsidiaries 29 1,063,338 157,002
Income tax payable 352,069 168,121
Other taxes payable 323,685 381,012
Dividends payable 1,344 875
------------- -------------
Total current liabilities 3,119,017 3,085,284
------------- -------------
Net current assets 1,901,471 452,425
------------- -------------
Total assets less current liabilities 11,733,760 10,039,145
Non-current liabilities
Bank loans 27 320,000 810,000
------------- -------------
Net assets 11,413,760 9,229,145
============= ============
Shareholders' equity
Share capital 30 2,523,755 2,523,755
Reserves 31 6,404,120 4,857,325
Retained earnings 31 2,485,885 1,848,065
------------- -------------
11,413,760 9,229,145
============= ============
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
for the year ended 31 December 2004
Statutory Discre-
Excess Statutory public tionary
Share Capital over share surplus welfare surplus Retained
capital reserve capital reserve fund reserve earnings Total
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Note 31(e) 31(a) 31(b) 31(c) 31(d)
As at 1 January 2003 2,523,755 1,990,029 (134,000) 868,745 523,562 1,433,913 1,241,302 8,447,306
Profit attributable
to shareholders - - - - - - 1,087,987 1,087,987
Appropriations - - - 119,402 119,402 11,682 (250,486) -
Dividends 12 - - - - - - (328,088) (328,088)
Deferred tax
arising from
government
grants 20(a) - 16,302 - - - - - 16,302
Others - 5,638 - - - - - 5,638
---------- ---------- --------- --------- --------- ---------- ---------- ----------
As at 31 December
2003 2,523,755 2,011,969 (134,000) 988,147 642,964 1,445,595 1,750,715 9,229,145
========== ========== ========= ========= ========= ========== ========== ==========
As at 1 January
2004, as
previously
reported 2,523,755 2,011,969 (134,000) 988,147 642,964 1,445,595 1,750,715 9,229,145
Adjustment to
appropriation
of three
reserves 31(f) - - - (102,614) (49,132) 54,396 97,350 -
---------- ---------- --------- --------- --------- ---------- ---------- ----------
As at 1 January
2004, as
reclassified 2,523,755 2,011,969 (134,000) 885,533 593,832 1,499,991 1,848,065 9,229,145
Profit attributable
to shareholders - - - - - - 2,613,288 2,613,288
Appropriations - - - 261,255 261,255 1,000,000 (1,522,510) -
Dividends 12 - - - - - - (454,276) (454,276)
Deferred tax
arising from
government
grants 20(a) - (1,318) - - - - 1,318 -
Others - 25,603 - - - - - 25,603
---------- ---------- --------- --------- --------- ---------- ---------- ----------
As at 31 December
2004 2,523,755 2,036,254 (134,000) 1,146,788 855,087 2,499,991 2,485,885 11,413,760
========== ========== ========= ========= ========= ========== ========== ==========
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
for the year ended 31 December 2004
Statutory Discre-
Excess Statutory public tionary
Share Capital over share surplus welfare surplus Retained
capital reserve capital reserve fund reserve earnings Total
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Note 31(e) 31(a) 31(b) 31(c) 31(d)
As at 1 January
2003 2,523,755 1,990,029 (134,000) 776,493 479,668 1,499,991 1,311,370 8,447,306
Profit
attributable to
shareholders - - - - - - 1,087,987 1,087,987
Appropriations - - - 111,602 111,602 - (223,204) -
Dividends 12 - - - - - - (328,088) (328,088)
Deferred tax
arising from
government
grants 20(a) - 16,302 - - - - - 16,302
Others - 5,638 - - - - - 5,638
---------- ---------- --------- --------- --------- ---------- ---------- ----------
As at 31 December
2003 2,523,755 2,011,969 (134,000) 888,095 591,270 1,499,991 1,848,065 9,229,145
Profit
attributable to
shareholders - - - - - - 2,613,288 2,613,288
Appropriations - - - 261,255 261,255 1,000,000 (1,522,510) -
Dividends 12 - - - - - - (454,276) (454,276)
Deferred tax
arising from
government
grants 20(a) - (1,318) - - - - 1,318 -
Others - 25,603 - (2,562) 2,562 - - 25,603
---------- ---------- --------- --------- --------- ---------- ---------- ----------
As at 31 December
2004 2,523,755 2,036,254 (134,000) 1,146,788 855,087 2,499,991 2,485,885 11,413,760
=================================================================================================
CONSOLIDATED CASH FLOW STATEMENT
for the year ended 31 December 2004
2004 2003
Note RMB'000 RMB'000
Operating activities
Cash generated from operations (a) 4,555,090 3,050,782
Income tax paid (931,285) (546,824)
------------- -------------
Net cash generated from operating activities 3,623,805 2,503,958
Investing activities
Acquisition of property, plant and equipment and construction in progress (1,083,740) (2,069,937)
Acquisition of associates, jointly controlled entity and other investments (35,538) (13,810)
Proceeds from sale of property, plant and equipment 2,936 12,737
Proceeds from sale of associates and other investments 7,645 10,071
Dividends received from associates and other investments 14,116 16,165
Interest received 13,446 7,555
Increase in time deposits with banks (9,685) (1,121)
------------- -------------
Net cash used in investing activities (1,090,820) (2,038,340)
Financing activities
New bank loans 15,291,513 8,645,440
Repayment of bank loans (16,235,713) (8,382,841)
Dividends paid (453,807) (328,074)
Dividends paid to minority shareholders (70) (14)
Interest paid (68,892) (96,966)
------------- -------------
Net cash used in financing activities (1,466,969) (162,455)
------------- -------------
Net increase in cash and cash equivalents 1,066,016 303,163
Cash and cash equivalents at 1 January 1,028,518 725,355
------------- -------------
Cash and cash equivalents at 31 December 2,094,534 1,028,518
============= =============
NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT
for the year ended 31 December 2004
(a) Reconciliation of profit from ordinary activities before taxation to cash
generated from operations
2004 2003
Note RMB'000 RMB'000
Profit from ordinary activities before taxation 3,765,434 1,609,594
Adjustments for:
Provision for impairment of other investments 17,442 1,676
Net loss on disposal of property, plant and equipment 28,202 22,506
Net loss on disposal of associates and other investments 154 -
Amortisation of lease prepayments 1,096 1,143
Depreciation of property, plant and equipment 1,032,879 844,305
Share of (profits) less losses from associates and jointly controlled entity (53,077) 4,898
Dividend income from other investments (6,141) (6,079)
Interest expense 62,661 73,102
Interest income (12,324) (8,122)
------------- -------------
Operating profit before changes in working capital 4,836,326 2,543,023
Increase in inventories (406,983) (371,948)
Decrease in trade receivables - third parties 37,770 111,179
Decrease in other receivables, deposits and prepayments 69,515 57,175
(Increase)/decrease in amounts due from associates and jointly controlled (20,693) 1,257
entity
(Increase)/decrease in amounts due from parent companies and fellow (309,172) 66,091
subsidiaries
Increase in lease prepayments (11,183) (1,450)
(Decrease)/increase in trade payables - third parties (316,983) 492,357
(Decrease)/increase in accruals and other payables (24,688) 142,577
Decrease in amounts due to associates - (5,012)
Increase in amounts due to parent companies and fellow subsidiaries 746,258 3,161
(Decrease)/increase in other taxes payable (45,077) 12,372
------------- -------------
Cash generated from operations 4,555,090 3,050,782
============= =============
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2004
1. BACKGROUND AND PRINCIPAL ACTIVITIES
Sinopec Zhenhai Refining & Chemical Company Limited ("the Company") was
established in the People's Republic of China ("the PRC") on 28 June 1994 as a
joint stock limited company as part of a restructuring exercise to convert
Zhenhai General Petrochemical Works ("ZGP"), a state-owned enterprise, into a
joint stock limited company. ZGP was under the direct supervision and control
of China Petrochemical Corporation ("Sinopec Group Company"), a ministry-level
enterprise under the direct supervision of the State Council of the PRC, which
is responsible for the administration and development of the petrochemical
industry in the PRC. On 28 June 1994, the Company took over the business
undertakings and subsidiaries of ZGP together with the relevant assets and
liabilities, and issued to Sinopec Group Company 1,800,000,000 state-owned
shares with a par value of RMB1.00 each.
As part of the reorganisation of Sinopec Group Company in 2000, Sinopec
Group Company transferred all of its shareholdings in the Company to China
Petroleum & Chemical Corporation ("Sinopec Corp"), a joint stock limited
company established in the PRC on 25 February 2000. Since then, Sinopec Corp is
the immediate parent company and Sinopec Group Company is the ultimate parent
company.
The Company and its subsidiaries (collectively "the Group") are
principally engaged in the production and sale of petroleum products (including
gasoline, diesel, kerosene, naphtha, liquefied petroleum gas ("LPG"), solvent
oil and fuel oil), intermediate petrochemical products, asphalt, urea and
petrochemical products (including paraxylene and polypropylene). Gasoline,
diesel and kerosene are three major products of the Group. The principal
activities of its principal subsidiaries are shown in note 16.
2. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies adopted in the preparation of the
financial statements are set out below:
(a) Statement of compliance
The financial statements of the Group have been prepared in
accordance with International Financial Reporting Standards ("IFRS")
adopted by the International Accounting Standards Board ("IASB"). IFRS
include International Accounting Standards ("IAS") and related
interpretations. These financial statements also comply with the
disclosure requirements of the Hong Kong Companies Ordinance and the
applicable disclosure provisions of the Rules Governing the Listing of
Securities on The Stock Exchange of Hong Kong Limited.
The IASB has issued a number of new and revised IFRS and IAS ("new
IFRS") which are effective for accounting periods beginning on or after 1
January 2005. The Group has not early adopted these new IFRS in the
financial statements for the year ended 31 December 2004. The Group has
commenced an assessment of the impact of these new IFRS but is not yet in
a position to state whether these new IFRS would have a significant
impact on its results of operations and financial position.
(b) Basis of preparation
The financial statements are presented in Renminbi, rounded to the
nearest thousand. The measurement basis used in the preparation of the
financial statements is historical cost modified by the revaluation of
certain property, plant and equipment where stated in note 2(e). The
accounting policies have been consistently applied by the Group and are
consistent with those adopted in the previous year.
The preparation of financial statements in accordance 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 the year. Actual results
could differ from those estimates.
(c) Basis of consolidation
(i) Subsidiaries
The consolidated financial statements of the Group include
the financial statements of the Company and all of its principal
subsidiaries. Subsidiaries are those entities controlled by the
Company. Control exists when the Company has the power, directly or
indirectly, to govern the financial and operating policies of an
enterprise so as to obtain benefits from its activities. The
financial statements of subsidiaries are included in the
consolidated financial statements from the date that control
commences until the date that control ceases.
(ii) Associates and jointly controlled entity
Associates are those entities in which the Company or the
Group has significant influence, but not control, over the
financial and operating policies.
A jointly controlled entity is an entity which operates under
a contractual arrangement between the Company or the Group and
other parties, where the contractual arrangement establishes that
the Company or the Group and one or more of the other parties share
joint control over the economic activity of the entity.
The Company's financial statements and the Group's
consolidated financial statements include the Company's and the
Group's share of the total recognised gains and losses of the
principal associates and jointly controlled entity on an equity
accounted basis, from the date that significant influence or joint
control commences until the date that significant influence or
joint control ceases. When the Company's or the Group's share of
losses exceeds the carrying amount of the associate and the jointly
controlled entity, the carrying amount is reduced to nil and
recognition of further losses is discontinued except to the extent
that the Company or the Group has incurred obligations in respect
of the associate and the jointly controlled entity.
(iii) Transactions eliminated on consolidation
Intra-group transactions and balances, and any material
unrealised profit arising from intra-group transactions, are
eliminated in preparing the consolidated financial statements.
(d) Translation of foreign currencies
Transactions in foreign currencies are translated into Renminbi at
the applicable exchange rates quoted by the People's Bank of China ("PBOC
rates") ruling at the transaction dates.
Monetary assets and liabilities denominated in foreign currencies
at the balance sheet date are translated into Renminbi at the applicable
PBOC rates ruling at that date.
Foreign currency translation differences relating to funds borrowed
to finance the construction of property, plant and equipment to the
extent that they are regarded as an adjustment to interest charges are
capitalised during the construction period. All other exchange
differences are dealt with in the income statement.
(e) Property, plant and equipment
Property, plant and equipment are stated in the balance sheets at
cost or valuation (see note 14(b)) less accumulated depreciation and
impairment losses (see note 2(t)). Revaluation is performed periodically
to ensure that the carrying amount does not differ materially from that
which would be determined using fair value at the balance sheet date.
(i) Subsequent expenditure
Expenditure incurred to replace a component of an item of
property, plant and equipment that is accounted for separately, is
capitalised with the carrying amount of the component being written
off. Other subsequent expenditure is capitalised only when it
increases the future economic benefits embodied in the item of
property, plant and equipment. All other expenditure is charged to
the income statement as an expense in the period in which it is
incurred.
(ii) Depreciation
Depreciation is provided to write off the costs or revalued
amount of property, plant and equipment over their estimated useful
lives on a straight-line basis, after taking into account their
estimated residual values, as follows:
Buildings 20 to 40 years
Plant, machinery, equipment and others 8 to 18 years
Motor vehicles 8 to 10 years
(iii) Retirement or disposal
Gains or losses arising from the retirement or disposal of
property, plant and equipment are determined as the difference
between the net sales proceeds and the carrying amount of the
assets and are recognised in the income statement on the date of
retirement or disposal.
(f) Construction in progress
Construction in progress represents buildings, various plant and
equipment under construction and pending installation, and is stated at
cost less impairment losses (see note 2(t)). 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 construction
period.
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.
(g) Lease prepayments
Lease prepayments represent the amount of land use rights paid to
the PRC land bureau. Land use rights are carried at historical cost less
accumulated amortisation and impairment losses (see note 2(t)).
Amortisation is calculated on a straight-line basis over the respective
periods of the rights.
(h) Investments in subsidiaries
In the Company's balance sheet, investments in subsidiaries are
accounted for using the equity method.
(i) Other investments
Other investments in unlisted equity securities are stated at cost
less impairment losses (see note 2(t)). A provision is made where, in the
opinion of management, the carrying amount of the other investments
exceeds its recoverable amount.
(j) Inventories
Inventories, other than spare parts and consumables, are carried at
the lower of cost and net realisable value. Cost includes the cost of
materials computed using the weighted average method and expenditure
incurred in acquiring the inventories and bringing them to their existing
location and condition. In the case of work in progress and finished
goods, cost includes direct labour and an appropriate proportion of
production overheads. Net realisable value is the estimated selling price
in the ordinary course of business less the estimated costs of completion
and the estimated costs necessary to make the sales.
When inventories are sold, the carrying amount of the inventories
is recognised as an expense in the period in which the related revenue is
recognised. The amount of any write-down of inventories to net realisable
value and all losses of inventories are recognised as an expense in the
period the write-down or loss occurs. The amount of any reversal of any
write-down of inventories, arising from an increase in net realisable
value, is recognised as a reduction in the amount of inventories
recognised as an expense in the period in which the reversal occurs.
Spare parts and consumables are stated at cost less any provision
for obsolescence.
(k) Trade receivables
Trade receivables are stated at cost less allowance for doubtful
accounts. An allowance for doubtful accounts is provided based upon the
evaluation of the recoverability of these accounts at the balance sheet
date.
(l) Cash equivalents
Cash equivalents consist of time deposits with banks with an
initial term of less than three months when acquired. Cash equivalents
are stated at cost, which approximate fair value.
(m) Provisions and contingent liabilities
Provisions are recognised for liabilities of uncertain timing or
amount when the Group or the Company has a legal or constructive
obligation arising as a result of a past event, it is probable that an
outflow of economic benefits will be required to settle the obligation
and a reliable estimate can be made. Where the time value of money is
material, provisions are stated at the present value of the expenditures
expected to settle the obligation.
Where it is not probable that an outflow of economic benefits will
be required, or the amount cannot be estimated reliably, the obligation
is disclosed as a contingent liability, unless the probability of outflow
of economic benefits is remote. Possible obligations, whose existence
will only be confirmed by the occurrence or non-occurrence of one or more
future events are also disclosed as contingent liabilities unless the
probability of outflow of economic benefits is remote.
(n) Revenue recognition
Revenue from the sale of goods is recognised 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 recognised if
there are significant uncertainties regarding recovery of the
consideration due, the possible return of goods, or when the amount of
revenue and the costs incurred or to be incurred in respect of the
transaction cannot be measured reliably.
Revenue from the rendering of services is recognised in the income
statement upon performance of the services.
Dividend income is recognised when the shareholder's right to
receive payment is established.
(o) Government grants
Capital-based government grants consist of grants for the purchase
of equipment used for technology improvements. Such grants are initially
recorded as long-term liabilities and are offset against the cost of
asset to which the grants related when construction commences. Upon
transfer to property, plant and equipment, the grants are recognised as
income over the useful life of the property, plant and equipment by way
of reduced depreciation charge.
(p) Net financing costs
Net financing costs comprise interest expense on borrowings,
interest income from bank deposits, foreign exchange gains and losses and
bank charges.
Interest income from bank deposits is accrued on a time-apportioned
basis by reference to the principal outstanding and the rate applicable.
All interest and other costs incurred in connection with borrowings
are expensed as incurred as part of net financing costs, except to the
extent that they are capitalised as being directly attributable to the
acquisition or construction of an asset which necessarily takes a
substantial period of time to get ready for its intended use or sale.
(q) Repairs and maintenance expenses
Repairs and maintenance expenses, including cost of major overhaul,
are charged to the income statement as and when they are incurred.
(r) 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. Because of the nature
of the Group's research and development activities, no development costs
satisfy the criteria for the recognition of such costs as an asset. The
research and development costs are therefore recognised as expenses in
the period in which they are incurred.
(s) Retirement benefits
Contributions to defined contribution scheme are recognised as an
expense in the income statement as incurred. Further information is set
out in note 9.
(t) Impairment losses
The carrying amounts of the Group's assets, other than trade
receivables (refer to accounting policy k), inventories (refer to
accounting policy j), and deferred tax assets (refer to accounting policy
v), are reviewed periodically in order to assess whether the recoverable
amounts have declined below the carrying amounts. These assets are tested
for impairment whenever events or changes in circumstances indicate that
their recorded carrying amounts may not be recoverable. When such a
decline has occurred, the carrying amount is reduced to the recoverable
amount. The recoverable amount is the greater of the net selling price
and the value in use. In determining the value in use, expected future
cash flows generated by the assets are discounted to their present value.
The amount of the reduction is recognised as an expense in the income
statement.
The Group assesses at each balance sheet date whether there is any
indication that an impairment loss recognised for an asset in prior years
may no longer exist. An impairment loss is reversed if there has been a
favourable change in the estimates used to determine the recoverable
amount. A subsequent increase in the recoverable amount of an asset, when
the circumstances and events that led to the write-down or write-off
cease to exist, is recognised as income. The reversal is reduced by the
amount that would have been recognised as depreciation had the write-down
or write-off not occurred.
(u) Dividends
Dividends are recognised as a liability in the period in which they
are declared.
(v) Income tax
Income tax on the income statement for the year comprises current
and deferred tax. Income tax is recognised in the income statement except
to the extent that it relates to items recognised directly in equity, in
which case it is recognised in equity.
Current tax is the expected tax payable on the taxable income for
the year, using tax rates enacted or substantially enacted at the balance
sheet date, and any adjustment to tax payable in respect of previous
years.
Deferred tax is provided under the balance sheet liability method,
providing for temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts
used for taxation purposes. The amount of deferred tax provided is based
on the expected manner of realisation or settlement of the carrying
amount of assets and liabilities, using tax rates enacted or
substantially enacted at the balance sheet date. The effect on deferred
tax of any changes in tax rates is charged to income statement.
A deferred tax asset is recognised only to the extent that it is
probable that future taxable profits will be available against which the
asset can be utilised. Deferred tax assets are reduced to the extent that
it is no longer probable that the related tax benefit will be realised.
(w) Related parties
For the purposes of these financial statements, parties are
considered to be related to the Group if the Group has the ability,
directly or indirectly, to control the party or exercise significant
influence over the party in making financial and operating decisions, or
vice versa, or where the Group and the party are subject to common
control or common significant influence. Related parties may be
individuals or other entities.
(x) Operating leases
Operating lease payments are charged to the income statement on a
straight-line basis over the period of the respective leases.
(y) Segment reporting
A segment is a distinguishable component of the Group that is
engaged in providing products or services and is subject to risks and
rewards that are different from those of other segments.
3. TURNOVER
Turnover represents the sales value of goods sold to customers, net of
value-added tax and is after deduction of any sales discounts and returns.
4. BUSINESS TAXES AND SURCHARGES
2004 2003
RMB'000 RMB'000
Consumption tax 1,355,469 967,569
City construction tax 178,855 114,361
Education surcharge 102,977 65,831
Others 16,198 13,604
------------- -------------
Total 1,653,499 1,161,365
============= =============
Consumption tax is levied on producers of gasoline and diesel based on an
applicable tax rate applied to the volume of sales. City construction tax and
education surcharge are levied on an entity based on applicable tax rates
applied to the total amount of value-added tax, consumption tax and business
tax.
5. OTHER OPERATING EXPENSES
2004 2003
RMB'000 RMB'000
Donations 30,025 4,520
Water utility fund 28,700 22,200
Provision for impairment of other investments 17,442 1,676
Others 23,841 11,782
------------- -------------
Total 100,008 40,178
============= =============
6. EMPLOYEE REDUCTION EXPENSES
In accordance with the Group's voluntary employee reduction plan, the
Group recorded employee reduction expenses of RMB69,184,000 during the year
ended 31 December 2003 in respect of the voluntary resignation of approximately
870 employees. There were no employee reduction expenses incurred during the
year ended 31 December 2004.
7. PROFIT FROM ORDINARY ACTIVITIES BEFORE TAXATION
Profit from ordinary activities before taxation is arrived at after
charging/(crediting):
2004 2003
RMB'000 RMB'000
(a) Net financing costs
Interest expense 67,434 97,291
Less: Amount capitalised as projects in progress* (4,773) (24,189)
------------- -------------
Interest expense, net 62,661 73,102
Interest income (12,324) (8,122)
Net foreign exchange loss 22,480 16,475
Bank charges 836 452
------------- -------------
Total 73,653 81,907
============= =============
* The borrowing costs have been capitalised at a rate of 5.05%-5.49%
(2003: 5.05%-5.49%) per annum for projects in progress.
2004 2003
RMB'000 RMB'000
(b) Other items
Cost of inventories # 34,862,907 25,092,790
Depreciation of property, plant and equipment # 1,032,879 844,305
Amortisation of lease prepayments 1,096 1,143
Repairs and maintenance expenses # 287,493 338,948
Research and development costs 14,076 41,864
Staff costs #
- Salaries, wages, bonus and other staff welfare 639,461 653,278
- Contributions to retirement scheme 109,332 101,035
Provision for impairment of other investments 17,442 1,676
Auditors' remuneration 2,608 2,608
Operating lease charges 12,634 4,243
Dividend income from other investments (6,141) (6,079)
============= =============
# Cost of inventories includes RMB1,710,585,000 (2003:
RMB1,588,967,000) relating to depreciation of property, plant and
equipment, repairs and maintenance expenses and staff costs, which
amount is also included in the respective total amounts disclosed
separately above for each of these types of expenses.
The number of employees of the Group as at 31 December 2004 was 8,766
(2003: 9,178).
8. DIRECTORS' AND SUPERVISORS' EMOLUMENTS
(a) Directors' and supervisors' emoluments are as follows:
Basic salaries,
allowances and Retirement scheme
Name Fees benefits in kind Bonus contributions Total
2004 2003 2004 2003 2004 2003 2004 2003 2004 2003
(Amounts in RMB'000)
Directors:
Sun Weijun - - 67 67 203 165 36 32 306 264
Zhan Juping - - 67 67 203 165 36 32 306 264
Xu Liqiao - - 54 54 163 132 36 32 253 218
Sun Jianli - - 54 54 163 132 36 32 253 218
Zhao Jinxuan - - 54 54 163 132 36 32 253 218
Yu Renming - - 54 54 163 132 36 32 253 218
External
directors:
Wang Lisheng 3 3 - - - - - - 3 3
Hu Weiqing 3 7 - - - - - - 3 7
Independent non-
executive
directors:
Sun Yongsen 12 17 - - - - - - 12 17
Cen Kefa 16 19 - - - - - - 16 19
Li Linghong 16 17 - - - - - - 16 17
Qiu Yun 14 19 - - - - - - 14 19
Supervisors:
Gu Yueguang - - 54 52 163 128 35 32 252 212
Lu Xiangyang 6 4 - - - - - - 6 4
Zhang Jianjun 6 4 - - - - - - 6 4
Bao Chuntian 14 17 - - - - - - 14 17
Luo Jie 18 19 - - - - - - 18 19
Liu Youyin - - 46 27 93 84 35 31 174 142
Chen Yaohuan - - 49 35 107 106 35 31 191 172
------- ------- ------ ------- ------- ------- ------- ------ ------- -------
108 126 499 464 1,421 1,176 321 286 2,349 2,052
======= ======= ====== ======= ======= ======= ======= ====== ======= =======
For the years ended 31 December 2004 and 2003, no emolument was
paid to the directors or supervisors as an inducement to join or upon
joining the Company or as compensation for loss of office.
(b) Five individuals with highest emoluments:
The five individuals with highest emoluments of the Company in 2004
and 2003 were all executive directors, whose total emoluments have been
shown above.
9. RETIREMENT SCHEME
As stipulated by the regulations of the PRC, the Group participates in a
defined contribution retirement scheme organised by the Ningbo Labour Insurance
Administration Department. The Group is required to make contributions to the
retirement scheme at a rate of 20% of total salaries and benefits in kind of
its employees. A member of the scheme is entitled to retirement benefits equal
to a fixed proportion of the salary prevailing at his retirement date.
Other than the above, pursuant to a document "Lao Bu Fa [1995] No. 464"
dated 29 December 1995 issued by the Ministry of Labour of the PRC, the Group
has set up a supplementary defined contribution retirement scheme for its
employees. The assets of the scheme are held separately from those of the Group
in an independent fund administered by representatives from the Group. The
scheme is funded by contributions from the Group which are calculated at a rate
based on the salaries and benefits in kind of its employees. The contribution
rate for 2004 was 5% (2003: 5%).
The Group has no other material obligation for the payment of retirement
benefits associated with this scheme beyond the annual contributions described
above.
10. INCOME TAX EXPENSE
Individual companies within the Group are mainly subject to Enterprise
Income Tax ("EIT") at 33% on taxable income determined according to the PRC tax
laws.
Pursuant to the document "Cai Shui Zi [1994] No. 1" issued by the
Ministry of Finance ("MOF") and the State Administration of Taxation of China
("SAT") on 29 March 1994, the Group is eligible for certain EIT preferential
treatments because of its recycling of certain waste materials. During 2004,
the amount of EIT refund was RMB71,747,000 (2003: RMB9,833,000).
Pursuant to the document "Cai Shui Zi [1999] No. 290" issued by the MOF
and SAT on 8 December 1999, the Group is eligible for certain EIT preferential
treatments because of its purchase of certain domestic equipment for technical
improvements. During 2004, the amount of EIT refund was RMB29,812,000 (2003:
RMB29,441,000).
The Group did not carry on business overseas and in Hong Kong and
therefore does not incur overseas and Hong Kong Profits Tax.
(a) Income tax expense in the consolidated income statement represents:
2004 2003
RMB'000 RMB'000
Current tax expense
- Current year 1,137,917 509,421
- Under provision in respect of prior years 477 5,120
------------- -------------
1,138,394 514,541
Deferred taxation (3,836) (165)
Share of associates' and jointly controlled entity's income tax 17,517 7,189
------------- -------------
Total income tax expense in consolidated income statement 1,152,075 521,565
============= =============
(b) Reconciliation of effective tax rate:
2004 2003
RMB'000 RMB'000
Profit from ordinary activities before taxation 3,765,434 1,609,594
============= =============
Expected income tax at statutory tax rate of 33% 1,242,593 531,166
Non-deductible expenses 7,771 15,386
Tax exempt revenue (2,027) (2,006)
EIT preferential treatments (101,559) (39,274)
Effect of tax losses not recognised 1,334 11,060
Differential tax rate of associates 129 778
Under provision of income tax expenses in respect of prior years 477 5,120
Others 3,357 (665)
------------- -------------
Income tax expense 1,152,075 521,565
============= =============
11. PROFIT ATTRIBUTABLE TO SHAREHOLDERS
The profit attributable to shareholders of RMB2,613,288,000 (2003:
RMB1,087,987,000) has been dealt with in the financial statements of the
Company.
12. DIVIDENDS
(a) Dividends attributable to the year
2004 2003
RMB'000 RMB'000
Interim dividend declared and paid of RMB0.09 per share (2003: RMB0.05 per
share) 227,138 126,188
Final dividend proposed after the balance sheet date of RMB0.21
per share (2003: RMB0.09 per share)
529,988 227,138
------------- -------------
757,126 353,326
============= =============
Pursuant to a resolution passed at the Board of Directors' meeting
on 8 April 2005, a final dividend of RMB0.21 (2003: RMB0.09) per share
totalling RMB529,988,438 (2003: RMB227,137,902) was proposed for
shareholders' approval at the Annual General Meeting.
The final dividend proposed after the balance sheet date has not
been recognised as a liability at the balance sheet date.
(b) Dividends attributable to the previous financial year, approved and
paid during the year
2004 2003
RMB'000 RMB'000
Final dividend in respect of the previous financial year, approved
and paid during the year, of RMB0.09 per share
(2003: RMB0.08 per share) 227,138 201,900
============= =============
13. EARNINGS PER SHARE
(a) Basic earnings per share
The calculation of basic earnings per share is based on the profit
attributable to ordinary shareholders of RMB2,613,288,000 (2003:
RMB1,087,987,000) and the weighted average number of ordinary shares of
2,523,754,468 (2003: 2,523,754,468) in issue during the year.
(b) Diluted earnings per share
There were no dilutive potential ordinary shares in existence
during the years ended 31 December 2003 and 2004.
14. PROPERTY, PLANT AND EQUIPMENT
The Group
Plant,
machinery,
equipment and Motor
Buildings others vehicles Total
RMB'000 RMB'000 RMB'000 RMB'000
Cost or valuation:
At 1 January 2004 920,712 12,645,870 138,104 13,704,686
Reclassification (8,740) 8,740 - -
Transfer from construction in progress (note 15) 95,458 929,616 40,598 1,065,672
Additions - 86,601 2,844 89,445
Disposals (15,220) (70,130) (26,859) (112,209)
------------- ------------- ------------- -------------
At 31 December 2004 992,210 13,600,697 154,687 14,747,594
Accumulated depreciation:
At 1 January 2004 208,094 4,876,000 92,673 5,176,767
Depreciation charge for the year 41,146 979,677 12,056 1,032,879
Written back on disposal (3,242) (53,815) (24,014) (81,071)
------------- ------------- ------------- -------------
At 31 December 2004 245,998 5,801,862 80,715 6,128,575
------------- ------------- ------------- -------------
Net book value:
At 31 December 2004 746,212 7,798,835 73,972 8,619,019
============= ============= ============= =============
At 31 December 2003 712,618 7,769,870 45,431 8,527,919
============= ============= ============= =============
The Company
Plant,
machinery,
equipment and Motor
Buildings others vehicles Total
RMB'000 RMB'000 RMB'000 RMB'000
Cost or valuation:
At 1 January 2004 460,885 11,757,612 103,396 12,321,893
Reclassification (8,700) 8,700 - -
Transfer from construction in progress (note 15) 59,335 918,425 18,511 996,271
Additions - 86,153 2,844 88,997
Disposals (14,007) (55,975) (22,887) (92,869)
------------- ------------- ------------- -------------
At 31 December 2004 497,513 12,714,915 101,864 13,314,292
Accumulated depreciation:
At 1 January 2004 97,352 4,505,004 75,330 4,677,686
Depreciation charge for the year 17,200 931,995 9,028 958,223
Written back on disposal (2,722) (39,995) (21,899) (64,616)
------------- ------------- ------------- -------------
At 31 December 2004 111,830 5,397,004 62,459 5,571,293
------------- ------------- ------------- -------------
Net book value:
At 31 December 2004 385,683 7,317,911 39,405 7,742,999
============= ============= ============= =============
At 31 December 2003 363,533 7,252,608 28,066 7,644,207
============= ============= ============= =============
(a) All of the Group's buildings are located in the PRC.
(b) The Company was established in the PRC on 28 June 1994 as a joint
stock limited company as part of the restructuring of ZGP. On the
same date, the principal business undertakings of ZGP together with
the relevant assets and liabilities were taken over by the Company.
As required by the relevant PRC rules and regulations, a valuation
of the assets and liabilities to be injected into the Company was
carried out as at 31 March 1994 by an independent valuer, Zhong Fa
International Properties Valuation Corporation, and approved by the
State-owned Assets Administration Bureau. The injected assets and
liabilities were reflected in the financial statements on this
basis.
In accordance with IAS 16 Property, plant and equipment, subsequent
to this revaluation, which was based on depreciated replacement
costs, property, plant and equipment are carried at revalued
amount, being the fair value at the date of the revaluation less
any subsequent accumulated depreciation and impairment losses.
Revaluation is performed with sufficient regularity to ensure that
the carrying amount of these assets does not differ materially from
that which would be determined using fair value at the balance
sheet date. Based on a revaluation performed by an independent
valuer registered in the PRC, China United Assets Appraisal
Corporation as of 31 December 2004, which was based on depreciated
replacement costs, the carrying value of property, plant and
equipment did not differ materially from their fair value.
15. CONSTRUCTION IN PROGRESS
The Group The Company
2004 2003 2004 2003
RMB'000 RMB'000 RMB'000 RMB'000
Projects in progress
At 1 January 489,618 1,101,062 473,110 1,089,606
Additions 1,357,177 2,095,427 1,296,359 1,984,455
Transfer to property, plant and equipment (note 14) (1,065,672) (2,706,871) (996,271) (2,600,951)
------------- ------------- ------------- -------------
At 31 December 781,123 489,618 773,198 473,110
Construction materials 59,036 94,782 17,838 94,782
------------- ------------- ------------- -------------
840,159 584,400 791,036 567,892
============= ============= ============= =============
16. INTERESTS IN SUBSIDIARIES
The Company
2004 2003
RMB'000 RMB'000
Share of net assets, unlisted 1,177,158 1,115,362
Amounts due from subsidiaries 248,516 441,026
Amounts due to subsidiaries (567,857) (566,589)
------------- -------------
857,817 989,799
============= =============
The following list contains only the particulars of subsidiaries, all of
which are companies established and operating in the PRC, which principally
affected the results, assets or liabilities of the Group:
Percentage of equity
Registered held by the held by Type of Principal
Name of subsidiary capital Company subsidiary legal entity activity
RMB'000
Zhenhai Refining & Chemical Maintenance 30,000 100% - Joint stock Repairing and
and Installation Company company installation of
industrial
equipment
Ningbo Economic & Technical Development 300,000 100% - Joint stock Warehousing
Zone Zhenhai Refining & Chemical company services
Warehousing Company
Zhenhai Refining & Chemical Engineering 50,000 100% - Joint stock Contractor for
company construction
projects
Zhenhai Refining & Chemical Materials and 245,000 100% - Joint stock Trading in
Equipment Company company construction
materials and
supplies
Ningbo Bonded Area Zhenhai Refining & 10,000 90% 10% Limited Import and
Chemical International Trading Company company export of
petrochemical
products
Zhenhai Refining & Chemical Haida 40,290 100% - Joint stock Contract labour
Development Company company services,
trading in daily
necessities for
employees and
trading in
petrochemical
products
Ningbo Bonded Area Zhenhai Refining & 50,000 95% 5% Limited Wholesale and
Chemical Gas Stations Investment company retail of
Company Limited petrochemical
products and
warehousing
services
Zhenhai Refining & Chemical Pressure 200 100% - Collective Provision of
Containers Examination and Maintenance enterprise repairs and
Station maintenance
services for
containers and
pipelines
Zhenhai Refining & Chemical Dong Hai Hotel 30,000 100% - Joint stock Provision of
company hotel and
catering
services
Ningbo Jinchen Trading Company Limited 18,000 90% 10% Limited Sales of
company petrochemical
products and
warehousing
services
Ningbo Donghai Petrochemical Company 4,000 90% 10% Limited Wholesale and
Limited company retail of
petrochemical
products
None of the subsidiaries has issued any debt securities.
17. INTERESTS IN ASSOCIATES
The Group The Company
2004 2003 2004 2003
RMB'000 RMB'000 RMB'000 RMB'000
Share of net assets 189,650 215,167 129,420 107,184
============= ============= ============= =============
The following list contains only the particulars of principal associates,
which are companies established and operating in the PRC, which principally
affected the results, assets or liabilities of the Group:
Percentage of
Registered equity held by Type of legal Principal
Name of associate capital the Company entity activity
RMB'000
Xiamen Luyong Petrochemical Company Limited 40,000 50% Limited company Trading in
petroleum
products
Zhuhai Gulf Petrochemical Company Limited 10,000 45% Limited company Trading in
petroleum and
petrochemical
products
Nantong Donghai Petrochemical Company Limited 73,000 50% Collective Trading in
enterprise petrochemical
products
Hangzhou Xiaoshan Donghai Petrochemical Company 15,000 50% Limited company Trading in
Limited petroleum
products
Wenzhou Donghai Petrochemical Company Limited 11,644 50% Limited company Trading in
petrochemical
products
Zhejiang Petroleum Products Pipage and Storage 90,000 50% Limited company Pipage and
Company Limited storage of
petroleum
products
18. INTEREST IN JOINTLY CONTROLLED ENTITY
The Group The Company
2004 2003 2004 2003
RMB'000 RMB'000 RMB'000 RMB'000
Share of net assets 44,962 8,178 44,962 8,178
============= ============= ============= =============
Details of the Group's interest in the jointly controlled entity are as
follows:
Place of Percentage of
Name of jointly incorporation Registered ownership interest Type of legal
controlled entity and operation capital held by the Company entity Principal activity
USD'000
Zhenhai Refining & PRC 10,000 50% Limited company Trading of LPG
Chemical BP (Ningbo)
LPG Company Limited
19. OTHER INVESTMENTS
The Group The Company
2004 2003 2004 2003
RMB'000 RMB'000 RMB'000 RMB'000
Other investments in unlisted shares, at cost 191,746 169,108 169,108 169,108
Less: Provision for impairment losses (42,750) (25,308) (42,483) (25,308)
------------- ------------- ------------- -------------
148,996 143,800 126,625 143,800
============= ============= ============= =============
20. DEFERRED TAX ASSETS
The movements and components of deferred tax assets are as follows:
The Group
Balance at Recognised Balance at Recognised Balance at
1 January in income Recognised 31 December in income 31 December
2003 statement in reserve 2003 statement 2004
Note RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Current
Provisions, 29,675 (5,950) - 23,725 2,596 26,321
primarily
for receivables
and inventories
Non-current
Government grants (a) - - 16,302 16,302 (1,318) 14,984
Provision for 7,799 553 - 8,352 5,668 14,020
other investments
Land use rights 55,000 (1,320) - 53,680 (1,320) 52,360
Property, plant 14,494 6,882 - 21,376 (1,790) 19,586
and equipment
------------- ------------- ------------- ------------- ------------- -------------
106,968 165 16,302 123,435 3,836 127,271
============= ============= ============= ============= ============= =============
The Company
Balance at Recognised Balance at Recognised Balance at
1 January in income Recognised 31 December in income 31 December
2003 statement in reserve 2003 statement 2004
Note RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Current
Provisions, 19,490 (5,950) - 13,540 1,680 15,220
primarily
for receivables
and inventories
Non-current
Government grants (a) - - 16,302 16,302 (1,318) 14,984
Provision for 7,799 553 - 8,352 5,668 14,020
other investments
Land use rights 55,000 (1,320) - 53,680 (1,320) 52,360
Property, plant 14,494 6,882 - 21,376 (1,790) 19,586
and equipment
------------- ------------- ------------- ------------- ------------- -------------
96,783 165 16,302 113,250 2,920 116,170
============= ============= ============= ============= ============= =============
(a) According to the Company's IFRS accounting policy (note 2(o)
refers) regarding government grants, capital-based government
grants are offset against cost of the asset to which the grants
related. However, for tax purposes, such government grants could
not be offset against the cost of the asset but should be treated
as a non-taxable item and credited to capital reserve. The
difference between the carrying amount of the asset, reduced by the
amount of the government grants received, and its tax base is a
temporary difference and gives rise to a deferred tax asset. The
deferred tax is credited directly to capital reserve.
(b) The Group has not recognised deferred tax assets in respect of the
unutilised tax losses of certain subsidiaries amounting to
RMB7,801,000 (2003: RMB6,467,000). Except for this, there is no
other significant deferred tax asset or liability that has not been
provided for in the financial statements.
21. INVENTORIES
The Group The Company
2004 2003 2004 2003
RMB'000 RMB'000 RMB'000 RMB'000
Raw materials 674,824 634,212 674,824 634,212
Work in progress 725,606 526,188 725,606 526,188
Finished goods 479,366 304,808 479,366 304,808
Spare parts and consumables 136,445 144,050 34,410 56,475
------------- ------------- ------------- -------------
2,016,241 1,609,258 1,914,206 1,521,683
============= ============= ============= =============
As at 31 December 2004, the carrying amount of the Group's and the
Company's inventories carried at net realisable value amounted to RMB107,799,000
(2003: RMB80,884,637).
22. TRADE RECEIVABLES - THIRD PARTIES
The Group The Company
2004 2003 2004 2003
RMB'000 RMB'000 RMB'000 RMB'000
Bills receivable 137,202 177,095 110,680 160,887
Accounts receivable 93,918 91,956 69,666 79,593
------------- ------------- ------------- -------------
231,120 269,051 180,346 240,480
Less: Allowance for doubtful accounts (1,103) (1,264) - (529)
------------- ------------- ------------- -------------
230,017 267,787 180,346 239,951
============= ============= ============= =============
The ageing analysis of trade receivables - third parties (before
allowance for doubtful accounts) is as follows:
The Group The Company
2004 2003 2004 2003
RMB'000 RMB'000 RMB'000 RMB'000
Invoice date:
Within one year 228,890 267,557 180,346 239,951
Between one and two years 1,607 329 - -
Between two and three years 6 - - -
Over three years 617 1,165 - 529
------------- ------------- ------------- -------------
231,120 269,051 180,346 240,480
============= ============= ============= =============
Sales are generally on a cash term. Subject to negotiation, credit is
generally only available for major customers with well-established trading
records.
23. OTHER RECEIVABLES, DEPOSITS AND PREPAYMENTS
Other receivables, deposits and prepayments of the Group and the Company
expected to be recovered after more than one year is RMB86,144,073 (2003:
RMB108,794,000).
24. AMOUNTS DUE FROM ASSOCIATES AND JOINTLY CONTROLLED ENTITY
The amounts due from associates and jointly controlled entity are
unsecured, interest free and have no fixed repayment terms.
25. AMOUNTS DUE FROM PARENT COMPANIES AND FELLOW SUBSIDIARIES
The Group The Company
2004 2003 2004 2003
RMB'000 RMB'000 RMB'000 RMB'000
Trade balances 616,056 402,586 615,690 402,586
Non-trade balances 153,778 116,639 7,311 9,130
------------- ------------- ------------- -------------
769,834 519,225 623,001 411,716
============= ============= ============= =============
The amounts due from parent companies and fellow subsidiaries are
unsecured, interest free and have no fixed repayment terms. All the trade and
non-trade balances aged less than one year.
26. DEPOSITS WITH BANKS AND CASH AND CASH EQUIVALENTS
The Group The Company
2004 2003 2004 2003
RMB'000 RMB'000 RMB'000 RMB'000
Cash at bank and in hand 1,994,534 1,021,069 1,943,974 993,965
Time deposits with an initial term of less than three 100,000 7,449 100,000 7,449
months
------------- ------------- ------------- -------------
Cash and cash equivalents 2,094,534 1,028,518 2,043,974 1,001,414
Time deposits with an initial term over three months 40,806 31,121 30,000 30,000
------------- ------------- ------------- -------------
2,135,340 1,059,639 2,073,974 1,031,414
============= ============= ============= =============
27. BANK LOANS
(a) Bank loans as at 31 December 2004 were unsecured and repayable as
follows:
The Group and the Company
2004 2003
RMB'000 RMB'000
Within 1 year or on demand
Current portion of long-term bank loans 430,000 884,200
After 1 year but within 2 years 320,000 430,000
After 2 years but within 5 years - 380,000
------------- -------------
320,000 810,000
750,000 1,694,200
============= =============
All the bank loans as at 31 December 2004 were denominated in
Renminbi.
(b) The interest rates and terms of repayment of long-term bank loans are
as follows:
The Group and the Company
Long-term bank loans Interest rate Interest type 2004 2003
RMB'000 RMB'000
Due in 2004 5.04%-6.12% Floating - 884,200
Due in 2005 5.22%-5.49% Floating 430,000 430,000
Due in 2006 5.05%-5.22% Floating 320,000 380,000
------------- -------------
Total long-term bank loans 750,000 1,694,200
Less: Current portion of long-term bank loans (430,000) (884,200)
------------- -------------
Non-current portion of long-term bank loans 320,000 810,000
============= =============
28. TRADE PAYABLES - THIRD PARTIES
The maturity analysis of trade payables - third parties is as follows:
The Group The Company
2004 2003 2004 2003
RMB'000 RMB'000 RMB'000 RMB'000
Due within 1 month or on demand 481,548 896,817 281,560 796,414
Due after 1 month and within 6 months 190,024 160,593 76,176 146,828
------------- ------------- ------------- -------------
671,572 1,057,410 357,736 943,242
============= ============= ============= =============
29. AMOUNTS DUE TO PARENT COMPANIES AND FELLOW SUBSIDIARIES
The Group The Company
2004 2003 2004 2003
Note RMB'000 RMB'000 RMB'000 RMB'000
Trade balances (a) 829,056 81,228 828,690 35,891
Non-trade balances (b) 362,665 177,937 234,648 121,111
------------- ------------- ------------- -------------
1,191,721 259,165 1,063,338 157,002
============= ============= ============= =============
(a) The maturity analysis of the trade balances included in the amounts
due to parent companies and fellow subsidiaries is as follows:
The Group The Company
2004 2003 2004 2003
RMB'000 RMB'000 RMB'000 RMB'000
Due within 1 month or on demand 828,040 81,228 827,674 35,891
Due after 1 month and within 6 months 1,016 - 1,016 -
------------- ------------- ------------- -------------
829,056 81,228 828,690 35,891
============= ============= ============= =============
(b) All the non-trade balances are unsecured, interest free and have no
fixed repayment terms.
30. SHARE CAPITAL
The Group and the Company
2004 2003
RMB'000 RMB'000
Authorised:
1,800,000,000 state-owned shares of RMB1.00 each 1,800,000 1,800,000
1,381,000,000 H shares of RMB1.00 each 1,381,000 1,381,000
------------- -------------
3,181,000 3,181,000
============= =============
Issued and fully paid:
1,800,000,000 state-owned shares of RMB1.00 each 1,800,000 1,800,000
723,754,468 H shares of RMB1.00 each 723,755 723,755
------------- -------------
2,523,755 2,523,755
============= =============
State-owned shares and H shares rank pari passu in all material respects,
except that the shareholders of the state-owned shares are restricted to the
legal persons, while the shareholders of H shares are restricted to investors
outside the PRC. In addition, dividends on the state-owned shares are payable
in Renminbi, while dividends on H shares are payable in Hong Kong dollars.
31. RESERVES AND RETAINED EARNINGS
(a) According to the Articles of Association of the Company and its
subsidiaries in the PRC, each of these entities is required to
transfer 10% of its profit after taxation, as determined in
accordance with the PRC Accounting Rules and Regulations, to the
statutory surplus reserve ("SSR") until the reserve balance reaches
50% of its registered capital. The transfer to this reserve must be
made before distribution of dividends to shareholders of these
entities.
The SSR can be used to make good its previous years' losses, if
any, or to expand its production and operation, and may be
converted into share capital by the issue of new shares to
shareholders in proportion to their existing shareholdings or by
increasing the par value of the shares currently held by them,
provided that the balance after such issue is not less than 25% of
its registered capital.
(b) According to the Articles of Association of the Company and its
subsidiaries in the PRC, each of these entities is required to
transfer 5% to 10% of its profit after taxation, as determined in
accordance with the PRC Accounting Rules and Regulations, to the
statutory public welfare fund ("SPWF"). This fund can only be
utilised on capital items for the collective benefits of its
employees such as the construction of dormitories, canteen and other
staff welfare facilities. This fund is non-distributable other than
in liquidation. The transfer to this fund must be made before
distribution of dividends to shareholders of these entities. The
Board of Directors of the Company has resolved to transfer 10%
(2003: 10%) of its current year's profit after taxation to the SPWF.
(c) The transfer to the discretionary surplus reserve ("DSR") from
profit after taxation is subject to the approval by shareholders at
Annual General Meeting. Its usage is similar to that of SSR.
The Company has proposed to transfer RMB1,000,000,000 of its profit
after taxation to this reserve in respect of the financial year
2004 (2003: RMB nil). The Company's subsidiaries have proposed not
to transfer any of its profit after taxation to this reserve in
respect of the financial year 2004 (2003: RMB11,682,000).
(d) According to the Company's Articles of Association, the amount of
retained earnings available for distribution to shareholders of the
Company is the lower of the amount determined in accordance with the
PRC Accounting Rules and Regulations and the amount determined in
accordance with IFRS. At 31 December 2004, the amount of retained
earnings available for distribution, which was the amount determined
in accordance with the PRC Accounting Rules and Regulations, was
RMB2,300,542,000 (2003: RMB1,664,776,000). After the balance sheet
date, the Board of Directors proposed a final dividend of
RMB529,988,438 (2003: RMB227,137,902) in respect of the financial
year 2004.
(e) Effective 1 January 2002, land use rights which are included in
lease prepayments are carried at historical cost less accumulated
amortisation and impairment losses. Accordingly, the surplus on the
revaluation of land use rights net of deferred tax asset was
reversed to shareholders' equity at 1 January 2002.
(f) Before 1 January 2004, appropriation of SSR, SPWF and DSR ("three
reserves") was provided by the individual legal entities
respectively and the balances of these three reserves presented in
the Company's consolidated financial statements reflected the total
of the balances in the individual financial statements of the
Company and its subsidiaries. However, according to a notice issued
by State-owned Assets Supervision and Administration Commission of
the State of Council on 22 October 2004, the appropriation of these
three reserves in an enterprise's consolidated financial statements
should be based on its consolidated profit after tax.
The effect of this change did not have a material impact on the
Group's financial condition and results of operations in the years
prior to the change. As such, certain comparative figures have been
reclassified to conform with the current year's presentation.
32. RELATED PARTY TRANSACTIONS
Most of the transactions undertaken by the Group during the year ended 31
December 2004 have been effected with such counterparties and on such terms as
have been determined by the Company's immediate parent company, Sinopec Corp,
and other 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.
(a) Major transactions between the Group with Sinopec Corp or Sinopec
Group Company are as follows:
2004 2003
Note RMB'000 RMB'000
Research and development expenses (i) - 35,000
Research and development subventions received (i) - 7,820
Insurance premium expenses (ii) 54,150 44,714
Safety insurance fund received (iii) 16,831 18,271
============= =============
(i) The Group paid Sinopec Corp for research and development
expenditures in accordance with the provisions of an
agreement between the Group and Sinopec Corp in 2003. Also,
the Group undertook certain research and development projects
for Sinopec Corp. During 2004, the Group undertook research
and development projects itself in accordance with Sinopec
Corp's instructions and no such expenses paid or payable to
Sinopec Corp were incurred.
(ii) Pursuant to administrative measures issued by Sinopec Corp,
the Group maintains insurance coverage with a subsidiary of
Sinopec Group Company, which cover the Group's buildings,
machinery, equipment and inventories. The insurance premium
expenses are calculated based on certain percentage of the
carrying value of the Group's assets covered.
(iii) Safety insurance fund received from Sinopec Group Company can
only be utilised to enhance the Group's security and safety
measures or to conduct specified researches.
(b) Major transactions between the Group with the related companies
under Sinopec Corp or Sinopec Group Company are as follows:
2004 2003
RMB'000 RMB'000
(i) inopec Yizheng Chemical Fibre Company Limited
Sales of products - paraxylene 1,771,026 293,474
============= =============
(ii) thers
Sales of products and service fee income 30,353,232 21,071,622
Import of crude oil through related companies 14,853,070 6,162,495
Purchase of crude oil - 2,102,218
Purchase of equipment and related service fee charges 403,722 830,863
Construction fee expense 384,102 346,829
Service fee charges in relation to import and export of
crude oil 74,551 46,492
Operating lease expense in respect of land 12,634 -
Interest income, net 1,464 735
============= =============
(c) Major transactions between the Group with its associates and jointly
controlled entity are as follows:
2004 2003
RMB'000 RMB'000
Sales of products 3,530,382 936,221
============= =============
(d) Settlement account with a related company:
2004 2003
RMB'000 RMB'000
Balance of settlement account 1,626,615 669,334
============= =============
The balance of the settlement account with a related company mainly
represents the proceeds from sales of certain petroleum products
made to a sales subsidiary of Sinopec Corp.
Balances of amounts due from/to parent companies, fellow
subsidiaries, associates and jointly controlled entity have been
disclosed on the face of the Group's consolidated balance sheet and
the Company's balance sheet.
The directors of the Company are of the opinion that the above
transactions with related parties were conducted in the ordinary
course of business and on normal commercial terms or in accordance
with the terms of agreements governing such transactions.
33. SEGMENT REPORTING
Segment information is presented in respect of the Group's business and
geographical segments. Business segment information is chosen as the primary
reporting format because this is more relevant to the Group's internal
financial reporting.
(a) Business segments
The Group conducts the majority of its business activities in two
areas, refining and chemicals. An analysis of business segments is as
follows:
2004
Refining Chemicals Elimination Total
RMB'000 RMB'000 RMB'000 RMB'000
Net sales 39,846,725 1,078,243 (586,986) 40,337,982
Cost of sales (35,744,133) (811,440) 586,986 (35,968,587)
------------- ------------- ------------- -------------
Gross profit 4,102,592 266,803 - 4,369,395
============= ============= =============
Other operating income 76,820
Selling and administrative expenses (531,995)
Other operating expenses (100,008)
Net loss on disposal of property, plant and equipment (28,202)
-------------
Profit from operations 3,786,010
Net financing costs (73,653)
Share of profits less (losses) from associates and 53,077
jointly controlled entity
-------------
Profit from ordinary activities before taxation 3,765,434
Income tax expense (1,152,075)
-------------
Profit from ordinary activities after taxation 2,613,359
Minority interests (71)
-------------
Profit attributable to shareholders 2,613,288
=============
Other segment information
Segment assets 12,029,167 1,030,840 - 13,060,007
Unallocated assets 2,432,772
-------------
Total assets 15,492,779
=============
Segment liabilities 3,584,125 120,000 - 3,704,125
Unallocated liabilities 372,543
-------------
Total liabilities 4,076,668
=============
Capital expenditure 1,426,419 20,203 - 1,446,622
Depreciation 944,560 88,319 - 1,032,879
============= ============= ============= =============
2004
Refining Chemicals Elimination Total
RMB'000 RMB'000 RMB'000 RMB'000
Net sales 27,716,100 648,643 (455,765) 27,908,978
Cost of sales (25,569,853) (514,571) 455,765 (25,628,659)
------------- ------------- ------------- -------------
Gross profit 2,146,247 134,072 - 2,280,319
============= ============= ============= =============
Other operating income 59,593
Selling and administrative expenses (511,645)
Other operating expenses (40,178)
Net loss on disposal of property, plant and equipment (22,506)
Employee reduction expenses (69,184)
-------------
Profit from operations 1,696,399
Net financing costs (81,907)
Share of profits less (losses) from associates and (4,898)
jointly controlled entity
-------------
Profit from ordinary activities before taxation 1,609,594
Income tax expense (521,565)
-------------
Profit from ordinary activities after taxation 1,088,029
Minority interests (42)
-------------
Profit attributable to shareholders 1,087,987
=============
Other segment information
Segment assets 10,878,001 1,178,823 - 12,056,824
Unallocated assets 1,431,761
-------------
Total assets 13,488,585
=============
Segment liabilities 3,478,171 613,954 - 4,092,125
Unallocated liabilities 164,965
-------------
Total liabilities 4,257,090
=============
Capital expenditure 1,978,364 590,584 - 2,568,948
Depreciation 808,126 36,179 - 844,305
============= ============= ============= =============
The above segment information is presented in respect of the
Group's business segments. The format of which is based on the Group's
management and internal reporting structure.
Inter-segment transfer pricing is based on cost plus an appropriate
margin, as specified by Sinopec Corp's policy.
Segment 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 cash and cash equivalents,
deposits with banks, corporate assets and liabilities.
Segment capital expenditure is the total costs incurred during the
year to acquire property, plant and equipment and projects in progress
that are expected to be used for more than one year.
The Group conducts the majority of its business activities in two
areas, refining and chemicals. The specific products of each segment are
as follows:
(i) The refining segment is principally engaged in the production
and sale of petroleum, intermediate petrochemical and other
petrochemical products. Gasoline, diesel and kerosene are
three major products of the segment.
(ii) The chemical segment is principally engaged in the production
and sale of urea.
(b) Geographical segments
In presenting information on the basis of geographical segments,
segment net sales is based on the geographical location of customers. No
segment assets and capital expenditure are disclosed as all the assets of
the Group are located in the PRC.
2004 2003
RMB'000 RMB'000
Net sales:
- Domestic sales in Mainland China 40,337,982 25,197,291
- Export sales to other countries or regions - 2,711,687
------------- -------------
40,337,982 27,908,978
============= =============
34. COMMITMENTS
(a) Capital commitments
Capital commitments relate primarily to construction of buildings,
plant, machinery, purchase of equipment and capital contributions to
investments. The Group and the Company had capital commitments
outstanding at 31 December 2004 not provided for in the financial
statements as follows:
The Group and the Company
2004 2003
RMB'000 RMB'000
Contracted for 195,307 353,076
Authorised but not contracted for 21,118 283,197
------------- -------------
216,425 636,273
============= =============
(b) Lease commitments
At 31 December 2004, the total future minimum lease payments under
non-cancellable operating leases are payable as follows:
The Group and the Company
2004 2003
RMB'000 RMB'000
Within 1 year 8,354 7,791
After 1 year but within 5 years 33,415 31,166
After 5 years 350,384 334,167
------------- -------------
392,153 373,124
============= =============
The Group leases land in the PRC under operating leases. The leases
run for an initial period of 25 to 50 years and lease payments are fixed.
None of the leases includes contingent rentals.
35. FINANCIAL INSTRUMENTS
(a) Financial risk factors and financial risk management
Financial assets of the Group and the Company include cash and cash
equivalents, deposits with banks, other investments, trade and other
receivables, and amounts due from parent companies and fellow
subsidiaries. Financial liabilities of the Group and the Company include
bank loans, trade and other payables, and amounts due to parent companies
and fellow subsidiaries. The Group does not hold or issue financial
instruments for trading purposes. The Group had no positions in
derivative contracts that are designated and qualified as hedging
instruments at 31 December 2004 and 2003.
(i) Interest rate risk
The interest rates and terms of repayment of bank loans of
the Group and the Company have been disclosed in note 27.
(ii) Credit risk
Deposits with banks
The Group's financial instruments do not represent a
concentration of credit risk because the Group deals with a
variety of major financial institutions with good credit
ratings.
Trade and other receivables
Majority of the Group's sales were made to group
companies of Sinopec Corp. Credit risks with other customers
were controlled by establishing credit limits and credit
terms based on periodic review of their creditability.
(iii) Foreign currency risk
The Group has foreign currency risk as dividend paid to H
share shareholders was in Hong Kong dollars. Depreciation or
appreciation of Renminbi against foreign currencies will affect the
Group's financial position and results of operations.
(b) Fair value
The following table presents the carrying amount and fair value of
the Group's long-term bank loans at 31 December 2004:
2004 2003
Carrying Fair value Carrying Fair value
amount amount
RMB'000 RMB'000 RMB'000 RMB'000
Liabilities
Long-term bank loans 750,000 746,780 1,694,200 1,692,754
============= ============= ============= =============
The fair value of long-term bank loans are estimated based on
applying a discounted cash flow using current market interest rates for
similar financial instruments.
Other investments are unquoted interests. There is no quoted market
price for such other investments in the PRC, and accordingly a reasonable
estimate of fair value could not be made without incurring excessive
costs.
The fair values of cash and cash equivalents, trade and other
receivables, trade and other payables and the amounts due from/to parent
companies and fellow subsidiaries are not materially different from their
carrying amounts.
The carrying amount of deposits with banks is estimated to
approximate its fair value based on the nature or short-term maturity of
this instrument.
Fair value estimates are made at a specific point in time and based
on relevant market information and information about the financial
instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgement and therefore cannot
be determined with precision. Changes in assumptions could significantly
affect the estimates.
36. CONTINGENT LIABILITIES
At 31 December 2004, the Company provided bank loan guarantees amounting
to RMB50,000,000 (2003: RMB110,000,000) to an associate of the Group.
37. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform with the
current year's presentation. Further details are set out in note 31(f).
38. PARENT COMPANIES
The directors consider the immediate parent company and the ultimate
parent company at 31 December 2004 to be Sinopec Corp and Sinopec Group Company
respectively, which are established in the PRC.
III. UNAUDITED INTERIM FINANCIAL REPORT OF ZRCC FOR THE SIX MONTHS ENDED 30
JUNE 2005
Set out below is a summary of the unaudited income statement, the cash
flow statement and statement of changes in shareholders' equity for each of the
six months ended 30 June, 2004 and 30 June, 2005 and the balance sheets as at
31 December, 2004 and 30 June, 2005 together with the relevant notes as
extracted from the unaudited interim financial report of ZRCC for the period
ended 30 June, 2005.
CONSOLIDATED INCOME STATEMENT
for the six months ended 30 June 2005 - unaudited
Six months ended 30 June
Note 2005 2004
RMB'000 RMB'000
Turnover 25,858,192 19,412,997
Less: Business taxes and surcharges (865,365) (832,872)
------------- -------------
Net sales 24,992,827 18,580,125
Cost of sales (23,186,041) (16,527,987)
------------- -------------
Gross profit 1,806,786 2,052,138
Other operating income 63,436 37,833
Selling and administrative expenses (253,086) (221,604)
Other operating expenses (32,715) (45,978)
------------- -------------
Operating profit before financing costs 1,584,421 1,822,389
Financial income 8,188 6,281
Financial expenses (37,977) (48,590)
------------- -------------
Net financing costs (29,789) (42,309)
Share of profits less losses of associates 21,052 18,628
Share of profits of jointly controlled entity 381 2,354
------------- -------------
21,433 20,982
------------- -------------
Profit before tax 4 1,576,065 1,801,062
Income tax expense 5 (314,892) (524,575)
------------- -------------
Profit for the period 3 1,261,173 1,276,487
============= =============
Attributable to:
Equity holders of the parent 1,261,148 1,276,600
Minority interests 25 (113)
------------- -------------
Profit for the period 3 1,261,173 1,276,487
============= =============
Basic earnings per share (in Rmb) 7(a) RMB0.50 RMB0.51
============= =============
Notes:
a. ZRCC did not have any extraordinary or exceptional items for the six
months ended 30 June, 2005.
b. For dividends attributable to the six months ended 30 June, 2005 and
dividends attributable to the year ended 31 December, 2004, approved and
paid during the six months ended 30 June, 2005, please refer to Note 6 of
the Unaudited Interim Financial Report on page 120.
CONSOLIDATED BALANCE SHEET
as at 30 June 2005 - unaudited
As at As at
30 June 31 December
Note 2005 2004
RMB'000 RMB'000
Non-current assets
Property, plant and equipment 8 8,910,315 8,619,019
Construction in progress 473,327 840,159
Lease prepayments 49,802 51,954
Interests in associates 209,163 189,650
Interest in jointly controlled entity 45,218 44,962
Other investments 144,744 148,996
Deferred tax assets 121,909 127,271
------------- -------------
Total non-current assets 9,954,478 10,022,011
Current assets
Inventories 3,283,135 2,016,241
Trade receivables - third parties 9 32,086 230,017
Other receivables, deposits and prepayments 406,499 287,083
Amounts due from associates and jointly controlled entity 103,359 32,253
Amounts due from parent companies and fellow subsidiaries 10 891,715 769,834
Deposits with banks 103,143 40,806
Cash and cash equivalents 11 1,026,694 2,094,534
------------- -------------
Total current assets 5,846,631 5,470,768
Current liabilities
Bank loans 430,000 430,000
Trade payables - third parties 12 638,288 671,572
Accruals and other payables 669,065 742,594
Amount due to associates 30,154 -
Amounts due to parent companies and fellow subsidiaries 13 1,134,156 1,191,721
Income tax payable 193,356 373,550
Other taxes payable 327,650 345,887
Dividends payable 1,344 1,344
------------- -------------
Total current liabilities 3,424,013 3,756,668
------------- -------------
Net current assets 2,422,618 1,714,100
------------- -------------
Total assets less current liabilities 12,377,096 11,736,111
Non-current liabilities
Bank loans 220,000 320,000
------------- -------------
Net assets 12,157,096 11,416,111
============= =============
Equity
Share capital 2,523,755 2,523,755
Reserves 14 7,913,324 6,404,120
Retained earnings 1,717,702 2,485,885
------------- -------------
Total equity attributable to equity holders of the parent 12,154,781 11,413,760
Minority interests 2,315 2,351
------------- -------------
Total equity 12,157,096 11,416,111
============= =============
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the six months ended 30 June 2005 - unaudited
Attributable to equity holders of the parent
Note Share Reserves Retained Total Minority Total
capital earnings interests equity
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
As at 1 January 2004
- as previously reported 2,523,755 4,954,675 1,750,715 9,229,145 - 9,229,145
- as previously presented 2 - - - - 2,350 2,350
separately from liabilities
and equity
------------ ----------- ----------- ----------- ----------- -----------
- as restated 2,523,755 4,954,675 1,750,715 9,229,145 2,350 9,231,495
Profit for the period
- attributable to equity - - 1,276,600 1,276,600 - 1,276,600
holders of the parent
- minority interests 2 - - - - (113) (113)
Dividends 6(b) - - (227,138) (227,138) - (227,138)
Distributions to minority interests - - - - (59) (59)
Others - 2,074 - 2,074 - 2,074
------------ ----------- ----------- ----------- ----------- -----------
As at 30 June 2004 2,523,755 4,956,749 2,800,177 10,280,681 2,178 10,282,859
============ =========== =========== =========== =========== ===========
As at 1 January 2005
- as previously reported 2,523,755 6,404,120 2,485,885 11,413,760 - 11,413,760
- as previously presented 2 - - - - 2,351 2,351
separately from liabilities
and equity
------------ ----------- ----------- ----------- ----------- -----------
- as restated 18 2,523,755 6,404,120 2,485,885 11,413,760 2,351 11,416,111
Profit for the period
- attributable to equity - - 1,261,148 1,261,148 - 1,261,148
holders of the parent
- minority interests 2 - - - - 25 25
Appropriations 14 - 1,500,000 (1,500,000) - - -
Dividends 6(b) - - (529,988) (529,988) - (529,988)
Distributions to minority interests - - - - (61) (61)
Deferred tax arising from - (657) 657 - - -
government grants
Others - 9,861 - 9,861 - 9,861
------------ ----------- ----------- ----------- ----------- -----------
As at 30 June 2005 2,523,755 7,913,324 1,717,702 12,154,781 2,315 12,157,096
============ =========== =========== =========== =========== ===========
CONDENSED CONSOLIDATED CASH FLOW STATEMENT
for the six months ended 30 June 2005 - unaudited
Six months ended 30 June
2005 2004
RMB'000 RMB'000
Cash generated from operations 748,199 1,553,397
Income tax paid (482,609) (385,964)
------------- ------------
Net cash generated from operating activities 265,590 1,167,433
Net cash used in investing activities (681,499) (730,340)
Net cash used in financing activities (651,931) (908,160)
------------- ------------
Net decrease in cash and cash equivalents (1,067,840) (471,067)
Cash and cash equivalents at 1 January 2,094,534 1,028,518
------------- ------------
Cash and cash equivalents at 30 June 1,026,694 557,451
============= ============
NOTES ON THE UNAUDITED INTERIM FINANCIAL REPORT
1. Principal activities and basis of preparation
Sinopec Zhenhai Refining & Chemical Company Limited ("the Company") and
its subsidiaries (collectively "the Group") is principally engaged in the
production and sale of petroleum products (including gasoline, diesel,
kerosene, naphtha, liquefied petroleum gas, solvent oil and fuel oil),
intermediate petrochemical products, asphalt, urea and other petrochemical
products (including paraxylene and polypropylene). Gasoline, diesel and
kerosene are three major products of the Group. China Petroleum & Chemical
Corporation ("Sinopec Corp") is the Company's immediate parent company and
China Petrochemical Corporation ("Sinopec Group Company") is the Company's
ultimate parent company.
This interim financial report has been prepared in accordance with the
applicable disclosure provisions of the Rules Governing the Listing of
Securities on The Stock Exchange of Hong Kong Limited, including compliance
with International Accounting Standard ("IAS") 34, Interim Financial Reporting,
adopted by the International Accounting Standards Board ("IASB"). The interim
financial report was authorized for issuance on 19 August 2005.
The interim financial report has been prepared in accordance with the
same accounting policies adopted in the 2004 annual financial statements,
except for the accounting policy change that is expected to be reflected in the
2005 annual financial statements. Details of this change in accounting policy
are set out in note 2.
The preparation of an interim financial report in conformity with IAS 34
requires management to make judgements, estimates and assumptions that affect
the application of policies and reported amounts of assets and liabilities,
income and expenses on a year to date basis. Actual results may differ from
these estimates.
This interim financial report contains condensed consolidated financial
statements and selected explanatory notes. The notes include an explanation of
events and transactions that are significant to an understanding of the changes
in financial position and performance of the Group since the 2004 annual
financial statements. The condensed consolidated interim financial statements
and notes thereon do not include all of the information required for a full set
of financial statements prepared in accordance with International Financial
Reporting Standards ("IFRSs").
The interim financial report is unaudited, but has been reviewed by KPMG
in accordance with Statement of Auditing Standards 700, Engagements to review
interim financial reports, issued by the Hong Kong Institute of Certified
Public Accountants.
The financial information relating to the financial year ended 31
December 2004 that is included in the interim financial report as being
previously reported information does not constitute the Company's annual
financial statements for that financial year but is derived from those
financial statements. Annual financial statements for the year ended 31
December 2004 are available from the Company's registered office. The auditors
have expressed an unqualified opinion on those financial statements in their
report dated 8 April 2005. The 2004 annual financial statements have been
prepared in accordance with IFRSs.
2. Change in accounting policy
The IASB has issued a number of new and revised IFRSs (which term
collectively includes IASs and Interpretations) that are effective or available
for early adoption for accounting periods beginning on or after 1 January 2005.
The Board of Directors has determined the accounting policies to be adopted in
the preparation of the Group's annual financial statements for the year ending
31 December2005, on the basis of IFRSs currently in issue.
The IFRS that will be effective or are available for voluntary early
adoption in the annual financial statements for the year ending 31 December
2005 may be affected by the issue of additional interpretation(s) or other
changes announced by the IASB subsequent to the date of issuance of this
interim report. Therefore the policies that will be applied in the Group's
financial statements for that period cannot be determined with certainty at the
date of issuance of this interim financial report.
The following sets out further information on the change in accounting
policy for the annual accounting period beginning on 1 January 2005 which has
been reflected in this interim financial report.
Minority interests (IAS 1, Presentation of financial statements and IAS
27, Consolidated and separate financial statements)
In prior years, minority interests at the balance sheet date were
presented in the consolidated balance sheet separately from liabilities
and as deduction from net assets. Minority interests in the results of
the Group for the year were also separately presented in the consolidated
income statement as a deduction before arriving at the profit
attributable to shareholders.
With effect from 1 January 2005, in order to comply with IAS 1 and
IAS 27, minority interests at the balance sheet date are presented in the
consolidated balance sheet within equity, separately from the equity
attributable to the equity holders of the parent, and minority interests
in the results of the Group for the period are presented on the face of
the consolidated income statement as an allocation of the total profit or
loss for the period between the minority interests and the equity holders
of the parent.
The presentation of minority interests in the consolidated balance
sheet, consolidated income statement and condensed consolidated statement
of changes in equity for the comparative period has been restated
accordingly.
3. Segment reporting
Segment information is presented in respect of the Group's business
segments. The Group conducts the majority of its business activities in two
areas, refining and chemicals. An analysis of business segment is as follows:
Six months ended 30 June 2005
Refining Chemicals Elimination Total
RMB'000 RMB'000 RMB'000 RMB'000
Net sales 24,725,546 482,957 (215,676) 24,992,827
Cost of sales (23,104,984) (296,733) 215,676 (23,186,041)
------------- ------------- ------------ -----------
Gross profit 1,620,562 186,224 - 1,806,786
============= ============= ============
Other operating income 63,436
Selling and administrative expenses (253,086)
Other operating expenses (32,715)
------------
Operating profit before financing costs 1,584,421
Net financing costs (29,789)
Share of profits less losses of associates 21,052
Share of profits of jointly controlled entity 381
------------
Profit before tax 1,576,065
Income tax expense (314,892)
------------
Profit for the period 1,261,173
============
Six months ended 30 June 2004
Refining Chemicals Elimination Total
RMB'000 RMB'000 RMB'000 RMB'000
Net sales 18,354,962 517,885 (292,722) 18,580,125
Cost of sales (16,457,761) (362,948) 292,722 (16,527,987)
------------- ------------- ------------ -----------
Gross profit 1,897,201 154,937 - 2,052,138
============= ============= ============
Other operating income 37,833
Selling and administrative expenses (221,604)
Other operating expenses (45,978)
------------
Operating profit before financing costs 1,822,389
Net financing costs (42,309)
Share of profits less losses of associates 18,628
Share of profits of jointly controlled entity 2,354
------------
Profit before tax 1,801,062
Income tax expense (524,575)
------------
Profit for the period 1,276,487
============
The above segment information is presented in respect of the Group's
business segments. The format of which is based on the Group's management and
internal reporting structure.
Inter-segment transfer pricing is based on cost plus an appropriate
margin, as specified by Sinopec Corp's policy.
The Group conducts the majority of its business activities in two areas,
refining and chemicals. The specific products of each segment are as follows:
(a) The refining segment is principally engaged in the production and
sale of petroleum products, intermediate petrochemical products and
other petrochemical products. Gasoline, diesel and kerosene are
three major products of the segment.
(b) The chemical segment is principally engaged in the production and
sale of urea.
4. Profit before tax
Profit before tax is arrived at after charging/(crediting):
Six months ended 30 June
2005 2004
RMB'000 RMB'000
Interest on borrowings 21,733 40,171
Less: Borrowing costs capitalised into projects in progress (855) (2,254)
------------- -------------
Interest expense, net 20,878 37,917
Write-down of inventory 30,920 8,437
Depreciation and amortisation 526,011 501,535
Net loss on disposal of property, plant and equipment 1,741 4,546
Dividend income from other investments (5,857) (5,461)
Interest income (8,188) (6,281)
============= =============
5. Income tax expense
Six months ended 30 June
2005 2004
RMB'000 RMB'000
Current tax expense
- Current period 310,391 525,735
- (Over)/under-provision in respect of prior years (7,976) 477
------------- -------------
302,415 526,212
Deferred taxation 5,362 (7,939)
Share of associates' taxation 6,989 5,525
Share of jointly controlled entity's taxation 126 777
------------- -------------
Total income tax expense in consolidated income statement 314,892 524,575
============= =============
Individual companies within the Group are mainly subject to Enterprise
Income Tax ("EIT") at 33% (2004: 33%) on taxable income determined according to
the PRC tax laws.
Pursuant to the document "Cai Shui Zi [1994] No. 1" issued by the
Ministry of Finance ("MOF") and State Administration of Taxation of China
("SAT") on 29 March 1994, the Group is eligible for certain EIT preferential
treatments because of its recycling of certain waste materials. The amount of
EIT refund recognized by the Group during the six months ended 30 June 2005 was
RMB120,587,000 (for the six months ended 30 June 2004: RMB71,747,000).
Pursuant to the document "Cai Shui Zi [1999] No. 290" issued by the MOF
and SAT on 8 December 1999, the Group is eligible for certain EIT preferential
treatments because of its purchase of certain domestic equipment for technical
improvements. The amount of EIT refund recognized by the Group during the six
months ended 30 June 2005 was RMB75,534,000 (for the six months ended 30 June
2004: RMB nil).
The Group did not carry on business overseas and in Hong Kong and
therefore does not incur overseas or Hong Kong Profits Tax.
6. Dividends
(a) Dividends attributable to the interim period:
Six months ended 30 June
2005 2004
RMB'000 RMB'000
Interim dividend declared after the interim period of RMB0.09 per share
(2004: RMB0.09 per share) 227,138 227,138
============= =============
The interim dividend has not been recognised as a liability at the
balance sheet date.
(b) Dividends attributable to the previous financial year, approved and
paid during the interim period:
Six months ended 30 June
2005 2004
RMB'000 RMB'000
Final dividend in respect of the financial year ended 31 December
2004, approved and paid during the following interim period, of
RMB0.21 per share (financial year ended
31 December 2003: RMB0.09 per share) 529,988 227,138
============= =============
7. Earnings per share
(a) Basic earnings per share
The calculation of basic earnings per share is based on the profit
attributable to equity holders of the parent of RMB1,261,148,000 for the
six months ended 30 June 2005 (six months ended 30 June 2004:
RMB1,276,600,000) and the weighted average number of ordinary shares of
2,523,754,468 (2004: 2,523,754,468) in issue during the period.
(b) Diluted earnings per share
The Group had no dilutive potential ordinary shares in existence
during the six months ended 30 June 2005.
8. Property, plant and equipment
The acquisitions and disposals of items of property, plant and equipment
during the six months ended 30 June 2005 are as follows:
Six months ended 30 June
2005 2004
RMB'000 RMB'000
Cost of acquisitions and transfer from construction in progress 852,980 89,172
Disposals (net carrying amount) 36,401 5,177
============= =============
9. Trade receivables - third parties
As at As at
30 June 31 December
2005 2004
RMB'000 RMB'000
Bills receivable 5,356 137,202
Accounts receivable 27,754 93,918
------------- -------------
33,110 231,120
Less: Allowance for doubtful accounts (1,024) (1,103)
------------- -------------
32,086 230,017
============= =============
The ageing analysis of trade receivables-third parties (before allowance
for doubtful accounts) is as follows:
As at As at
30 June 31 December
2005 2004
RMB'000 RMB'000
Invoice date:
Within one year 31,135 228,890
Between one and two years 1,358 1,607
Between two and three years - 6
Over three years 617 617
------------- -------------
33,110 231,120
============= =============
The Company generally requests customers to pay cash or settle by bills
in full prior to delivery of goods. Subject to negotiation, credit is only
available for major customers with well-established trading records.
10. Amounts due from parent companies and fellow subsidiaries
As at As at
30 June 31 December
2005 2004
RMB'000 RMB'000
Trade balances 759,942 616,056
Non-trade balances 131,773 153,778
------------- -------------
891,715 769,834
============= =============
The credit term granted to the Company's parent companies and fellow
subsidiaries is normally within one month. All the trade balances aged less
than one year.
11. Cash and cash equivalents
As at As at
30 June 31 December
2005 2004
RMB'000 RMB'000
Cash on hand 113 78
Balances with banks and other financial institutions with an initial term of less
than three months 1,026,581 2,094,456
------------- -------------
1,026,694 2,094,534
============= =============
12. Trade payables - third parties
The maturity analysis of trade payables - third parties is as follows:
As at As at
30 June 31 December
2005 2004
RMB'000 RMB'000
Due within 1 month or on demand 254,936 481,548
Due after 1 month and within 6 months 383,352 190,024
------------- -------------
638,288 671,572
============= =============
13. Amounts due to parent companies and fellow subsidiaries
As at As at
30 June 31 December
2005 2004
RMB'000 RMB'000
Trade balances 946,353 829,056
Non-trade balances 187,803 362,665
------------- -------------
1,134,156 1,191,721
============= =============
The maturity analysis of the trade balances included in the amounts due
to parent companies and fellow subsidiaries is as follows:
As at As at
30 June 31 December
2005 2004
RMB'000 RMB'000
Due within 1 month or on demand 946,353 828,040
Due after 1 month and within 6 months - 1,016
------------- -------------
946,353 829,056
============= =============
14. Reserves
For the six months ended 30 June 2005, the Company approved to transfer
RMB1,500,000,000 from its retained earnings to discretionary surplus reserve
(2004: RMB nil). No transfers were made to the statutory surplus reserve or the
statutory public welfare fund during the period (2004: RMB nil).
15. Related party transactions
Most of the transactions undertaken by the Group during the six months
ended 30 June 2005 have been effected with such counterparties and on such
terms as have been determined by the Company's immediate parent company,
Sinopec Corp, and other 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.
Transactions with other state-controlled entities in the PRC
The Group operates in an economic regime currently predominated by
state-controlled entities. Apart from transactions with Sinopec Group Company
and fellow subsidiaries, the Group conducts a majority of its business
activities with entities directly or indirectly owned or controlled by the PRC
government and numerous government authorities and agencies (collectively
referred to as "state- controlled entities") in the ordinary course of
business.
The directors consider that meaningful disclosures of related party
transactions have been made below and further disclosures on transactions with
state-controlled entities (other than Sinopec Group Company and fellow
subsidiaries) in the ordinary course of business would not be necessary given
that this will cause undue burden in preparing the interim financial report and
the cost of preparing such information would outweigh its benefit.
(a) Major transactions between the Group with Sinopec Corp or Sinopec
Group Company are as follows:
Six months ended 30 June
Note 2005 2004
RMB'000 RMB'000
Insurance premium expenses (i) 27,887 26,958
Safety insurance fund received (ii) 10,866 8,242
============= =============
(i) Pursuant to administrative measures issued by Sinopec Corp,
the Group maintains insurance coverage with a subsidiary of
Sinopec Group Company, which covers the Group's buildings,
machinery, equipment and inventories. The insurance premium
expenses are calculated based on certain percentage of the
carrying value of the Group's assets covered.
(ii) Safety insurance fund received from Sinopec Group Company can
only be utilised to enhance the Group's security and safety
measures or to conduct specified researches.
(b) Major transactions between the Group with the related companies under
Sinopec Corp or Sinopec Group Company are as follows:
Six months ended 30 June
2005 2004
RMB'000 RMB'000
(i) Sinopec Yizheng Chemical Fibre Company Limited
Sales of products-paraxylene 1,324,657 799,445
============= =============
(ii) Shanghai Secco Petrochemical Company Limited
Sales of products-naphtha 1,246,894 -
============= =============
(iii) Others
Six months ended 30 June
2005 2004
RMB'000 RMB'000
Sales of products and service fee income 17,425,367 14,016,447
Import of crude oil through related companies 12,777,590 6,900,126
Purchase of trading stock, equipment and related service fee charges 314,395 61,279
Construction fee expense 27,536 91,015
Service fee charges in relation to import and export of crude oil 40,264 41,401
Operating lease expense in respect of land 5,193 9,411
Interest income, net 1,155 809
============= =============
(c) Major transactions between the Group with its associates and jointly
controlled entity are as follows:
Six months ended 30 June
2005 2004
RMB'000 RMB'000
Sales of products 1,939,402 1,741,680
============= =============
(d) Settlement account with a related company:
As at As at
30 June 31 December
2005 2004
RMB'000 RMB'000
Balance of settlement account 713,091 1,626,615
============= =============
The balance of the settlement account with a related company mainly
represents the proceeds from sales of certain petroleum products made to
a sales subsidiary of Sinopec Corp.
Balances of amounts due from/to parent companies, fellow
subsidiaries, associates and jointly controlled entity have been
disclosed on the face of the Group's consolidated balance sheet.
The directors of the Company are of the opinion that the above
transactions with related parties were conducted in the ordinary course
of business and on normal commercial terms or in accordance with the
terms of agreements governing such transactions.
16. Capital commitments
Capital commitments relate primarily to construction of buildings, plant,
machinery and purchase of equipment. The Group had capital commitments
outstanding at 30 June 2005 not provided for in the interim financial report as
follows:
As at As at
30 June 31 December
2005 2004
RMB'000 RMB'000
Contracted for 330,362 195,307
Authorised but not contracted for 568,379 21,118
------------- -------------
898,741 216,425
============= =============
17. Contingent liabilities
At 30 June 2005, the Group provided bank loan guarantees totalling
RMB20,000,000 (31 December 2004: RMB50,000,000) to an associate of the Group.
18. Comparative figures
Certain comparative figures have been adjusted as a result of the change
in accounting policy, details of which are set out in note 2.
19. Post balance sheet event
With the authorisation from the PRC government, the People's Bank of
China announced that the PRC government reformed the exchange rate regime by
moving into a managed floating exchange rate regime based on market supply and
demand with reference to a basket of currencies on 21 July 2005. The exchange
rate of US dollars against RMB was adjusted to 8.11 yuan per US dollar with
effect from the time of 19:00 hours on 21 July 2005.
IV. INDEBTEDNESS (UNAUDITED)
As at the close of business on 31 October 2005, being the latest
practicable date for the purpose of this indebtedness statement prior to the
printing of this document, ZRCC had outstanding unsecured bank loans of
approximately RMB450 million. ZRCC did not have any unsecured loans from parent
companies and fellow subsidiary.
Save for the above, each of the members of the ZRCC Group does not have
any other bank overdrafts or loans, or other similar indebtedness, mortgages,
charges, or guarantees or other material contingent liabilities.
ZRCC Directors are not aware of any material changes to the indebtedness
and contingent liabilities of ZRCC since 31 October, 2005.
V. MATERIAL CHANGES
ZRCC Directors are not aware of any material changes in the financial or
trading position or outlook of ZRCC since 31 December 2004, the date which the
latest audited financial statements of ZRCC were made up.
--------------------------------------------------------------------------------
APPENDIX II GENERAL INFORMATION
--------------------------------------------------------------------------------
RESPONSIBILITY STATEMENT
The information in this document relating to ZRCC has been supplied by
ZRCC Directors. The issue of this document has been approved by ZRCC Directors,
who jointly and severally accept full responsibility for the accuracy of the
information contained in this document (other than that relating to Sinopec
Corp. and/or Sinopec Corp. Directors and/or Ningbo Yonglian and/or Ningbo
Yonglian Directors) and confirm, having made all reasonable enquiries that to
their best knowledge, opinions expressed in this document have been arrived at
after due and careful consideration and there are no other facts not contained
in this document the omission of which would make any statement in this
document misleading.
The information in this document relating to Sinopec Corp. has been
supplied by Sinopec Corp. Directors. The issue of this document has been
approved by Sinopec Directors, who jointly and severally accept full
responsibility for the accuracy of the information contained in this document
(other than that relating to ZRCC and/or ZRCC Directors) and confirm, having
made all reasonable enquiries that to their best knowledge, opinions expressed
in this document have been arrived at after due and careful consideration and
there are no other facts not contained in this document the omission of which
would make any statement in this document misleading.
SHARE CAPITAL OF ZRCC
As at the Latest Practicable Date, ZRCC had 2,523,754,468 ZRCC Shares in
issue, with 1,800,000,000 ZRCC Domestic Shares and 723,754,468 ZRCC H Shares.
Sinopec Corp. owned 1,800,000,000 ZRCC Domestic Shares, repesenting
approximately 71.3% of the issued share capital of ZRCC, and ZRCC H
Shareholders were interested in 723,754,468 ZRCC H Shares, representing
approximately 28.7% of the issued share capital of ZRCC. There was no movement
in the share capital of ZRCC for the period between 31 December, 2004 and the
Latest Practicable Date. There were no outstanding options, warrants or
convertible securities issued by ZRCC.
DISCLOSURE OF INTERESTS
For the purpose of this paragraph, "interested" and "interests" have the
same meanings as ascribed thereto in Part XV of the SFO. For the purposes of
Note 1 to paragraph 4 of Schedule I of the Takeovers Code, holdings of ZRCC H
Shares are the relevant shareholdings in ZRCC and holdings of shares in Sinopec
Corp. are the relevant shareholdings in Sinopec Corp..
(a) Holdings, interests and dealings in ZRCC Shares
(i) Sinopec Corp. owned 1,800,000,000 ZRCC Domestic Shares as at the
Latest Practicable Date. The table below sets out the shareholding
structure of ZRCC as at the Latest Practicable Date:
As at the Latest Practicable Date
Percentage over the
Number of ZRCC Class of ZRCC entire issued share
Shares Shares capital of ZRCC (%)
Sinopec Corp. 1,800,000,000 Domestic Shares 71.3
Ningbo Yonglian 0 - 0
Total number of ZRCC Shares held by
Sinopec Corp., associates of Sinopec Corp.
and parties acting in concert with them 800,000,000 Domestic Shares 71.3
Independent ZRCC Shareholders (including
679,000 ZRCC H Shares held by Lehman
Brothers Finance S.A. and Lehman Brothers
(International) Europe, affiliates of
Lehman Brothers, for the purpose of hedging
their positions arising from derivatives
transactions entered into by them) 723,754,468 H Shares 28.7
------------- -------------
Total number of ZRCC Shares 2,523,754,468 100
============= =============
(ii) Save as disclosed in this section, Sinopec Corp. does not own any
ZRCC Shares and has not dealt for value in any ZRCC Shares during
the Disclosure Period.
(iii) None of the ZRCC Directors or the Sinopec Corp. Directors had any
interest in any ZRCC Shares or dealt for value in any ZRCC Shares
during the Disclosure Period.
(iv) Save in relation to dealings for the account of non-discretionary
clients by the brokerage division of a subsidiary of CICC, none of
the parties acting in concert with Sinopec Corp., or parties which
are presumed to be acting in concert with Sinopec Corp. under the
Takeovers Code, owned or controlled any ZRCC Shares as at the
Latest Practicable Date or had dealt for value in any ZRCC Shares
during the Disclosure Period.
(v) Save as disclosed above, no pension fund of any member of the
Sinopec Corp. or any of its subsidiaries, or any professional
advisor to ZRCC as specified in class (2) of the definition of
associate in the Takeovers Code, owned or controlled any ZRCC
Shares as at the Latest Practicable Date or has dealt for value in
any ZRCC Shares either on a proprietary basis or on account of
clients for whom they have discretionary management mandate during
the period commencing from the date of the Announcement and ending
on the Latest Practicable Date.
(vi) No arrangement of the kind referred to in Note 8 to Rule 22 of the
Takeovers Code existed between any person and Sinopec Corp. or ZRCC
or any person acting in concert with Sinopec Corp. or any person
who is an associate of Sinopec Corp. or of ZRCC by virtue of
classes (1), (2), (3) or (4) of the definition of "associate" under
the Takeovers Code during the period commencing from the date of
the Announcement and ending on the Latest Practicable Date.
(vii) No interest in ZRCC H Shares was managed on a discretionary basis
by fund managers (other than exempt fund managers) connected with
ZRCC during the period commencing from the date of the Announcement
and ending on the Latest Practicable Date.
(viii) The rights of the holders of ZRCC Domestic Shares and ZRCC H
Shares rank pari passu to each others, including voting rights, the
right to participate in the distribution of the assets of ZRCC in
the event of termination or liquidation of ZRCC and the right to
receive dividend payment, except that payment of dividend will be
made in RMB to ZRCC Domestic Shareholders and in Hong Kong dollars
to ZRCC H Shareholders.
(b) Holdings, interests and dealings in the shares of Sinopec Corp.
As at the Latest Practicable Date:
(i) ZRCC did not own any shares in Sinopec Corp. and had not dealt in
the shares of Sinopec Corp. during the Disclosure Period; and
(ii) None of the ZRCC Directors had any interest in the shares of
Sinopec Corp. and none of the ZRCC Directors had dealt for value in
any such shares during the Disclosure Period.
(c) Other interests
As at the Latest Practicable Date:
(i) no benefit is to be given to any ZRCC Director as compensation for
loss of office or otherwise in connection with the Proposal;
(ii) no agreement, arrangement or understanding, including any
compensation arrangement, existed between Sinopec Corp. or any
person acting in concert with Sinopec Corp. and any of the ZRCC
Directors, recent ZRCC Directors, ZRCC Shareholders or recent ZRCC
Shareholders having any connection with or dependence upon the
Proposal;
(iii) no agreement or arrangement existed between any ZRCC Director and
any other person which is conditional on or dependent upon the
outcome of the Proposal or otherwise connected with the Proposal;
(iv) no material contract had been entered into by Sinopec Corp. in
which any of the ZRCC Directors has a material personal interest;
(v) none of the ZRCC Directors has a service contract with any member
of the ZRCC Group in force:
(i) which (including both continuous and fixed term contracts)
have been entered into or amended during the Disclosure
Period;
(ii) which are continuous contracts with a notice period of 12
months or more; or
(iii) which are fixed term contracts with more than 12 months to
run irrespective of the notice period; and
(vi) save from the Conditions contained in the Merger Agreement,
there is no agreement or arrangement to which Sinopec Corp.
is party which relates to the circumstances in which it may
or may not invoke or seek to invoke a condition to the
Proposal.
RIGHTS OF ZRCC SHAREHOLDERS
The ZRCC Shareholders, inter alia, enjoy the following rights:
(1) the right to dividends and other distributions in proportion to the
number of shares held by them;
(2) the right to attend or appoint a proxy to attend shareholders'
meetings of ZRCC and to vote thereat;
(3) the right to transfer ZRCC Shares in accordance with laws,
regulations and provisions of the articles of association of ZRCC;
(4) in the event of termination or liquidation of ZRCC, to participate
in the distribution of the remaining assets of ZRCC in accordance
with the number of ZRCC Shares held; and
(5) the rights of the holders of ZRCC Domestic Shares and ZRCC H Shares
rank pari passu to each others, including voting rights and the
right to receive divided payment, except that payment of dividends
will be made in RMB to ZRCC Domestic Shareholders and in Hong Kong
dollars to ZRCC H Shareholders.
MARKET PRICES
The ZRCC H Shares are traded on the Hong Kong Stock Exchange.
The table below shows the respective closing prices of the ZRCC H Shares
on the Hong Kong Stock Exchange (i) on the last trading day of each of the six
calendar months preceding the date of the Announcement, (ii) on 2 November,
2005, being the last trading day prior to the suspension of trading in the H
Shares pending the issue of the Announcement, and (iii) on the Latest
Practicable Date.
Date Price per ZRCC H
Share
HK$
31 May, 2005 7.50
30 June, 2005 7.35
29 July, 2005 8.30
31 August, 2005 8.45
30 September, 2005 8.50
31 October, 2005 9.05
2 November, 2005 9.45
Latest Practicable Date 10.20
The lowest and highest closing prices per ZRCC H Share recorded on the
Hong Kong Stock Exchange during the period from 12 May, 2005, being the date
six months prior to the date of the Announcement, to the Latest Practicable
Date were respectively HK$6.60 on 14 July, 2005 and 19 July, 2005 and HK$10.30
on 15 November, 2005.
MATERIAL CONTRACTS
No material contracts have been entered into by members of the ZRCC
Group, not being contracts entered into during the ordinary course of business
carried on or intended to be carried on by any member of the ZRCC Group, after
the date two years preceding the date of this document, save and except for the
Merger Agreement.
MATERIAL LITIGATION
As at the Latest Practicable Date, no member of the ZRCC Group was
engaged in litigation or arbitration of material importance and no litigation
or claim of material importance was known to the ZRCC Directors to be pending
or threatened by or against any member of the ZRCC Group.
PROCEDURES FOR DEMANDING A POLL BY SHAREHOLDERS
Set out below is the procedure by which ZRCC Shareholders and the
chairman of any ZRCC Shareholders' meeting may demand a poll pursuant to
article 79 of ZRCC Articles.
According to the ZRCC Articles, a poll may be demanded by:
(1) the chairman of the meeting;
(2) at least two qualified shareholders or two proxies of qualified
shareholders;
(3) one or more qualified shareholders (including proxies),
individually or in aggregate, representing 10% or more of all the
voting shares at the meeting.
Unless a poll is requested, a declaration shall be made by the chairman
of the meeting that a resolution has been passed by a show of hands. The
request for a poll may be withdrawn by the person who requests the same.
QUALIFICATION OF EXPERT
The following are the qualifications of the experts who have given
opinion or advice which are contained in this document:
Name Qualifications
Rothschild N M Rothschild & Sons (Hong Kong) Limited, a corporation
licensed by the SFO to conduct Type 1 (dealing in
securities), Type 4 (advising on securities) and Type 6
(advising on corporate finance) regulated activity as
defined under the SFO
CONSENT
Rothschild has given and has not withdrawn its written consent to the
issue of this document with the inclusion therein of its opinions, and the
references to its name and opinions in the form and context in which it
respectively appears.
DOCUMENTS AVAILABLE FOR INSPECTION
Copies of the following documents are available for inspection at the
offices of Johnson Stokes & Master at 17th Floor, Prince's Building, 10 Chater
Road, Central, Hong Kong during normal business hours from 9:00 a.m. to 5:00
p.m. on any weekday (public holidays excepted) until the Effective Date or the
date on which the Proposal lapses or is withdrawn, whichever is the earliest:
(a) the articles of association of Sinopec Corp.;
(b) the articles of association of ZRCC;
(c) the Merger Agreement;
(d) the audited consolidated accounts of the ZRCC Group for each of the
years ended 31 December, 2002, 2003 and 2004;
(e) the letter from Rothschild, the text of which is set out on pages 20
to 47 of this document;
(f) the letter from the Independent Board Committee, the text of which
is set out on pages 18 to 19 of this document; and
(g) the letter of consent referred to in the section headed "Consent"
of this Appendix II.
FEES AND EXPENSES
Except as disclosed in this document and as set forth in the Merger
Agreement, each of Sinopec Corp. and ZRCC agrees to pay its costs, fees and
expenses in connection with the Merger. The costs in connection with the
printing and mailing of this document will be borne by ZRCC.
MISCELLANEOUS
(a) The registered office of Sinopec Corp. is at 6A, Huixindong Street,
Chaoyang District, Beijing, the PRC and the place of business in Hong
Kong of Sinopec Corp. is at 12th Floor, Office Tower, Convention Plaza, 1
Harbour Road, Wanchai, Hong Kong, respectively.
(b) The controlling shareholder of ZRCC is Sinopec Corp., a joint stock
limited company incorporated in the PRC with limited liability.
(c) The controlling shareholder of Sinopec Corp. is CPC. Apart from CPC,
there is no other shareholder of Sinopec Corp. who holds 30% or more of
the shares in Sinopec Corp..
(d) The registered office of Ningbo Yonglian is Room 209, Zhenming Road #618,
Ningbo City, Zhejiang Province, the PRC.
(e) The controlling shareholder of Ningbo Yonglian is Sinopec Corp.. Apart
from Sinopec Corp., there is no other shareholder of Ningbo Yonglian who
holds 30% or more of the shares of Ningbo Yonglian.
(f) The registered office of CICC is at Suite 2307, 23rd Floor, One
International Finance Centre, 1 Harbour View Street, Central, Hong Kong.
(g) The registered office of Lehman Brothers is at 25th Floor to 26th Floor
and units 2706 to 2714, Two International Finance Centre, 8 Finance
Street, Central, Hong Kong.
(h) The registered office of Rothschild is at 16th Floor, Alexandra House, 18
Chater Road, Central, Hong Kong.
(i) As at the date hereof, the Sinopec Board comprises: Messrs. Chen Tonghai,
Wang Jiming, Mou Shuling, Zhang Jiaren, Cao Xianghong, Liu Genyuan, Gao
Jian and Fan Yifei, as executive directors; Messrs. Chen Qingtai, Ho Tsu
Kwok Charles, Shi Wanpeng and Zhang Youcai, as independent non-executive
directors; and Mr. Cao Yaofeng, as the employee representative director.
(j) CPC is a state-owned enterprise and does not have a board of directors.
The general manager of CPC is Mr. Chen Tonghai.
(k) The directors of Ningbo Yonglian are Mr. Yu Jiuling, Mr. Dai Zhaoming and
Mr. Zhang Baolin.
(l) The Registers are open to inspection by ZRCC Shareholders or any other
person in accordance with ZRCC Articles.
(m) The English text of this document, the forms of proxy and reply slip
shall prevail over the Chinese text.
(n) All announcements in relation to the Proposal will be published as a paid
announcement in at least one leading English language newspaper and one
leading Chinese language newspaper, being in each case a newspaper which
is published daily and circulating generally in Hong Kong.
--------------------------------------------------------------------------------
APPENDIX III NOTICE OF SPECIAL GENERAL MEETING
--------------------------------------------------------------------------------
[ZRCC GRAPHIC OMITTED])
[CHINESE CHARACTERS OMITTED]
SINOPEC ZHENHAI REFINING & CHEMICAL COMPANY LIMITED
(a joint stock limited company incorporated in the People's Republic of China)
(Stock code: 1128)
NOTICE IS HEREBY GIVEN that a special general meeting (the "SGM") of
Sinopec Zhenhai Refining & Chemical Company Limited (the "Company") will be
held at the conference room on the 1st Floor, Donghai Hotel at Zhenhai
District, Ningbo Municipality, Zhejiang Province, the People's Republic of
China (the "PRC") on Thursday, 12 January, 2006, at 9:30 a.m. to consider and,
if appropriate, pass the following resolutions as special resolutions
(resolutions approved by at least two-thirds of the votes attaching to the
shares of the Company that are cast either in person or by proxy in the
meeting):
SPECIAL RESOLUTIONS
1. THAT Section 2 of Article 179 of the Company's articles of association be
deleted and replaced by the following with immediate effect:
"In relation to merger, parties to the merger shall sign a merger
agreement, and prepare balance sheet and list of assets. The Company
shall, after passing the resolution of the merger, notify its creditors
within 10 days, and publish it on the newspaper at least three times
within 30 days. Within 30 days after receiving the notification, or 45
days after it is first published on the newspaper if notification has not
received, the creditors may require the Company to make repayment or
provide guarantee in relation to the debts."
2. THAT subject to the passing of this same resolution by the independent
shareholders of the Company in a separate special general meeting of the
independent shareholders of the Company, as approved by at least 75% of
the votes attaching to the H shares of the Company held by the
independent shareholders of the Company that are cast either in person or
by proxy at the meeting and with the number of votes cast against the
resolution by the independent shareholders of the Company being not more
than 10% of all the H shares held by the independent shareholders of the
Company:
(a) the merger agreement entered into between the Company and Ningbo
Yonglian dated 12 November, 2005 ("Merger Agreement"), the
execution of the Merger Agreement by or for and on behalf of the
Company, and the merger and the other transactions conducted or to
be conducted as contemplated thereunder be and are hereby approved,
ratified and confirmed; and
(b) the Chairman of the Board of Directors of the Company be and is
hereby authorised to take such other action and execute such
documents or deeds as he may consider necessary or desirable for
the purpose of implementing the Merger and all other transactions
contemplated by the Merger Agreement.
On behalf of the board of
Sinopec Zhenhai Refining & Chemical Company Limited
Su Dewen
Secretary to the Board of Directors
Ningbo, the PRC, 28 November, 2005
Notes:
1. Eligibility for attending the SGM
Shareholders of the Company whose names appear on the register of members
kept at Hong Kong Registrars Limited at 4:00 p.m. on Friday, 9 December, 2005
are eligible to attend and vote at the SGM. Shareholder or his proxy is
entitled to cast one vote for each share held.
In order to be eligible to attend and vote at the SGM to be held on
Thursday, 12 January, 2006, all transfers together with the relevant share
certificates must be delivered to the Company's H share registrar in Hong Kong
- Hong Kong Registrars Limited, at Shops 1712-1716, 17th Floor, Hopewell
Centre, 183 Queen's Road East, Wanchai, Hong Kong, not later than 4:00 p.m. on
Friday, 9 December, 2005.
2. Proxy
(1) A shareholder eligible to attend and vote at the SGM is entitled to
appoint one or more proxies in writing to attend and vote at the
SGM on his behalf. A proxy need not be a shareholder of the
Company.
(2) A shareholder should appoint his proxy in writing. The proxy form
must be signed by the shareholder or the proxy authorised in
writing, or if the proxy form is signed by another person
authorised by the shareholder, any authorisation documents of such
an appointment must be notarised.
(3) The proxy form of H share's shareholder together with the power of
attorney or other authority, if any, under which it is signed or a
notarially certified copy of such power or authority must be lodged
at the Company's share registrar in Hong Kong not less than 24
hours before the time for holding the meeting to be valid.
(4) A proxy may exercise the right to vote by raising his hand or by
poll. However, if more than one proxy is appointed by a
shareholder, such proxies shall only exercise the right to vote by
poll.
3. Registration procedures for attending the SGM
(1) A shareholder or his proxy shall produce proof of identity when
attending the SGM.
(2) Holders of H shares who intend to attend the SGM shall complete and
lodge the reply slip and return the same to the Company or its Hong
Kong share registrar on or before Thursday, 22 December, 2005.
(3) The reply slip may be delivered by hand, by post, or by fax.
4. Registration of share transfers
The register of members of the Company will be closed from Monday, 12
December, 2005 to Thursday, 12 January, 2006 (both days inclusive).
5. Vote on resolutions by way of poll
The resolutions of the SGM held on Thursday, 12 January, 2006 will demand
the vote to be carried out by way of poll. Please refer to the section headed
"Appendix II - Procedures for Demanding a Poll by Shareholders" of the
composite document despatched by the Company on Monday, 28 November, 2005.
6. Other businesses
(1) It is expected that the SGM will not last for more than one day.
Shareholders who attend shall bear their own travelling and
accommodation expenses.
(2) The fax number of the Company is (86-574) 86456155.
--------------------------------------------------------------------------------
APPENDIX IV NOTICE OF SPECIAL GENERAL MEETING OF
THE INDEPENDENT ZRCC SHAREHOLDERS
--------------------------------------------------------------------------------
[ZRCC GRAPHIC OMITTED])
[CHINESE CHARACTERS OMITTED]
SINOPEC ZHENHAI REFINING & CHEMICAL COMPANY LIMITED
(a joint stock limited company incorporated in the People's Republic of China)
(Stock code: 1128)
NOTICE IS HEREBY GIVEN that a special general meeting of independent
shareholders (the "ISGM") of Sinopec Zhenhai Refining & Chemical Company
Limited (the "Company") will be held at the conference room on the 1st Floor,
Donghai Hotel at Zhenhai District, Ningbo Municipality, Zhejiang Province, the
People's Republic of China (the "PRC") on Thursday, 12 January, 2006, at 10:30
a.m. to consider and, if appropriate, pass the following resolution by at least
75% of the votes attaching to the H shares of the Company and held by the
independent shareholders of the Company that are cast either in person or by
proxy at the meeting, and with the number of votes cast against the resolution
at the meeting amounting to not more than 10% of all the H shares of the
Company held by the independent shareholders of the Company:
RESOLUTION
THAT
1. (a) the merger agreement entered into between the Company and
Ningbo Yonglian dated 12 November, 2005 ("Merger Agreement"),
the execution of the Merger Agreement by or for and on behalf
of the Company, and the merger and the others transactions
conducted or to be conducted as contemplated thereunder be
and are hereby approved, ratified and confirmed; and
(b) the Chairman of the Board of Directors of the Company be and
is hereby authorised to take such other action and execute
such documents or deeds as he may consider necessary or
desirable for the purpose of implementing the Merger and all
other transactions contemplated by the Merger Agreement.
On behalf of the board of
Sinopec Zhenhai Refining & Chemical Company Limited
Su Dewen
Secretary to the Board of Directors
Ningbo, the PRC, 28 November, 2005
Notes:
1. Eligibility for attending the ISGM
Independent shareholders for the purpose of the ISGM mean shareholders
other than China Petroleum & Chemical Corporation and parties acting in concert
with it.
Independent shareholders of the Company whose names appear on the
register of members kept at Hong Kong Registrars Limited at 4:00 p.m. on
Friday, 9 December, 2005 are eligible to attend and vote at the ISGM.
Shareholder or his proxy is entitled to cast one vote for each share held.
In order to be eligible to attend and vote at the ISGM to be held on
Thursday, 12 January, 2006, all transfers together with the relevant share
certificates must be delivered to the Company's H share registrar in Hong Kong
- Hong Kong Registrars Limited, at Shops 1712-1716, 17th Floor, Hopewell
Centre, 183 Queen's Road East, Wanchai, Hong Kong, not later than 4:00 p.m. on
Friday, 9 December, 2005.
2. Proxy
(1) A shareholder eligible to attend and vote at the ISGM is entitled
to appoint one or more proxies in writing to attend and vote at the
ISGM on his behalf. A proxy need not be a shareholder of the
Company.
(2) A shareholder should appoint his proxy in writing. The proxy form
must be signed by the shareholder or the proxy authorised in
writing, or if the proxy form is signed by another person
authorised by the shareholder, any authorisation documents of such
an appointment must be notarised.
(3) The proxy form of H share's shareholder together with the power of
attorney or other authority, if any, under which it is signed or a
notarially certified copy of such power or authority must be lodged
at the Company's share registrar in Hong Kong not less than 24
hours before the time for holding the meeting to be valid.
(4) A proxy may exercise the right to vote by raising his hand or by
poll. However, if more than one proxy is appointed by a
shareholder, such proxies shall only exercise the right to vote by
poll.
3. Registration procedures for attending the ISGM
(1) A shareholder or his proxy shall produce proof of identity when
attending the ISGM.
(2) Holders of H shares who intend to attend the ISGM shall complete
and lodge the reply slip and return the same to the Company or its
Hong Kong share registrar on or before Thursday, 22 December, 2005.
(3) The reply slip may be delivered by hand, by post, or by fax.
4. Registration of share transfers
The register of members of the Company will be closed from Monday, 12
December, 2005 to Thursday, 12 January, 2006 (both days inclusive).
5. Vote on resolution by way of poll
The resolution of the ISGM held on Thursday, 12 January, 2006 will demand
the vote to be carried out by way of poll. Please refer to the section headed
"Appendix II - Procedures for Demanding a Poll by Shareholders" of the
composite document despatched by the Company on Monday, 28 November, 2005.
6. Other businesses
(1) It is expected that the ISGM will not last for more than one day.
Shareholders who attend shall bear their own travelling and
accommodation expenses.
(2) The fax number of the Company is (86-574) 86456155.
[ZRCC GRAPHIC OMITTED])
[CHINESE CHARACTERS OMITTED]
SINOPEC ZHENHAI REFINING & CHEMICAL COMPANY LIMITED
(a joint stock limited company incorporated in the People's Republic of China)
(Stock code: 1128)
Proxy form for the Special General Meeting of the Company
to be held on 12 January, 2006
I/We(1) _______________________________________________________________________
(of ___________________________________________________________________________)
being the registered holder(s) of(2)______________________________________shares
of RMB1.00 each in the capital of Sinopec Zhenhai Refining & Chemical Company
Limited (the "Company") hereby appoint the Chairman of the meeting
or(3)_________________________________ (of_____________________________________)
as my/our proxy to attend on my/our behalf at the special general meeting of
the Company or any adjournment thereof of the Company to be held at the
conference room on the 1st Floor of Donghai Hotel at Zhenhai District, Ningbo
Municipality, Zhejiang Province, the People's Republic of China at 9:30 a.m. on
Thursday, 12 January, 2006, and to vote for me/us and in my/our name(s) as
indicated below in respect of the following resolutions, in order to review
and, if appropriate, pass on my/our behalf the resolutions listed on the Notice
of Special General Meeting of the Company and to vote for me/us as indicated
below in respect of the following resolutions. Should instructions have not
been given, proxy may vote at his discretion.
-------------------------------------------------------------------------------
SPECIAL RESOLUTIONS | For | Against |
-------------------------------------------------------------------------------
1. THAT Section 2 of Article 179 of the Company's | | |
articles of association be deleted and replaced | | |
by the following with immediate effect: | | |
| | |
"In relation to merger, parties to the merger | | |
shall sign a merger agreement, and prepare | | |
balance sheet and list of assets. The Company | | |
shall, after passing the resolution of the | | |
merger, notify its creditors within 10 days, and | | |
publish it on the newspaper at least three times | | |
within 30 days. Within 30 days after receiving | | |
the notification, or 45 days after it is first | | |
published on the newspaper if notification has | | |
not received, the creditors may require the | | |
Company to make repayment or provide guarantee in | | |
relation to the debts." | | |
| | |
-------------------------------------------------------------------------------
2. THAT subject to the passing of this same | | |
resolution by the independent shareholdersof the | | |
Company in a separate special general meeting of | | |
the independent shareholders of the Company, as | | |
approved by at least 75% of the votes attaching | | |
to the H shares of the Company held by the | | |
independent shareholders of the Company that are | | |
cast either in person or by proxy at the meeting | | |
and with the number of votes cast against the | | |
resolution by the independent shareholders of the | | |
Company being not more than 10% of all the H | | |
shares held by all the independent shareholders | | |
of the Company: | | |
| | |
(a) the merger agreement entered into between | | |
the Company and Ningbo Yonglian dated 12 | | |
November, 2005 ("Merger Agreement"), the | | |
execution of the Merger Agreement by or for | | |
and on behalf of the Company, and the | | |
merger and the other transactions conducted | | |
or to be conducted as contemplated | | |
thereunder be and are hereby approved, | | |
ratified and confirmed; and | | |
| | |
(b) the Chairman of the Board of Directors of | | |
the Company be and is hereby authorised to | | |
take such other action and execute such | | |
documents or deeds as he may consider | | |
necessary or desirable for the purpose of | | |
implementing the Merger and all other | | |
transactions contemplated by the Merger | | |
Agreement. | | |
-------------------------------------------------------------------------------
Signed this ______________ day ______________ of ______________
Signature(s): _________________________________
Notes:
(1) Please insert full name(s) (in Chinese and English) and address(es) (as
shown in the registers of members) in BLOCK CAPITALS.
(2) Please insert the number and class of shares registered in your name(s).
If no number is inserted, this form of proxy will be deemed to relate to
all the shares in the capital of the Company registered in your name(s).
(3) If any proxy other than the Chairman of the Meeting is appointed, strike
out "the Chairman of the Meeting or" and insert the name and address of
the proxy desired in the space provided. Each alteration made to this
form of proxy must be initialled by the person who signs it.
(4) IMPORTANT: If you wish to vote for a resolution, place a "|X|" in the
box marked "FOR". If you wish to vote against a resolution, place a
"|X|" in the box marked "AGAINST". Failure to complete a box will
entitle your proxy to cast your vote(s) at his discretion.
(5) This form of proxy must be signed by you or your attorney authorized in
writing, or in the case of a company with limited liability, must be
executed either under the company's seal or signed by a director or
attorney authorised on the company's behalf.
(6) This form of proxy, together with the power of attorney or other
authority, if any, under which it is signed or a notarially certified
copy of such power or authority must be lodged at the Company's share
registrar, Hong Kong Registrars Limited at 46/F, Hopewell Centre, 183
Queen's Road East, Wanchai, Hong Kong not less than 24 hours before the
time for holding the meeting.
(7) A proxy need not be a shareholder of the Company but must attend the
meeting in person to represent you.
(8) Completion and deposit of the form of proxy will not preclude you from
attending and voting at the meeting if you so wish.
[ZRCC GRAPHIC OMITTED])
[CHINESE CHARACTERS OMITTED]
SINOPEC ZHENHAI REFINING & CHEMICAL COMPANY LIMITED
(a joint stock limited company incorporated in the People's Republic of China)
(Stock code: 1128)
Proxy Form for the Special General Meeting of the Independent
Shareholders of the Company to be held on 12 January, 2006
I/We(1) _______________________________________________________________________
(of ___________________________________________________________________________)
being the registered holder(s) of(2) ____________________________________ shares
of RMB1.00 each in the capital of Sinopec Zhenhai Refining & Chemical Company
Limited (the "Company") hereby appoint the Chairman of the meeting
or(3) __________________________ (of __________________________________________)
as my/our proxy to attend on my/our behalf at the special general meeting of
the independent shareholders of the Company or any adjournment thereof of the
Company to be held at the conference room on the 1st Floor of Donghai Hotel at
Zhenhai District, Ningbo Municipality, Zhejiang Province, the People's Republic
of China at 10:30 a.m. on Thursday, 12 January, 2005, and to vote for me/us and
in my/our name(s) as indicated below in respect of the following resolution, in
order to consider and, if appropriate, pass on my/our behalf the resolution
listed on the Notice of Special General Meeting of the Independent Shareholders
of the Company and to vote for me/us as indicated below in respect of the
following resolution. Should instructions have not been given, proxy may vote
at his discretion.
-------------------------------------------------------------------------------
SPECIAL RESOLUTIONS | For | Against |
-------------------------------------------------------------------------------
1. THAT | | |
(a) the merger agreement entered into between | | |
the Company and Ningbo Yonglian dated 12 | | |
November, 2005 ("Merger Agreement"), the | | |
execution of the Merger Agreement by or for | | |
and on behalf of the Company, and the | | |
merger and the others transactions | | |
conducted or to be conducted as | | |
contemplated thereunder be and are hereby | | |
approved, ratified and confirmed; and | | |
| | |
(b) the Chairman of the Board of Directors of | | |
the Company be and is hereby authorised to | | |
take such other action and execute such | | |
documents or deeds as he may consider | | |
necessary or desirable for the purpose of | | |
implementing the Merger and all other | | |
transactions contemplated by the Merger | | |
Agreement. | | |
-------------------------------------------------------------------------------
Signed this ______________ day ______________ of ______________
Signature(s): _________________________________
(1) Please insert full name(s) (in Chinese and English) and address(es) (as
shown in the registers of members) in BLOCK CAPITALS.
(2) Please insert the number and class of shares registered in your name(s).
If no number is inserted, this form of proxy will be deemed to relate to
all the shares in the capital of the Company registered in your name(s).
(3) If any proxy other than the Chairman of the Meeting is appointed, strike
out "the Chairman of the Meeting or" and insert the name and address of
the proxy desired in the space provided. Each alteration made to this
form of proxy must be initialled by the person who signs it.
(4) IMPORTANT: If you wish to vote for a resolution, place a "|X|" in the
box marked "FOR". If you wish to vote against a resolution, place a
"|X|" in the box marked "AGAINST". Failure to complete a box will
entitle your proxy to cast your vote(s) at his discretion.
(5) This form of proxy must be signed by you or your attorney authorized in
writing, or in the case of a company with limited liability, must be
executed either under the company's seal or signed by a director or
attorney authorised on the company's behalf.
(6) This form of proxy, together with the power of attorney or other
authority, if any, under which it is signed or a notarially certified
copy of such power or authority must be lodged at the Company's share
registrar, Hong Kong Registrars Limited at 46/F, Hopewell Centre, 183
Queen's Road East, Wanchai, Hong Kong not less than 24 hours before the
time for holding the meeting.
(7) A proxy need not be a shareholder of the Company but must attend the
meeting in person to represent you.
(8) Completion and deposit of the form of proxy will not preclude you from
attending and voting at the meeting if you so wish.
[ZRCC GRAPHIC OMITTED])
[CHINESE CHARACTERS OMITTED]
SINOPEC ZHENHAI REFINING & CHEMICAL COMPANY LIMITED
(a joint stock limited company incorporated in the People's Republic of China)
(Stock code: 1128)
REPLY SLIP FOR ATTENDING THE SPECIAL GENERAL MEETING
OF THE COMPANY TO BE HELD ON 12 JANUARY, 2006
To: Sinopec Zhenhai Refining & Chemical Company Limited (the "Company")
I/We(1) ________________________________________________________________________
of(1)___________________________________________________________________________
(as shown in the registers of members) being the registered holder(s) of(2) ____
______________________ shares of RMB1.00 each in the capital of the Company,
hereby inform the Company that I/we intend to attend (in person or by proxy) the
special general meeting of the Company to be held at the conference room on the
1st Floor, Donghai Hotel at Zhenhai District, Ningbo Municipality, Zhejiang
Province, the People's Republic of China at 9:30 a.m. on Thursday, 12 January,
2006.
Date: ____________________ Signature: _______________________________
Notes:
(1) Please insert full name(s) (in Chinese and in English) and registered
address(es) as shown in the registers of members in BLOCK CAPITALS.
(2) Please insert the number and class of shares registered under your
name(s).
(3) The completed and signed reply slip must be delivered to the Company or
the Company's Hong Hong share registrar, Hong Kong Registrars Limited at
46th Floor, Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong on
or before Thursday, 22 December, 2005. This reply slip may be delivered
by hand, by post or by fax at: (86-574) 86456155.
[ZRCC GRAPHIC OMITTED])
[CHINESE CHARACTERS OMITTED]
SINOPEC ZHENHAI REFINING & CHEMICAL COMPANY LIMITED
(a joint stock limited company incorporated in the People's Republic of China)
(Stock code: 1128)
REPLY SLIP FOR ATTENDING THE SPECIAL GENERAL MEETING
OF THE INDEPENDENT SHAREHOLDERS OF THE COMPANY
TO BE HELD ON 12 JANUARY, 2006
To: Sinopec Zhenhai Refining & Chemical Company Limited (the "Company")
I/We(1) ________________________________________________________________________
of(1) __________________________________________________________________________
(as shown in the registers of members) being the registered holder(s) of(2) ____
___________________________________ shares of RMB1.00 each in the capital of the
Company, hereby inform the Company that I/we intend to attend (in person or by
proxy) the special general meeting of the independent shareholders of the
Company to be held at the conference room on the 1st Floor, Donghai Hotel at
Zhenhai District, Ningbo Municipality, Zhejiang Province, the People's Republic
of China at 10:30 a.m. on Thursday, 12 January, 2006.
Date: _______________________ Signature: _______________________________
Notes:
(1) Please insert full name(s) (in Chinese and in English) and registered
address(es) as shown in the registers of members in BLOCK CAPITALS.
(2) Please insert the number and class of shares registered under your
name(s).
(3) The completed and signed reply slip must be delivered to the Company or
the Company's Hong Hong share registrar, Hong Kong Registrars Limited at
46th Floor, Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong on
or before Thursday, 22 December, 2005. This reply slip may be delivered
by hand, by post or by fax at: (86-574) 86456155.