UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

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

OR

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

For the fiscal year ended December 31, 2016

OR

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

OR

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

Date of event requiring this shell company report

For the transition period from                  to                 

Commission file number 1-12158

(Exact name of Registrant as specified in its charter)

Sinopec Shanghai Petrochemical Company Limited

(Translation of Registrant’s name into English)

The People’s Republic of China

(Jurisdiction of incorporation or organization)

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

(Address of principal executive offices)

Mr. Wang Zhiqing

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

The People’s Republic of China

Tel: +86 (21) 57943143

Fax: +86 (21) 57940050

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

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

Title of each class	Name of each exchange on which registered
American Depositary Shares, each representing 100 H Shares, par value RMB1.00 per Share H Shares, par value RMB1.00 per Share	New York Stock Exchange The Stock Exchange of Hong Kong Limited

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

None

(Title of Class)

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

None

(Title of Class)

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

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

7,305,000,000 domestic shares, par value RMB1.00 per Share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☒    No  ☐

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

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

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

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

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

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

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

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

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

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

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

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

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

Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS		ii
EXCHANGE RATES		ii
CERTAIN TERMS AND CONVENTIONS		iii
PART I		1
ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS.	1
ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE.	1
ITEM 3.	KEY INFORMATION.	1
ITEM 4.	INFORMATION ON THE COMPANY.	12
ITEM 4A.	UNRESOLVED STAFF COMMENTS.	37
ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS.	37
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.	54
ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.	65
ITEM 8.	FINANCIAL INFORMATION.	68
ITEM 9.	THE OFFER AND LISTING.	68
ITEM 10.	ADDITIONAL INFORMATION.	69
ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.	84
ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.	86
PART II		87
ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.	87
ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.	87
ITEM 15.	CONTROLS AND PROCEDURES.	88
ITEM 16A.	AUDIT COMMITTEE FINANCIAL EXPERT.	89
ITEM 16B.	CODE OF ETHICS.	89
ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES.	89
ITEM 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.	90
ITEM 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.	90
ITEM 16F.	CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT.	90
ITEM 16G.	CORPORATE GOVERNANCE.	90
ITEM 16H.	MINE SAFETY DISCLOSURE.	94
PART III		94
ITEM 17.	FINANCIAL STATEMENTS.	94
ITEM 18.	FINANCIAL STATEMENTS.	94
ITEM 19.	EXHIBITS.	95

i

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

• amount and nature of future development;

• future prices of and demand for our products;

• future earnings and cash flow;

• capital expansion programs;

• future plans and capital expenditures;

• expansion and other development trends of the petrochemical industry;

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

• expansion and growth of our business and operations; and

• our prospective operational and financial information.

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

• fluctuations in crude oil and natural gas prices;

• fluctuations in prices of our products;

• failures or delays in achieving production from development projects;

• potential acquisitions and other business opportunities;

• continued availability of capital and financing;

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

• other risks and factors beyond our control.

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

EXCHANGE RATES

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

We publish our financial statements in Renminbi. Unless otherwise indicated, all translations from Renminbi to U.S. Dollars have been made at a rate of RMB6.9430 to U.S.$1.00, the noon buying rate on December 30, 2016 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. We do not represent that Renminbi or U.S. dollar amounts could be converted into U.S. Dollars or Renminbi, as the case may be, at any particular rate.

ii

CERTAIN TERMS AND CONVENTIONS

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

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

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

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

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

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

References to our “domestic shares” are references to 7,305,000,000 domestic shares of the Company, par value RMB1.00 per share, which are ordinary shares held by Chinese investors.

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

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

All references to “tons” are to metric tons.

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

iii

PART I

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

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.

Not applicable.

ITEM 3. KEY INFORMATION.

A. Selected Financial Data.

Our selected consolidated statements of operations data (except for ADS data) and cash flows data for each of the years ended December 31, 2014, 2015 and 2016 and our selected consolidated balance sheets data as of December 31, 2015 and 2016 are derived from our consolidated financial statements included in Item 18. Financial Statements. Our selected consolidated statements of operations data and cash flows data for the years ended December 31, 2012 and 2013 and our consolidated balance sheets data as of December 31, 2012, 2013 and 2014 are derived from our consolidated financial statements not included in this annual report. Our selected consolidated financial data should be read in conjunction with our consolidated financial statements, and the notes thereto, and Item 5. Operating and Financial Review and Prospects. Our consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board.

Selected Consolidated Financial Data

(in thousands, except per share and per ADS data)

	Years Ended December 31
	2012 (RMB)			2013 (RMB)		2014 (RMB)			2015 (RMB)		2016 (RMB)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
Net sales:
Synthetic fibers		3,313,318			3,220,466		2,891,460			2,328,225		1,855,464
Resins and plastics		14,706,350			14,268,401		12,489,421			9,992,167		9,797,573
Intermediate petrochemicals		17,993,493			18,430,821		12,391,065			9,332,022		8,827,560
Petroleum products		38,301,388			57,419,833		49,259,457			30,802,040		24,002,557
Trading of petrochemical products		12,020,651			11,157,633		14,790,956			13,718,180		20,585,356
Others		882,074			1,006,024		902,605			864,571		867,959
(Loss)/profit from operations		(1,772,446	)		2,192,266		(587,900	)		3,908,932		6,777,856
(Loss)/earnings before income tax		(2,016,473	)		2,444,653		(889,944	)		4,237,188		7,778,295
Net (loss)/income attributable to owners of the Company		(1,528,397	)		2,055,328		(692,222	)		3,274,308		5,968,466
Net income attributable to non-controlling interests		23,255			10,174		16,462			36,103		13,007
Basic (loss)/earnings per share(a)		(0.14	)		0.19		(0.064	)		0.303		0.553
Basic (loss)/earnings per ADS(a)		(14.15	)		19.03		(6.41	)		30.318		55.26

(a) After the implementation of share capital increase from the capital reserve under the domestic share reform in December 2013, total shares increased from 7,200,000,000 shares to 10,800,000,000 shares. See Item 4. Information on the Company – A. History and Development of the Company – Domestic Share Reform. The calculation of earnings per share is retrospectively restated based on the weighted average number of shares outstanding of 10,800,000,000 in each of 2012 and 2013, respectively as if these shares were in issue since January 1, 2012. Earnings per ADS are calculated on the basis that one ADS is equivalent to 100 H Shares.

1

	Years Ended December 31
	2012 (RMB)			2013 (RMB)			2014 (RMB)			2015 (RMB)			2016 (RMB)
CONSOLIDATED STATEMENTS OF CASH FLOWS DATA
Net cash (used in)/generated from operating activities		(2,066,385	)		5,098,538			3,662,408			4,932,824			7,181,770
Capital expenditure		(4,259,859	)		(1,323,137	)		(1,089,268	)		(695,277	)		(901,475	)
Proceeds from borrowings		53,365,372			55,037,612			51,385,298			31,999,758			2,589,432
Repayments of borrowings		(46,779,614	)		(59,155,947	)		(53,444,473	)		(35,684,713	)		(4,113,000	)
	As of December 31
	2012 (RMB)			2013 (RMB)			2014 (RMB)			2015 (RMB)			2016 (RMB)
CONSOLIDATED BALANCE SHEETS DATA
Current assets		12,891,424			14,486,028			9,510,415			8,143,980			14,875,881
Property, plant and equipment		17,468,748			16,669,479			15,541,575			14,383,319			13,474,287
Total assets		36,462,546			36,636,810			30,905,632			27,820,591			33,945,610
Short term borrowings (a)		11,023,877			7,094,026			4,078,195			2,070,000			546,432
Current liabilities		18,927,257			18,017,454			12,484,849			7,726,271			8,942,375
Long term borrowings (excluding current portion)		1,231,340			627,800			1,632,680			—			—
Total equity attributable to owners of the Company		16,037,166			17,732,494			16,500,272			19,797,282			24,721,965

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

Dividends

The following table sets forth certain information concerning the dividends of the Company since January 1, 2012:

Dividend Period	Dividend per Share
January 1, 2012-December 31, 2012	No dividend
January 1, 2013-December 31, 2013	RMB0.05 (U.S.$0.0081)
January 1, 2014-December 31, 2014	No dividend
January 1, 2015-December 31, 2015	RMB0.1 (U.S.$0.0154)
January 1, 2016-December 31, 2016	RMB0.25 (U.S.$0.036)

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

Exchange Rates

The Chinese government controls its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade. See Item 10. Additional Information – D. Exchange Controls.

The following table sets forth the high and low noon buying rates between Renminbi and U.S. Dollars for each month during the previous six months and the most recent practicable date:

	Noon Buying Rate  (1)
	High		Low
	(RMB per U.S.$)
October 2016		6.7819		6.6685
November 2016		6.9195		6.7534
December 2016		6.9559		6.8771
January 2017		6.9575		6.8360
February 2017		6.8517		6.8810
March 2017		6.9132		6.8665
April 2017 (ending as of April 21)		6.8988		6.8778

(1) The exchange rates reflect the noon buying rates as set forth in the H.10 statistical release of the Federal Reserve Board.

2

The following table sets forth the average noon buying rates between Renminbi and U.S. dollars for each of 2012, 2013, 2014, 2015 and 2016, calculated by averaging the noon buying rates on the last day of each month during the relevant year:

	Average Noon Buying Rate(1)
	(RMB per U.S.$)
2012		6.2990
2013		6.1412
2014		6.1701
2015		6.2869
2016		6.6549

(1) The exchange rates reflect the noon buying rates as set forth in the H.10 statistical release of the Federal Reserve Board.

B. Capitalization and Indebtedness.

Not applicable.

C. Reasons for the Offer and Use of Proceeds.

Not applicable.

D. Risk Factors.

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

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

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

We consume large amounts of crude oil to manufacture our products of which more than 95% is typically imported. In 2016, crude oil costs accounted for RMB22.95billion, or 39.07% of our annual cost of sales. As a result, changes in crude oil prices can affect our profitability. In recent years, due to various reasons, the price of crude oil has fluctuated significantly. We cannot rule out the possibility of the occurrence of certain global emergencies which might disrupt our crude oil supply. We expect that the volatility and uncertainty of the prices of crude oil and petrochemical products will continue, and that increasing crude oil prices and declines in prices of petrochemical products may adversely affect our business and results of operations and financial condition.

3

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

We consume large amounts of crude oil to manufacture our products of which more than 95% is typically imported. We attempt to mitigate the effect of increased costs due to rising crude oil prices. However, our ability to pass on these increased costs to our customers is dependent on market conditions and government regulations. Given that the increase of the sales prices of our products may lag behind the increase of crude oil costs, we may fail to completely cover the increased costs by increasing our sales prices, particularly where government regulations restrict the prices of certain of our fuel products. In particular, gasoline, diesel and jet fuel, and liquefied petroleum gas are subject to government price controls at present. In 2014, 2015 and 2016 approximately 48.02%, 40.81% and 36.40% of our net sales were from such products subject to price controls. Although the current price-setting mechanism for refined petroleum products in China allows the Chinese government to adjust price in the PRC market when the average international crude oil price fluctuates beyond certain levels within a certain time period (see Item 4. Information on the Company – B. Business Overview – Product Pricing), the Chinese government still retains discretion as to whether or when to adjust the prices of the refined oil products. The Chinese government generally exercises certain price control over refined oil products once international crude oil prices experience a sustained rise or become significantly volatile. For instance, some of our fuel products are required to be sold to designated distributors (such as the subsidiaries of Sinopec Corp.). Because we cannot freely sell our fuel products to take advantage of opportunities for higher prices, we may not be able to fully cover increases in crude oil prices by increasing the sale prices of our products, which has had and will possibly continue to have a material adverse effect on our financial condition, results of operations and cash flows.

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

The petrochemical business is a capital intensive business. Our ability to maintain and increase our revenues, net income and cash flows depends upon continued capital spending. Our current business strategy contemplates capital expenditure for 2017 of approximately RMB1,500 million (U.S.$216.04 million), which will be provided through financing activities and use of our own capital. Our actual capital expenditures may vary significantly from these planned amounts, subject to our ability to generate sufficient cash flows from operations, investments and other factors that may be beyond our control. In addition, there can be no assurance as to whether, or at what cost, our capital projects will be completed or the success of these projects if completed.

As of March 31, 2017, we had an aggregate outstanding indebtedness of approximately RMB604.00 million (U.S.$86.99 million). Most of our borrowings are with state-controlled banks in China and structured as short term debt obligations with payment due in one year or less. These banks have generally been willing to provide new short term loans while we pay off existing loans. Sinopec Corp., our controlling shareholder, did not provide any guarantee or credit support for our debt for the year ended December 31, 2016 and for the three months ended March 31, 2017.

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

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

We could face increasing competition.

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

4

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

As of March 31, 2017, Sinopec Corp. owned 50.56% of our shares. Accordingly, it has voting and management control over us, and its interests may be different from the interests of our other shareholders. Subject to our Articles of Association and applicable laws and regulations, Sinopec Corp. will be in a position to cause us to declare dividends, determine the outcome of corporate actions requiring shareholder approval or effect corporate transactions without the approval of the holders of the H shares and ADSs. Any such increase in our dividend payout would reduce funds available for reinvestment in our business and any such actions or transactions could adversely affect us or our minority shareholders. Sinopec Corp. may also experience changes in its own business strategy and policies. Although we are not currently aware of any specific changes, they could, in turn, lead Sinopec Corp. to change its policies or practices toward us in ways that we cannot predict, with corresponding unpredictable consequences for our business. Additionally, Sinopec Corp. may leverage its controlling shareholder position to influence our decisions with regard to the manufacturing and operation, allocation of financial resources and appointment and removal of senior management members, which could adversely affect us or our minority shareholders.

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

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

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

• the imposition of fees and penalties for the discharge of waste substances;

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

• the government to close or suspend any facility which fails to comply with orders and require it to correct or stop operations causing environmental damage.

Our production operations produce substantial amounts of waste materials (i.e., waste water, waste gas and waste residue). In addition, our production and operations require permits that are subject to renewal, modification and revocation. In February 2014, the Environmental Protection Bureau of Jinshan District imposed a fine of RMB80,000 on us because we commenced the operation of the environmental protection facility that supports the continuous polyester testing plant of the Polyester Fiber Research Institute under our Polyester Fiber Department without complying with the required inspection and acceptance procedures for the facility after we completed the upgrading of some of its equipment in 2006. See Item 4. Information of the Company – B. Business Overview – Environmental Protection. At present, we believe that our operations substantially comply with all applicable Chinese environmental laws and regulations as they have been previously interpreted and enforced. The Chinese government (including the local governments), however, has moved, and may move further, toward the adoption of more regulations and more stringent environmental standards. Chinese national or local authorities may also apply more rigorous enforcement of such regulations which would require us to incur additional expenditures on environmental matters.

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

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

5

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

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

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

• mandating distribution channels for our fuel products;

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

• assessing taxes and fees payable;

• setting import and export quotas and procedures; and

• setting safety, environmental and quality standards.

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

Our development plans may require regulatory approval.

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

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

We face increasing foreign competition in our lines of business.

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

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

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

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

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

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

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

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

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

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

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

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

The Renminbi currently is not a freely convertible currency. We receive most of our revenue in Renminbi. A portion of our Renminbi revenue must be converted into other currencies to meet our foreign currency obligations. We have substantial requirements for foreign currencies, including:

• debt service costs on foreign currency-denominated debt;

• purchases of imported equipment;

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

• import of crude oil and other materials.

Under existing foreign exchange regulations in China, we may undertake current account foreign exchange transactions, including the payment of dividends, without prior approval from the State Administration of Foreign Exchange (“SAFE”) by producing commercial documents evidencing the foreign exchange transactions, provided that they are processed through Chinese banks licensed to engage in foreign exchange transactions. The Chinese government has stated publicly that it intends to eventually make the Renminbi freely convertible. However, uncertainty exists as to whether the Chinese government may restrict access to foreign currency for current account transactions if foreign currency becomes scarce in China.

Foreign exchange transactions under the capital account (international revenues and expenditures that increase or decrease debt or equity, including principal payments in respect of foreign currency-denominated obligations) continue to be subject to limitations and require the prior approval of the SAFE. These limitations could affect our ability to obtain foreign exchange through debt financing, or to make capital expenditures in foreign currency.

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

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

The exchange rate between the Renminbi and the U.S. Dollar or other foreign currencies might fluctuate and be affected by the change in China’s political and economic conditions and China’s foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar, and the RMB appreciated more than 20% against the U.S. dollar over the following three years. However, the People’s Bank of China, or the PBOC, regularly intervenes in the foreign exchange market to limit fluctuations in RMB exchange rates and achieve policy goals. During the period between July 2008 and June 2010, the exchange rate between the RMB and the U.S. dollar had been stable and traded within a narrow range. However, the RMB fluctuated significantly during that period against other freely traded currencies, in tandem with the U.S. dollar. Since June 2010, the RMB has started to slowly appreciate against the U.S. dollar, though there have been periods when the U.S. dollar has appreciated against the RMB. On August 11, 2015, the PBOC allowed the RMB to depreciate by approximately 2% against the U.S. dollar. During 2016, the RMB depreciated by over 6% against the U.S. dollar. It is difficult to predict how long such depreciation of RMB against the U.S. dollar may last and when and how the relationship between the RMB and the U.S. dollar may change again. There remains significant international pressure on the PRC government to adopt a flexible currency policy.

A small portion of our cash and cash equivalents is denominated in foreign currencies (including the U.S. Dollar). The appreciation in the value of Renminbi against foreign currencies (including the U.S. Dollar) may cause a decrease in the Renminbi value of our cash and cash equivalents that are denominated in foreign currencies. In addition, the appreciation of Renminbi may harm the exports of our downstream manufacturers, thus adversely affecting the market demand for our products.

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

Interpretation and enforcement of Chinese laws and regulations is uncertain.

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

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

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

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

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

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Our auditor, like other independent registered public accounting firms operating in China, is not permitted to be subject to inspection by Public Company Accounting Oversight Board and, as such, investors may be deprived of the benefits of such inspection.

Our independent registered public accounting firm that issues the audit reports included in our annual reports filed with the SEC, as an auditor of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or PCAOB, is required by the laws of the United States to undergo regular inspections by PCAOB to assess its compliance with the applicable professional standards. Because our auditor is located in China, a jurisdiction where PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, our auditor, like other independent registered public accounting firms operating in China, is currently not inspected by PCAOB.

Inspections of other firms that PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The inability of PCAOB to conduct inspections of independent registered public accounting firms operating in China makes it more difficult to regularly evaluate the effectiveness of our auditor’s audit procedures or quality control procedures. As a result, investors may be deprived of the benefits of PCAOB.

Proceedings instituted recently by the SEC against the Big Four PRC-based accounting firms, including our independent registered public accounting firm, could result in our financial statements being determined to not be in compliance with the requirements of the Exchange Act.

In December 2012, the SEC brought administrative proceedings against the Big Four accounting firms, including our independent registered public accounting firm, in China, alleging that they had refused to produce audit work papers and other documents related to certain other China-based companies under investigation by the SEC for potential accounting fraud. On January 22, 2014, an initial administrative law decision, or Initial Decision, was issued, censuring these accounting firms and suspending four of the five firms from practicing before the SEC for a period of six months. The accounting firms filed a petition for review of the Initial Decision to the SEC. On February 6, 2015, the Big Four China-based accounting firms each agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC and audit U.S.-listed companies. The settlement required the firms to follow detailed procedures and to seek to provide the SEC with access to Chinese firms’ audit documents via the China Securities Regulatory Commission, or the CSRC. If future document productions fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. While we cannot predict if the SEC will further review the four China-based accounting firms’ compliance with specified criteria or if the results of such a review would result in the SEC imposing penalties such as suspensions or restarting the administrative proceedings, if the accounting firms are subject to additional remedial measures, our ability to file our financial statements in compliance with SEC requirements could be impacted. A determination that we have not timely filed financial statements in compliance with SEC requirements could ultimately lead to the delisting of our ADSs from the New York Stock Exchange or the termination of the registration of our H shares under the Securities Exchange Act of 1934, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.

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

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

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

The United States has adopted a number of measures since 1996 that provide for the possible imposition of sanctions against non-U.S. companies engaged in certain activities in and with Iran in the energy and other sectors, including Executive Orders 13622 (effective July 31, 2012 and revoked January 16, 2016), 13628 (effective October 9, 2012), and 13645 (effective July 1, 2013 and revoked January 16, 2016), the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRSHRA”) enacted August 10, 2012 and the Iran Freedom and Counter-Proliferation Act (“IFCA”) enacted January 2, 2013. The sanctionable activities include certain investments, the provision of goods, services, technology, or support that could contribute to the development of petroleum and petrochemical resources or the production of refined petroleum products in Iran, the exportation of refined petroleum products to Iran, the transportation of crude oil from Iran, or the engagement in a significant transaction for the purchase or acquisition of petroleum or petroleum products from Iran, and the engagement in transactions with certain Iranian specially designated nationals and blocked persons (“SDNs”) as identified and published by U.S. Department of the Treasury’s Office of Foreign Assets Control, or OFAC, the agency primarily responsible for administering U.S. sanctions and embargoes.

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

If our purchases of crude oil from Iran and transactions related thereto are determined to be sanctionable activities by the U.S. President and/or the relevant U.S. governmental authorities, we may be subject to five or more of the twelve sanctions options available under the Iran Sanctions Act of 1996 (as amended) (“ISA”) and the ITRSHRA, which include restrictions on bank financing, outright blocking of the Company’s property within U.S. jurisdiction, under the control of U.S. persons anywhere in the world, and prohibition of U.S. persons from investing or purchasing a significant amount of equity or debt instruments of the Company. Similar sanctions may also be imposed under the Executive Orders cited above, the IFCA, and other U.S. laws. In addition, many states in the United States have adopted legislation requiring state pension funds to divest themselves of securities in any company with active business operations in Iran. We cannot assure that we or any of our affiliates will not be sanctioned by the U.S. President and/or the relevant U.S. governmental authorities in light of the activities by us or our affiliates in Iran. The imposition of any such sanctions on us or our affiliates will have a negative impact on our business, reputation or stock price. In addition, purchase of crude oil by Sinopec Corp. subsidiaries that supply us with raw materials may from time to time be sourced from National Iranian Oil Company. This entity has been identified by the U.S. government as an SDN and sanctioned under various laws, including for assisting the government of Iran to avoid sanction and for engaging in activities related to nuclear proliferation. Under Executive Order 13645, the U.S. President can sanction non-U.S. companies that prior to January 16, 2016, had engaged in transactions with SDNs such as the National Iranian Oil Company. To the extent we indirectly (or directly) purchase raw materials from this entity, we risk potential U.S. government sanctions. Even absent any U.S. government sanctions, we risk adverse publicity in the world markets, which may impair our reputation and business.

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

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

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Further, the ISA authorizes the imposition of sanctions on companies that engage in certain activities in and with Iran, especially in Iran’s energy sector. It is possible that Sinopec Group or its affiliates engage in activities that are targeted for sanction purposes by the ISA or other U.S. laws. If the U.S. President determines that Sinopec Group or one of its affiliates in fact engaged in the targeted activities, he would be required under the ISA to impose on Sinopec Group or its affiliates at least five sanctions from among twelve sanctions options available under the ISA, which range from restrictions on U.S. exports or bank financing to outright blocking of Sinopec Group or its affiliate’s property within the U.S. or in the possession or control of U.S. persons anywhere in the world. In addition, the IFCA requires the U.S. President to block the property of persons and entities within U.S. jurisdiction or control of U.S. persons if he determines that, among other things, such persons or entities are engaged in certain transactions involving the energy, shipping or shipbuilding sectors of Iran or with certain SDNs. It also requires the U.S. President to impose five or more sanctions under the ISA on a person that he determines has knowingly, on or after July 1, 2013, sold, supplied or transferred to or from Iran precious metals or certain other materials (including graphite, aluminum, steel, coal and certain software) if used for specified purposes. If the U.S. President determines that Sinopec Group, or an entity it owns or controls, prior to January 16, 2016,had engaged in any such activities and if the most extreme sanction under the ISA or other U.S. sanctions laws, blocking, were applied to Sinopec Group’s property, including controlled subsidiaries, Sinopec Group could be prohibited from engaging in business activities in the United States or with U.S. individuals or entities, and U.S. transactions in our securities and distributions to U.S. individuals and entities with respect to our securities could also be prohibited.

In addition, pursuant to the IFCA, Executive Order 13645 and other U.S. laws, the U.S. government can sanction financial institutions anywhere in the world that engage in certain Iran related transactions. Such sanctions include prohibiting the financial institution from opening, or imposing strict conditions on maintaining, a correspondent or payable through account in the United States. The potential for financial institutions to be sanctioned for Iran related activities may impact our ability to engage in financial transactions related to Iran transactions. Although many of the sanctions discussed above were terminated on January 16, 2016 pursuant to the commitments of the United States under Joint Comprehensive Plan of Action, such termination would not affect sanctionable activities occurring prior to that date.

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

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

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

• changes in financial estimates by securities research analysts;

• conditions in petroleum and petrochemical markets;

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

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

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

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

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

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ITEM 4. INFORMATION ON THE COMPANY.

A. History and Development of the Company

General Information

We were established in the People’s Republic of China as a joint stock limited company under the Chinese Company Law on June 29, 1993 as Shanghai Petrochemical Company Limited. On October 12, 2000, we changed our name to Sinopec Shanghai Petrochemical Company Limited. Our registered office is at No. 48 Jinyi Road, Jinshan District, Shanghai, China 200540. Our telephone number there is (86-21) 5794-1941.

Our Predecessor

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

Construction Projects

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

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

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

Our Initial Public Offering and Listing

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

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

Domestic Share Reform

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

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

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

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

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

Description of Principal Capital Expenditures and Divestitures

In the fourth quarter of 2001, we established Secco, together with BP Chemicals East China Investments Limited (“BP”) and Sinopec Corp. We own 20%, while BP and Sinopec Corp. own 50% and 30% of the equity interest of Secco, respectively. Secco was established to build and operate a 900,000 ton Rated Capacity ethylene petrochemical manufacturing facility in order to manufacture and market ethylene, polyethylene, styrene, polystyrene, propylene, acrylonitrile, polypropylene, butadiene, aromatics and by-products; provide related after-sales services and technical advice with respect to such petrochemical products and by-products; and engage in polymers application development. Secco completed construction in 2005. Secco’s registered capital is U.S.$901,440,964 of which we were obligated to contribute an amount in Renminbi equivalent to U.S.$180,287,952 prior to the end of 2005. As of December 31, 2005, we had contributed such amount in full.

In 2009, Secco completed the reconstruction and capacity expansion of ethylene cracking and downstream derivatives facilities. The capacity of ethylene cracking facility has been expanded to 1,090,000 tons per year.

To fund Secco’s new acrylonitrile plant project with a capacity of 260,000 tons/year, its new ethylene plant with a new supercharger, its new butadiene plant with a capacity of 90,000 tons/year, and its utility facilities upgrading project, in 2013 the shareholders of Secco agreed to increase the registered capital of Secco by U.S.$150,085,618 according to their respective shares in the equity interests in Secco, of which the Company was obligated to contribute an amount of U.S.$30,017,124 in installments. We have paid U.S.$9,817,718 and U.S.$1,884,050 on December 10, 2013 and March 5, 2014, respectively.

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

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B. Business Overview

We are one of the largest petrochemical companies in China based on 2016 net sales and ethylene production. Our highly integrated petrochemical complex processes crude oil into a broad range of products in four major product areas:

• synthetic fibers,

• resins and plastics,

• intermediate petrochemicals, and

• petroleum products.

Based on 2016 sales volumes, we are a leading Chinese producer of synthetic fibers and resins and plastic products. We believe that we are also a leading competitor in sales of petroleum products and intermediate petrochemicals in our regional markets.

Our net sales by business lines as a percentage of total net sales in each of 2014, 2015 and 2016 are summarized as follows:

Net Sales of RMB92,725.0 million in 2014

Synthetic fibers	3.12	%
Resins and plastics	13.47	%
Intermediate petrochemicals	13.36	%
Petroleum products	53.13	%
Trading of petrochemical products	15.95	%
Others	0.97	%
Total	100.00	%

Net Sales of RMB67,037.2 million in 2015

Synthetic fibers	3.47	%
Resins and plastics	14.91	%
Intermediate petrochemicals	13.92	%
Petroleum products	45.95	%
Trading of petrochemical products	20.46	%
Others	1.29	%
Total	100.00	%

Net Sales of RMB65,936.5 million in 2016

Synthetic fibers	2.81	%
Resins and plastics	14.86	%
Intermediate petrochemicals	13.39	%
Petroleum products	36.40	%
Trading of petrochemical products	31.22	%
Others	1.32	%
Total	100.00	%

We derive a substantial portion of our revenues from customers in Eastern China (principally Shanghai and its six neighboring provinces), an area that has experienced economic growth above the national average in recent years. Shown by geographic region and exports, our net sales by business lines as a percentage of total net sales for each of 2014, 2015 and 2016 are as follows:

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2014 Net Sales by Region (%)
	Eastern China		Other parts of China		Exports
Synthetic fibers		87.10		12.90		0.00
Resins and plastics		87.83		12.17		0.00
Intermediate petrochemicals		94.60		2.10		3.30
Petroleum products		99.47		0.53		0.00
Trading of petrochemical products		96.77		0.30		2.93
Total net sales		96.21		2.50		1.29

2015 Net Sales by Region (%)
	Eastern China		Other parts of China		Exports
Synthetic fibers		88.42		11.58		0
Resins and plastics		88.59		11.41		0
Intermediate petrochemicals		95.60		1.52		2.89
Petroleum products		99.55		0.45		0
Trading of petrochemical products		46.33		23.94		29.73
Total net sales		88.67		6.26		5.07

2016 Net Sales by Region (%)
	Eastern China		Other parts of China		Exports
Synthetic fibers		86.58		12.40		1.02
Resins and plastics		91.49		8.50		0.01
Intermediate petrochemicals		97.77		1.07		1.16
Petroleum products		90.98		9.02		0
Trading of petrochemical products		36.53		9.52		53.95
Total net sales		76.69		8.03		15.28

Business Strategy

In 2017, we expect that our business and operating conditions will remain challenging. We will continue our efforts to ensure high quality and effectiveness in our production. We will also endeavor to maintain the safety and environmental protection standards while realizing sustained promising operating results in 2017. We will seek to further deepen system optimization, lower costs and enhance efficiency in order to maintain our sustainable growth.

To achieve our business objectives in 2017, we will strive to fulfill the following goals:

Further implement safety and environmental protection standards

We have established a Health, Safety and Environment (“HSE”) accountability system and will continue to implement various mechanisms to prevent occurrence of any accidents. On top of optimizing our local corporate co-operation mechanism, we will increase our efforts on hazards examination and on-site supervision and improving safety level of our oil and gas pipelines. We will enhance our supervision of HSE process to seek to eliminate potential safety hazards. By establishing the work mechanism and management system of hazard and operability study (“HAZOP”), we will fully commence the risk assessment on HAZOP. Meanwhile, we will formulate the environmental protection accountability system and implement such system to increase the awareness of environmental protection. We will continue the examination of environmental protection hazards as well as our leak detection and repair (“LDAR”) work. We will also strive to enhance supervision and checks of occupational hygiene and seek to optimize the on-site safety protection measures for production and operation, so as to safeguard occupational health.

Ensure stable production

By enhancing the management and production organization and co-ordination, we endeavor to improve the management of process technology, stringently monitor our operation and minimize non-scheduled shut-downs of our facilities. We will focus on modification and shut-down check and repair for our production facilities, so as to balance raw materials management and to ensure the stable operation of our overall production system. We will continue to monitor the safety and efficiency of our equipment, and enhance our management of equipment failures by strengthening examination and repair to seek to ensure safe operation of equipment.

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Optimize production process to reduce operation cost and expenditure

Adhering to the practice of “daily calculation of products’ marginal effectiveness and weekly identification of the corporate potential”, we will utilize our major product optimization model and enhance our tracking of contributions from chemical devices, and then we will adjust the respective workload on a timely basis in accordance with the change of marginal effectiveness. Based on the change in price of crude oil and refined oil products, we will optimize and adjust our refined oil product structure while increasing the proportion and production volume of high-end gasoline. We aim to enhance the recovery rate of olefins and reduce the production cost of ethylene by using advanced technologies. We will adjust the raw materials for hydrogen production and fuel structure pursuant to the price of natural gas and liquefied gas, so as to reduce production costs. Apart from continuous cost control in the course of production and operation, we will place efforts on cutting costs and expenses. We strive to strengthen financial risk prevention and control, while enhancing research on fiscal tax policies and proactively taking advantage of the benefits under various tax policies.

Foster project construction, technology development and digitalization

We will organize and coordinate the upgrading and modification of our newly built projects and existing equipment. We strive to strengthen our efforts on handling hazards, energy conservation and emission reduction as well as investment in industry upgrading projects. Apart from gradually eliminating backward production capacity, progress on projects such as modification on the desulfurization of thermal boilers is expected to be accelerated, and we expect to commence construction of projects such as “ultra-low discharge & energy conservation” project in Congeneration Unit of Thermal Power Divisions and 300,000-ton per year of alkylation production. While strengthening scientific research and development, we will focus on the implementation of key scientific research projects such as carbon fiber and catalyzed conversion of diesel and hydrogen, as well as technological development for new products, industrialization development and market expansion to adjust the product structure. We will further regulate the application of Enterprise Resource Planning (“ERP”), Manufacturing Execution System (“MES”), Laboratory Information Management System (“LIMS”), and integrate information technology into every aspect of corporate production. In addition, we will further expand the application of advanced process control (APC) system and facilitate the construction of digitalization projects, including the comprehensive statistics information system.

Strive to enhance internal management

We strive to optimize our corporate appraisal system and operation flow by optimizing procedures along the supply chain from crude oil to product. We aim to maximize our effectiveness and will refine our performance appraisal mode. While strengthening our team building and employee management, we will also seek to optimize our staff structure and enhance our training system to improve the quality of our staff. We will endeavor to create a harmonious and stable environment for corporate development.

Principal Products

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

In 2016, the volume of our production amounted to 12,830,600 tons, representing a decrease of 7.47% over the previous year. The decrease was primarily attributable to the maintenance of our major refining plants in 2016, which resulted in a decrease in our total processing capacity.

The following table shows a comparison of the production volume and sales volume in 2015 and 2016 by our major products.

	Production							Sales
Products	2016 (10,000 tons)		2015 (10,000 tons)		Year-on-year change			2016 (10,000 tons)		2015 (10,000 tons)		Year-on-year change
Diesel Note1		388.22		426.53		-8.98	%		280.70		361.17		-22.28	%
Gasoline		287.87		309.76		-7.07	%		285.01		310.26		-8.14	%
Jet Fuel Note 1		159.83		161.30		-0.91	%		55.91		61.22		-8.67	%
Paraxylene		67.06		65.97		1.65	%		46.60		46.51		0.19	%
Benzene		37.27		35.95		3.67	%		35.91		35.78		0.36	%
Ethylene Glycol		36.14		42.15		-14.26	%		24.37		30.66		-20.52	%
Ethylene Oxide		14.84		18.29		-18.86	%		14.59		17.06		-14.48	%
Ethylene Note 2		82.56		83.65		-1.30	%		3.75		3.04		23.36	%
Polyethylene		53.10		53.56		-0.86	%		53.51		53.22		0.54	%
Polypropylene		49.23		48.88		0.72	%		45.40		45.30		0.22	%
Polyester Pellet Note 2		41.56		39.47		5.30	%		29.83		28.11		6.12	%
Acrylic		14.05		15.97		-12.02	%		14.06		16.11		-12.73	%
Polyester Staple		6.47		6.40		1.09	%		6.08		5.99		1.50	%

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

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

The following table shows our 2016 net sales by major products as a percentage of total net sales together with the typical uses of these products.

Product	% of net sales			Typical Use
SYNTHETIC FIBERS
Polyester staple fiber		0.42	%	Textiles and apparel
Acrylic staple fiber		2.23	%	Woven into fabrics or blended with other material fabrics to make fabric or acrylic top
Others		0.16	%
Sub-total		2.81	%
RESINS AND PLASTICS
Polyester chips		2.45	%	Polyester fibers, films and containers
PE pellets		5.25	%	Films, ground sheeting, wire and cable compound and other injection molding products such as housewares and toys
PP pellets		4.89	%	Extruded films or sheets, injection molded products such as housewares, toys and household electric appliance and automobile parts
PVA		0.21	%	PVA fibers, building coating materials and textile starch
Others		2.06	%
Sub-total		14.86	%
INTERMEDIATE PETROCHEMICALS
Ethylene		0.38	%	Feedstock for polyethylene, EG, polyvinyl chloride (“PVC”) and other intermediate petrochemicals which can be further processed into resins, plastics and synthetic fiber.
Ethylene oxide		1.55	%	Intermediate products for the chemical and pharmaceutical industry, including dyes, detergents and auxiliary agents
Benzene		2.27	%	Intermediate petrochemical products, styrene, plastics, explosives, dyes, detergents, epoxies and nylon
Paraxylene		3.62	%	Intermediate petrochemicals and polyester
Butadiene		1.17	%	Synthetic rubber and plastics
Ethylene glycol		1.70	%	Fine chemicals
Others		2.70	%
Sub-total		13.39	%
PETROLEUM PRODUCTS
Gasoline		15.80	%	Transportation fuels
Diesel		13.02	%	Transportation fuels and agricultural fuels
Jet Fuel		2.33	%	Transportation fuels
Others		5.25	%
Sub-total		36.40	%
Trading of petrochemical products		31.22	%
Others		1.32	%
Total		100.00	%

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

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

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

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Production Processes

The key sectors in our vertically integrated production plants are the ethylene units which produce ethylene and propylene, and our aromatics plants which principally produce paraxylene (“PX”) and benzene. Ethylene is the major raw material in the production of polyethylene (“PE”) and monoethylene glycol (“MEG”) which, together with pure terephthalic acid (“PTA”), is used to manufacture polyester. Propylene is the major raw material in the production of acrylonitrile and polypropylene (“PP”). These products are produced through the processing of a series of petrochemical units from crude oil. Our production processes are shown in the flow chart below.

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Our refinery units refine crude oil into five basic components: (1) naphtha, (2) kerosene, (3) atmospheric gas oil (“AGO”), (4) Vacuum Gas Oil (“VGO”), and (5) residual oil. Part of the Naphtha and part of the AGO is fed to the ethylene units primarily to produce ethylene and propylene. Part of the Naphtha is fed to the reforming prehydrogenation units to produce refined Naphtha which will be used for the production of Aromatics. The other part of the AGO is processed into diesel oil, and kerosene is fed to the jet fuel sweetening unit to produce jet fuel. Part of the VGO is further processed in a hydrocracking unit producing mainly light and heavy naphtha, liquefied petroleum gas (“LPG”), diesel oil, various aromatic hydrocarbon products and jet fuel. The other part of the VGO and residual oil can be further processed into gasoline, diesel oil, LPG, propylene and other products.

Intermediate Petrochemicals

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

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

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

Resins and Plastics and Synthetic Fibers

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

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

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

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

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

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

Polyvinyl acetate – PVA granules are produced from vinyl acetate (“VAC”), derived from ethylene.

Raw Materials

In 2016, we continued to strengthen our advantages in refining and chemical integration and leverage the strong adaptability of our refining plants to process more high-sulfur crude oil; we used a Process Industry Modeling System (“PIMS”) to determine the cost performance of crude oil to further improve the cost control of crude oil purchases; and the total volume of the top ten main types of oil purchased in the whole year of 2016 accounted for 97.7% of the total purchase of crude oil, and as a result of the increased concentration, the overall cost of crude oil we purchased reduced.

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To enhance the overall profitability, we optimized our ethylene cracking stocks, adjusted and improved our natural gas and fuel gas structure, optimized our hydrogen system, reduced the emission and increased the efficiency of flare gas, increased the outputs of gasoline and aviation kerosene, and optimized naphtha, residual oil and wax oil processing lines. By reducing the output of paraxylene, we increased our supply of high-octane gasoline blending components to produce more gasoline. By substituting aviation kerosene hydrogenation for diesel hydrogenation and upgrading the quality of 3.3 million tons of diesel through hydrogenation, we further optimized the structure of our finished oil products, achieving a diesel to gasoline ratio of 1.35:1 for 2016. We strengthened our tracking of the margin contribution of our units, and continuously carried out daily profitability measurement for each product so as to promptly detect changes in profitability, quickly adjust the load and running schedule of our production units and afford priority to the production of products with high profitability and market demand.

Crude Oil

Crude oil is our primary raw material and the most significant raw material we purchase from outside sources. In 2016, crude oil accounted for approximately 41.60% of our total cost of sales. Accordingly, the supply and price of crude oil are key factors in determining our profitability.

Supply and Transportation – All crude oil required by us, whether from domestic or foreign sources, is purchased through the channels of Sinopec Corp. as an agent. During 2016, we did not experience any significant problems in obtaining sufficient crude oil to meet our production needs.

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

We have received confirmation from Sinopec Corp. that it has purchased and will do so on our behalf 11.6 million tons of imported crude oil in 2017. Sinopec Corp. has further confirmed that, subject to China’s national crude oil policy and our actual production needs, it will continue to purchase on our behalf sufficient quantities and appropriate kinds of crude oil, including domestic offshore and imported crude oil, to satisfy our anticipated annual needs. We anticipate that we will fully utilize our supply of crude oil in 2017. We believe that the mix of crude oil feedstock currently available is satisfactory for our 2017 production capacity and targets. Additionally, as part of China’s commitment at its accession into WTO, certain non-state-owned enterprises have been granted an increasing amount of quota to import crude oil. Although we do not expect to obtain crude oil through this channel in the foreseeable future due to the current crude oil supply system, this may provide us with an alternative source of crude oil supply.

Crude Oil Mix – Our refining equipment is designed to process certain grades of crude oil. Therefore, the origin and quality of the crude oil available can be important to our business. We believe that as we have been significantly increasing usage of imported crude oil, we will continue to be able to obtain from the market such imported crude oil that is compatible with our refining equipment. The overall mix of foreign versus domestic crude oil we process in 2017 will depend on a variety of factors, including the amount of future supply of domestic offshore crude oil and the availability, price, quality, processing profitability and compatibility with our refining capabilities of imported crude oil. Provided there are no significant modifications to the existing channels of crude oil supply, we believe that sufficient supplies of crude oil will be available on the domestic or international markets for our 2017 production capacity and goals.

In 2016, our crude oil was sourced as follows:

Domestic offshore crude oil	0.82	%
Imported crude oil	99.18	%
Total:	100.00	%

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

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

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

Pricing – The price of domestic crude oil shall apply the market –adjusted rate and the imported crude oil is generally sold to us at prevailing international market prices. The average cost of imported crude oil and domestic offshore crude oil in 2016 was RMB2,673.92 (U.S.$385.12) per ton and RMB2,206.05 (U.S.$317.74) per ton, respectively. In 2016, we processed 14.3 million tons of imported crude oil and 0.11 million tons of domestic offshore crude oil (including 2.59 million tons of crude oil processed on a sub-contract basis).

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

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

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

In 2016, as the global economic growth remained slow, the demand for petroleum decreased. The shale gas revolution in the U.S. significantly increased petroleum supply. The international crude oil price fluctuated drastically due to the U.S. dollar’s entry into a bullish period after the end of the U.S.’s quantitative easing policy in the fourth quarter of 2014, the OPEC member states’ maintenance of their crude oil outputs to retain their market shares, and geopolitical and some other factors. In 2016, the average West Texas Intermediate (“WTI”) crude oil price on the U.S. mercantile exchanges was U.S.$43.47/barrel, representing a decrease of 10.85% from U.S.$ 48.76/barrel in 2015. In 2016, the average price of Brent crude oil on the London Intercontinental Exchange was U.S.$45.13/barrel, representing a decrease of 15.8% from U.S.$ 53.60/barrel in 2015; and in 2016, the average price of crude oil in Dubai was U.S.$41.43/barrel, representing a decrease of 18.62% from U.S.$ 50.91/barrel in 2015.

For the year ended December 31, 2016 we processed a total of 14.3 million tons of crude oil (including 2.6 million tons of crude oil processed on a sub-contract basis), representing a decrease of 0.49 million tons, or 3.32%, over the previous year. Of the crude oil we processed in 2016, domestic offshore oil accounted for 0.11 million tons and imported crude oil accounted for 14.19 million tons. After the launching of the refinery revamping and expansion project as part of Phase 6 Project in 2012, we enhanced the adaptability of the crude oil and significantly improved the ability to process the relatively low-cost high-sulfur crude oil in 2016. The average unit cost of crude oil processed (by us) in 2016 was RMB1,979.58/ton (RMB2,533.46 /ton in 2015), representing a decrease of 21.86% over the previous year. Our total cost of crude oil processed reached RMB23.19 billion in 2016, representing a decrease of 28.41% as compared to RMB32.39 billion in 2015, which represented 41.60% of the total cost of sales.

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Coal

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

We expect that our total requirement for coal to generate electricity in 2017 will be approximately 2.05 million tons. In 2016, we consumed approximately 2.01 million tons of coal, a decrease from 2015 of 0.04 million tons.

Other Raw Materials

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

We purchase some ancillary raw materials from outside sources. These raw materials include natural gas, MX, methanol, ammonia, sodium hydroxide, sulfur, acetone, acrylonitrile, PTA, propylene and a variety of catalytic agents. In 2016, the total cost of these materials accounted for approximately 16.29% of our total cost of sales. We do not expect any difficulties in obtaining a supply of any of these ancillary raw materials in amounts sufficient to meet our needs in the foreseeable future.

Sales and Marketing

Distribution

The distribution of our fuel products is subject to government regulations. We are required to sell certain refined products to the subsidiaries of Sinopec Group or customers designated by Sinopec Group. Since the second half of 2005, Sinopec Group has executed reforms to its system of selling petrochemical products and implemented what it refers to as a “Five Consolidations” strategy featuring “consolidated marketing strategy, consolidated promotion, consolidated logistics optimization, consolidated sales and consolidated branding”. As a result, the sales of our major petrochemical products are now conducted in a consolidated manner by sales agents designated by Sinopec Group. However, we have the autonomy to decide on the distribution method of our other products in accordance with market conditions. The products we sold in 2016 that were subject to planned distribution by Sinopec Group, sales by agents and sales based on our own discretion accounted for 55.35%, 40.56% and 4.08%, respectively, of the total products we sold.

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

We use long term contracts to sell most of our products. We did not experience significant write-offs or defaults on our accounts receivable or other trading accounts in 2016. In general we managed to maintain a stable correlation between production and sales in 2016.

Product breakdown

Synthetic Fibers – In 2016, 74.6% of our synthetic fiber products were purchased by provincial and municipal government trading companies that act as intermediaries between us and end-users. No single customer accounted for more than 30% of our sales of synthetic fibers in 2016.

Resins and Plastics – In 2016, approximately 55.4% of our resins and plastics sales were to provincial and municipal government trading companies and approximately 44.6% were sold to industrial users. No single customer accounted for more than 5% of our sales of resins and plastics in 2016.

Intermediate Petrochemicals – We sell a variety of intermediate petrochemical products, among which the sale volume of petroleum benzene and paraxylene was relatively high in 2016. Secco is the principal outside consumer of our petroleum benzene. In 2016, we sold 0.11 million tons of petroleum benzene to Secco, representing 32% of our total 2016 production of such product.

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Jiaxing Petrochemical Company Limited and Oriental Petrochemical (Shanghai) Corporation (“Oriental”) are the principal outside consumers of our paraxylene. In 2016, we sold 0.33 million tons and 0.13 million tons of paraxylene, representing 71.6% and 28.4% of our total 2016 production of such product, to Jiaxing Petrochemical Company Limited and Oriental respectively, at prices mutually agreed upon by the relevant parties.

Petroleum Products – In 2016, our primary gasoline and diesel customer was Sinopec Huadong Sales Company Limited.

Trading of Petrochemical Products – In 2016, our largest trading customer for petrochemical products was Sinopec Chemical Commercial Holding Company Limited.

Product Pricing

Most of our products are permitted to be sold at market prices. However, four types of petroleum products (gasoline, diesel and jet fuel, and liquefied petroleum gas) that we sell are subject to varying degrees of government pricing control and are, accordingly, sold at prices set by the Chinese government, which may sometimes be below our costs. In 2014, 2015 and 2016, approximately 48.02%, 40.81% and 53.49% of our net sales, respectively, were from products subject to price controls. Price controls may apply to these products in various ways. Such price controls are sometimes applied exclusively to our products, exclusively to our competitors’ products or sometimes applied to neither our products nor our competitors’ products. The Chinese government has adopted changes to the pricing mechanism for domestic refined oil to be indirectly aligned with international crude oil prices in a controlled manner through use of certain formula(s).

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

Competition

We compete principally in the Chinese domestic market where 99.33% of our products in volume were sold in 2016. In addition, we believe the limitation in transportation infrastructure in China and the difficulties involved in transporting petrochemical products force petrochemical companies in China, including us, to compete primarily on a regional basis. In 2016, 76.96% of our net sales were made to customers in Eastern China.

Our Competitive Advantages

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

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

The Domestic Competitive Environment

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

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Foreign Competition and the World Trade Organization

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

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

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

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

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

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

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

Our Competitive Position

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

Synthetic Fibers

In 2016, we had an approximate 0.55% share of total domestic polyester and acrylic consumption while imports had an approximate 1.00% share.

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The following table summarizes the competitive position of our principal synthetic fibers according to domestic sales in 2016.

Product	Our share of domestic consumption			Our competitive ranking		Location of principal domestic competitor	Principal domestic competitor’s share of consumption			Imports’ share of consumption
	(%)						(%)			(%)
Acrylic		16.97	%		2	Jilin Province		34.47	%		16.70	%

Sources: Statistics provided to us by Sinopec Group and the China National Council of Textiles.

Resins and Plastics

In 2016, we had an approximate 2.51% share of total domestic resins and plastics consumption while imports had an approximate 23.81% share. The following table summarizes the competitive position of our principal resins and plastics products according to domestic sales in 2016.

Product	Our share of domestic consumption			Our competitive ranking		Location of principal domestic competitor	Principal Domestic competitor’s Share of consumption			Imports’ share of consumption
	(%)						(%)			(%)
Polyester chips		3.66	%		5	Jiangsu Province		11.70	%		1.80	%
PE		2.21	%		16	Guangdong Province		2.16	%		41.43	%
PP		2.31	%		15	Guangdong Province		2.89	%		14.18	%

Intermediate Petrochemicals

In 2016, we were one of the largest sellers of intermediate petrochemicals in China, holding an approximate 2.68% share of total domestic consumption, while imports had an approximate 24.17% share of domestic consumption. Ethylene glycol, paraxylene, benzene and butadiene are our major intermediate petrochemical products. In 2016, we were a major producer of ethylene glycol, paraxylene and benzene in China. The following table summarizes the competitive position of our principal intermediate petrochemicals according to domestic sales in 2016.

Product	Our share of domestic consumption			Our competitive ranking		Location of principal domestic competitor	Principal Domestic competitor’s Share of consumption			Imports’ share of consumption
	(%)						(%)			(%)
Ethylene glycol		2.66	%		3	Zhejiang Province		2.86	%		55.79	%
Paraxylene		3.14	%		8	Jiangsu Province		2.96	%		57.90	%
Benzene		3.90	%		1	Zhejiang Province		2.48	%		16.22	%
Butadiene		3.99	%		19	Zhejiang Province		7.31	%		9.82	%

Petroleum Products

In 2016, we had an approximate 2.48% share of total domestic petroleum products market while imports had an approximate 5.70% share. Although we have one of the largest refining capabilities in China, we use most of our refining capacity to produce feedstock for our own downstream processing of petrochemical products.

The domestic markets for each of our major petroleum products are geographically concentrated because these markets tend to be highly localized with individual producers controlling a large share of the markets in their locality. In 2016, we sold approximately 90.98% of our petroleum products in Eastern China.

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Investments

We established Secco, a Sino-foreign equity joint venture, in late 2001 with BP and Sinopec Corp., primarily to build and operate a 900,000 ton Rated Capacity ethylene petrochemical manufacturing facility. Secco completed construction and commenced its manufacturing operations in 2005. In 2009, Secco had expanded the capacity of certain facilities to 1,090,000 tons of ethylene per annum. We own 20% of the equity interest of Secco, while BP and Sinopec Corp. own 50% and 30% interests in Secco, respectively. Secco plans to invest in a new acrylonitrile plant project with a capacity of 260,000 tons/year, a new ethylene plant with a new supercharger, a new butadiene plant with a capacity of 90,000 tons/year, and a utility facilities upgrading project. To fund Secco’s new projects, in 2013, the shareholders of Secco agreed to increase the registered capital of Secco by U.S.$150,085,618 according to their respective shares in the equity interests in Secco, of which the Company was obligated to contribute an amount of U.S.$30,017,124 in installments. We have paid U.S.$9,817,718 and U.S.$1,884,050 on December 10, 2013 and March 5, 2014, respectively.

In 2016, Secco achieved a sales revenue of RMB23.784 billion (U.S.$3.425 billion), representing a slight increase of 0.4% from its sales revenue of RMB23.682 billion (U.S.$ 3.656 billion) in 2015. Secco produced 1,267,600 tons of ethylene in 2016, representing an increase of 3,500 tons over the previous year. Secco had a net profit of RMB3.779 billion (U.S.$544.3 million) in 2016 , representing an increase of RMB1.584 billion (U.S.$228.14 million), or 72.2% over the previous year. The net profit was primarily because the price of raw materials, naphtha, kept at a low level, while the price of the products remained good, and Secco’s production facilities were operated safely and stably in 2016.

Environmental Protection

We are subject to national and local environmental protection regulations, which currently impose a graduated schedule of fees for the discharge of waste substances, require the payment of fines for pollution and provide for the forced closure of any facility that fails to comply with orders requiring it to cease or cure certain environmentally damaging practices. We have established environmental protection systems which consist of pollution control facilities to treat certain of our waste materials and to safeguard against accidents. Because of the nature of our business, however, we store a significant amount of waste substances in the plants and discharge them into the environment after making such waste substances meet the discharge standards. During 2016, we were assessed a total of RMB63.16 million (U.S.$9.10 million) in fees for discharges of waste substances.

On October 12, 2015, in the field inspection on wastewater discharge by the general inspection team of Shanghai Environmental Protection Monitoring, law enforcement found that the PH value of the No.5 plump vent was above the discharge limit set forth in the Wastewater Discharge Standards (DB31/199-2009). The Company was imposed a fine of RMB60,000 by Shanghai Environmental Protection Bureau on March 11, 2016.

On November 17, 2015, in the field inspection on air pollutant emission from start up boilers of the olefin department by the general inspection team of Shanghai Environmental Protection Monitoring, law enforcement found that the concentration of nitrogen oxides emissions from ethylene No.2 Boiler A and Boiler B was above the emission limit set forth in the Thermal Power Plant Air Pollutants Emission Standards (GB13223-2011). The Company was imposed a fine of RMB80,000 by Shanghai Environmental Protection Bureau on February 16, 2016.

On November 25, 2015, in the field inspection on air pollutant emission by the general inspection team of Shanghai Environmental Protection Monitoring, law enforcement found that the concentration of non-methane hydrocarbon from No.2 sulfur equipment vent was above the emission limit set forth in the Integrated Emission Standard of Air Pollutants (GB16297-1996). The Company was imposed a fine of RMB50,000 by Shanghai Environmental Protection Bureau on March 11, 2016.

On November 26, 2015, in the field inspection on air pollutant emission by the general inspection team of Shanghai Environmental Protection Monitoring, law enforcement found that the concentration of particles from the carbonization vent of acrylic fiber was above the emission limit set forth in the Integrated Emission Standard of Air Pollutants(GB16297-1996). The Company was imposed a fine of RMB60,000 by Shanghai Environmental Protection Bureau on March 11, 2016.

During the period between April 1, 2016 and April 15, 2016, the average nitrogen oxides emissions from ethylene No. 2 Boiler A and Boiler B were above the emission limit set forth in the Thermal Power Plant Air Pollutants Emission Standards (GB13223-2011). The Company was imposed a fine of RMB400,000 by Shanghai Environmental Protection Bureau on July 26, 2016.

We believe our environmental protection facilities and systems are adequate for the existing national and local environmental protection regulations. In 2016, we continued to carry out various energy-saving and emissions reduction measures in accordance with the relevant domestic energy conservation and emissions reduction requirements, and achieved all energy-saving and emissions reduction goals set by the Chinese government during the year.

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During 2016, the Company’s overall level of energy consumption per RMB10,000 of product value was 0.777 ton of standard coal, decreased by 3.72% from the previous year. As compared with 2015, the total volume of chemical oxygen demand (“COD”) discharged was decreased 6.18%, while that of ammonia nitrogen, sulfur dioxide, nitrogen oxides and volatile organic compounds declined by 6.17%, 9.74%, 7.27% and 9.08%, respectively. At the same time, the compliance rate of waste water and waste gas emissions reached 100%, and all hazardous waste was disposed of properly at 100%. The average heat efficiency of heaters decreased 0.05% to 92.40% due to the load reduction.

Insurance

We currently participate in a package of insurance coverage plan through Sinopec Group as its controlled subsidiary, which, as of December 31, 2016, was approximately RMB41.288 billion (U.S.$5.947 billion) on our property and facilities and approximately RMB1.729 billion (U.S.$0.249 billion) on our inventory. In addition, we maintain insurance policies for such assets as engineering construction projects and products in transit with third-party’s commercial insurance company. The Sinopec Group insurance coverage is compulsory and applies to all enterprises controlled by Sinopec Group, pursuant to guidelines of Sinopec Group which may not be legally enforceable against Sinopec Group. Thus, there are uncertainties under Chinese law as to what percentage insurance claims we may demand against Sinopec Group.

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

Government Regulations

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

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

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

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

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

In 2016, we sourced a small amount of crude oil from Iran through a wholly-owned subsidiary of Sinopec Corp., our controlling shareholder, and such amount represented 5.89% of our total purchase volume of crude oil. Details of the purchase volume and purchase expenses are provided below:

	Volume (thousand  tons)		% of total		Amount (RMB  billion)		% of total
Iran		684.916		5.89		1.353		5.88
Others		10,937.514		94.11		21.667		94.12
Total		11,622.430		100.00		23.020		100.00

In addition, based on feedback to our inquiries to Sinopec Group, the controlling shareholder of Sinopec Corp., Sinopec Group, directly or indirectly, engaged in a small amount of business activities in Iran such as providing engineering support and designs. Sales revenue from these business activities accounted for 0.0008% of Sinopec Group’s total unaudited sales revenue in 2016. Sinopec Corp. engaged in a small amount of trading activities with an Iranian company with net profit of approximately U.S.$264 million in 2016.

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We have no performance obligations under any contract to continue to purchase crude oil sourced from Iran in 2016.

C. Organizational Structure.

Our Subsidiaries

Our significant subsidiaries are listed below. All of the subsidiaries named below are incorporated in China.

Subsidiary Name	Our ownership interest		Our voting power
	(%)		(%)
Shanghai Petrochemical Investment Development Company Limited		100.00		100.00
China Jinshan Associated Trading Corporation		67.33		67.33
Shanghai Jinchang Engineering Plastics Company Limited		74.25		71.43
Shanghai Golden Phillips Petrochemical Company Limited		60.00		60.00
Zhejiang Jin Yong Acrylic Fiber Company Limited		75.00		75.00
Shanghai Jinshan Trading Corporation		67.33		67.33
Shanghai Golden Conti Petrochemical Company Limited		100.00		100.00

Sinopec Corp.

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

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

Subsidiaries

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

				Percentage of equity
Name of Company	Particulars of issued capital		Type of legal entity	Percentage of equity held by Sinopec Corp. and its subsidiary		Principal activities
	(millions)			(%)
China Petrochemical International Company Limited		RMB1,400	Limited company		100.00	Trading of petrochemical products
Sinopec Chemical Sales Company Limited		RMB1,000	Limited company		100.00	Marketing and distribution of petrochemical products
Sinopec Marketing Co.		RMB28,403	Limited company		70.42	Marketing and distribution of refined petroleum products
Sinopec Yangzi Petrochemical Company Limited		RMB13,203	Limited company		100.00	Manufacturing of intermediate petrochemical products and petroleum products
Fujian Petrochemical Company Limited		RMB5,745	Limited company		50.00	Manufacturing of plastics, intermediate petrochemical products and petroleum products

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Name of Company	Particulars of issued capital		Type of legal entity	Percentage of equity held by Sinopec Corp. and its subsidiary		Principal activities
	(millions)			(%)
Sinopec Shanghai Petrochemical Company Limited		RMB10,800	Limited company		50.56	Manufacturing of synthetic fibers, Resin and plastics, intermediate petrochemical products and petroleum products
Sinopec Kantons Holdings Limited		HK$248	Limited company		60.34	Trading of crude oil and petroleum products
Sinopec Yizheng Chemical Fiber Limited Liability Company		RMB4,000	Limited company		100.00	Production and sale of polyester chips and polyester fibers
Sinopec International Petroleum Exploration and Production Company Limited		RMB8,000	Limited company		100.00	Investment in exploration, production and sales of petroleum and natural gas
Sinopec Catalyst Company Limited		RMB1,500	Limited company		100.00	Production and sale of catalyst products
Sinopec Pipeline Storage & Transportation Company Limited		RMB12,000	Limited company		100.00	Pipeline storage and transportation of crude oil
Sinopec Qingdao Refining and Chemical Company Limited		RMB5,000	Limited company		85.00	Manufacturing of intermediate petrochemical products and petroleum products
China International United Petroleum & Chemical Company Limited		RMB3,000	Limited company		100.00	Trading of crude oil and petrochemical products
Sinopec Hainan Refining & Chemical Company Limited		RMB3,986	Limited company		75.00	Manufacturing of intermediate petrochemical products and petroleum products
Sinopec Overseas Investment Holding Limited		U.S.$1,638	Limited company		100.00	Overseas investment and management of equities
Sinopec Lubricant Company Limited		RMB3,374	Limited Company		100.00	Production and sale of refined petroleum products, lubricant base oil, and petrochemical materials
Sinopec Great Wall Energy and Chemical Company Limited		RMB20,739	Limited company		100.00	Coal chemical industry investment management, production and sale of coal chemical products
Sinopec Beihai Refining and Chemical Limited Liability Company		RMB5,294	Limited company		98.98	Import and processing of crude oil, production, storage and sales of petroleum and petrochemical products
Sinopec-SK(Wuhan) Petrochemical Company Ltd.		RMB6,270	Limited company		65.00	Production, sales, research and development of ethylene and downstream byproducts
Sinopec Qingdao Petrochemical Company Limited		RMB1,595	Limited company		100.00	Manufacturing of intermediate petrochemical products and petroleum products
Sinopec Zhanjiang Dongxing Petrochemical Company Limited		RMB4,397	Limited company		75.00	Manufacturing of intermediate petrochemical products and petroleum products
Sinopec Shanghai Gaoqiao Petrochemical Company Limited		RMB10,000	Limited Company		55.00	Manufacturing of intermediate petrochemical products and petroleum products

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D. Property, Plant and Equipment.

Real Property

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

Plants and Facilities

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

The following table sets forth the Rated Capacities and weighted average utilization rates of our principal production units for petroleum products and intermediate petrochemicals in 2016:

Production Unit (number of units)	Rated Capacity (tons)		Utilization Rate (%)
Crude oil distillation units (2)		14,000,000		97.5
Hydrocracker (2)		3,000,000		94.0
Ethylene units		700,000		107.7
*Aromatics unit (2)		835,000		100.1
PTA unit		400,000		78.3
EO/EG unit (2)		525,000		84.3
Cracking and catalyzing		3,500,000		97.5
Delayed Coking (2)		2,200,000		93.0
Diesel oil hydrogenation unit (3)		5,050,000		85.4
C5 segregation unit (2)		205,000		100.0

* The No. 1 paraxylene unit(23.5 tons/year) ceased operating during 2016.

Our two crude oil distillation units were designed and built in China. In 2016, the actual quantity of crude oil we processed was approximately 14.3 million tons. Our hydrocracker uses technology from United Oil Products Corporation of the United States. Our second ethylene unit uses technology from ABB Lummus Global Inc. of the United States. The aromatics unit uses technology from Universal Oil Products Corporation of the United States. The PTA unit uses technology from Mitsui Petrochemical Corporation of Japan. The EO/EG unit was constructed using technology from Scientific Design Corporation of the United States.

The following table sets forth the Rated Capacities and weighted average utilization rates of our principal production units for resins and plastics and synthetic fibers in 2016:

Production Unit (number of units)	Rated Capacity (tons)		Utilization Rate (%)
**Polyester units (3)		550,000		88.7
***Polyester staple units (2)		158,000		89.6
Polyester filament units		21,000		88.7
Acrylic staple fiber units (3)		141,000		115.4
PE units (3)		408,000		97.9
PP units (3)		400,000		97.8
Vinyl acetate unit		86,100		95.7

** The No.3 polyester unit (0.1 million tons/year) ceased operating on September 1, 2013.

*** The No.1 polyester staple unit (4,000 tone/year) ceased operating during 2016.

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

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

Power Facilities

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

Other Facilities

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

Maintenance

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

In 2016, we continued to place emphasis on QHSE by implementing a QHSE responsibility system at each level to strengthen the safety supervision at our operations and construction sites and to improve the QHSE-related performance appraisal. We believe these efforts have resulted in continued improvement in our safety and environmental protection practices. We did not encounter serious accidents involving production safety, environmental pollution or occupational poisoning in 2016. Among the 83 major indicators that measure technical and economic capacity, 41 exceeded those of the previous year while 17 reached advanced levels in our industry.

Transportation-Related Fixtures

Crude oil, our principal raw material, is transported by pipeline and oil tanker to a crude oil terminal wharf and storage tanks. Our products leave the factory by water, rail, road and pipeline. In 2016, approximately 87.7% of our products by sales volume were collected by customers from our premises, and we delivered the balance. Our major ethylene customer is supplied via a pipeline. Some of the products collected by customers were also transported using our facilities.

Wharfs

We own one chemical wharf at Jinshan with five berths of 2,000, 5,000, 8,000, 10,000 and 25,000 tons. We also own a connecting pipeline capable of loading up to approximately 1.4 million tons of chemical products annually onto ocean-going barges and ships. In 2016, products representing 9.77% of total sales volume were shipped from the wharf. We also have a facility to load ships and barges which use the region’s inland waterways. In 2016, products representing 1.50% of total sales volume were shipped from these facilities. We believe that we have a competitive advantage because a greater proportion of our products are shipped by water as opposed to rail and truck, which is subject to capacity constraints on China’s rail and highway networks. Additionally, we own facilities for receiving crude oil and coal at docks that we own and transporting such materials by pipeline or conveyor to our production facilities.

Rail

We own a railroad loading depot with an annual capacity of 500,000 tons. The depot provides access via a spur line to the national Chinese railway system. In 2016, products representing 0.43% of total sales volume were transported from the factory by rail. Our ability to transport products by rail is limited because of China’s overburdened railway system, the allocation of use of which remains strictly controlled by the Chinese government.

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Capital Expansion Program

In 2016, through desulfurization reconstruction of No. 6 furnace of our thermoelectricity department, desulfurization and denitrification of start-up boilers flue gas in olefin plant and other environment protection projects, we believe we further improved our environment protection and pollution treatment, and enhanced the sustainable development of the company. In addition, we have planned or started a number of other principal capital expansion projects. Our principal capital expansion projects for the near term are summarized in the table and further described below. In aggregate, we expect that total investment in the projects described below will be approximately RMB1.5 billion in 2017. This amount will be funded by our own capital and by bank loans.

Name of Project	Rated Capacity (tons/year)		Start Date		Expected Completion Date		Status
Manufacturing Facilities of EVA with a Capacity of 100,000 Tons/Year		100,000		2017		2019	Basic Design
Transformation project for “ultra clean discharge” work in cogeneration unit		N/A		2017		2017	Basic Design
Transformation of No. 2 olefin cracking burner		N/A		2017		2017	Basic Design
Transformation project for the obturation of burning storage areas of the thermoelectricity department		N/A		2017		2017	Basic Design

N/A – not applicable.

In 2014, 2015 and 2016, we invested RMB1.089 billion, RMB0.723 billion and RMB0.824 billion, respectively, in capital expansion projects.

Refining Capacity Expansion

We launched No. 2 Diesel Hydrogenation Unit Reconstruction and Diesel Quality Upgrading Project so as to further improve the quality of oil product and perfect oil product structure. Through the No. 2 Diesel Hydrogenation Unit Reconstruction and Diesel Quality Upgrading Project, we transformed the 1.2 million tons/year diesel hydrogenation unit to a 1.1 million tons/year upgrading unit (800,000 tons/year catalytic diesel + 300,000 tons/year RDS diesel). The project has been implemented in two phases, the first phase finished and put into operation by the end of September 2016, and the second phase is anticipated to finish and put into operation by the end 2017.

Expansion of New and Existing Downstream Petrochemical Products

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

To take advantage of our specialty in producing acrylics fiber and to improve our industrial structure and upgrade certain products, we plan to construct a carbon fiber project with a capacity of 1,500 tons/year. Sinopec Corp. approved the basic design for this project in December 2010; pile foundation construction was commenced in December 2010; civil engineering was commenced in February 2011 and one series of facilities under phase I were launched for trial operation in 2012. The Company will decide on the timing of the construction of the additional phases of the project based on market conditions.

We plan to construct a new 100,000t/a EVA production unit with imported technology. The revised feasibility study report for this project was submitted to Sinopec Corp. for approval in September 2011. In 2016, we completed the basic design formulation and approval process. The construction of this project is scheduled to be commenced in 2017 and completed in 2019.

Upgrading Environmental Protection Facilities Projects

To enhance our capacity for sustainable development and response to the government requirements of environmental protection, we intend to increase our capital expenditures on a series of environmental projects, mainly including transformation project for “ultra clean discharge” work in cogeneration unit, transformation of No. 2 olefin cracking burner, transformation project for up-to-standard discharge of tail gas for sulfur recovery unit of our refining department, transformation project for the obturation of burning storage areas of our thermoelectricity department. There projects are in design stage and anticipated to finish in 2017.

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ITEM 4A. UNRESOLVED STAFF COMMENTS.

None.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.

General

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

Critical Accounting Policies

The following discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements. The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during 2016. Our financial condition and results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of our financial statements. We based our assumptions and estimates on historical experience and on various other assumptions that we believe to be reasonable and which form the basis for making judgments about matters that are not readily apparent from other sources. On an on-going basis, our management evaluates its estimates. Actual results may differ from those estimates as facts, circumstances and conditions change.

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

Impairments for long-lived assets

Assets that have an indefinite useful life must be tested annually for impairment. Long term assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. In determining the value in use, expected cash flows generated by the asset or the cash-generating unit are discounted to their present value. We use all readily available information in determining an amount that is a reasonable approximation of recoverable amount, including estimates based on reasonable and supportable assumptions and projections of sale volume, selling price and amount of operating costs. During the years ended December 31, 2014, 2015 and 2016, we recognized impairment charges on property, plant and equipment and other long-term assets of RMB10.2 million, RMB50 million and RMB254.2 million, respectively.

Depreciation

Property, plant and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets, after taking into account the estimated residual value. We review the estimated useful lives of the assets annually in order to determine the amount of depreciation expense to be recorded during any reporting period. The useful lives are based on our historical experience with similar assets, taking into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates. There were no significant changes in these estimates during the years ended December 31, 2014, 2015 and 2016.

Impairment for bad and doubtful debts

We estimate impairment losses for bad and doubtful debts resulting from the inability of the customers to make the required payments. We base the estimates on the aging of the accounts receivable balance, customer credit-worthiness and historical write-off experience. If the financial condition of the customers were to deteriorate, actual impairment losses would be higher than estimated. Impairment provisions for bad and doubtful debts were a provision of RMB nil, RMB nil and RMB0.1 million, during the years ended December 31, 2014, 2015 and 2016, respectively.

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Inventory management

At the beginning of every year, the management team determines the appropriate levels of inventories to maintain on the basis of annual production and operating plans, financial budgets and market conditions. Every six months, the management team conducts an inventory status analysis in conjunction with its supply, production, marketing, financial and other departments and develops a plan for keeping inventories at an appropriate level.

Management assesses the realizability of our inventories based on the estimates of the net realizable value of the inventories at the end of each reporting period. Net realizable value represents the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. We base the estimates on all available information, including the current market prices of the finished goods and raw materials and historical operating costs. Any excess of the cost over the net realizable value of each item of inventories is recognized as a provision for diminution in the value of inventories. If the actual selling prices were to be lower or the costs of completion were to be higher than the estimates, the actual allowance for diminution in value of inventories could be higher than estimated. In addition, management periodically reviews inventory aging information to assess if any obsolete inventories are required to be written down at the period end. Based on our assessments, we recorded write-down of inventories of RMB214 million, RMB45 million and RMB76 million, respectively, for the years ended December 31, 2014, 2015 and 2016. Barring unforeseeable changes that may occur to the current economic environment in either China or worldwide, our management does not anticipate encountering major difficulties with our attempt to realize by the end of 2017 the bulk of our inventories as of December 31, 2016 after deducting for diminution in values.

Recognition of deferred tax assets

There are many transactions and events for which the ultimate tax determination is uncertain during the ordinary course of business. Significant judgment is required from the Group in determining the provision for income taxes in each of these jurisdictions. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

Deferred tax assets are recognized in respect of temporary deductible differences and the carry forward of unused tax losses. We recognize deferred tax assets only to the extent that it is probable that future taxable profit will be available against the assets which can be realized or utilized. At the end of each reporting period, we assess whether previously unrecognized deferred tax assets should be recognized. The Company recognizes a previously unrecognized deferred tax asset to the extent that it is probable that future taxable profit will allow the deferred tax asset to be utilized. In addition, we assess the carrying amount of deferred tax assets that are recognized at the end of each reporting period. The Company reduces the carrying amount of a deferred tax asset to the extent that it is no longer probable that sufficient taxable profit will be available for the deferred tax asset to be utilized.

In making the assessment of whether it is probable the Company will realize or utilize the deferred tax assets, we primarily rely on the generation of future taxable income to support the recognition of deferred tax assets. In order to fully utilize the deferred tax assets recognized at December 31, 2016, the Company would need to generate future taxable income of at least RMB412 million.

We believe that it is probable that the Company will generate sufficient taxable income before the unused tax losses expire. Favorable factors include the enlargement of crude oil refinery capacity of the Company and the new pricing mechanism in the PRC for setting gasoline and diesel prices to more closely track crude oil costs. Uncertainties which could affect the estimated taxable income include various factors such as the volatility of international crude oil prices and the cyclical nature of the petroleum and petrochemical industry. Upon changes in facts and circumstances, management may conclude that deferred tax assets may not be realizable in future periods, resulting in a future reduction in the carrying amount of a deferred tax asset.

Government Policies

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

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In particular, we consume large amounts of crude oil to manufacture our products of which more than 95% is typically imported. We attempt to mitigate the effect of increased costs due to rising crude oil prices. However, our ability to pass on these increased costs to our customers is dependent on government regulations, among other factors. Given that the increase of the sales prices of our products can lag behind the increase of crude oil costs, we sometimes fail to completely cover the increased costs by increasing our sales prices, particularly where government regulations restrict the prices of certain of our fuel products such as gasoline, diesel and jet fuel, and liquefied petroleum gas. In 2014, 2015 and 2016, approximately 48.02%, 43.33% and 32.52% of our net sales were from such products subject to price controls. Although the current price-setting mechanism for refined petroleum products in China allows the Chinese government to adjust price in the PRC market when the average international crude oil price fluctuates beyond certain levels within a certain time period (see Item 4. Information on the Company – B. Business Overview – Product Pricing), the Chinese government still retains discretion as to whether or when to adjust the prices of the refined oil products. The Chinese government generally exercises certain price control over refined oil products once international crude oil prices experience a sustained rise or become significantly volatile. Moreover, the Chinese government controls the distribution of many fuel products in China. For instance, some of our fuel products are required to be sold to designated distributors (such as the subsidiaries of Sinopec Corp.). Because we cannot freely sell our fuel products to take advantage of opportunities for higher prices, we may not be able to fully cover increases in crude oil prices by increases in the sale prices of our products, which has had and will continue to have a material adverse effect on our financial condition, results of operations and cash flows.

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

Summary

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

	For the year ended December 31,
	2014						2015						2016
	Sales Volume (‘000 tons)		Net Sales (Millions of RMB)		% of Total Net Sales		Sales Volume (‘000 tons)		Net Sales (Millions of RMB)		% of Total Net Sales		Sales Volume (‘000 tons)		Net Sales (Millions of RMB)		% of Total Net Sales
Synthetic fibers		228.7		2,891.5		3.1		222.2		2,328.2		3.5		202.1		1,855.5		2.8
Resins and plastics		1,321.4		12,489.4		13.5		1,316.0		9,992.2		14.9		1,341.7		9,797.6		14.9
Intermediate petrochemicals		1,968.9		12,391.0		13.4		2,162.1		9,332.0		13.9		2,055.7		8,827.6		13.4
Petroleum products		9,305.3		49,259.5		53.1		9,268.9		30,802.0		45.9		8,097.9		24,002.6		36.4
Trading of petrochemical products		—		14,791.0		15.9		—		13,718.2		20.5		—		20,585.4		31.2
Others		—		902.6		1.0		—		864.6		1.3		—		867.8		1.3
Total		12,824.3		92,725.0		100.0		12,969.2		67,037.2		100.0		11,697.4		65,936.5		100.0

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

	For the year ended December 31,
	2014						2015						2016
	Millions of RMB			% of Net sales			Millions of RMB			% of Net sales			Millions of RMB			% of Net sales
Synthetic fibers
Net sales		2,891.5			3.1			2,328.2			3.5			1,855.5			2.8
Operating expenses		(3,473.4	)		(3.7	)		(2,684.6	)		(4.0	)		(2,466.4	)		(3.7	)
Segment (loss)/profit		(581.9	)		(0.6	)		(356.4	)		(0.5	)		(608.9	)		(0.9	)
Resins and plastics
Net sales		12,489.4			13.5			9,992.2			14.9			9,797.6			14.9
Operating expenses		(12,820.9	)		(13.8	)		(8,773.6	)		(13.1	)		(8,160.0	)		(12.4	)

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	For the year ended December 31,
	2014						2015						2016
	Millions of RMB			% of Net sales			Millions of RMB			% of Net sales			Millions of RMB			% of Net sales
Segment (loss)/profit		(331.5	)		(0.3	)		1,218.6			1.8			1,637.6			2.5
Intermediate petrochemicals
Net sales		12,391.0			13.4			9,332.0			13.9			8,827.6			13.4
Operating expenses		(12,259.2	)		(13.2	)		(8,375.2	)		(12.5	)		(7,017.6	)		(10.6	)
Segment profit		131.8			0.2			956.8			1.4			1,810.0			2.7
Petroleum products
Net sales		49,259.5			53.1			30,802.0			45.9			24,002.6			36.4
Operating expenses		(49,288.8	)		(53.2	)		(28,939.7	)		(43.1	)		(20,189.6	)		(30.6	)
Segment loss/(profit)		(29.3	)		(0.1	)		1,862.3			2.8			3,813.0			5.8
Trading of petrochemical products
Net sales		14,791.0			15.9			13,718.2			20.5			20,585.4			31.2
Operating expenses		(14,724.9	)		(15.9	)		(13,703.0	)		(20.5	)		(20,534.2	)		(31.1	)
Segment profit		66.1			0.0			15.2			0.0			51.2			0.1
Others
Net sales		902.6			1.0			864.6			1.3			867.8			1.3
Operating expenses		(745.7	)		(0.8	)		(652.2	)		(1.0	)		(792.8	)		(1.2	)
Segment profit		156.9			0.2			212.4			0.3			75.0			0.1
Total
Net sales		92,725.0			100.0			67,037.2			100.0			65,936.5			100.0
Operating expenses		(93,312.9	)		(100.6	)		(63,128.3	)		(94.2	)		(59,158.6	)		(89.7	)
(Loss)/profit from operations		(587.9	)		(0.6	)		3,908.9			5.8			6,777.9			10.3
Net financing income/(costs)		(359.7	)		(0.4	)		(243.8	)		(0.4	)		83.7			0.1
Investment income		—			—			—			—			—			—
Share of profit of associates and jointly controlled entities		57.7			0.1			572.1			0.9			916.8			1.4
(Loss)/ Earnings before income tax		(889.9	)		(1.0	)		4,237.2			6.3			7,778.3			11.8
Income tax		214.1			0.2			(926.8	)		(1.4	)		(1,796.8	)		(2.7	)
Net (loss)/income		(675.8	)		(0.7	)		3,310.4			4.9			5,981.5			9.1
Attributable to:
Equity shareholders of the Company		(692.2	)		(0.7	)		3,274.3			4.8			5,968.5			9.0
Non-controlling interests		16.4			0.0			36.1			0.1			13.0			0.0
Net (loss)/income		(675.8	)		(0.7	)		3,310.4			4.9			5,981.5			9.0

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

Results of Operations

In general, the recovery of the world economy was slower than expected in 2016. The U.S. economy delivered a strong performance in 2016, while the economies of the Euro zone and Japan recovered slowly and the growth of emerging economies, including China continued to slow down. The Chinese government adopted a series of macroeconomic control and reform measures and was able to maintain stable economic growth, with an annual GDP growth rate of 6.7% in 2016. Primarily due to the slowing growth of the Chinese economy, weak market demand, excessive production capacity and low market prices, the petroleum and petrochemical industry remained in a weak position. However, the earnings of industry players increased in 2016 because crude oil prices declined significantly, and the unit purchase price of raw materials dropped to a larger extent than the unit price of petroleum and petrochemical products.

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In 2016, given the complex market conditions, with a focus on our profit and returns, we enhanced our effort to improve our environmental protection facilities and to continuously reduce our costs and increase our production efficiency.

In 2016, our net sales amounted to RMB65.94 billion, decreased by 1.64% compared with 2015. The decrease was primarily due to the decline in weighted average sales price of our petroleum and petrochemical products mainly as a result of the decrease in crude oil price and excessive production capacity of petroleum products in the industry. The total volume of our products was 12,830,600 tons in 2016, representing a decrease of 7.47% over the previous year. Our production/sale ratio was 100.27%, and the trade receivables recovery rate was 100%. Our total amount of export was RMB11.90 billion, increased by 190.39% compared with 2015.

Year ended December 31, 2016 compared with year ended December 31, 2015

Net sales

Primarily due to the decrease in crude oil price, the market prices of petrochemical products dropped in 2016. The excessive production capacity of petrochemical products and the weak demand in domestic and international markets led to intensive market competition. In 2016, our net sales amounted to RMB65,936.5 million, representing a decrease of 1.64%, as compared to RMB67,037.2 million in 2015. The decrease in our net sales was primarily due to the decline in market prices of petrochemical products as a result of the decrease of crude oil price and weak customer demand for our products. The processing volume of crude oil decreased slightly in 2016 considering the domestic demands, which led to a decrease in the sales volume of our petroleum products. For the year ended December 31, 2016, the weighted average prices (excluding tax) of our synthetic fibers, resins and plastics, intermediate petrochemical products, and petroleum products decreased by 12.41%, 3.83%, 0.51% and 10.81% over the previous year, respectively.

(i) Synthetic fibers

In 2016, the net sales for synthetic fibers amounted to RMB1,855.5 million, representing a decrease of 20.30% as compared to RMB2,328.2 million in 2015. The decrease was primarily due to the decline in price of synthetic fibers, driven by the decline in crude oil price, and also due to the decline in sales volume because of the continued sluggish downstream demand and under-performing initiatives in raw material procurement. The weighted average sales price of synthetic fibers decreased by 12.41%. While the weighted average sales price of acrylic fiber, the principal synthetic fiber product of our Company, decreased by 13.51%, the weighted average sales price of polyester fiber decreased by 5.99% compared to that of the previous year. The decrease in the weighted average price of acrylic fiber and polyester fiber was primarily due to the decline in cost of raw materials resulted from the decrease in crude oil price. The sales of acrylic fiber and polyester fiber accounted for 79.22% and 14.90% of the total sales of synthetic fibers, respectively. Sales volume of synthetic fibers decreased by 9.02% in 2016 compared to that of the previous year.

The net sales of synthetic fiber products accounted for 2.8% of the total net sales in 2016, representing a decrease of 0.7% as compared to the previous year.

(ii) Resins and plastics

The net sales of resins and plastics amounted to RMB9,797.6 million in 2016, representing a decrease of 1.95% as compared to RMB9,992.2 million in 2015. The decrease in net sales was mainly attributable to the decrease in price of resin and plastics, driven by the decline in crude oil price. The weighted average sales price of resins and plastics fell by 3.83%. Among resins and plastics products, the weighted average sales price of polyethylene for 2016 decreased by 3.23%; the weighted average sales price of polypropylene for 2016 decreased by 4.22%; and the weighted average sales price of polyester pellet for 2016 decreased by 0.58%. The decrease in the weighted average price of polyester pellet was primarily due to the decline in cost of raw materials resulted from the decrease in crude oil price. Sales of polyethylene, polypropylene and polyester pellet accounted for 45.11%, 33.07% and 16.56% of the total sales of resins and plastics, respectively. The sales volume of resins and plastics slightly increased by 1.95% in 2016 as compared to the previous year.

The net sales of resins and plastics remain stable at 14.9% of total net sales in 2015 and 2016.

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(iii) Intermediate petrochemicals

The net sales of intermediate petrochemical products amounted to RMB8,827.6 million in 2016, representing a decrease of 5.41% as compared to RMB9,332.0 million in 2015. The decrease was primarily due to the decline in the price of intermediate petrochemical products, driven by the decline in crude oil price, and also due to the decline in sales volume because of the decreased downstream demand. The weighted average sales price of intermediate petrochemical products decreased by 0.51%. Among the intermediate petrochemicals, the weighted average sales prices of paraxylene, butadiene, ethylene oxide, benzene and glycol decreased by 0.38%,1.32%,8.50%,0.42% and 9.88%, respectively. The decreases in weighted average sales prices of paraxylene, butadiene, ethylene oxide, benzene and glycol were primarily due to the decline in cost of raw materials resulted from the decrease in crude oil price. Sales of paraxylene, butadiene, ethylene oxide, benzene and glycol accounted for 27.01%, 8.76%, 11.58%, 16.99% and 12.7% of the total sales of intermediate petrochemicals, respectively. The sales volume of intermediate petrochemical products decreased by 4.92% in 2016 as compared to the previous year.

The net sales of intermediate petrochemicals accounted for 13.4% of the total net sales in 2016, representing a decrease of 0.5% as compared to the previous year.

(iv) Petroleum products

The net sales of petroleum products amounted to RMB24,002.6 million in 2016, representing a decrease of 22.07% as compared to RMB30,802.0 million in 2015, with the weighted average sales price decreased by 10.81% and the sales volume of petroleum products decreased by 12.63%. The weighted average sales price of petroleum products decreased in 2016 as compared to the previous year primarily due to the decrease in refined oil price in China as a result of the decline in crude oil price. The decrease in sales volume was mainly due to the reduced processing volume of crude oil after taking into account of the domestic demands.

The net sales of petroleum products accounted for 36.4% of the total net sales in 2016, representing a decrease of 9.5% as compared to the previous year.

(v) Trading of petrochemical products

The net sales of the trading of petroleum products amounted to RMB20,585.4 million in 2016, representing an increase of 50.06% as compared to RMB13,718.2 million in 2015. This increase was mainly attributable to the significant growth in sales of Shanghai Jinmao International Trading Company Limited, one of our subsidiaries, during the year.

The net sales of trading of petrochemical products accounted for 31.2% of the total net sales in 2016, representing an increase of 10.7% as compared to the previous year.

(vi) Others

The net sales of others amounted to RMB867.8 million in 2016, which remained stable as compared to RMB864.6 million in 2015.

The net sales of others accounted for 1.3% of our total net sales in 2016, which remained at the same level as the previous year.

Operating expenses

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

Our operating expenses decreased by 6.29% from RMB63,128.3 million in 2015 to RMB59,158.6million in 2016. Our operating expenses of synthetic fibers, resins and plastics, intermediate petrochemicals, petroleum products, trading of petrochemical products and others were RMB2,464.4 million, RMB8,160.0 million, RMB7,017.6 million, RMB20,189.6 million, RMB20,534.2 million and RMB792.9 million, respectively, representing decreases of 8.20%,6.99%,16.21%,30.24%, and increases of 49.85% and 21.57% as compared to the previous year, respectively. The decreases in costs of sales and expenses of synthetic fibers, resins and plastics, intermediate petrochemicals products and petroleum products were primarily due to the decline in cost of raw materials resulted from the decrease in crude oil price. The increases in the cost of sales of the trading of petrochemical products and others are mainly attributable to the increases in the trading volume of and expansion of business in crude oil processed on a sub-contract bases.

• Cost of sales

Our cost of sales amounted to RMB58,731.7 million in 2016, decreased by 6.41% from RMB62,757.1 million in 2015. Cost of sales accounted for 89.07% of net sales for 2016, as compared to 93.62% in 2015. The decrease in cost of sales was primarily due to the decline in crude oil price in 2016.

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• Selling and administrative expenses

Our selling and administrative expenses amounted to RMB546.1 million in 2016, representing a decrease of 9.12% as compared to RMB600.9 million in 2015, mainly due to a decrease in sales compared with the previous year, which resulted in a decline in warehousing and sales agency fees.

• Other operating income

Our other operating income amounted to RMB197.3 million in 2016, representing a decrease of 16.01% as compared to RMB234.9 million in 2015. The decrease in other operating income was mainly attributable to the decrease of leasing income due to termination of some property leasing and change into the company’s own usage. Meanwhile, the pipeline transportation fees dropped due to the decrease in sales volume.

• Other (losses)/gains - net

Our other losses – net amounted to RMB53.9 million in 2016, representing a decrease of RMB82.5 million as compared to other gains – net of RMB28.6 million in 2015. This was mainly due to the increase of net loss on disposal of property, plant and equipment of RMB32.6 million and the decrease of gain on forward foreign exchange contracts of RMB37.2 million, as we did not enter into any forward foreign exchange contracts in 2016.

Profits/loss from operations

Our profit from operations amounted to RMB6,777.9 million in 2016, representing an increase of RMB2,869.0 million as compared to RMB3,908.9 million in 2015. In 2016, costs for all segments dropped generally as a result of the decrease of crude oil price. Compared with the decline in unit price of finished products, the unit purchase price of raw materials dropped to a larger extent than the unit price of finished products, leading to a significant growth in our profit from operations as compared to the previous year.

(i) Synthetic fibers

Loss from operations of synthetic fibers amounted to RMB608.9 million in 2016, representing an increase of RMB252.5 million in loss as compared to loss of RMB356.4 million in 2015. The increase was mainly attributable to the continuous increase in the price of acrylonitrile which is the raw material for acrylic fiber products due to capacity fluctuation, which resulted in a surge in costs. The loss was further intensified by the reduction of the profit margin of synthetic fibers products under the sluggish downstream demand.

(ii) Resins and plastics

Profit from operations of resins and plastics amounted to RMB1,637.6 million in 2016, representing an increase of RMB419.0 million as compared to RMB1,218.6 million in 2015. The increase in profit was primarily due to a 6.99% decrease in operating expenses of resins and plastics to RMB8,160.3 million in 2016 from RMB8,773.6 million in 2015 while the market demand and the price of products, in particular polyethylene are relatively stable. The decreases in operating expenses and net sales were primarily attributable to significantly lower costs of raw materials as a result of the decrease in crude oil price.

(iii) Intermediate petrochemicals

Profit from operations of intermediate petrochemicals amounted to RMB1,810.0 million in 2016, representing an increase of RMB853.2 million as compared to profit of RMB956.8 million in 2015. The significant increase in profit was primarily attributable to a decrease of RMB1,357.6 million in cost of sales of intermediate petrochemicals in 2016, while the net sales for the same period only decreased by RMB504.4 million, which leads to a profit growth as compared to the previous year.

(iv) Petroleum products

Profit from operations of petroleum products amounted to RMB3,813.0 million, representing an increase of RMB1,950.7 million as compared to RMB1,862.3 million in 2015. The significant increase in profit was primarily attributable to a decrease of RMB8,750.1 million in cost of sales of petroleum products in 2016 , while the net sales for the same period only decreased by RMB6,799.4 million, which leads to a profit growth as compared to the previous year.

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(v) Trading of petrochemical products

Profit from operations of trading of petrochemical products amounted to RMB51.2 million in 2016, representing an increase of RMB36.0 million as compared to RMB15.2 million in 2015. The increase in profit was primarily due to an increase in net sales of RMB6,867.2 million in 2016, while the operating expenses of trading of petrochemical products decreased by RMB6,831.2 million, which leads to a profit growth as compared to the previous year.

(vi) Others

Profit from operations of others amounted to RMB75.0 million in 2016, representing a decrease of 64.69% as compared to RMB212.4 million in 2015. The decrease in profit was mainly attributable to an increase of RMB140.7 million in cost of sales and expenses of other products, while the net sales of other products increased by RMB3.2 million, which leads to a profit decrease as compared to the previous year. The increase in cost of sales and expenses of other products was primarily due to the increase in the net loss on disposal of property, plant and equipment and the decrease in gains on forward foreign exchange contracts.

Net financing income

Our net financing income was RMB83.7 million in 2016, compared with a net financing expenses of RMB243.8 million in 2015. The change was mainly due to the repayment of long term borrowings and certain short term borrowings by us in 2016, which lowered the interest expense from RMB211.9 million in 2015 to RMB53.6 million in 2016. Furthermore, our interest income increased by RMB84.2 million as a result of an increase in bank deposits.

Share of profit of associates and jointly controlled entities

Our share of profit of associates and jointly controlled entities amounted to RMB916.8 million in 2016, representing an increase of 60.25% as compared to RMB572.1 million in 2015. The increase was mainly attributable to a significant increase in our share of profit in Secco from RMB437.0 million in 2015 to RMB742.7 million in 2016.

Earnings before income tax

Our earnings before taxation was RMB7,778.3 million in 2016, representing an increase of RMB3,541.1 million, or 83.6%, as compared to RMB4,237.2 million in 2015.

Income tax

Our income tax expenses amounted to RMB1,796.8 million in 2016, representing an increase of RMB870.0 million, or 93.9%, as compared to RMB926.8 million in 2015. The change was primarily attributable to profit increase.

In accordance with the PRC Enterprise Income Tax Law (amended) which took effect from 1 January 2008, the income tax rate of the Company in 2016 was 25% (2015:25%). Our effective income tax rate was 23.10% in 2016, as compared to 21.87% in 2015. The relatively high effective income tax rate in 2016 was mainly due to the ratio of the share profit of investments accounted for using the equity method over profit before taxation is 11.61% in 2016, representing a decrease of 1.65% compared with that of 13.26% in 2015.

Net income/loss

Our net income was RMB5,918.5million in 2016, representing an increase of RMB2,671.1 million, or 80.7%, as compared to RMB3,310.4 million in 2015.

Year ended December 31, 2015 compared with year ended December 31, 2014

Net sales

Primarily due to the decrease in crude oil price, the market prices of petrochemical products dropped in 2015. The excessive production capacity of petrochemical products and the weak demand in domestic and international markets led to intensive market competition. In 2015, our net sales amounted to RMB67,037.2 million, representing a decrease of 27.70% from RMB92,725 million in 2014. The decrease in our net sales was primarily due to the decline in market prices of petrochemical products as a result of the decrease of crude oil price and weak customer demand for our products. We increased our crude oil processing volume in 2015, which led to a slight increase in the sales volume of our petroleum products. For the year ended December 31, 2015, the weighted average prices (excluding tax) of our synthetic fibers, resins and plastics, intermediate petrochemical products, and petroleum products decreased by 17.13%, 19.67%, 31.42% and 37.22% over the previous year, respectively.

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(i) Synthetic fibers

In 2015, the net sales for synthetic fibers amounted to RMB2,328.2 million, representing a decrease of 19.48% as compared to RMB2,891.5 million in the previous year. The decrease was primarily due to the decline in price of synthetic fibers, driven by the decline in crude oil price, and also due to the decline in sales volume because of the continued sluggish downstream demand and under-performing initiatives in raw material procurement. The weighted average sales price of synthetic fibers decreased by 17.13%. While the weighted average sales price of acrylic fiber, the principal synthetic fiber product of our Company, decreased by 18.53%, the weighted average sales price of polyester fiber decreased by 21.53% compared to that of the previous year. The decrease in the weighted average price of acrylic fiber and polyester fiber was primarily due to the decline in cost of raw materials resulted from the decrease in crude oil price. The sales of acrylic fiber and polyester fiber accounted for 83.33% and 12.40% of the total sales of synthetic fibers, respectively. Sales volume of synthetic fibers decreased by 2.84% in 2015 compared to that of the previous year.

The net sales of synthetic fiber products accounted for 3.5% of the total net sales in 2015, representing an increase of 0.4% as compared to the previous year.

(ii) Resins and plastics

The net sales of resins and plastics amounted to RMB9,992.2 million in 2015, representing a decrease of 19.99% as compared to RMB12,489.4 million in 2014. The decrease in net sales was mainly attributable to the decrease in price of resin and plastics, driven by the decline in crude oil price. The weighted average sales price of resins and plastics fell by 19.67%. Among resins and plastics products, the weighted average sales price of polyethylene for 2015 decreased by 13.67%; the weighted average sales price of polypropylene for 2015 decreased by 24.68%; and the weighted average sales price of polyester pellet for 2015 decreased by 23.14%. The decrease in the weighted average price of polyester pellet was primarily due to the decline in cost of raw materials resulted from the decrease in crude oil price. Sales of polyethylene, polypropylene and polyester pellet accounted for 33.71%, 33.67% and 15.35% of the total sales of resins and plastics, respectively. The sales volume of resins and plastics slightly decreased by 0.41% in 2015 primarily because we reduced the production of polyester chips in 2015 mainly as a result of weak customer demand.

The net sales of resins and plastics accounted for 14.9% of total net sales in 2015, representing an increase of 1.4% as compared to the previous year.

(iii) Intermediate petrochemicals

The net sales of intermediate petrochemical products amounted to RMB9,332.0 million in 2015, representing a decrease of 24.69% as compared to RMB12,391.0 million in 2014 as a result of the decline in the price of intermediate petrochemical products resulted from the decrease of 31.42% in their weighted average sales price, as their price was driven down by the drop of crude oil price. Among the intermediate petrochemicals, the weighted average sales prices of paraxylene, butadiene, ethylene oxide, benzene and glycol decreased by 31.65%, 28.24%, 25.86%, 42.47% and 14.45%, respectively. The decreases in weighted average sales prices of paraxylene, butadiene, ethylene oxide, benzene and glycol were primarily due to the decline in cost of raw materials resulted from the decrease in crude oil price. Sales of paraxylene, butadiene, ethylene oxide, benzene and glycol accounted for 25.47%, 6.36%, 11.84%, 15.98% and 16.82% of the total sales of intermediate petrochemicals, respectively. The sales volume of intermediate petrochemical products increased by 9.81% in 2015 primarily because we increased production of intermediate petrochemical products mainly as a result of strong market demand in 2015.

The net sales of intermediate petrochemicals accounted for 13.9% of the total net sales in 2015, representing an increase of 0.5% as compared to the previous year.

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(iv) Petroleum products

The net sales of petroleum products amounted to RMB30,802.0 million in 2015, representing a decrease of 37.47% as compared to RMB49,259.5 million in 2014, with the weighted average sales price decreasing by 37.22% and the sales volume of petroleum products decreasing by 0.39%. The weighted average sales price of petroleum products decreased in 2015 as compared to the previous year primarily due to the decrease in refined oil price in China as a result of the decline in crude oil price.

The net sales of petroleum products accounted for 45.9% of the total net sales in 2015, representing a decrease of 7.2% as compared to the previous year.

(v) Trading of petrochemical products

The net sales of the trading of petroleum products amounted to RMB13,718.2 million in 2015, representing a decrease of 7.25% as compared to RMB14,791.0 million in 2014. This decrease was mainly attributable to the decrease of price of major petrochemical products in the global oil price market.

The net sales of trading of petrochemical products accounted for 20.5% of the total net sales in 2015, representing an increase of 4.6% as compared to the previous year.

(vi) Others

The net sales of others amounted to RMB864.6 million in 2015, representing a decrease of 4.21% as compared to RMB902.6 million in the previous year. This decrease in net sales was mainly because the declines in income from disposal of scrap materials.

The net sales of others accounted for 1.3% of our total net sales in 2015, representing an increase of 0.3% as compared to the previous year.

Operating expenses

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

Our operating expenses decreased from RMB93,312.9 million in 2014 to RMB63,128.3 million in 2015. Our operating expenses of synthetic fibers, resins and plastics, intermediate petrochemicals, petroleum products, trading of petrochemical products and others were RMB2,684.6 million, RMB8,773.6 million, RMB8,375.2 million, RMB28,939.7 million, RMB13,703.0 million and RMB652.2 million, representing decreases of 22.71%, 31.57%, 31.68%, 41.29%, 6.94% and 12.54% as compared to the previous year, respectively. Such decreases were primarily due to the decline in cost of raw materials resulted from the decrease in crude oil price.

• Cost of sales

Our cost of sales amounted to RMB62,757.1 million in 2015, decreased by 32.45% from RMB92,910.1 million in 2014. Cost of sales accounted for 93.62% of net sales for 2015, as compared to 100.20% in the previous year. The decrease in cost of sales was primarily due to the decline in crude oil price in 2015.

• Selling and administrative expenses

Our selling and administrative expenses amounted to RMB600.9 million in 2015, representing an increase of 6.5% as compared to RMB564.2 million in the previous year, mainly due to an increase in impairment of fixed assets.

• Other operating income

Our other operating income amounted to RMB234.9 million in 2015, representing a decrease of 10.21% as compared to RMB261.6 million in the previous year. The decrease in other operating income was mainly because the receipt of refunds relating to local education surcharge of RMB101 million in 2015, decreased by RMB23 million from the last year.

• Other operating expenses

Our other operating expenses were RMB33.9 million in 2015, representing a decrease of 66.17% as compared to RMB100.2 million in the previous year. This decrease was mainly due to the decrease of exchange loss of RMB22 million relating to the production and operation, and the decrease of the loss on fixed assets disposal of RMB33.8 million.

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Profits/loss from operations

Our profit from operations amounted to RMB3,908.9 million in 2015, representing an increase of RMB4,496.8 million as compared to our loss from operation of RMB587.9 million in the previous year. In 2015, costs for all segments dropped drastically as a result of the decrease of crude oil price. Compared with the decline in unit price of finished products, the unit purchase price of raw materials dropped to a larger extent than the unit price of finished products, leading to a significant growth in our profit from operations as compared to the previous year. In addition, profit from our investment in Secco was RMB437 million in 2015, representing an increase of RMB505 million as compared to a loss of RMB68 million in 2014.

(i) Synthetic fibers

Loss from operations of synthetic fibers amounted to RMB356.4 million in 2015, representing a decrease of RMB225.5 million in loss as compared to loss of RMB581.9 million in the previous year. The decrease in loss was primarily due to a 22.7% decrease in operating expenses of synthetic fibers to RMB2,684.6 million in 2015 from RMB3,473.4 million in the previous year while the net sales of synthetic fibers decreased by 19.48% to RMB2,328.2 million in 2015 from RMB2,891.5 million in the previous year. The decreases in operating expenses and net sales were primarily attributable to the decline in the cost of raw materials of synthetic fiber products.

(ii) Resins and plastics

Profit from operations of resins and plastics amounted to RMB1,218.6 million in 2015, representing an increase of RMB1,550.1 million as compared to loss of RMB331.5 million in the previous year. The increase in profit was primarily due to a 31.57% decrease in operating expenses of resins and plastics to RMB8,773.6 million in 2015 from RMB12,820.9 million in the previous year while the net sales of resins and plastics decreased by 19.99% to RMB9,992.2 million in 2015 from RMB12,489.4 million in the previous year. The decreases in operating expenses and net sales were primarily attributable to significantly lower costs of raw materials as a result of the decrease in crude oil price.

(iii) Intermediate petrochemicals

Profit from operations of intermediate petrochemicals amounted to RMB956.8 million in 2015, representing an increase of RMB825.0 million as compared to profit of RMB131.8 million in the previous year. The increase in profit was primarily due to a 24.69% decrease in net sales of intermediate petrochemicals to RMB9,332 million in 2015 from RMB12,391.0 million in the previous year while operating expenses of intermediate petrochemicals decreased by 31.68% to RMB8,375.2 million in 2015 from RMB12,259.2 million in the previous year. The decreases in net sales and operating expenses were primarily attributable to the decrease the decline in the cost of raw materials as a result of the decrease of crude oil price.

(iv) Petroleum products

Profit from operations of petroleum products amounted to RMB1,862.3 million, representing an increase of RMB1,891.6 million as compared to loss of RMB29.3 million in the previous year. The loss was mainly attributable to the decrease of 37.4% in net sales of petroleum products to RMB30,802 million in 2015 from RMB49,259.5 million in the previous year while the operating expenses of petroleum products decreased by 41.2% to RMB28,939.7 million in 2015 from RMB49,288.8 million in the previous year. The decreases in net sales and operating expenses were attributable to the decrease in refined oil price in China as a result of the decline in crude oil price.

(v) Trading of petrochemical products

Profit from operations of trading of petrochemical products amounted to RMB15.2 million in 2015, representing a decrease of RMB50.9 million as compared to RMB66.1 million in the previous year. The decrease in profit was primarily due to a 6.9% decrease in operating expenses to RMB13,703 million in 2015 from RMB14,724.9 million in the previous year while net sales from trading of petrochemical products decreased by 7.25% to RMB13,718.2 million in 2015 from RMB14,791.0 million in 2014. The decreases in net sales and operating expenses were mainly attributable to the decrease of price of major petrochemical products in the global oil price market.

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(vi) Others

Profit from operations of others amounted to RMB212.4 million in 2015, representing an increase of 35.37% as compared to RMB156.9 million in the previous year. The increase in profit was mainly attributable to a decrease of 4.21% in net sales of other products to RMB864.6 million in 2015 from RMB902.6 million in 2014 while the operating expenses of others decreased by 12.54% to RMB652.2 million in 2015 from RMB745.7 million in the previous year. The decrease in net sales was primarily due to the declines in volume from disposal of scrap materials.

Net financing income/costs

Our net financing costs were RMB243.8 million in 2015, compared with a net financing cost of RMB359.7 million in 2014. The change was mainly due to the repayment of long term borrowings and certain short term borrowings by us in 2015, which lowered the interest expense from RMB374.6 million in 2014 to RMB211.9 million in 2015.

Share of profit of associates and jointly controlled entities

Our share of profit of associates and jointly controlled entities amounted to RMB572.1 million in 2015, representing an increase of 891.5% as compared to RMB57.7 million in 2014. The increase was mainly attributable to a significant increase in our share of profit in Secco from share of loss of RMB68.0 million in 2014 to share of profit of RMB437 million in 2015.

Earnings/loss before income tax

Our earnings before taxation was RMB4,237.2 million in 2015, representing a significant increase of RMB5,127.1 million as compared to the loss before taxation of RMB889.9 million in 2014.

Income tax

Our income tax expenses amounted to RMB926.8 million in 2015, while the income tax benefit was RMB214.2 million in 2014. The change was primarily attributable to the payment of current income tax as the Company recorded profits in 2015.

In accordance with the PRC Enterprise Income Tax Law (amended) which took effect from 1 January 2008, the income tax rate of the Company in 2015 was 25% (2014:25%). However, the effective rate for income tax was 21.87% in 2015, compared to 24.07% in 2014. The relatively low effective income tax rate in 2015 was mainly because that share profit of investments accounted for using the equity method amounted to RMB140.5 million in 2015, representing an increase of RMB128.6 million as compared to RMB11.9 million in 2014.

Net income/loss

Our net income was RMB3,310.4 million in 2015, representing an increase of RMB3,986.2 million from the net loss of RMB675.8 million in 2014.

B. Liquidity and Capital Resources.

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

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

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The following table sets forth a condensed summary of our consolidated statement of cash flows for the years ended December 31, 2014, 2015 and 2016.

	Year Ended December 31,
Cash flow data	2014			2015		2016
	(Millions of RMB)
Net cash generated from operating activities		3,662.4			4,932.8		7,181.8
Net cash used in investing activities		(910.1	)		439.0		189.9
Net cash used in financing activities		(2,606.5	)		3,695.7		2,637.2
Net increase/(decrease) in cash and cash equivalents		145.8			798.0		4,354.7

Net cash generated from/used in operating activities

The net cash generated from operating activities amounted to RMB7,181.8 million in 2016, representing an increase in cash inflows of RMB2,249.0 million as compared to the net cash inflows of RMB4,932.8 million in 2015, due to the following reasons: (1) we recorded profit before income tax of RMB7,778.3 million in 2016, representing an increase of RMB3,541.1 million as compared to RMB4,237.2 million in 2015; (2) we paid income tax amounted to RMB1,268.1 million in 2016, representing an increase of RMB1,235.0 million as compared to RMB33.1 million in 2015.

The net cash generated from operating activities amounted to RMB4,932.8 million in 2015, representing an increase in cash inflows of RMB1,270.4 million as compared to the net cash inflows of RMB3,662.4 million in 2014, due to the following reasons: (1) we recorded profit from operation during the reporting period, net cash inflows from profit before taxation (net of depreciation and impairment losses on property, plant and equipment) amounted to RMB6,009.5 million in 2015, representing an increase of RMB4,959.7 million in cash inflows as compared with net cash inflows of RMB1,049.8 million in the previous year, (2) our decreased inventory balance as at the end of the period led to an increase in operating cash flow of RMB1,752.5 million in 2015 (compared with an increase in operating cash flow of RMB3,108.5 million in the previous year due to decreased inventory balance at the end of the previous year), (3) the increase in operating payables as at the end of the period led to a decrease in operating cash flow of RMB1,451.7 million in 2015 (as compared to a decrease in operating cash flow of RMB1,255.2 million as a result of an increase in operating payables in the corresponding period of the previous year).

Net cash used in investing activities

Our net cash used in investing activities decreased from RMB439.0million in 2015 to RMB189.9 million in 2016. This was primarily because the dividends we received from associates and jointly controlled entities increased from RMB216.5 million in 2015 to RMB557.3 million in 2016.

Our net cash used in investing activities decreased from RMB910.1 million in 2014 to RMB439.0 million in 2015. This was primarily because our purchases of property, plant and equipment and other long-term asset decreased from RMB1,089.3 million in 2014 to RMB695.3 million in 2015, and our dividends received from joint ventures and associates increased from RMB98.8 million in 2014 to RMB216.5 million in 2015.

Net cash used in financing activities

Our net cash used in financing activities was RMB2,637.2 million in 2016, while our net cash used in financing activities was RMB3,695.7 million in 2015. The decrease was primarily due to the decrease in repayments of borrowings to third parties of RMB23,690.33 million, the effect of which was partially offset by the decrease in proceeds from borrowings from third parties of RMB7,347.5 million from 2015 to 2016 as we reduced crude oil processing volume in 2016 due to weak customer demand for our petroleum products.

Our net cash used in financing activities was RMB3,695.7 million in 2015, while our net cash used in financing activities was RMB2,606.5 million in 2014. The increase was primarily due to the decrease in repayments of borrowings to third parties of RMB18,109.8 million, the effect of which was partially offset by the decrease in proceeds from borrowings from third parties of RMB18,035.5 million from 2014 to 2015,while our proceeds from borrowings from related parties decreased from RMB7,070.0 million in 2014 to RMB5,720.0 million in 2015 due to the reducing of demands on liquidity.

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Borrowings and banking facilities

Due to the Company’s net profit position and the reduced capital expenditure, the Company managed to maintain the balance of cash and cash equivalents at a prudent level with a decrease in the amount of borrowings in 2016. Our total borrowings at the end of 2016 amounted to RMB546.4 million, representing a decrease of RMB1,523.6 million as compared to RMB2,070 million at the end of the previous year. We have generally been able to arrange short term loans with several PRC financial institutions as and when needed. The debt obligations as of December 31, 2015 and 2016 were as follows.

	Year Ended December 31,
Debt instruments	2015		2016
	(Millions of RMB)
Short term bank loans (1)		1700.0		546.4
Short term loans from a related party (2)		370.0		—
Long term bank loans (1)		—		—
		2,070.0		546.4

(1) As of December 31, 2016, no borrowings were secured by the way of property, plant and equipment. We obtained a credit rating of AA- for financing loans, assessed by Centrus Business Credit Consulting Co., Ltd., a credit rating agency authorized by the People’s Bank of China. As of December 31, 2016, the current assets exceeded current liabilities by RMB5,933.51million. The liquidity of the Company is primarily dependent on the ability to maintain adequate cash inflow from operations, the renewal of its short-term bank loans and on its ability to obtain adequate external financing to support its working capital and meet its debt obligation when they become due. As of December 31, 2016, we had standby credit facilities of RMB23,664.19 million, within which the maturity dates of unused facility amounting to RMB21,959.22million will be after 31 December 2017. We assessed that all the facilities could be renewed upon their expiration dates. We have carried out a detailed review of the cash flow forecast for the 12 months ending December 31, 2017. Based on such forecast, we believe that we will be able to renew these facilities when they expire based on our well-established relationships with various lenders and adequate sources of liquidity exist to fund our working capital and capital expenditure requirements.

(2) We borrowed short term loans from a subsidiary of Sinopec Group, Sinopec Finance Company Limited, on terms no less favorable to us than terms available from the other commercial banks in China. We have entered into the Comprehensive Services Framework Agreement with Sinopec Group so as to obtain financial services from Sinopec Finance Company Limited for the three years ending December 31, 2014, 2015 and 2016.

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

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

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

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

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

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

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

Liability-to-asset ratio

As at December 31, 2016, our liability-to-asset ratio was 26.34%, while as of December 31, 2015, our liability-to-asset ratio was 27.77%. The ratio is calculated using this formula: total liabilities divided by total assets.

Capital expenditure

In 2016, our capital expenditure amounted to RMB824.0 million, representing an increase of 3.00% as compared to RMB800.0 million in capital expenditure in 2015. Major projects include the following:

Project	Total project investment  RMB million		Project status as at December  31, 2016
Manufacturing facilities of EVA with a capacity of 100,000 Tons/Year		1,132	Preliminary design
Desulfurization revamps for furnaces No. 1, to No. 6 thermal power boilers		164	Completed
Desulfurization & denitrification of start-up boilers flue gas in olefin plant		81	Completed
Upgrade project on No.2 diesel hydrogenation unit		99	Completed
Oil tank’s odors control project of Storage and Transportation Department		63	Completed
Total		1539

Our capital expenditure for 2017 is estimated at approximately RMB1.5 billion.

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

We have a number of technology development units, including the Petrochemical Research Institute, the Plastics Research Institute, the Polyester Fiber Research Institute, the Acrylic Fiber Research Institute and the Environmental Protection Research Institute. These units are charged with various research and development tasks with respect to new technology, new products, new production processes and equipment and environmental protection. Our research and development expenditures in 2014, 2015 and 2016 were RMB43.6 million, RMB87.6 million and RMB102.1 million, respectively.

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

D. Trend Information

In 2017, the global economy is expected to be largely uncertain and recover slowly from the financial crisis. Although the rebound of the U.S. economy may improve the world’s economy, the U.S.’s exit of its quantitative easing monetary policy may have an impact on the economies of emerging markets. Given the high level of debts of developed countries and the slowing growth rates in major economies, emerging markets are expected to enhance their efforts to adjust the structures of their economies for further development.

There exists uncertainty in China’s economic development. China’s economy is expected to continue to grow steadily; however, a variety of factors, such as difficulties in significantly increasing domestic and foreign demand, will constrain such growth.

Supply in the international crude oil market is expected to be sufficient, while market demand for crude oil may be suppressed by the pessimistic outlook for the world’s economic growth. The price of crude oil is generally expected to fluctuate in 2017.Given the strong supply of crude oil, the price of crude oil may remain unchanged or even decrease.

Against this backdrop of economic and market conditions, the domestic petroleum and petrochemical markets are expected to face a tougher external business environment with market competition intensifying due to the slowing growth rate in market demand, excessive production capacity of refineries in China and abundant supply of imported petrochemical products. Stricter regulations in relation to environmental protection and resources conservation will also result in greater challenges to manufacturers.

E. Off-balance Sheet Arrangements

As of December 31, 2016, we had no contingent liabilities in respect of guarantees issued to banks in favor of our associated companies and other unlisted investments (December 31, 2015: nil). Other than our capital commitments disclosed in Note 32 in our consolidated financial statements included in Item 18. Financial Statements, we do not have any other off-balance sheet arrangements.

F. Contractual Obligations and Commercial Commitments

The following table sets forth our obligations to make future payments under contracts effective as of December 31, 2016.

			As of December 31, 2016/Payment Due by Period
	Total		Within 1 year or on demand		More than 1 year but within 2 years		More than 2 years but within 5 years		More than 5 years
	(RMB’000)		(RMB’000)		(RMB’000)		(RMB’000)		(RMB’000)
Contractual obligations
Short term borrowings		546,432		546,432		—		—		—
Long term borrowings		—		—		—		—		—
Operating lease		118,154		60,125		54,438		2,136		1,455
Total contractual obligations		664,586		606,557		54,438		2,136		1,455

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			As of December 31, 2016/Payment Due by Period
	Total		Within 1 year or on demand		More than 1 year but within 2 years		More than 2 years but within 5 years		More than 5 years
	(RMB’000)		(RMB’000)		(RMB’000)		(RMB’000)		(RMB’000)
Estimated future interest payments
Fixed rate		1,547		—		—		—		—
Variable rate		12,152		—		—		—		—
Total estimated future interest payments		13,699		—		—		—		—
Investment commitments
Capital contribution to Secco (Note 29(i))		111,263		—		—		—		—
Other commercial commitments
Capital commitments (Note 32)		913,336		—		—		—		—

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

G. Other Information

Employees

Our employment costs for 2016 were RMB2,353.2 million.

As at December 31, 2016, we had 11,088 employees in total, among whom there were 6,607 production staff, 69 sales representatives, 83 financial personnel, 1,134 administrative staff and 3,195 other personnel. 50.76% of our employees had tertiary qualifications or above. The company has 17,451 retired employees who are under retirement insurance plans, details of which are provided under Item 6. D. Employees. During 2015, we terminated employment with 1,071 persons (including the retired and voluntary leave), accounting for 8.81% of 12,159 employees we had as of January 1, 2016.

Inflation

Inflation or deflation did not have a significant impact on our results of operations for the year ended December 31, 2016.

Purchase, Sale and Investment

Except as disclosed in this report, during the year ended December 31, 2016, we engaged in no material purchase or sale of our subsidiaries or associated companies or any other material investments.

Pledge of Assets

As of December 31, 2016, we have not pledged any of our property or equipment.

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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.

A. Directors and Senior Management.

The following table sets forth certain information concerning our directors, executive officers and members of our supervisory committee (“Supervisory Committee”). The current term for our directors, executive officers and members of our Supervisory Committee is three years, which term will end in June 2017.

Name	Age		Position
Directors
Wang Zhiqing		54	Chairman of the Board of Directors and President
Wu Haijun		54	Vice Chairman of the Board of Directors
Gao Jinping		50	Vice Chairman of the Board of Directors and Vice President
Ye Guohua(1)		48	Director and Chief Financial Officer
Jin Qiang		51	Director and Vice President
Guo Xiaojun		47	Director and Vice President
Lei Dianwu		54	External Director
Mo Zhenglin		52	External Director
Choi Tingki		62	Independent Director and Director of the Audit Committee
Zhang Yimin		62	Independent Director and Director of the Remuneration and Appraisal Committee
Liu Yunhong		40	Independent Director
Du Weifeng		40	Independent Director
Supervisory Committee
Kuang Yuxiang(2)		54	Chairman of Supervisory Committee
Zuo Qiang		54	Supervisor
Li Xiaoxia		47	Supervisor
Zhai Yalin		52	External Supervisor
Wang Liqun(3)		59	External Supervisor
Zheng Yunrui		51	Independent Supervisor
Pan Fei		60	Independent Supervisor
Other Executive Officers
Zhang Jianbo (4)		54	Secretary to the Board
Zhou meiyun (5)		47	Vice President and Chief Financial Officer
Jin Wenmin(6)		51	Vice President

(1) Mr. Ye Guohua resigned from his position of Director, Executive Director, member of the Remuneration and Appraisal Committee, Vice President and Chief Financial Officer on January 26, 2017.

(2) Mr. Kuang Yuxiang resigned from his position of Supervisor and Chairman of Supervisory Committee on July 29, 2016.

(3) Mr. Wang Liqun resigned from his position of Supervisor on February 23, 2017.

(4) Mr. Zhang Jianbo was appointed Secretary to the Board on the eleventh meeting of the Eighth Session of the Board of Directors on March 16, 2016 and resigned from his position of Secretary to the Board on April 26, 2017.

(5) Mr. Zhou Meiyun was appointed Vice President and Chief Financial Officer on the seventeenth meeting of the Eighth Session of the Board of Directors on February 8, 2017.

(6) Mr. Jin Wenmin was appointed Vice President on the fourteenth meeting of the Eighth Session of the Board of Directors on September 7, 2016.

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Directors

Wang Zhiqing, 54, is the Chairman, President and Deputy Secretary of the Communist Party Committee of the Company. Mr. Wang began his career in 1983 and has held various positions including Deputy Leader of preparatory team for the chemical fiber plant of Luoyang Petrochemical Complex, Deputy Chief Engineer of Luoyang Petrochemical Complex cum Officer-in-Charge of the preparatory team for the chemical fiber plant, and the Deputy Chief Engineer cum Director of the chemical fiber plant. From June 1999 to December 2001, Mr. Wang was the Chief Engineer of Luoyang Petrochemical Complex. From February 2000 to December 2001, Mr. Wang was the Vice President cum Chief Engineer of Sinopec Corp. Luoyang Branch. From December 2001 to October 2006, Mr. Wang was the Manager of Sinopec Corp. Luoyang Branch. From July 2005 to May 2007, Mr. Wang was the Leader of the preparatory team for a Sinopec refinery project in Guangxi. From October 2006 to December 2008, Mr. Wang was the Manager of Sinopec Corp. Jiujiang Branch. From December 2008 to July 2010, Mr. Wang was the Manager of Sinopec Corp. Jiujiang Branch. Mr. Wang was appointed the President and Deputy Secretary of the Communist Party Committee of the Company in July 2010. Mr. Wang was appointed the Director of the Company in December 2010 and served as the Vice Chairman of the Company from December 2010 to June 2013. In February 2011, Mr. Wang was appointed the Director and Chairman of the board of Secco. In June 2013, Mr. Wang was appointed the Chairman of the Board of the Company. Mr. Wang graduated from the East China Petroleum Institute majoring in refinery engineering and obtained a Bachelor of Engineering in 1983. He graduated from China University of Petroleum (East China) majoring in chemical engineering and technology and obtained a Doctorate in Engineering in 2006. In 2001 Mr. Wang also obtained an MBA from Open University of Hong Kong. In 2013, he obtained an MBA from China Europe International Business School. He is a professor-level senior engineer by professional title.

Wu Haijun, 54, is the Vice Chairman of the Company, Director and Vice President of Secco. Mr. Wu joined the Complex in 1984 and has held various positions including the Deputy Director and Director of the Company’s No.2 Chemical Plant as well as the Manager of the Chemical Division. He was the Vice President of the Company from May 1999 to March 2006 and the Director of the Company from June 2004 to June 2006. He was the Manager and Secretary of the Communist Party Committee of Sinopec Corp. Chemical Sales Branch from December 2005 to March 2008. From December 2005 to April 2010, he was the Director of the Chemical Business Department of Sinopec Corp. In April 2010, he was appointed the Director of Secco. From April 2010 to February 2011, he served as the President of Secco. In June 2010, he was appointed the Director and Vice Chairman of the Company. In February 2011, Mr. Wu was appointed the Vice President of Secco. Mr. Wu graduated from the East China Institute of Chemical Technology in 1984, majoring in chemical engineering, and obtained a Bachelor of Engineering. In 1997, he obtained an MBA from the China Europe International Business School. He is a senior engineer by professional title.

Gao Jinping, 50, is the Vice Chairman of the Company, Secretary of the Communist Party Committee and Vice President of the Company. Mr. Gao joined the Company in 1990 and has held various positions including the Deputy Secretary of the Communist Youth League Committee of the Company, Deputy Secretary of the Communist Party Committee of the Experimental Plant, Deputy Secretary of the Chemical Division of the Company and Director of the Propaganda Division of the Communist Party Committee of the Company. From May 2003 to March 2013 Mr. Gao served as the Deputy Secretary of the Communist Party Committee of the Company. From May 2003 to November 2013 Mr. Gao served as the Chairman of the Labor Union of the Company. From June 2004 to June 2006 Mr. Gao served as the Director of the Company. From April 2006 to March 2013 Mr. Gao served as the Secretary of the Communist Party Discipline Supervisory Committee of the Company. From June 2006 to April 2013 Mr. Gao served as the Supervisor and Chairman of the Supervisory Committee of the Company. In March 2013 Mr. Gao was appointed the Secretary of the Communist Party Committee of the Company. In April 2013 Mr. Gao was concurrently appointed the Vice President of the Company. In June 2013 Mr. Gao was appointed the Director of the Company. Mr. Gao graduated from the Food Processing Faculty of Shanghai Aquatic Products University majoring in cooling and cold storage technology and obtained a Bachelor of Engineering in 1990. In 2001, he completed his post-graduate studies in business administration focusing on the aspects of industrial economics at Shanghai Academy of Social Sciences. He is a senior specialist technician by professional title.

Jin Qiang, 51, is the Director and Vice President of the Company. Mr. Jin joined Zhenhai General Petrochemical Works in 1986 and has held various positions including the Deputy Director of the Utilities Department, Deputy Director and Director of the Machinery and Power Division of Sinopec Zhenhai Refining & Chemical Co., Ltd, and Director of the Machinery and Power Division of Sinopec Corp. Zhenghai Refining & Chemical Branch. From March 2007 to October 2011, Mr. Jin served as the Deputy Chief Engineer of Sinopec Corp. Zhenghai Refining & Chemical Branch. Mr. Jin was appointed the Vice President of the Company in October 2011. In June 2014, Mr. Jin was appointed Director of the Company. Mr. Jin graduated in 1986 from East China Institute of Chemical Technology majoring in chemical machinery, and graduated in 2007 from the Graduate School of Central Party School majoring in economic management. He is a senior engineer by profession title.

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Guo Xiaojun, 47, is the Director and Vice President of the Company. Mr. Guo joined the Complex in 1991 and has held various positions including the Director of the Polyolefin Integrated Plant in the Plastics Division as well as Deputy Chief Engineer, Assistant to the Manager, Deputy Manager, and Manager cum Deputy Secretary of the Communist Party Committee of the Plastics Division. He served as the Deputy Chief Engineer and Director of the Production Department of the Company from March 2011 to April 2013. In April 2013, he was appointed the Vice President of the Company. In June 2014, Mr. Guo was appointed Director of the Company. He graduated from the East China University of Science and Technology majoring in basic organic chemical engineering in 1991 and obtained a Bachelor of Engineering. Mrs. Guo obtained a Master of Engineering majoring in chemical engineering from the East China University of Science and Technology in 2008. He is a professor-level senior engineer by professional title.

External Directors

Lei Dianwu, 54, is the Vice President of Sinopec Corp., Assistant to President and Chief Economist of Sinopec Group. Mr. Lei has been serving as an External Director of the Company since June 2005. Mr. Lei has held various positions including the Deputy Director of Planning Division of Yangzi Petrochemical Company, Director of the Preparation Office of the Joint Venture of Yangzi Petrochemical Company, Vice President and Manager of the Production Division of Yangzi BASF Stylene Company Limited. He acted as the Deputy Manager and Deputy Director of the Joint Venture Office at Yangzi Petrochemical Company, Director of Planning and Development Department of China Dong Lian Petrochemical Limited Liabilities Company, Vice President of Yangzi Petrochemical Limited Liabilities Company and Deputy Director of Development and Planning Division of Sinopec Corp. From March 2001 to August 2013, he served as the Director of Development and Planning Division of Sinopec Corp. He has been serving as the Assistant to President of Sinopec Group since March 2009 and serving as the Vice President of Sinopec Corp since May 2009. In August 2013, Mr. Lei was appointed the Chief Economist of Sinopec Group. Mr. Lei has rich experience in enterprise planning and investment development management. In 1984, Mr. Lei graduated from the East China Petroleum Institute majoring in basic organic chemicals and obtained a Bachelor of Engineering. He is a senior engineer by professional title.

Mo Zhenglin, 52, is Chief Accountant of the Chemical Division of Sinopec Corp. and Director of Shanghai Secco. Mr. Mo began his career in August 1986 and has held various positions, including Deputy Director of the Finance Department and Head of the Accounting Department, as well as Chief Accountant and Director of the Finance Department of the Refinery Division of Beijing Yanshan Petrochemical Corporation (now known as Sinopec Beijing Yanshan Company); and Deputy Chief Accountant of Sinopec Beijing Yanshan Company and Chief Accountant of the Refinery Division. He served as Director of Beijing Yanshan Petrochemical Company Limited and Chief Accountant of Sinopec Beijing Yanshan Company from April 2002 to August 2008. Mr. Mo has been Chief Accountant of the Chemical Division of Sinopec Corp. since August 2008, and Director of Shanghai Secco Petrochemical Company since November 2008. In June 2014, he was appointed the Director of the Company. Mr. Mo obtained a bachelor’s degree in Management from Zhongnan University of Economics in 1986, majoring in Finance and Accounting. He is a senior accountant by professional title.

Independent Directors

Choi Tingki, 62, is a senior Fellow of the Hong Kong Institute of Certified Public Accountants, a member of the Committee of the Chinese People’s Political Consultative Conference of Jing’an District, Shanghai, and Honorary Vice-Chairman of the Federation of Returned Overseas Chinese of Jing’an District, Shanghai. Mr. Cai has been serving as an Independent Director of the Company since June 2011. Mr. Cai graduated from the Faulty of Accounting of Hong Kong Polytechnic University in 1978. He joined KPMG in the same year and has held various positions, including the Deputy Manager and Manager of the Audit Department of KPMG Hong Kong Office, Managing Partner of KPMG Shanghai Office, Senior Partner of KPMG Huazhen Shanghai Office as well as Senior Partner of KPMG Huazhen in Eastern and Western China. Mr. Cai retired from KPMG Huazhen in April 2010. Mr. Cai was responsible for IPO projects for a number of large Chinese domestic enterprises in China, Hong Kong or overseas, as well as for various projects for listed companies. He possesses a wealth of professional knowledge and experience.

Zhang Yimin, 62, is a Professor of Economics and Finance, and Director of the Faculty of Accounting and Finance at China Europe International Business School. Mr. Zhang has been serving as an Independent Director of the Company since October 2013. Mr. Zhang obtained a doctorate degree majoring in finance and political studies at the Business School of the University of British Columbia in Canada, and has held various positions including a Post-doctoral Fellow at the Business School of University of British Columbia, an Assistant Professor at University of New Brunswick, and an Associate Professor at City University of Hong Kong. He has been working as a Professor of Economics and Finance at the China Europe International Business School since September 2004. Mr. Zhang’s major study areas are business operations, financing and industrial economic studies, and has accumulated abundant expertise and experience in these areas.

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Liu Yunhong, 40, is a doctor of law and a post-doctoral fellow in economics and law, and is General Manager of the Investment Banking Department of Hwabao Securities co. Ltd. Mr. Liu has been serving as an independent director of the Company since June 2015. He is also Deputy Head of the Institute of International M&A and Investment, Renmin University of China and a supervisor of post-graduate studies at East China University of Political Science and Law. From June 2008 to August 2010, Mr. Liu was the Head of Legal and Compliance Division of Guotai Asset Management Co., Ltd. From September 2010 to August 2012, he conducted post-doctoral research at the Shanghai Stock Exchange. From September 2012 to October 2013, Mr. Liu was the General Manager of the Investment Banking Department of Aerospace Securities Co., Ltd. From October 2013 onwards, Mr. Liu has been the General Manager of the Institutional Business Department (later renamed as the Investment Banking Department) of Hwabao Securities Co. Ltd. Mr. Liu is also an Independent Director of Shanghai Aerospace Automobile Electromechanical Co.,Ltd. and Guangdong Hec Technology Holding Co., Ltd. Mr. Liu obtained a doctorate degree in Law majoring in civil and commercial law in July 2008. From October 2008 to August 2010, Mr. Liu was a researcher conducting post-doctoral research in economics at Guanghua School of Management, Peking University.

Du Weifeng, 40, holds a master’s degree in law and a master’s degree in business administration and is a lawyer. Mr. Du is a partner of the Shanghai branch of Beijing JunZeJun Law Offices. He has been serving as an independent director of the Company since June 2015. He was a lawyer at Watson & Band Law Offices in Shanghai between June 2004 and December 2006, and a lawyer at Wintell & Co Law Firm in Shanghai between January 2007 and February 2009. He has been a partner of the Shanghai branch of Beijing JunZeJun Law Offices since February 2009. Mr. Du has extensive experience in the disposal of non-performing financial assets, and is very familiar with the processes and methods of disposal of non-performing financial assets. Mr. Du obtained a bachelor’s degree in commercial law from Shanghai University in July 1998, and a master’s degree in commercial law from Bristol University in September 2005. He also obtained a master’s degree in business administration from China Europe International Business School in October 2013.

Supervisory Committee

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

Zuo Qiang, 54, is the Supervisor, Vice Secretary of the Discipline Supervisory Committee, Director of the Supervisory Office and Director of the Office of the Supervisory Committee of the Company. Mr. Zuo joined the Complex in 1981 and has held various positions, including the archivist of the Command Division for the Construction of No. 1 Chemical Plant Phase II, Head of the Archives Office of the ethylene plant, Secretary of the Youth League Committee of the ethylene plant, Secretary of the Youth League Committee of the Refining and Chemical Division of the Complex, Secretary of the Youth League Committee of the Refining and Chemical Division, General Secretary of the Communist Party Committee of Ethylene Plant No. 1 of the Refining and Chemical Division of the Company, Deputy Director of the Supervisory Office, and Secretary of the Discipline Supervisory Committee of the Company. He was appointed the Director of the Supervisory Office of the Company in April 2011. He was appointed the Supervisor of the Company and the Director of the Office of the Supervisory Committee in June 2011. In October 2011, he was appointed the Deputy Secretary of the Discipline Supervisory Committee. Mr. Zuo graduated from the Correspondence College of the Communist Party Committee School of the Central Committee in 1993 with a major in Party & Administrative management. He is a senior specialist technician by professional title.

Li Xiaoxia, 47, is the Supervisor and the Vice Chairman of the Labor Union of the Company. Ms. Li joined the Complex in 1991 and has held various positions, including the Controller of the operation zone of the marine terminal of the Company, Assistant to the Workshop Director, Deputy Workshop Director and Deputy Section Chief of Storage and Transportation Area No. 2 of the Refining and Chemical Division, Deputy Secretary of the Youth League Committee of the Company , General Secretary of the Communist Party of the Labor Union for Staff Exchange and Relocation Centre, and Secretary of the Communist Party Committee and Deputy Manager of the Refining Division of the Company. She was appointed the Supervisor of the Company in June 2011 and Vice Chairman of the Labor Union of the Company in December 2011. Ms. Li graduated from the Liaoning University of Petroleum and Chemical Technology in 1991 majoring in petroleum and natural gas transportation. She is a senior specialist technician by professional title.

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External Supervisors

Zhai Yalin, 52, is the Deputy Director of the Auditing Bureau of Sinopec Group and Deputy Director of the Auditing Division of Sinopec Corp. and has been serving as an External Supervisor of the Company since June 2008. Mr. Zhai began his career in 1986 and has held various positions including the Deputy Director of the Office and Director of the Auditing Department of Qianguo Refinery, Deputy Director of the General Office of Sinopec Huaxia Auditing Company, Deputy Director of the General Administrative Office of the Auditing Bureau of Sinopec Group, Director of the General Administrative Office of the Auditing Bureau of Sinopec Group, and Director of the General Administrative Office of the Auditing Bureau of Sinopec Group (Auditing Department of Sinopec Corp.). Since December 2001, Mr. Zhai has been concurrently serving as the Deputy Director of the Auditing Bureau of Sinopec Group and Deputy Director of Auditing Department of Sinopec Corp. Mr. Zhai graduated from the Jilin Siping Normal College in 1986. He is a senior economist by professional title.

Independent Supervisors

Zheng Yunrui, 51, is currently a professor of the Civil and Commercial Law Department of East China University of Political Science and Law School of Law. He has been serving as an Independent Supervisor of our Company since December 2014. Mr. Zheng graduated from Shangrao Normal College in Jiangxi Province in July 1986, with an English major and obtained LL.M. and Ph.D. from Peking University Law School in July 1993 and July 1998, respectively. Mr. Zheng subsequently worked in Shangrao Education Bureau in Jiangxi Province, Hainan Airport Company Limited, China Township Enterprises Investment & Development Co., Ltd and Legislative Affairs Office of Shanghai Municipal People’s Government. Since August 2001, he has been served as a teacher for the East China University of Political Science and Law. From July 2002 to December 2002, he was a visiting scholar of the National University of Singapore School of Law. Mr. Zheng has engaged in the teaching and research work in such areas as the Civil Law Subjects, Property Law, Contract Law, Insurance Law, Social Insurance Law and Government Procurement Act and advises on legal issues in relation to the operation and management of the company. He has accomplished great academic achievements and an evaluation expert in terms of the procurement of Shanghai Municipal Government and an arbitrator of the Shenzhen Arbitration Commission.

Pan Fei, 60, holds a PhD in Accounting. Mr. Pan is the Deputy Dean of the School of Accountancy and a Professor of Accounting at Shanghai University of Finance and Economics. He has been serving as an Independent Supervisor of our Company since June 2015. Mr. Pan worked as a Lecturer, Associate Professor, and Professor of Accounting and Deputy Dean of School of Accountancy at Shanghai University of Finance and Economics in 1983-1995, 1995- 2000, and from 2000 onwards, respectively. Mr. Pan is also an Independent Director of Bright Dairy & Food Co., Ltd, Universal Scientific Industrial (Shanghai) Co., Ltd, Shanghai M&G Stationery Inc, and Shanghai Wanye Enterprises Co., Ltd. Mr. Pan graduated from the Shanghai University of Finance and Economics with a bachelor’s degree in accounting in January 1983. He also obtained a master’s degree in accounting with a major in cost management accounting in January 1991, and obtained a PhD in accounting with a major in accounting theory in June 1998 at the Shanghai University of Finance and Economics in June 1998.

Senior Management

Jin Wenmin, 51, is the Vice President of the Company and Head of Production Department. Mr. Jin joined the Shanghai Petrochemical Complex in 1985. He has held various positions, including the Secretary of the Communist Party Committee of the Company’s 1# refining unit, the head of butadiene unit, manager of the branch company of storage and transportation, the manager and deputy secretary of the Communist Party Committee of storage and transportation department, the manager and deputy secretary of the Communist Party Committee of refining division. From April 2013 to February 2017, Mr. Jin served as the Head of Production Department of the Company. From May 2013 to August 2016, Mr Jin served as the Assistant to General Manager of the Company. Mr. Jin was appointed as Vice President of the Company in September 2016. Mr. Jin graduated from Shanghai Second Polytechnic University, majoring in Business Administration. He has senior engineer qualifications.

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Zhou Meiyun, 47, is the Vice President and Chief Financial Officer of the Company. Mr. Zhou joined Shanghai Petrochemical Complex in 1991 and held various positions, including Manager of Finance Department, Assistant of Manager, Deputy Manager and Manager of the Company. He was appointed as the Manager of Finance Department of Shanghai SECCO in May 2011 and Vice President and Chief Financial Officer of the Company in February 2017. Mr. Zhou graduated from Shanghai University of Finance and Economics in 1991, majoring in accounting. He obtained a master’s degree in economics from Huazhong University of Science and Technology majoring in western economics in 1997. He is a senior accountant by professional title.

A. Compensation.

The aggregate amount of cash compensation we paid to our directors, supervisors and executive officers during the year ended December 31, 2016 was approximately RMB5.97 million. In addition, directors and supervisors who are also officers or employees receive certain other benefits-in-kind, such as subsidized or free health care services, housing and transportation, which large Chinese enterprises customarily provide to their employees. No benefits are payable to members of the board or the Supervisory Committee or the executive officers upon termination of their relationship with us.

The following tables set forth the compensation on an individual basis for our directors, supervisors and executive officers who received compensation from us in 2016.

Name	Position with the Company	Salaries and other benefits		Retirement scheme contributions(1)		Discretionary bonus		Share Options		Total Remuneration in 2016
		(RMB’000) (before tax)		(RMB’000) (before tax)		(RMB’000) (before tax)		(RMB’000) (before tax)		(RMB’000) (before tax)
Wang Zhiqing	Chairman, President & Executive Director		199		18		564		250		1,031
Wu Haijun	Vice Chairman & Executive Director		199		18		563		250		1,030
Gao Jinping	Vice Chairman, Vice President &Executive Director		175		18		490		215		898
Jin Qiang	Executive Director & Vice President		239		18		490		215		962
Guo Xiaojun	Executive Director & Vice President		175		18		484		215		892
Lei Dianwu	External Director		—		—		—		—		—
Mo Zhenglin	External Director		—		—		—		—		—
Choi Tingki	Independent Director and Director of the Audit Committee		150		—		—		—		150
Zhang Yimin	Independent Director and Director of the Remuneration and Appraisal Committee		150		—		—		—		150
Liu Yunhong	Independent Director		150		—		—		—		150
Du Weifeng	Independent Director		150		—		—		—		150
Kuang Yuxiang	Former Chairman of Supervisory Committee		140		11		320		—		471
Zuo Qiang	Supervisor		120		15		295		—		430
Li Xiaoxia	Supervisor		119		14		259		—		392
Zhai Yalin	External Supervisor		—		—		—		—		—
Wang Liqun	Former External Supervisor		—		—		—		—		—
Zheng Yunrui	Independent Supervisor		—		—		—		—		—
Pan Fei	Independent Supervisor		—		—		—		—		—
Ye Guohua	Former Director and Chief Financial Officer		175		18		490		215		898

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

Name	Position with the Company	Remuneration  in 2016
		(RMB’000) (before tax)
Zhang Jianbo	Former Secretary to the Board		318.4
Zhou Meiyun	Vice President and Chief Financial Officer		—
Jin Wenmin	Vice President		85.5

C. Board Practices.

Board of Directors

Our board of directors consists of eleven members. Our directors are elected at meetings of our shareholders, and, unless they resign at an earlier date, are deceased or removed, will serve three-year terms. The directors shall be eligible for reelection upon expiry of their terms of office; however, the combined tenure of an independent director may not exceed a total of six years. The term of our current board of directors will expire in June 2017. None of our directors have entered into any service contracts with us or any of our subsidiaries providing for benefits upon termination of appointment or employment (with the exception of compensation required by Chinese labor law).

Independent Board Committee

We formed an Independent Board Committee on October 24, 2013, which consists of four independent non-executive directors. The current members are Choi Tingki, Zhang Yimin, Liu Yunhong and Du Weifeng. The Independent Board Committee advised our shareholders other than Sinopec Corp. and its associates in respect of the terms of the continuing connected transactions under the renewed Mutual Product Supply and Sale Services Framework Agreement with Sinopec Group and Sinopec Corp. and the renewed Comprehensive Services Framework Agreement with Sinopec Group and the proposed caps on annual transaction values thereof for the three years ending December 31, 2016.

Supervisory Committee2.50

The Supervisory Committee is responsible for ensuring that our directors and senior officers act in the interests of our company or those of our shareholders or employees and that they do not abuse their positions and powers. The Supervisory Committee has no power to overturn the decisions or actions of our directors or officers and may only recommend that they correct any acts that are harmful to our interests or the interests of our shareholders or employees. The Supervisory Committee is currently composed of seven members appointed for a three year term. The term of the current members will expire in June 2017. Supervisory Committee members have the right to attend meetings of our board of directors, inspect our financial affairs and perform other supervisory functions.

Audit Committee

Pursuant to Paragraph 14 of the Code of Best Practices set out in Appendix 14 of the Rules Governing the Listing of Securities on The HKSE, we formed an audit committee on June 15, 1999 which consists of three directors. The current members are Choi Tingki, Liu Yunhong and Du Weifeng. The principal duty of the audit committee is to review and supervise our financial reporting process and internal controls. The members of the audit committee will hold office for the same term as their directorships which will expire in June 2017.

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Remuneration Committee

We formed a remuneration committee on December 25, 2001 which consists of three directors. As of December 31, 2016, the members of the remuneration committee are Zhang Yimin, Ye Guohua and Du Weifeng. Mr. Ye Guohua resigned as Executive Director, Vice President and Chief Financial Officer on 26 January 2017. Following his resignation, Mr. Ye Guohua ceased to be a member of the Remuneration and Appraisal Committee on the same day. The Company is looking for a suitable candidate to fill the vacancy. The key responsibility of the Remuneration Committee is to formulate and review the remuneration policy and plan for the directors and executive officers, formulate the standards for evaluation of the directors and executive officers and conduct such evaluations.

Summary Corporate Governance Differences

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

D. Employees.

As of December 31, 2016, we had 11,088 employees.

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

	December 31,
	2014		2015		2016
Management		1,441		1,603		1,134
Engineers, technicians and factory personnel		7,801		7,081		6,607
Accounting, marketing and others		4,071		3,475		3,347
Total		13,313		12,159		11,088

Approximately 50.76% of our work force are graduates with a tertiary degree or higher. In addition, we offer our employees opportunities for education and training based upon our development plans and requirements and the individual performance of each employee.

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A system of labor contracts has been adopted in our Company. The contract system imposes discipline, provides incentives to adopt better work habits and gives us greater management control over our work force. We believe that by linking remuneration to productivity, the contract system has also improved employee morale. As of December 31, 2016, almost all of the work force was employed pursuant to labor contracts which specify the employee’s position, responsibilities, remuneration and grounds for termination. The contracts generally have short terms of one to five years and may be renewed with the agreement of both parties. The remaining personnel are employed for an indefinite term.

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

Total remuneration of our employees includes salary and bonuses. Employees also receive certain benefits in terms of housing, education and health services that we subsidize, and other miscellaneous subsidies. In 2016, we incurred RMB2,469.5 million in employment costs.

In compliance with Shanghai regulations, we and our employees participate in a defined contribution government pension scheme under which all employees upon retirement are entitled to receive pensions. In order to safeguard and properly enhance the living level of retired employees and improve the medium and long term incentive system, the company established an enterprise annuity plan. According to the plan, to the extent that the employees volunteer for the related payments and have been with the Company for one year or more, such employees are entitled to participate in the enterprise annuity plan. We will make payments to match the payments made by the employees after giving considerations to our profitability, the employee’s work responsibilities, contributions, and treatments post retirement based on the principle of universal benefits. We have 17,706 retired employees under the above retirement insurance plans.

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

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E. Share Ownership.

As of December 31, 2016, none of our directors, supervisors and executive officers beneficially owns any of our shares.

On January 6, 2015, our board of directors approved the proposal of the initial grant of the share option incentive scheme. A total of 2,540,000 share options were granted to Mr. Wang Zhiqing, Mr. Gao Jinping, Mr. Ye Guohua, Mr. Guo Xiaojun, Mr. Jin Qiang and Mr. Jin Wenmin. Mr. Tang Weizhong resigned from his position of Secretary of Board of our Company on October 23, 2015. Pursuant to relevant provisions of the share option incentive scheme, the 250,000 share options granted to him have been invalid. See Item 6. Directors, Senior Management and Employees – E. Share Ownership – Share Option Incentive Scheme for more information.

Share Option Incentive Scheme

We adopted a share option incentive scheme on December 23, 2014, pursuant to which our directors, senior management members and key business personnel may be granted options to purchase our A shares. Under the share option incentive scheme, the total number of underlying shares to be granted shall neither exceed 10% of the total share capital of the Company nor exceed 10% of the total A-share capital of the Company. Unless approved by the shareholders as a special resolution at a general meeting of the Company, the aggregate number of A shares to be acquired by each grantee through the share option scheme and other effective share option schemes of the Company (if any) at any time shall not exceed 1% of the total A-share capital of the Company. The exercisable period for the share options shall be three years, commencing from the expiry of the two-year period after the grant date, and the vesting period for each grant under the scheme shall be no less than two years. The exercise price of a share under initial grant will be determined by our board of directors in its discretion, which shall not be lower than the highest of: (1) the closing price of the A shares of the Company on the trading day immediately before the date of announcement on the summary of the draft scheme, which was RMB3.29 per share; (2) the average closing price of the A shares of the Company for the 30 trading days immediately before the date of announcement on the summary of the draft scheme, which was RMB3.27 per share; and (3) RMB4.20 per share. The exercise price for further grant shall be the higher of: (1) the closing price of the A shares of the Company on the trading day immediately before the date of announcement on the summary of the draft proposal for each grant; and (2) the average closing price of the A shares of the Company for the 30 trading days immediately before the date of announcement on the summary of the draft proposal for each grant. The expiration date of this scheme is December 22, 2024.

On January 6, 2015, our board of directors approved the proposal of the initial grant of the share option incentive scheme. A total of 38,760,000 share options were granted to 214 participants, among which 2,540,000 were granted to six of our directors and senior management. The total number of underlying stock accounted for 0.359% of the Company’s total share capital when granted. According to the principle on the determination of exercise price, the exercise price of the initial grant was RMB4.20 per share (in the event of dividends payment, capitalization of capital reserves, bonus issue, subdivision or reduction of shares or allotment of shares during the validity period, the exercise price shall be adjusted according to the Share Option Incentive Scheme). On June 15, 2016, the 2015 annual profit distribution plan was considered and passed at the 2015 annual general meeting, whereby cash dividend of RMB1.00 was paid for each 10 shares, and the exercise price was adjusted to RMB4.10 per share accordingly. The following table summarizes the outstanding options that the Company granted to our directors, executive officers and other employees:

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Name	A Shares Underlying Outstanding Options		Exercise Price (RMB/Share)		Grant Date	Vesting Date	Expiration Date
Wang Zhiqing		500,000		4.10	January 6, 2015	within a year after January 6, 2017, subject to additional conditions	January 5, 2020
Gao Jinping		500,000		4.10	January 6, 2015	within a year after January 6, 2017, subject to additional conditions	January 5, 2020
Ye Guohua*		430,000		4.10	January 6, 2015	within a year after January 6, 2017, subject to additional conditions	January 5, 2020
Jin Qiang		430,000		4.10	January 6, 2015	within a year after January 6, 2017, subject to additional conditions	January 5, 2020
Guo Xiaojun		430,000		4.10	January 6, 2015	within a year after January 6, 2017, subject to additional conditions	January 5, 2020
Tang Weizhong*		250,000		4.10	January 6, 2015	within a year after January 6, 2017, subject to additional conditions	January 5, 2020
Jin Wenmin		250,000		4.10	January 6, 2015	within a year after January 6, 2017, subject to additional conditions	January 5, 2020
Other employees		35,970,000		4.10	January 6, 2015	within a year after January 6, 2017, subject to additional conditions	January 5, 2020

* Mr. Ye Guohua resigned from his positions of Director, Vice President and Chief Financial Officer of our Company on January 26, 2017. Pursuant to relevant provisions of the share option incentive scheme, the 430,000 share options granted to him have been invalid.

* Mr. Tang Weizhong resigned from his position of Secretary of Board of our Company on October 23, 2015. Pursuant to relevant provisions of the share option incentive scheme, the 250,000 share options granted to him have been invalid.

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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.

A. Major Shareholders.

Sinopec Corp. owns 50.56% of our share capital and is able to exercise all the rights of a controlling shareholder, including the election of directors and voting on amendments to our Articles of Association.

The table below sets forth information regarding ownership of our capital stock as of March 31, 2017 by (i) all persons who we know own more than five percent of our capital stock and (ii) our officers and directors as a group. Our major shareholders listed below do not have voting rights different from those of our other shareholders.

Title of Class	Identity of Person or Group	Number of Shares Held		Percent of Total  Share Capital
Domestic Shares	Sinopec Corp.		5,460,000,000		50.56	%
H Shares	HKSCC nominees Ltd.		3,454,966,321		31.99	%
Domestic Shares	Directors and  Officers(1)		0		0	%

(1) On January 6, 2015, our board of directors approved the proposal of the initial grant of the share option incentive scheme. As of December 31, 2016, a total of 2,540,000 share options were granted to Mr. Wang Zhiqing, Mr. Gao Jinping, Mr. Ye Guohua, Mr. Guo Xiaojun, Mr. Jin Qiang and Mr. Jin Wenmin. Mr. Ye Guohua resigned from his positions of Director, Vice President and Chief Financial Officer of our Company on January 26, 2017. Pursuant to relevant provisions of the share option incentive scheme, the 430,000 share options granted to him have been invalid. See Item 6. Directors, Senior Management and Employees – E. Share Ownership – Share Option Incentive Scheme for more information.

As of March 31, 2017, a total of 3,495,000,000 H Shares were outstanding. A total of 7,305,000,000 domestic shares were outstanding on March 31, 2017.

As of March 31, 2017, a total of 2,150,895 ADSs were registered in the name of The Bank of New York Mellon, the depositary under our ADS deposit agreement. The Bank of New York Mellon has advised us that, as of March 31, 2017, 2,150,895 ADSs, representing the equivalent of 215,089,500 H Shares, were held of record by 80 other registered shareholders domiciles in and outside of the United States. We have no further information as to our shares held, or beneficially owned, by U.S. persons.

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

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

B. Related Party Transactions.

Intercompany service agreements and business-related dealings

During 2016, pursuant to the Mutual Product Supply and Sales Service Framework Agreement entered into by the Company and Sinopec Corp., we purchased raw materials from, and sold petroleum products and petrochemicals as well as leased properties to, Sinopec Corp. and its associates, and Sinopec Corp. and its associates acted as sales agents for our petrochemical products. Under the Comprehensive Services Framework Agreement entered into by the Company and Sinopec Group, we accepted construction and installation, engineering design, insurance agency and financial services relating to the petrochemical industry provided by Sinopec Group and its associates. The relevant connected transactions were conducted in accordance with the terms of the Mutual Product Supply and Sales Services Framework Agreement and the Comprehensive Services Framework Agreement. The current Mutual Product Supply and Sales Service Framework Agreement and Comprehensive Services Framework Agreement were renewed with Sinopec Corp. and Sinopec Group respectively upon approval and authorization at our 2013 Extraordinary General Meeting held on December 11, 2013. At the 2013 Extraordinary General Meeting, our shareholders also approved certain caps on the annual transaction values of certain ongoing continuing connected transactions for the years ending December 31, 2014, December 31, 2015 and December 31, 2016. The transaction amounts of the relevant connected transactions in 2016 did not exceed such caps.

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

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

The table below sets forth certain relevant information regarding our continuing connected transactions with Sinopec Corp. and Sinopec Group under the Mutual Product Supply and Sales Services Framework Agreement and the Comprehensive Services Framework Agreement in 2016.

Type of major transactions	Connected parties	Annual cap for 2016		Transaction Amount during The reporting Period		Unit: RMB’000 Percentage Of the total Amount of the same type of transaction (%)
Mutual Product Supply and Sales Services Framework Agreement
Purchases of raw materials	Sinopec Corp. and its associates		94,475,000		26,350,188		45.27
Sales of petroleum products	Sinopec Corp. and its associates		79,586,000		33,159,665		42.57
Sales of petrochemical products	Sinopec Corp. and its associates		31,156,000		5,738,425		7.37
Property leasing	Sinopec Corp. and its associates		116,000		28,160		61.47
Agency sales of petrochemical	Sinopec Corp. and its associates		309,000		100,220		100.00
Comprehensive Services Framework Agreement
Construction, installation and engineering design services	Sinopec Group and its associates		1,824,000		177,295		21.52
Petrochemical industry insurance services	Sinopec Group and its associates		200,000		123,621		96.93
Financial services	Sinopec Group		300,000		3,553		4.45

On December 5, 2016, the Company entered into an asset leasing agreement (the “Lease Agreement”) with Baishawan branch of Sinopec Petroleum Reserve Company Limited (the “Baishawan Branch”), a wholly-owned subsidiary of the Company’s de facto controller Sinopec Group. Pursuant to the Lease Agreement, the Company rents the oil tanks and ancillary facilities from the Baishawan Branch at an annual rent up to RMB53,960,000 (exclusive of VAT), with the leasing period from 1 January 2016 to 31 December 2018. The Lease Agreement was considered and approved at the 16th meeting of the eighth session of the Board on 24 November 2016. During the Reporting Period, the Company incurred leasing cost of RMB53,960,000.

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Equity joint venture

Late in 2001, we established Secco, a Sino-foreign equity joint venture, together with BP and Sinopec Corp. We own 20% interest in Secco, while BP and Sinopec Corp. own 50% and 30% interests in Secco, respectively. Secco was established to build and operate a 900,000 ton Rated Capacity ethylene petrochemical manufacturing facility to manufacture and market ethylene, polyethylene, styrene, polystyrene, propylene, acrylonitrile, polypropylene, butadiene, aromatics and by-products; provide related after-sales services and technical advice with respect to such petrochemical products and by products; and engage in polymers application development. Secco completed construction in 2005. Secco’s total initial registered capital was U.S.$901,440,964, of which we provided the Renminbi equivalent of U.S.$180,287,952.

To fund Secco’s new acrylonitrile plant project with a capacity of 260,000 tons/year, its new ethylene plant with a new supercharger, its new butadiene plant with a capacity of 90,000 tons/year, and its utility facilities upgrading project, in 2013, the shareholders of Secco agreed to increase the registered capital of Secco by U.S.$150,085,618 according to their respective shares in the equity interests in Secco, of which the Company was obligated to contribute an amount of U.S.$30,017,124 in installments. We have paid U.S.$9,817,718 and U.S.$1,884,050 on December 10, 2013 and March 5, 2014, respectively.

HKSE connected transactions rules

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

C. Interests of Experts and Counsel.

Not applicable.

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ITEM 8. FINANCIAL INFORMATION.

A. Consolidated Statements and Other Financial Information.

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

Export Sales

In 2016, export sales accounted for RMB10.1 billion (U.S.$1.5 billion), or 15.28% of our total net sales.

Litigation

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

Dividend Policy

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

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

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

B. Significant Changes.

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

ITEM 9. THE OFFER AND LISTING.

A. Offer and Listing Details

Set forth below is certain market information relating to our H Shares, ADSs and domestic shares for the periods indicated.

	The Stock Exchange of Hong Kong				The New York Stock Exchange				The Shanghai Stock Exchange
	High		Low		High		Low		High		Low
2012		3.20		1.88		41.43		24.64		6.76		4.68
2013		2.50		1.44		48.24		26.98		5.47		2.67
2014		2.85		1.86		35.30		22.73		4.69		2.81
2015		5.33		2.21		65.21		28.48		11.91		3.88
2016		4.28		2.86		54.86		35.86		7.95		5.07
2015
First Quarter		2.95		2.21		37.84		28.48		5.61		3.88
Second Quarter		5.33		3.02		65.21		39.00		11.91		5.54
Third Quarter		4.21		2.45		53.54		30.66		10.90		5.25
Fourth Quarter		3.41		2.66		44.96		34.50		7.72		6.16

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	The Stock Exchange of Hong Kong				The New York Stock Exchange				The Shanghai Stock Exchange
	High		Low		High		Low		High		Low
2016
First Quarter		3.93		2.86		50.42		35.86		6.96		5.07
Second Quarter		4.00		3.37		51.90		42.87		7.95		5.63
Third Quarter		4.11		3.52		53.69		45.37		6.44		5.74
Fourth Quarter		4.28		3.82		54.86		48.89		6.68		5.81
2017
First Quarter		5.03		4.20		64.66		54.06		6.87		6.39
Most Recent Six Months
October 2016		4.00		3.91		51.61		50.53		6.09		5.89
November 2016		4.08		3.82		52.80		48.89		6.22		5.81
December 2016		4.28		4.05		54.86		52.46		6.68		6.10
January 2017		4.88		4.20		63.15		54.06		6.84		6.44
February 2017		5.03		4.65		64.66		60.40		6.87		6.60
March 2017		4.70		4.31		60.45		55.76		6.71		6.39

In connection with the domestic share reform, the trading of domestic shares of the Company on the Shanghai Stock Exchange was suspended twice from May 31, 2013 to June 20, 2013 and from June 28, 2013 to August 19, 2013. For more information regarding the domestic share reform, see Item 4. Information on the Company – A. History and Development of the Company – Domestic Share Reform.

B. Plan of Distribution

Not applicable.

C. Markets

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

D. Selling Shareholders

Not applicable.

E. Dilution

Not applicable.

F. Expenses of the Issuer

Not applicable.

ITEM 10. ADDITIONAL INFORMATION.

A. Share Capital

Not applicable.

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B. Memorandum and Articles of Association.

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

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

Our Articles of Association provide, at article 11, that our purpose is:

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

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

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

Our scope of business is limited to matters approved by Chinese authorities. Article 12 provides that our primary business scope includes:

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

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

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

Sources of Shareholders’ Rights

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

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

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

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

Enforceability of Shareholders’ Rights

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

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

Our Articles of Association provide that all differences or claims

• between a holder of H shares and us;

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

• between a holder of H shares and a holder of domestic shares,

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

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

Restrictions on Transferability and the Share Register

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

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

• all relevant transfer fees and stamp duties are paid;

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

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

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

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

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

Dividends

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

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

• recovery of losses, if any;

• allocations to the statutory common reserve fund; and

• allocations to a discretionary common reserve fund.

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

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

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

Voting Rights and Shareholders’ Meetings

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The following decisions must be adopted by special resolution:

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

• the issue of our debentures;

• our division, merger, dissolution and liquidation;

• amendments to our Articles of Association;

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

• share incentive schemes; and

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

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

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

Board of Directors

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• proposals for our financial policies;

• the increase or reduction of our registered capital;

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

• any repurchase of our shares;

• significant acquisitions or disposals;

• our merger, division or dissolution; and

• any amendment to our Articles of Association.

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

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

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

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

• our directors, supervisors and other senior management;

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

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

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

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

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

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

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

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

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

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

Supervisory Committee

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

• attend the meetings of our board of directors;

• inspect our financial affairs;

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

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

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

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• require the board of directors to convene an extraordinary general meeting of shareholders;

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

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

• any other matters authorized by the Articles of Association.

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

Liquidation Rights

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

Obligation of Shareholders

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

Duration

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

Increase in Share Capital

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

Reduction of Share Capital and Purchase by Us of Our Shares

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

Restrictions on Large or Controlling Shareholders

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

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

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

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

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

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

• has the power to elect more than one-half of the board of directors;

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

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

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

Minutes, Accounts and Annual Report

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

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

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

C. Material Contracts.

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

D. Exchange Controls.

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

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

On July 21, 2005, the Chinese government changed its policy of pegging the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. Since the adoption of this new policy, the value of the Renminbi has fluctuated daily within a narrow band, but overall has appreciated against the U.S. dollar. Nevertheless, the Chinese government continues to receive significant international pressure to further liberalize its currency policy which could result in a further and more significant appreciation in the value of the Renminbi against the U.S. dollar. The value of the Renminbi depreciated by 6.83% against the U.S. dollar in the year 2016.

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

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

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E. Taxation

PRC Taxation

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

Tax on Dividends

For an Individual Investor

According to the Individual Income Tax Law of the People’s Republic of China, as amended on June 30, 2011 (the “Individual Income Tax Law”) dividends paid by Chinese companies to individual investors are subject to Chinese withholding tax at a flat rate of 20%. As for a foreign individual investor that neither has a domicile nor resides in China, or that has no domicile and has resided in China for no more than one year, the dividends received by such an investor in China are generally subject to a withholding tax at a flat rate of 20% under the individual income tax law, subject to exemption or reduction by an applicable income tax treaty. According to the State Administration of Taxation’s tax treatments with regard to the dividends of H shares paid by onshore non-foreign invested enterprises listed on HKEx, we will withhold and pay the individual income tax at the tax rate of 10% for individual shareholders who are residents of Hong Kong, Macau, or countries which have entered into tax treaties with mainland China, which provide for a 10% dividends tax rate, and we will temporarily withhold and pay the individual income tax at the tax rate of 10% for individual shareholders who are residents of countries which have entered into tax treaties with mainland China, which provide for a less than 10% dividends tax rate. Shareholders of H Shares may directly or through our Company apply to the in-charge tax authority for the preferential treatments provided by the relevant tax treaties. Upon the approval by the in-charge tax authority, the excessive amount being paid will be refunded. For individual shareholders who are residents of countries which have entered into tax treaties with mainland China providing for a more than 10% but less than 20% dividends tax rate, we will withhold and pay the individual income tax at the specific tax rate required therein. We will withhold and pay the individual income tax at the dividends tax rate of 20% for individual shareholders who are residents of countries which have not entered into any forms of tax treaties with mainland China or in circumstances other than above described.

For a Corporation

According to the Enterprise Income Tax Law of the People’s Republic of China (“Enterprise Income Tax Law”) and its implementation rules, effective January 1, 2008, dividends by Chinese resident enterprises to non-resident enterprises are ordinarily subject to a Chinese withholding tax levied at a flat rate of 10%. For purposes of the Enterprise Income Tax Law, a “Chinese resident enterprise” is an enterprise which is either (i) set up in China in accordance with PRC laws or (ii) set up in accordance with the laws of a foreign country (region) but whose actual administrative headquarters is in China. For purposes of the Enterprise Income Tax Law, a “non-resident enterprise” is an enterprise which is set up in accordance with the laws of a foreign country (region) and whose actual administrative headquarters is located outside China but which has either (i) set up a legal presence in China or (ii) has income originating from China despite not having formally set up a legal presence in China. The State Administration of Taxation issued a Circular on Issues Relating to the Withholding of Enterprise Income Tax for Dividends Distributed by Resident Enterprises in China to Non-resident Enterprises Holding H-shares of the Enterprises (Guo Shui Han [2008] No. 897)(“Circular No. 897”) on November 6, 2008, which further clarifies that Chinese resident enterprises should, in distributing dividends for 2008 or any year hereafter to non-resident enterprises holding H-shares of the Chinese resident enterprise, withhold enterprise income tax for such dividends at a tax rate of 10%. After receiving dividends, non-resident enterprises holding H-shares of any Chinese resident enterprise can, on their own or through an agent, file an application to the relevant taxation authorities for such dividends to be covered by any applicable tax treaty (or other arrangement). The relevant taxation authorities should, upon reviewing and verifying the application and supporting materials to be correct, refund the difference between the tax levied and the tax payable calculated at a tax rate specified by the applicable tax treaty (or other arrangement).

Capital Gains Tax

For an Individual Investor

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

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For a Corporation

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

Tax Treaties

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

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

Stamp Tax

While no express exemption exists for the imposition of Chinese stamp tax on transfers of Overseas Shares pursuant to the Provisional Regulations of the People’s Republic of China Concerning Stamp Tax effective on July 1, 1989, we are not aware of any circumstance under which Chinese stamp tax has actually been imposed on the transfer of Overseas Shares.

Estate or Gift Tax

China does not currently impose any estate or gift tax.

U.S. Taxation

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

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

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

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

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

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

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

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

ADSs

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

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

TAXATION OF U.S. HOLDERS

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

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Distributions on H Shares or ADSs

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

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

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

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

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

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

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

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

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

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

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Dispositions of H Shares or ADSs

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

You should consult your own tax advisor regarding the U.S. federal income tax consequences if you receive currency other than U.S. Dollars upon the disposition of H Shares or ADSs.

Passive Foreign Investment Company

We generally will be a PFIC under Section 1297 of the Code if, for a taxable year, either (a) 75% or more of our gross income for such taxable year is passive income (the “income test”) or (b) 50% or more of the average percentage, generally determined by fair market value, of our assets during such taxable year either produce passive income or are held for the production of passive income (the “asset test”). “Passive income” includes, for example, dividends, interest, certain rents and royalties, certain gains from the sale of stock and securities, and certain gains from commodities transactions.

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

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

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

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

Information reporting regarding specified foreign financial assets

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

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

Information Reporting and Backup Withholding

Generally, information reporting requirements will apply to distributions on H Shares or ADSs or proceeds from the disposition of H Shares or ADSs paid within the United States (and, in certain cases, outside the United States) to a U.S. Holder unless such U.S. Holder is an exempt recipient, such as a corporation. Furthermore, backup withholding (currently at 28%) may apply to such amounts unless such U.S. Holder (i) is an exempt recipient that, if required, establishes its right to an exemption, or (ii) provides its taxpayer identification number, certifies that it is not currently subject to backup withholding, and complies with other applicable requirements.

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

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

F. Dividends and Paying Agents.

Not applicable.

G. Statement by Experts.

Not applicable.

H. Documents on Display.

We are subject to the periodic reporting and other informational requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Under the Exchange Act, we are required to file reports and other information with the Securities and Exchange Commission. Specifically, we are required to file annually a Form 20-F no later than four months after the close of each fiscal year, which is December 31 of each year. Copies of reports and other information, when so filed, may be inspected without charge and may be obtained at prescribed rates at the public reference facilities maintained by the Securities and Exchange Commission at 100 F Street, N.E., Washington, D.C. 20549. You can request copies of these documents upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. The SEC also maintains a Web site at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short- swing profit recovery provisions contained in Section 16 of the Exchange Act.

I. Subsidiary Information.

Not applicable.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

Commodity Price Risk

We are exposed to commodity price risk related to price volatility of crude oil and refined oil products. We had no program of commodity price hedging activities and did not engage in any such activities in 2015 or 2016. See Item 3. Key Information – D. Risk Factors – Our operations may be adversely affected by the cyclical nature of the petroleum and petrochemical market and by the volatility of prices of crude oil and petrochemical products.

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Interest Rate Risk

We are subject to risk resulting from fluctuations in interest rates. Our borrowings are fixed and variable rate bank and other borrowings, with original maturities ranging from 1 to 5 years. Accordingly, fluctuations in interest rates can lead to significant fluctuations in the fair value of such debt instruments. We had no program of interest rate hedging activities and did not engage in any such activities in 2015 or 2016.

The following table provides information, by maturity date, regarding our interest rate sensitive financial instruments, which consist of fixed and variable rate short term and long term debt obligations, as of December 31, 2016 and 2015.

	As of December 31, 2016
	2017			2018		2019		2020		2021		Total Recorded Amount		Fair Value
	(RMB equivalent in thousands, except interest rates)
Fixed rate bank and other loans
In U.S. Dollars		—			—		—		—		—		—		—
Average interest rate		—			—		—		—		—		—		—
In RMB		500,000			—		—		—		—		—		500,000
Average interest rate(1)		2.97	%		—		—		—		—		—		—
Variable rate bank and other loans
In U.S. Dollars		—			—		—		—		—		—		—
Average interest rate(1)		—			—		—		—		—		—		—
In Euro		—			—		—		—		—		—		—
Average interest rate (1)		—			—		—		—		—		—		—
In RMB		46,432			—		—		—		—		—		46,432
Average interest rate (1)		4.35	%		—		—		—		—		—		—

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

	As of December 31, 2015
	2016			2017		2018		2019		2020		Total Recorded Amount		Fair Value
	(RMB equivalent in thousands, except interest rates)
Fixed rate bank and other loans
In U.S. Dollars		—			—		—		—		—		—		—
Average interest rate		—			—		—		—		—		—		—
In RMB		70,000			—		—		—		—		—		70,000
Average interest rate(1)		3.95	%		—		—		—		—		—		—
Variable rate bank and other loans
In U.S. Dollars		—			—		—		—		—		—		—
Average interest rate(1)		—			—		—		—		—		—		—
In RMB		2,000,000			—		—		—		—		—		2,000,000
Average interest rate(1)		3.51	%		—		—		—		—		—		—

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

Exchange Rate Risk

We are also exposed to foreign currency exchange rate risk as a result of our foreign currency denominated short term borrowing and, to a limited extent, cash and cash equivalents denominated in foreign currencies. The following table provides information, by maturity date, regarding our foreign currency exchange rate sensitive financial instruments, which consist of cash and cash equivalents, short term debt obligations as of December 31, 2016 and 2015.

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	As of December 31, 2016
	2017		2018		2019		2020		2021		Thereafter		Total Recorded Amount		Fair Value
	(RMB equivalent in thousands, except interest rates)
On-balance sheet financial instruments
Cash and cash equivalents:
In Hong Kong Dollars		—		—		—		—		—		—		—		—
In U.S. Dollars		249,281		—		—		—		—		—		—		249,281
In Euro		—		—		—		—		—		—		—		—
In Japanese Yen		—		—		—		—		—		—		—		—
In Swiss Frank		—		—		—		—		—		—		—		—
Debt:
Fixed rate bank and other loans in U.S. Dollars		—		—		—		—		—		—		—		—
Average interest rate (1)		—		—		—		—		—		—		—		—
Variable rate bank and other loans in U.S. Dollars		—		—		—		—		—		—		—		—
Average interest rate (1)		—		—		—		—		—		—		—		—
Variable rate bank and other loans in EURO		—		—		—		—		—		—		—		—
Average interest rate (1)		—		—		—		—		—		—		—		—

	As of December 31, 2015
	2016		2017		2018		2019		2020		Thereafter		Total Recorded Amount		Fair Value
	(RMB equivalent in thousands, except interest rates)
On-balance sheet financial instruments
Cash and cash equivalents:
In Hong Kong Dollars		—		—		—		—		—		—		—		—
In U.S. Dollars		86,109		—		—		—		—		—		86,109		86,109
In Euro		—		—		—		—		—		—		—		—
In Japanese Yen		—		—		—		—		—		—		—		—
In Swiss Frank		—		—		—		—		—		—		—		—
Debt:
Fixed rate bank and other loans in U.S. Dollars		—		—		—		—		—		—		—		—
Average interest rate (1)		—		—		—		—		—		—		—		—
Variable rate bank and other loans in U.S. Dollars		—		—		—		—		—		—		—		—
Average interest rate (1)		—		—		—		—		—		—		—		—

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

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.

A. Debt Securities.

Not applicable.

B. Warrants and Rights.

Not applicable.

C. Other Securities.

Not applicable.

D. American Depositary Shares.

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

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

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

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

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

From January 1, 2016 through March 31, 2017, a total of U.S.$92,238.16 was paid by the Bank of New York Mellon on our behalf for our ADSs program. The standard out-of-pocket maintenance costs for our ADSs program were U.S.$162,733.14, which have been waived by the Bank of New York Mellon.

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.

None.

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

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

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

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

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

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

ITEM 15. CONTROLS AND PROCEDURES.

(a). Disclosure Controls And Procedures.

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

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

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) of the Securities Exchange Act of 1934) as of the end of the fiscal year covered by this annual report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the fiscal year covered by this annual report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file under the Exchange Act is accumulated and communicated to the management to allow timely decisions to be made regarding required disclosures, and is recorded, processed, summarized and reported as and when required.

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

Our management is accountable for establishing and maintaining effective internal control over financial reporting (as defined in Rules 13a-15(f) of the Securities Exchange Act of 1934). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become ineffective because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting based upon the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as of December 31, 2016. Based on that evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2016 based on these criteria.

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PwC, an independent registered public accounting firm, has audited the consolidated financial statements included in this annual report on Form 20-F and, as part of the audit, has issued a report, included herein, on the effectiveness of our internal control over financial reporting.

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

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

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

For the year ended December 31, 2016, there have been no changes to our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT.

Our board of directors has determined that Mr. Choi Tingki, who is currently serving on our audit committee, is an audit committee financial expert and is an independent director as defined in 17 CFR 240.10A-3.

ITEM 16B. CODE OF ETHICS.

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

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The following table summarizes the fees charged by PwC, our principal accountant, for certain services rendered to us during 2015 and 2016.

	For the year  ended December 31,
	(in thousands of RMB)
	2015		2016
Audit fees (1)		7,800		7,800
Audit-related fees (2)		—		—
Tax fees (3)		—		—
All other fees (4)		—		—
Total		7,800		7,800

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

(2) “Audit-related fees” means the aggregate fees billed in each of the fiscal years listed for assurance and related services rendered by our principal auditors for the audit of our financial information.

(3) “Tax fees” means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal auditors for tax compliance, tax advice and tax planning.

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

Audit Committee Pre-approval Policies and Procedures

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

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

89

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

We have not been granted an exemption from the applicable listing standards for the audit committee of our board of directors.

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

None.

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

Not applicable.

ITEM 16G. CORPORATE GOVERNANCE.

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

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

90

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

91

The purposes and responsibilities of the compensation committee stated in its charter must include: (1) reviewing and approving the corporate goals and objectives associated the with the CEO’s compensation, evaluate the performance of the CEO in fulfilling these goals and objectives, and, either as a committee or together with the other independent directors (as directed by the board), determine and approve the CEO’s compensation level based on such evaluation; (2) making recommendations to the board with respect to non-CEO executive officer compensation, and incentive-compensation and equity-based plans that are subject to board approval; and (3) producing a committee report on executive compensation as required by the SEC to be included in the annual proxy statement or annual report filed with the SEC. The charter must also include the requirement for an annual performance evaluation of the compensation committee. The responsibilities of the compensation and assessment committee include: (1) reviewing the standards for the evaluation of directors and management, evaluate directors and management and report the results of such evaluation to the board of directors; and (2) reviewing compensation policies and benefit plans for directors and executive officers. Unlike the NYSE rules, the PRC rules do not require the committee to produce a report on the executive compensation or make an annual performance evaluation of the committee. In addition, the compensation committee evaluates and reviews the compensation of directors as well as executive officers. The board of directors of the Company has established a compensation evaluation committee with a majority of the members being independent directors who act as the convener, and the committee has established a written charter complying with the domestic corporate governance rules.

92

Audit Committee	Listed companies must have an audit committee that satisfies the requirements of Rule 10A-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). It must have a minimum of three members, and all audit committee members must satisfy the requirements for independence set forth in Section 303A.02 of the NYSE Corporate Governance Rules and , in the absence of an applicable exemption, Rule 10A-3b(1) of the Exchange Act. The written charter of the audit committee must specify that the purpose of the audit committee is to assist the board oversight of the integrity of financial statements, the company’s compliance with legal and regulatory requirements, the qualifications and independence of the independent auditors, the performance of the listed company’s internal audit function and independent auditors. The written charter must also require the audit committee to prepare an audit committee report as required by the SEC to be included in the listed company’s annual proxy statement as well as an annual performance evaluation of the audit committee. The written charter must also address the duties and responsibilities of the audit committee as required under Section 303A.07 of the NYSE Corporate Governance Rules.	The board of directors of a listed company can, through the resolution of the shareholders’ meeting, establish an audit committee composed entirely of directors, of which the independent directors are the majority and act as the convener, and, at minimum, one independent director is an accounting professional. The purpose, authority and responsibilities of the audit committee are similar to those stipulated by the NYSE rules, but according to customary practices in China, the Company is not required to make an annual performance evaluation of the audit committee, and the audit committee is not required to prepare an audit report to be included in the Company’s annual proxy statement. The board of directors of the Company has established an audit committee that satisfies Rule 10A-3 under the Securities Exchange Act of 1934, as amended and relevant domestic requirements. The audit committee has a written charter.
	Each listed company must maintain an internal audit function to provide management and the audit committee with ongoing assessments of the listed company’s risk management processes and system of internal controls.	China has a similar regulatory provision, and the Company has an internal audit department.
Equity Compensation	Shareholders must be given the opportunity to vote on all equity compensation plans and material revisions thereto, except for employment inducement awards, certain grants, plans and amendments in the context of mergers and acquisitions, and certain specific types of plans as described under Section 303A.08 of the NYSE Corporate Governance Rules.	The relevant regulations of China require the board of directors propose plans on the amount and types of director compensation for the shareholders’ meeting to approve. The compensation plan of executive officers shall be approved by the board and announced at the shareholders’ meeting and disclosed to the public upon the approval of the board of directors.

93

Corporate Governance Guidelines	Listed companies must adopt and disclose corporate governance guidelines involving director qualification standards, director responsibilities, director compensation, director access to management and, as necessary and appropriate, independent advisors, director orientation and continuing education and management succession. The board should conduct a self-evaluation at least annually to determine whether it and its committees are functioning effectively. A listed company must make its corporate governance guidelines available on or through its website.	The China Securities Regulatory Commission (the “CSRC”) has issued the Corporate Governance Rules, prescribing detailed guidelines on directors of the listed companies, including director selection, the structure of the board of directors and director performance evaluation. The Company has complied with the above mentioned rules.
Code of Ethics for Directors, Officers and Employees	Listed companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. Each listed company may determine its own policies, but all listed companies should address the most important topics, including, among others, conflicts of interest, corporate opportunities, confidentiality, fair dealing, protection and proper use of listed company assets, compliance with laws, rules and regulations (including insider trading laws), and encouraging the reporting of any illegal or unethical behavior.	There is no such requirement for a code for ethics in China. As the directors and officers of the Company have all signed a Director Service Agreement, however, they are bound by their fiduciary duties to the Company. In addition, the directors and officers must perform their legal duties in accordance with the Company Law of the PRC, relevant requirements of CSRC and Mandatory Provisions to the Charter of Companies Listed Overseas.
	Each listed company CEO must certify to the NYSE each year that he or she is not aware of any violation by the company of NYSE corporate governance listing standards and he or she must promptly notify the NYSE in writing of any non-compliance with any applicable provisions of Section 303A.	No similar requirements.

ITEM 16H. MINE SAFETY DISCLOSURE.

Not applicable.

PART III

ITEM 17. FINANCIAL STATEMENTS.

Not applicable.

ITEM 18. FINANCIAL STATEMENTS.

See pages F-1 to F-76.

94

ITEM 19. EXHIBITS.

No.	Exhibit
1.1	Translation of the amended and restated Articles of Association of Sinopec Shanghai Petrochemical Company Limited as approved in the Second Extraordinary General Meeting of Sinopec Shanghai Petrochemical Company Limited for 2013 on December 11, 2013 (incorporated by reference to Exhibit 1.1 of our annual report on Form 20-F (File No.001-12158) filed with the Commission on April 30, 2014).
2.	Amended and Restated Deposit Agreement between Sinopec Shanghai Petrochemical Company Limited and The Bank of New York Mellon dated May 11, 2011(incorporated by reference to Exhibit 2 of our annual report on Form 20-F (File No. 001-12158) filed with the Commission on April 30, 2012).
4.1	Translation of the renewed Product Supply and Sales Services Framework Agreement between Sinopec Shanghai Petrochemical Company Limited and China Petroleum & Chemical Corporation as approved in the Second Extraordinary General Meeting of Sinopec Shanghai Petrochemical Company Limited for 2013 on December 11, 2013 (incorporated by reference to Exhibit 4.1 of our annual report on Form 20-F (File No.001-12158) filed with the Commission on April 30, 2014).
4.2	Translation of the renewed Comprehensive Services Framework Agreement between Sinopec Shanghai Petrochemical Company Limited and China Petrochemical Corporation as approved in the Second Extraordinary General Meeting of Sinopec Shanghai Petrochemical Company Limited for 2013 on December 11, 2013 (incorporated by reference to Exhibit 4.2 of our annual report on Form 20-F (File No.001-12158) filed with the Commission on April 30, 2014).
4.3	Translation of the Property Right Transaction Agreement with Sinopec Sales Company Limited as approved in the eighteenth meeting of the seventh session of the board of directors of Sinopec Shanghai Petrochemical Company Limited on December 5, 2013 (incorporated by reference to Exhibit 4.3 of our annual report on Form 20-F (File No.001-12158) filed with the Commission on April 30, 2014).
4.4	English summary of principal terms of the Share Option Scheme as adopted at the second meeting of the eighth session of the board of directors of Sinopec Shanghai Petrochemical Company Limited on August 15, 2014 (incorporated by reference to Appendix I of our Form 6-K (File No.001-12158) filed with the Commission on November 6, 2014).
8	A list of subsidiaries of Sinopec Shanghai Petrochemical Company Limited.
12.1	Certification of President Required by Rule 13a-14(a).
12.2	Certification of Chief Financial Officer Required by Rule 13a-14(a).
13.1	Certification of President Required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code.
13.2	Certification of Chief Financial Officer Required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code.

95

SIGNATURES

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

	SINOPEC SHANGHAI PETROCHEMICAL COMPANY LIMITED
Date: April 27, 2017	/s/ WANG ZHIQING
	Wang Zhiqing, President

96

Sinopec Shanghai Petrochemical Company Limited

(Incorporated in the People’s Republic of China with limited liability)

Index to Consolidated Financial Statements

For the Year Ended 31 December 2014, 2015 and 2016

	Page
Reports of independent registered public accounting firm		F - 2
Consolidated income statement		F - 3
Consolidated statement of comprehensive income		F - 4
Consolidated balance sheet		F - 5
Consolidated statement of changes in equity		F - 7
Consolidated statement of cash flows		F - 9
Notes to the consolidated financial statements		F - 10

F - 1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of

Sinopec Shanghai Petrochemical Company Limited:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, changes in equity and cash flows present fairly, in all material respects, the financial position of Sinopec Shanghai Petrochemical Company Limited (the “Company”) and its subsidiaries (collectively referred to as the “Group”) at December 31, 2016 and December 31, 2015 ,and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 15. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers Zhong Tian LLP

Shanghai, the People’s Republic of China

April 27, 2017

F - 2

Sinopec Shanghai Petrochemical Company Limited

Consolidated Income Statement

For the year ended 31 December 2016

		Year ended 31 December
	Note	2014 RMB’000			2015 RMB’000			2016 RMB’000
Revenue	5		102,126,247			80,748,138			77,842,906
Sales taxes and surcharges			(9,401,283	)		(13,710,933	)		(11,906,438	)
Net Sales			92,724,964			67,037,205			65,936,468
Cost of sales	10		(92,910,062	)		(62,757,106	)		(58,731,674	)
Gross (loss)/profit			(185,098	)		4,280,099			7,204,794
Selling and administrative expenses	10		(564,161	)		(600,859	)		(546,087	)
Other operating income	6		261,585			234,924			197,306
Other operating expenses	7		(100,226	)		(33,871	)		(24,275	)
Other gains/(losses)-net	8		—			28,639			(53,882	)
Operating (loss)/profit			(587,900	)		3,908,932			6,777,856
Finance income	9		64,673			49,302			137,302
Finance expenses	9		(424,371	)		(293,081	)		(53,617	)
Finance (expense)/income – net			(359,698	)		(243,779	)		83,685
Share of profit of investments accounted for using the equity method	19		57,654			572,035			916,754
(Loss)/Profit before income tax			(889,944	)		4,237,188			7,778,295
Income tax benefit/(expense)	12		214,184			(926,777	)		(1,796,822	)
(Loss)/Profit for the year			(675,760	)		3,310,411			5,981,473
(Loss)/Profit attributable to:
-Owners of the Company			(692,222	)		3,274,308			5,968,466
-Non-controlling interests			16,462			36,103			13,007
			(675,760	)		3,310,411			5,981,473
(Loss)/Earnings per share attributable to owners of the Company for the year (expressed in RMB per share)
Basic (loss)/earnings per share	13	RMB	(0.064	)	RMB	0.303		RMB	0.553
Diluted (loss)/earnings per share	13	RMB	(0.064	)	RMB	0.303		RMB	0.552
(Loss)/Earnings per ADS attributable to owners of the Company for the year (expressed in RMB per ADS)
Basic (loss)/earnings per ADS	13	RMB	(6.409	)	RMB	30.318		RMB	55.264
Diluted (loss)/earnings per ADS	13	RMB	(6.409	)	RMB	30.292		RMB	55.219

The notes on pages F-10 to F-76 are an integral part of these consolidated financial statements.

Wang Zhiqing	Gao Jinping
Chairman and General Manager	Director and Vice General Manager

F - 3

Sinopec Shanghai Petrochemical Company Limited

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2016

		Year ended 31 December
	Note	2014 RMB’000			2015 RMB’000		2016 RMB’000
(Loss)/Profit for the year			(675,760	)		3,310,411		5,981,473
Other comprehensive income:
Share of other comprehensive income of investments accounted for using the equity method			—			—		18,213
Other comprehensive income for the year, net of tax			—			—		18,213
Total comprehensive (loss)/income for the year			(675,760	)		3,310,411		5,999,686
Attributable to:
– Owners of the Company			(692,222	)		3,274,308		5,986,679
– Non-controlling interests			16,462			36,103		13,007
Total comprehensive (loss)/income for the year			(675,760	)		3,310,411		5,999,686

The notes on pages F-10 to F-76 are an integral part of these consolidated financial statements.

Wang Zhiqing	Gao Jinping
Chairman and General Manager	Director and Vice General Manager

F - 4

Sinopec Shanghai Petrochemical Company Limited

Consolidated Balance Sheet

For the year ended 31 December 2016

				As at 31 December
	Note			2015 RMB’000		2016 RMB’000
Assets
Non-current assets
Lease prepayment and other assets		14			783,016		705,456
Property, plant and equipment		15			14,383,319		13,474,287
Investment properties		16			405,572		380,429
Construction in progress		17			722,520		717,672
Investments accounted for using the equity method		19			3,311,139		3,688,794
Deferred income tax assets		12			71,045		103,091
					19,676,611		19,069,729
Current assets
Inventories		20			4,178,188		6,159,473
Trade receivables		21			488,560		414,944
Bills receivable		21			991,273		1,238,620
Other receivables		21			141,655		165,798
Prepayments		21			103,746		165,804
Amounts due from related parties		21,29	(c)		1,163,128		1,290,619
Cash and cash equivalents		22			1,077,430		5,440,623
					8,143,980		14,875,881
Total assets					27,820,591		33,945,610
Equity and liabilities
Equity attributable to owners of the Company
Share capital		23			10,800,000		10,800,000
Reserves		24			8,997,282		13,921,965
					19,797,282		24,721,965
Non-controlling interests					297,038		281,270
Total equity					20,094,320		25,003,235

F - 5

Sinopec Shanghai Petrochemical Company Limited

Consolidated Balance Sheet (Continued)

For the year ended 31 December 2016

				As at 31 December
	Note			2015 RMB’000		2016 RMB’000
Liabilities
Current liabilities
Borrowings		26			2,070,000		546,432
Advance from customers					561,721		462,992
Trade payables		28			1,562,232		2,123,904
Bills payable		28			—		5,000
Other payables		28			1,898,754		2,139,378
Amounts due to related parties		28,29	(c)		1,573,967		3,044,304
Income tax payable					59,597		620,365
					7,726,271		8,942,375
Total liabilities					7,726,271		8,942,375
Total equity and liabilities					27,820,591		33,945,610

The notes on pages F-10 to F-76 are an integral part of these consolidated financial statements.

The consolidated financial statements on pages F-3 to F-9 were approved by the Board of Directors on 27 April 2017 and were signed on its behalf.

Wang Zhiqing	Gao Jinping
Chairman and General Manager	Director and Vice General Manager

F - 6

Sinopec Shanghai Petrochemical Company Limited

Consolidated Statement of Changes in Equity

For the year ended 31 December 2016

			Attributable to owners of the Company
	Note		Share capital RMB’000		Other reserves RMB’000			Retained earnings RMB’000			Total RMB’000			Non- controlling interests RMB’000			Total equity RMB’000
Balance at 1 January 2014				10,800,000		4,183,843			2,748,651			17,732,494			259,062			17,991,556
Total comprehensive (loss)/income for the year				—		—			(692,222	)		(692,222	)		16,462			(675,760	)
Dividends proposed and approved		30		—		—			(540,000	)		(540,000	)		—			(540,000	)
Dividends paid by subsidiaries to non-controlling interests				—		—			—			—			(4,129	)		(4,129	)
Utilization of safety production fund		24		—		(4,567	)		4,567			—			—			—
Balance at 31 December 2014				10,800,000		4,179,276			1,520,996			16,500,272			271,395			16,771,667
			Attributable to owners of the Company
	Note		Share capital RMB’000		Other reserves RMB’000			Retained earnings RMB’000			Total RMB’000			Non- controlling interests RMB’000			Total equity RMB’000
Balance at 1 January 2015				10,800,000		4,179,276			1,520,996			16,500,272			271,395			16,771,667
Total comprehensive income for the year				—		—			3,274,308			3,274,308			36,103			3,310,411
Employees share option scheme		25		—		22,702			—			22,702			—			22,702
Dividends paid by subsidiaries to non-controlling interests				—		—			—			—			(10,460	)		(10,460	)
Utilization of safety production fund		24		—		(312	)		312			—			—			—
Balance at 31 December 2015				10,800,000		4,201,666			4,795,616			19,797,282			297,038			20,094,320

F - 7

Sinopec Shanghai Petrochemical Company Limited

Consolidated Statement of Changes in Equity (Continued)

For the year ended 31 December 2016

			Attributable to owners of the Company
	Note		Share capital RMB’000		Other reserves RMB’000			Retained earnings RMB’000			Total RMB’000			Non- controlling interests RMB’000			Total equity RMB’000
Balance at 1 January 2016				10,800,000		4,201,666			4,795,616			19,797,282			297,038			20,094,320
Profit for the year				—		—			5,968,466			5,968,466			13,007			5,981,473
Other comprehensive income				—		18,213			—			18,213			—			18,213
Total comprehensive income for the year				—		18,213			5,968,466			5,986,679			13,007			5,999,686
Dividends proposed and approved		30		—		—			(1,080,000	)		(1,080,000	)		—			(1,080,000	)
Employees share option scheme		25		—		18,004			—			18,004			—			18,004
Dividends paid by subsidiaries to non-controlling interests				—		—			—			—			(28,775	)		(28,775	)
Utilisation of safety production fund		24		—		(607	)		607			—			—			—
Balance at 31 December 2016				10,800,000		4,237,276			9,684,689			24,721,965			281,270			25,003,235

The notes on pages F-10 to F-76 are an integral part of these consolidated financial statements.

Wang Zhiqing	Gao Jinping
Chairman and General Manager	Director and Vice General Manager

F - 8

Sinopec Shanghai Petrochemical Company Limited

Consolidated Statement of Cash Flows

For the year ended 31 December 2016

			Year ended 31 December
	Note		2014 RMB’000			2015 RMB’000			2016 RMB’000
Cash flows from operating activities
Cash generated from operations		31		4,050,016			5,176,515			8,479,057
Interest paid to related parties				(58,619	)		(32,400	)		(3,570	)
Interest paid to third parties				(318,892	)		(178,173	)		(25,617	)
Income tax paid				(10,097	)		(33,118	)		(1,268,100	)
Net cash generated from operating activities				3,662,408			4,932,824			7,181,770
Cash flows from investing activities
Cash received from entrusted lending				78,000			82,000			106,000
Dividends received from joint ventures and associates				98,824			216,530			557,312
Net Proceeds from disposal of property, plant and equipment				24,462			16,875			11,889
Proceeds from disposal of associates				14,822			—			—
Interest received from related parties				1,057			624			232
Interest received from third parties				63,540			46,263			124,148
Purchases of property, plant and equipment from related parties				(169,763	)		(74,702	)		(205,775	)
Purchases of property, plant and equipment and other long-term assets from third parties				(919,505	)		(620,575	)		(695,701	)
Investment in an associate				(11,541	)		—			—
Cash payment of entrusted lending				(90,000	)		(106,000	)		(88,000	)
Net cash used in investing activities				(910,104	)		(438,985	)		(189,895	)
Cash flows from financing activities
Proceeds from borrowings from related parties				7,070,000			5,720,000			—
Proceeds from borrowings from third parties				44,315,298			26,279,758			2,589,432
Repayments of borrowings to related parties				(6,070,000	)		(6,420,000	)		(370,000	)
Repayments of borrowings to third parties				(47,374,473	)		(29,264,713	)		(3,743,000	)
Dividends paid to the Company’s shareholders				(543,157	)		(287	)		(1,084,814	)
Dividends paid by subsidiaries to non-controlling interests				(4,129	)		(10,460	)		(28,775	)
Net cash used in financing activities				(2,606,461	)		(3,695,702	)		(2,637,157	)
Net increase in cash and cash equivalents				145,843			798,137			4,354,718
Cash and cash equivalents at beginning of the year		22		133,256			279,198			1,077,430
Exchange gain on cash and cash equivalents				99			95			8,475
Cash and cash equivalents at end of the year		22		279,198			1,077,430			5,440,623

The notes on pages F-10 to F-76 are an integral part of these consolidated financial statements.

Wang Zhiqing	Gao Jinping
Chairman and General Manager	Director and Vice General Manager

F - 9

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

1 General information

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

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

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

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

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

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

The 15th meeting of the 7th term of Board of Directors was held on 28 August 2013 and the Company proposed and passed a resolution regarding interim cash dividend for the first half of 2013 and the conversion of share premium and surplus reserve to share capital. The resolution included a distribution of 5 shares and a cash dividend distribution of RMB 0.5 (tax included) for every 10 shares based on the 7,200,000 thousands ordinary shares as at 30 June 2013. Among the 5 shares distributed, 3.36 shares were converted from share premium of RMB 2,420,841 thousands and 1.64 shares were converted from surplus reserves of RMB 1,179,159 thousands. The resolution were approved by the extraordinary general meeting of shareholders, A share class shareholders meeting and H share class shareholders meeting on 22 Oct 2013, respectively. As at 31 December 2015 and 2016, total shares of the Company were 10,800,000 thousands.

The Company and its subsidiaries (“the Group”) are principally engaged in processing crude oil into synthetic fibres, resins and plastics, intermediate petrochemicals and petroleum products.

These consolidated financial statements are presented in thousands of Renminbi Yuan (RMB), unless otherwise stated. These financial statements have been approved for issue by the Board of Directors on 27 April 2017.

F - 10

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

2 Summary of significant accounting policies

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

2.1 Basis of preparation

The consolidated financial statements of the Group have been prepared in accordance with all applicable International Financial Reporting Standards (“IFRS”) as issued by International Accounting Standards Board (IASB). The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets, and financial assets and financial liabilities at fair value through profit or loss, which are carried at fair value.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4.

2.1.1 Changes in accounting policy and disclosures

(a) New and amended standards adopted by the Group

The following amendments to standards have been adopted by the Group for the first time for the financial year beginning on 1 January 2016.

‘Equity method in separate financial statements’-amendment to IAS 27

Amendment to IAS 27, ‘Equity method in separate financial statements ’, allows entities to use equity method to measure investments in subsidiaries, joint ventures and associates in their separate financial statements. Previously, IAS 27 allows entities to measure their investments in subsidiaries, joint ventures and associates either at cost or as a financial asset in their separate financial statements. The amendment introduces the equity method as a third option. The election can be made independently for each category of investment (subsidiaries, joint ventures and associates). Entities wishing to change to the equity method must do so retrospectively. The amendment is effective for annual period beginning on or after 1 January 2016.

The Group has changed cost method to equity method to measure investments in joint ventures and associates in the separate financial statements from 1 January 2016 and accordingly made retrospective adjustments. Please refer to Note 34 for the details of the retrospective adjustments.

‘Accounting for acquisitions of interests in joint operations’ - amendments to IFRS 11

‘Clarification of acceptable methods of depreciation and amortization’ – amendments to IAS 16 and IAS 38

Annual improvements to IFRSs 2012 – 2014 cycle, and

‘Disclosure initiative’ - amendment to IAS 1.

Except for the Amendment to IAS 27, the adoption of all other amendments did not have material impact on the current or any prior period and is not likely to affect future periods. There are no other amended standards or interpretations that are effective for the first time for the financial year beginning on 1 January 2016 that could be expected to have a material impact on the consolidated financial statements of the Group.

F - 11

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

2 Summary of significant accounting policies (continued)

2.1 Basis of preparation (continued)

2.1.1 Changes in accounting policy and disclosures (continued)

(b) New standards and interpretations not yet adopted

A number of new standards and amendments to standards and interpretations are effective for annual periods beginning after 1 January 2016 and have not been applied in preparing these consolidated financial statements. Those applicable to the Group are listed below.

IFRS 9, ‘Financial instruments’, addresses the classification, measurement and derecognition of financial assets and financial liabilities. The complete version of IFRS 9 was issued in July 2014. It replaces the whole of IAS 39. IFRS 9 introduces a new model for the recognition of impairment losses – the expected credit losses (ECL) model, which constitutes a change from the incurred loss model in IAS 39. IFRS 9 applies to all hedging relationships, with the exception of portfolio fair value hedges of interest rate risk. The new guidance better aligns hedge accounting with the risk management activities of an entity and provides relief from the more “rule-based” approach of IAS 39. IFRS 9 is effective for annual periods beginning on or after 1 January 2018. It is expected to have no significant impact on the consolidated financial statement of the Group.

IFRS 15, ‘Revenue from contracts with customers’, establishes a comprehensive framework for determining when to recognize revenue and how much revenue to recognise through a 5-step approach. IFRS 15 provides specific guidance on capitalisation of contract cost and licence arrangements. It also includes a cohesive set of disclosure requirements about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. The core principle is that a company should recognise revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. IFRS 15 replaces the previous revenue standards: IAS 18 ‘Revenue’ and IAS 11 ‘Construction Contracts’ and the related Interpretations on revenue recognition: IFRIC 13 ‘Customer Loyalty Programmes’, IFRIC 15 ‘Agreements for the Construction of Real Estate’, IFRIC 18 ‘Transfers of Assets from Customers’ and SIC-31 ‘Revenue—Barter Transactions Involving Advertising Services’. IFRS 15 is effective for annual reporting periods beginning on or after 1 January 2018.

Management is currently assessing the effects of applying the new standard on the Group’s financial statements. At this stage, the Group is not able to estimate the impact of the new rules on the consolidated financial statements. The Group will make more detailed assessments of the impact over the next twelve months. IFRS 15 is mandatory for financial years commencing on or after 1 January 2018. At this stage, the group does not intend to adopt the standard before its effective date.

IFRS 16, ‘Leases’, provides updated guidance on the definition of leases, and the guidance on the combination and separation of contracts. Under IFRS 16, a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. IFRS 16 requires lessees to recognise lease liability reflecting future lease payments and a ‘right-of-use-asset’ for almost all lease contracts, with an exemption for certain short-term leases and leases of low value assets. The lessors accounting stays almost the same as under IAS 17 ‘Leases’. IFRS 16 is effective for annual reporting periods beginning on or after 1 January 2019. Earlier application is permitted if IFRS 15 is also applied.

The standard will affect primarily the accounting for the Group’s operating leases when the Group is as the leasee in those leases. As at the reporting date, the Group has non-cancellable operating lease commitments, as disclosed in Note 32. Most of the commitments are covered by the exception for short-term and low value leases under new IFRS 16 standard. The Group is still evaluating the effects of the new standard on the other lease commitments with the lease term greater than one year. IFRS 16 is mandatory for financial years commencing on or after 1 January 2019. At this stage, the group does not intend to adopt the standard before its effective date.

F - 12

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

2 Summary of significant accounting policies (continued)

2.2 Subsidiaries

2.2.1 Consolidation

A subsidiary is an entity (including a structured entity) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.

(a) Business combinations

The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date.

The Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis. Non-controlling interests in the acquiree that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation are measured at either fair value or the present ownership interests’ proportionate share in the recognised amounts of the acquiree’s identifiable net assets. All other components of non-controlling interests are measured at their acquisition date fair value, unless another measurement basis is required by IFRS.

Acquisition-related costs are expensed as incurred.

If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognized in profit or loss.

Any contingent consideration to be transferred by the Group is recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognized in accordance with IAS 39 in profit or loss. Contingent consideration that is classified as equity is not remeasured, and its subsequent settlement is accounted for within equity.

The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired, is recorded as goodwill. If the total consideration transferred, non-controlling interest recognized and previously held interest measured is less than the fair value of the identifiable net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognized directly in the income statement.

Intra-Group transactions, balances and unrealized gains on transactions between group companies are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. When necessary, amounts reported by subsidiaries have been adjusted to conform with the Group’s accounting policies.

F - 13

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

2 Summary of significant accounting policies (continued)

2.2 Subsidiaries (continued)

2.2.1 Consolidation (continued)

(b) Changes in ownership interests in subsidiaries without change of control

Transactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions – that is, as transactions with the owners of the subsidiary in their capacity as owners. The difference between fair value of any consideration paid and the relevant share acquired of the carrying amount of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity.

(c) Disposal of subsidiaries

When the Group ceases to have control, any retained interest in the entity is re-measured to its fair value at the date when control is lost, with the change in carrying amount recognized in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognized in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. It means the amounts previously recognized in other comprehensive income are reclassified to profit or loss or transferred to another category of equity as specified by applicable IFRSs.

2.2.2 Separate financial statements

Investments in subsidiaries are accounted for at cost less impairment. Cost includes direct attributable costs of investment. The results of subsidiaries are accounted for by the Company on the basis of dividend received and receivable.

Impairment testing of the investments in subsidiaries is required upon receiving a dividend from these investments if the dividend exceeds the total comprehensive income of the subsidiary in the period the dividend is declared or if the carrying amount of the investment in the separate financial statements exceeds the carrying amount in the consolidated financial statements of the investee’s net assets including goodwill.

Investments in joint ventures and associates are accounted for using the equity method of accounting.

2.3 Associates

An associate is an entity over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting. Under the equity method, the investment is initially recognized at cost, and the carrying amount is increased or decreased to recognize the investor’s share of the profit or loss of the investee after the date of acquisition. The Group’s investments in associates include goodwill identified on acquisition. Upon the acquisition of the ownership interest in an associate, any difference between the cost of the associate and the Group’s share of the net fair value of the associate’s identifiable assets and liabilities is accounted for as goodwill.

F - 14

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

2 Summary of significant accounting policies (continued)

2.3 Associates (continued)

If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognized in other comprehensive income is reclassified to profit or loss where appropriate.

The Group’s share of post-acquisition profit or loss is recognized in the income statement, and its share of post-acquisition movements in other comprehensive income is recognized in other comprehensive income with a corresponding adjustment to the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognize further losses, unless it has incurred legal or constructive obligations or made payments on behalf of the associate.

The Group determines at each reporting date whether there is any objective evidence that the investment in the associate is impaired. If this is the case, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognizes the amount adjacent to ‘share of profit of investments accounted for using equity method’ in the income statement.

Profits and losses resulting from upstream and downstream transactions between the Group and its associates are recognized in the Group’s financial statements only to the extent of unrelated investor’s interests in the associates. Unrealized losses are eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group.

Gain or losses on dilution of equity interest in associates are recognised in the income statement.

2.4 Joint arrangements

The Group has applied IFRS 11 to all joint arrangements. Under IFRS 11, investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations of each investor. The Group has assessed the nature of its joint arrangements and determined them to be joint ventures. Joint ventures are accounted for using the equity method.

Under the equity method of accounting, interests in joint ventures are initially recognized at cost and adjusted thereafter to recognize the Group’s share of the post-acquisition profits or losses and movements in other comprehensive income. The Group’s investments in joint ventures include goodwill identified on acquisition. Upon the acquisition of the ownership interest in a joint venture, any difference between the cost of the joint venture and the Group’s share of the net fair value of the joint venture’s identifiable assets and liabilities is accounted for as goodwill. When the Group’s share of losses in a joint venture equals or exceeds its interests in the joint ventures, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the joint ventures.

Unrealized gains on transactions between the Group and its joint ventures are eliminated to the extent of the Group’s interest in the joint ventures. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of the joint ventures have been changed where necessary to ensure consistency with the policies adopted by the Group.

F - 15

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

2 Summary of significant accounting policies (continued)

2.5 Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board of Directors that makes strategic decisions.

2.6 Foreign currency translation

(a) Functional and presentation currency

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in RMB, which is the Company’s functional and the Group’s presentation currency.

(b) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement, except when deferred in other comprehensive income as qualifying cash flow hedges and qualifying net investment hedges.

Foreign exchange gains and losses that relate to borrowings and cash and cash equivalents are presented in the income statement within ‘finance income or expenses’. All other foreign exchange gains and losses are presented in the income statement within ‘Other (losses)/gains - net’.

2.7 Property, plant and equipment

Property, plant and equipment is stated at historical cost less depreciation and impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred.

Depreciation on property, plant and equipment is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows:

Buildings	12-40 years
Plant and machinery	12-20 years
Vehicles and other equipment	4-20 years

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 2.11).

Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized within ‘Other (loss)/gains-net’ in the income statement.

F - 16

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

2 Summary of significant accounting policies (continued)

2.8 Construction in progress

Construction in progress represents buildings, various plant and equipment under construction and pending installation, and is stated at cost less government grants that compensate the Company for the cost of construction, and impairment losses. Cost comprises direct costs of construction as well as interest charges, and foreign exchange differences on related borrowed funds to the extent that they are regarded as an adjustment to interest charges, during the period of construction. Construction in progress is transferred to property, plant and equipment when the asset is substantially ready for its intended use. No depreciation is provided in respect of construction in progress.

2.9 Investment properties

Investment properties are properties which are owned or held under a leasehold interest either to earn rental income and/or for capital appreciation.

Investment properties are stated in the balance sheet at cost less accumulated depreciation and impairment losses (Note 2.11). Depreciation is provided over their estimated useful lives on a straight-line basis, after taking into account their estimated residual values. Estimated useful lives of the Group’s investment properties are 30-40 years.

2.10 Lease prepayments and other assets

Lease prepayments and other assets mainly represent prepayments for land use rights and catalysts used in production. These assets are carried at cost less accumulated amortisation and impairment losses. Lease prepayments and other assets are amortised on a straight-line basis over the respective periods of the rights and the estimated useful lives of the catalysts, as follows:

Land use rights	30-50 years
Patents	10-28 years
Catalyst	2-5 years

2.11 Impairment of non-financial assets

Intangible assets that have an indefinite useful life or intangible assets not ready to use are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.

F - 17

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

2 Summary of significant accounting policies (continued)

2.12 Financial assets

2.12.1 Classification

The Group classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables and available for sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.

(a) Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are also categorised as held for trading unless they are designated as hedges. Assets in this category are classified as current assets if expected to be settled within 12 months; otherwise, they are classified as non-current.

(b) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for the amounts that are settled or expected to be settled more than 12 months after the end of the reporting period. These are classified as non-current assets. The Group’s loans and receivables comprise ‘trade receivables, bills receivable and other receivables’ and ‘cash and cash equivalents’ in the balance sheet (Note 2.17 and 2.18).

(c) Available-for-sale financial assets

Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless the investment matures or management intends to dispose of it within 12 months of the end of the reporting period.

2.12.2 Recognition and measurement

Regular way purchases and sales of financial assets are recognized on the trade-date – the date on which the Group commits to purchase or sell the asset. Investments are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognized at fair value, and transaction costs are expensed in the income statement. Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are subsequently carried at amortised cost using the effective interest method.

Gains or losses arising from changes in the fair value of the ‘financial assets at fair value through profit or loss’ category are presented in the income statement within ‘Other (losses)/gains-net’ in the period in which they arise. Dividend income from financial assets at fair value through profit or loss is recognised in the income statement as part of other income when the Group’s right to receive payments is established.

Changes in the fair value of monetary and non-monetary securities classified as available for sale are recognised in other comprehensive income.

When securities classified as available for sale are sold or impaired, the accumulated fair value adjustments recognized in equity are included in the income statement as ‘gains and losses from investment securities’.

F - 18

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

2 Summary of significant accounting policies (continued)

2.12 Financial assets (continued)

2.12.2 Recognition and measurement (continued)

Interest on available-for-sale securities calculated using the effective interest method is recognized in the income statement as part of other income. Dividends on available-for-sale equity instruments are recognized in the income statement as part of other income when the Group’s right to receive payments is established.

2.13 Offsetting financial instruments

Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the asset and settle the liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the company or the counterparty.

2.14 Impairment of financial assets

(a) Assets carried at amortised cost

The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

Evidence of impairment may include indications that the receivables or a group of receivables is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation, and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

For loans and receivables category, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognized in the consolidated income statement. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Group may measure impairment on the basis of an instrument’s fair value using an observable market price.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor’s credit rating), the reversal of the previously recognized impairment loss is recognized in the consolidated income statement.

F - 19

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

2 Summary of significant accounting policies (continued)

2.14 Impairment of financial assets (continued)

(b) Financial assets classified as available for sale

The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired.

For debt securities, if any such evidence exists, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is reclassified from equity and recognised in profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through the consolidated income statement.

For equity investments, a significant or prolonged decline in the fair value of the security below its cost is also evidence that the assets are impaired. If any such evidence exists, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is reclassified from equity and recognised in profit or loss. Impairment losses recognised in the consolidated income statement on equity instruments are not reversed through the consolidated income statement.

2.15 Derivative financial instruments

Derivative financial instruments of the Group are foreign exchange forward contracts, which are not designated as hedges.

Derivative financial instruments are initially recognized at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value.

Fair values are obtained from quoted market prices in active markets, including recent market transactions, and through the use of valuation techniques, including discounted cash flow models and options pricing models, as appropriate. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative.

The best evidence of the fair value of a derivative at initial recognition is the transaction price (i.e., the fair value of the consideration given or received) unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets. When such evidence exists, the Group recognizes profits (losses) on that day.

2.16 Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted average cost method. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity). It excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses.

F - 20

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

2 Summary of significant accounting policies (continued)

2.17 Trade receivables, bills receivable and other receivables

Trade receivables and bills receivable are amounts due from customers for merchandise sold or services performed in the ordinary course of business. If collection of trade receivables, bills receivable and other receivables is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as non-current assets.

Trade receivables, bills receivable and other receivables are recognized initially at fair value plus transaction costs and subsequently measured at amortised cost using the effective interest method, less allowance for impairment. See Note 2.12.2 for further information about the Group’s accounting for receivables and Note 2.14 for a description of the Group’s impairment policies.

2.18 Cash and cash equivalents

In the consolidated statement of cash flows, cash and cash equivalents include cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. In the Group’s balance sheet, bank overdrafts are shown within borrowings in current liabilities.

2.19 Share capital

Ordinary shares are classified as equity.

Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds.

2.20 Safety production fund

Under China’s law and regulation, the Group is required to accrue safety production fund at a certain percentage of the sales of dangerous goods. The fund is earmarked for improving the safety of production. The fund is accrued from retained earnings to other reserves and converted back to retained earnings when used.

2.21 Trade payables and other payables

Trade payables and other payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Trade payables and other payables are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities.

Trade payables and other payables are recognized initially at fair value plus transaction costs and subsequently measured at amortised cost using the effective interest method.

F - 21

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

2 Summary of significant accounting policies (continued)

2.22 Borrowings

Borrowings are recognized initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognized in the income statement over the period of the borrowings using the effective interest method.

Fees paid on the establishment of loan facilities are recognized as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a pre-payment for liquidity services and amortised over the period of the facility to which it relates.

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period.

2.23 Borrowing costs

General and specific borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.

Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation.

All other borrowing costs are recognized in profit or loss in the period in which they are incurred.

Borrowing costs include interest expense, finance charges in respect of exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. The exchange gains and losses that are an adjustment to interest costs include the interest rate differential between borrowing costs that would be incurred if the entity had borrowed funds in its functional currency, and the borrowing costs actually incurred on foreign currency borrowings.

F - 22

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

2 Summary of significant accounting policies (continued)

2.24 Current and deferred income tax

The tax expense for the period comprises current and deferred tax. Tax is recognized in the income statement, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively.

(a) Current income tax

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company’s subsidiaries, associates and joint ventures operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

(b) Deferred income tax

Inside basis differences

Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognized if they arise from the initial recognition of goodwill, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled.

Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.

Outside basis differences

Deferred income tax liabilities are provided on taxable temporary differences arising from investments in subsidiaries, associates and joint arrangements, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Generally the Group is unable to control the reversal of the temporary difference for associates. Only when there is an agreement in place that gives the Group the ability to control the reversal of the temporary difference in the foreseeable future, deferred tax liability in relation to taxable temporary differences arising from the associate’s undistributed profits is not recognised.

Deferred income tax assets are recognized on deductible temporary differences arising from investments in subsidiaries, associates and joint arrangements only to the extent that it is probable the temporary difference will reverse in the future and there is sufficient taxable profit available against which the temporary difference can be utilised.

(c) Offsetting

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

F - 23

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

2 Summary of significant accounting policies (continued)

2.25 Employee benefits

(a) Pension obligations

The PRC employees of the Group are covered by various PRC government-sponsored defined-contribution pension plans under which the employees are entitled to a monthly pension based on certain formulas. The relevant government agencies are responsible for the pension liability to these employees when they retire. The Group contributes on a monthly basis to these pension plans for the employees which are determined at a certain percentage of their salaries. Under these plans, the Group has no obligation for post-retirement benefits beyond the contribution made. Contributions to these plans are expensed as incurred and contributions paid to the defined contribution pension plans for a staff are not available to reduce the Group’s future obligations to such defined-contribution pension plans even if the staff leaves the Group.

(b) Termination benefits

Termination benefits are payable when employment is terminated by the Group before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognizes termination benefits at the earlier of the following dates: when Group demonstrably commits itself to terminate employment or to provide benefits as a result of voluntary redundancy by having a detailed formal plan which is without realistic possibility of withdrawal. Benefits falling due more than 12 months after the end of the reporting period are discounted to their present value.

2.26 Share-based payment

(a) Equity-settled share-based payment transactions

The Group operates a number of equity-settled, share-based compensation plans, under which the entity receives services from employees as consideration for equity instruments (options) of the Group. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed is determined by reference to the fair value of the options granted:

• including any market performance conditions such as an entity’s share price;

• excluding the impact of any service and non-market performance vesting conditions such as profitability, sales growth targets and remaining an employee of the entity over a specified time period; and

• including the impact of any non-vesting conditions such as the requirement for employees to save or holding shares for a specified period of time.

At the end of each reporting period, the Group revises its estimates of the number of options that are expected to vest based on the non-marketing performance and service conditions. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity.

In addition, in some circumstances employees may provide services in advance of the grant date and therefore the grant date fair value is estimated for the purposes of recognising the expense during the period between service commencement period and grant date.

When the options are exercised, the Company issues new shares. The proceeds received net of any directly attributable transaction costs are credited to share capital.

F - 24

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

2 Summary of significant accounting policies (continued)

2.26 Share-based payment (continued)

(b) Share-based payment transactions among Group entities

The grant by the Company of options over its equity instruments to the employees of subsidiary undertakings in the Group is treated as a capital contribution. The fair value of employee services received, measured by reference to the grant date fair value, is recognised over the vesting period as an increase to investment in subsidiary undertakings, with a corresponding credit to equity in the parent entity accounts.

2.27 Provisions

Provisions for environmental restoration, restructuring costs and legal claims are recognised when: the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Restructuring provisions comprise lease termination penalties and employee termination payments. Provisions are not recognised for future operating losses.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense.

2.28 Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable, and represents amounts receivable for goods supplied, stated net of discounts, returns and value added taxes. The Group recognizes revenue when the amount of revenue can be reliably measured; when it is probable that future economic benefits will flow to the entity; and when specific criteria have been met for each of the Group’s activities, as described below. The Group bases its estimates of return on historical results, taking into consideration the type of customers, the type of transactions and the specifics of each arrangement.

(a) Sales of petroleum and chemical products

Revenues associated with the sale of petroleum and chemical products are recognized in the income statement when the significant risks and rewards of ownership have been transferred to the buyer. Revenue excludes value added tax and is after deduction of any trade discounts and returns. No revenue is recognized if there are significant uncertainties regarding recovery of the consideration due to the possible return of goods, or when the amount of revenue and the costs incurred or to be incurred in respect of the transaction cannot be measured reliably.

(b) Pipeline transportation services

Revenues associated with pipeline transportation services are recognized by reference to the stage of completion (that is, when the services are rendered) of the transaction at the end of the reporting period and when the outcome of the transaction can be estimated reliably. The outcome of the transaction can be estimated reliably when the amount of revenue, the costs incurred and the stage of completion can be measured reliably and it is probable that the economic benefits associated with the transaction will flow to the Group.

F - 25

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

2 Summary of significant accounting policies (continued)

2.28 Revenue recognition (continued)

(c) Rental income

Rental income from investment property is recognized in the income statement on a straight-line basis over the term of the lease.

2.29 Interest income

Interest income is recognized using the effective interest method. When a loan and receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans and receivables is recognized using the original effective interest rate.

2.30 Dividend income

Dividend income is recognized when the right to receive payment is established.

2.31 Government grants

Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions.

Government grants relating to costs are deferred and recognised in the income statement over the period necessary to match them with the costs that they are intended to compensate.

Grants that compensate the Group for the cost of an asset are deducted from the carrying amount of the asset and consequently are effectively recognized in the income statement over the useful life of the asset by way of reduced depreciation expense.

2.32 Leases

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.

2.33 Dividend distribution

Dividend distribution to the Company’s shareholders is recognized as a liability in the Group’s financial statements in the period in which the dividends are approved by the Company’s shareholders.

F - 26

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

2 Summary of significant accounting policies (continued)

2.34 Research and development costs

Research and development costs comprise all costs that are directly attributable to research and development activities or that can be allocated on a reasonable basis to such activities. Research and development costs are recognized as intangible assets when the following criteria are met:

• it is technically feasible to complete the research and development project so that it will be available for use or sale;

• management intends to complete the research and development project, and use or sell it;

• it can be demonstrated how the research and development project will generate economic benefits;

• there are adequate technical, financial and other resources to complete the development and the ability to use or sell the research and development project; and

• the expenditure attributable to the research and development project during its development phase can be reliably measured.

Other research and development expenditure that do not meet these criteria are recognized as an expense as incurred. Research and development costs previously recognized as an expense are not recognized as an asset in a subsequent period.

2.35 Related parties

(i) A person, or a close member of that person’s family, is related to the Group if that person:

(1) has control or joint control over the Group;

(2) has significant influence over the Group; or

(3) is a member of the key management personnel of the Group or the Group’s parent.

(ii) An entity is related to the Group if any of the following conditions applies:

(1) The entity and the Group are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others).

(2) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member).

(3) Both entities are joint ventures of the same third party.

(4) One entity is a joint venture of a third entity and the other entity is an associate of the third entity.

(5) The entity is a post-employment benefit plan for the benefit of employees of either the Group or an entity related to the Group.

(6) The entity is controlled or jointly controlled by a person identified in (i).

(7) A person identified in (i)(1) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).

Close members of the family of a person are those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity.

F - 27

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

3 Financial risk management

3.1 Financial risk factors

The Group’s activities exposed it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and commodity price risk), credit risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance.

(a) Market risk

(i) Foreign exchange risk

The Group’s major operational activities are carried out in Mainland China and a majority of the transactions are denominated in RMB. Nevertheless the Group is exposed to foreign exchange risk arising from the recognised assets and liabilities (mainly trade payables), and future transactions denominated in foreign currencies, primarily with respect to USD and EUR. The Group’s finance department at its headquarter is responsible for monitoring the amount of assets and liabilities, and transactions denominated in foreign currencies to minimise the foreign exchange risk. During the year ended 31 December 2016, the Group did not enter into any forward foreign exchange contracts (2015: the Group entered into forward foreign exchange contracts to mitigate foreign exchange risk arising from borrowings denominated in EUR).

As at 31 December 2016, if the foreign currencies had weakened/strengthened by 5% against RMB with all other variables held constant, the Group’s net profit for the year would have been RMB 23,139 thousands increased/decreased as a result of foreign exchange gains/losses on translation of foreign currencies denominated trade payables (31 December 2015: RMB 3,605 thousands.2014: RMB 107,395 thousands decreased/increased in net loss which was mainly resulted from the translation of USD denominated trade payables and EUR    denominated borrowings).

(ii) Cash flow and fair value interest rate risk

The Group’s interest rate risk arises from short-term and long-term interest bearing borrowings. Borrowings obtained at variable rates expose the Group to cash flow interest rate risk. Borrowings obtained at fixed rates expose the Group to fair value interest rate risk. The Group determines the relative proportions of its fixed rate and floating rate contracts depending on the prevailing market conditions. As at 31 December 2016, the Group’s short-term interest bearing borrowings denominated with floating rates amounted to RMB 46,432 thousands (31 December 2015: RMB 2,000,000 thousands, representing 97% of total borrowing balance), which represented 7% of total borrowing balance.

The Group’s finance department at its headquarter continuously monitors the interest rate position of the Group. Increases in interest rates will increase the cost of new borrowing and the interest expenses with respect to the Group’s outstanding floating rate borrowings, and therefore could have a material adverse effect on the Group’s financial position. The Group makes adjustments timely with reference to the latest market conditions and may enter into interest rate swap agreements to mitigate its exposure to interest rate risk. During the year ended 31 December 2016 and 2015, the Group did not enter into any interest rate swap agreements.

As at 31 December 2016, if interest rates on the floating rate borrowings had risen/fallen by 50 basis points while all other variables had been held constant, the Group’s net profit would have decreased/increased by approximately RMB 174 thousands (31 December 2015: RMB 7,500 thousands), mainly as a result of higher/lower interest expense on floating rate borrowings.

F - 28

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

3 Financial risk management (continued)

3.1 Financial risk factors (continued)

(a) Market risk (continued)

(iii) Commodity price risk

The Group principally engages in processing crude oil into synthetic fibres, resins and plastics, intermediate petrochemicals and petroleum products. The selling price of petroleum products is periodically adjusted by government department based on the market price adjustment mechanism, and generally in connection with the crude oil price. The selling prices of synthetic fibres, resins and plastics and intermediate petrochemicals are market prices. The Group didn’t have any derivative financial instrument such as commodity futures and swaps, therefore the fluctuation of crude oil price could have significant impact on the Group.

(b) Credit risk

Credit risk is managed on group basis. It mainly arises from cash at bank, trade receivables, other receivables, bills receivable, etc.

The Group expects that there is no significant credit risk associated with cash at bank since they are deposited at state-owned banks and other medium or large size listed banks. Management does not expect that there will be any significant losses from non-performance by these counterparties.

In addition, the Group has policies to limit the credit exposure on accounts receivables, other receivables and bills receivable. The Group assesses the credit quality of and sets credit limits on its customers by taking into account their financial position, the availability of guarantee from third parties, their credit history and other factors such as current market conditions. The credit history of the customers is regularly monitored by the Group. In respect of customers with a poor credit history, the Group will use written payment reminders, or shorten or cancel credit periods, to ensure the overall credit risk of the Group is limited to a controllable extent.

(c) Liquidity risk

Cash flow forecast is performed by the operating entities of the Group and aggregated by Group finance. Group finance monitors rolling forecasts of the Group’s liquidity requirements to ensure it has sufficient cash to meet operational needs while maintaining sufficient headroom on its undrawn committed borrowing facilities from major financial institution so that the Group does not breach borrowing limits or covenants on any of its borrowing facilities to meet the short-term and long-term liquidity requirements.

The liquidity of the Group is primarily dependent on its ability to maintain adequate cash inflow from operations, the renewal of its short-term bank loans and its ability to obtain adequate external financing to support its working capital and meet its debt obligation when they become due. As at 31 December 2016, the Group had standby credit facilities with several PRC financial institutions which provided the Group to borrow up to RMB 23,664,190 thousands, within which the maturity dates of unused facility amounted to RMB 21,959,224 thousands will be after 31 December 2017 as disclosed in Note 26. Management assessed that all the facilities could be renewed upon the expiration dates.

Surplus cash held by the operating entities over and above balance required for working capital management are transferred to the Group treasury. As at 31 December 2016, the Group held cash and cash equivalents of RMB 5,440,623 thousands (31 December 2015: RMB 1,077,430 thousands) (Note 22) and trade receivables of RMB 414,944 thousands (31 December 2015: RMB 488,560 thousands) (Note 21), that are expected to readily generate cash inflows for managing liquidity risk. .

The table below analyses the Group’s non-derivative financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows.

F - 29

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

3 Financial risk management (continued)

3.1 Financial risk factors (continued)

(c) Liquidity risk (continued)

	Less than 1 year RMB’000		Between 1 and 2 years RMB’000		Between 2 and 5 years RMB’000		Over 5 years RMB’000		Total RMB’000
At 31 December 2016
Borrowings		546,432		—		—		—		546,432
Bill payables		5,000		—		—		—		5,000
Trade payables		2,123,904		—		—		—		2,123,904
Other payables		563,682		—		—		—		563,682
Amounts due to related parties		3,030,490		—		—		—		3,030,490
		6,269,508		—		—		—		6,269,508
	Less than 1 year RMB’000		Between 1 and 2 years RMB’000		Between 2 and 5 years RMB’000		Over 5 years RMB’000		Total RMB’000
At 31 December 2015
Borrowings		2,103,881		—		—		—		2,103,881
Trade payables		1,562,232		—		—		—		1,562,232
Other Payables		549,934		—		—		—		549,934
Amounts due to related parties		1,555,802		—		—		—		1,555,802
		5,771,849		—		—		—		5,771,849

3.2 Capital management

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

Consistent with others in the industry, the Group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including ‘current and non-current borrowings’ as shown in the consolidated balance sheet) less cash and cash equivalents. Total capital is calculated as ‘equity’ as shown in the consolidated balance sheet plus net debt.

F - 30

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

3 Financial risk management (continued)

3.2 Capital management (continued)

As cash and cash equivalents exceed total borrowings, which was resulted primarily from the significantly improved profitability and the early repayment of some bank loans before its maturity, there was no net debt as at 31 December 2016.

The gearing ratios at 31 December 2016 and 31 December 2015 were as follows:

	As at 31 December
	2015
	RMB’000
Total borrowings (Note 26)		2,070,000
Less: cash and cash equivalents (Note 22)		(1,077,430	)
Net debt		992,570
Total Equity		20,094,320
Total Capital		21,086,890
Gearing ratio		4.71	%

3.3 Fair value estimation

The table below analyses the Group’s financial instruments carried at fair value as at 31 December 2016 by level of the inputs to valuation techniques used to measure fair value. Such inputs are categorised into three levels within a fair value hierarchy as follows:

• Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).

• Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2).

• Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level3).

Financial assets and financial liabilities not measured at fair value mainly represent bills receivable, trade receivables and other receivables, trade and other payables (except for the staff salaries and welfare payables and taxes payables) and borrowings. As at 31 December 2016, these financial assets are expected to be collected in one year or less and these financial liabilities are due within one year or less. As a result, the carrying amounts of these financial assets and liabilities not measured at fair value are a reasonable approximation of their fair value.

F - 31

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

3 Financial risk management (continued)

3.4 Offsetting financial assets and financial liabilities

(a) Financial assets

	As at 31 December
	2015			2016
	RMB’000			RMB’000
Gross amount of recognised amounts due from related parties		1,227,020			1,403,442
Gross amount of recognised amounts due to related parties set off in the balance sheet		(63,892	)		(112,823	)
Net amounts of amounts due from related parties presented in the balance sheet		1,163,128			1,290,619

(b) Financial liabilities

	As at 31 December
	2015			2016
	RMB’000			RMB’000
Gross amount of recognised amounts due to related parties		1,637,859			3,157,127
Gross amount of recognised amounts due from related parties set off in the balance sheet		(63,892	)		(112,823	)
Net amounts of amounts due to related parties presented in the balance sheet		1,573,967			3,044,304

According to the offsetting master arrangements entered into in October 2014 between the Company and its related party, Shanghai Secco Petrochemical Company Limited (“Shanghai Secco”) and in December 2016 between the Company and its related party, BOC-SPC Gases Company Limited (“BOC”), the relevant financial assets and liabilities of each operating agreement between the Company and Shanghai Secco and those between the Company and BOC, are settled on a net basis periodically.

4 Critical accounting estimates and assumptions

Estimates and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

4.1 Critical accounting estimates and assumptions

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below.

(a) Impairments for non-financial assets

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

F - 32

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

4 Critical accounting estimates and judgments (Continued)

4.1 Critical accounting estimates and assumptions (Continued)

(b) Useful life and residual value of property, plant and equipment

Property, plant and equipment, are depreciated on a straight-line basis over the estimated useful lives of the assets, after taking into account the estimated residual value. Management reviews the estimated useful lives of the assets annually in order to determine the amount of depreciation expense to be recorded during any reporting period. The useful lives are based on the Group’s historical experience with similar assets, taking into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates.

(c) Net realisable value of inventories

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

(d) Recognition of deferred tax assets

There are many transactions and events for which the ultimate tax determination is uncertain during the ordinary course of business. Significant judgment is required from the Group in determining the provision for income taxes. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

Deferred tax assets are recognised in respect of temporary deductible differences and the carryforward of unused tax losses. Management recognises deferred tax assets only to the extent that it is probable that future taxable profit will be available against the assets which can be realised or utilised. At the end of each reporting period, management assesses whether previously unrecognised deferred tax assets should be recognized. The Group recognises a previously unrecognised deferred tax asset to the extent that it is probable that future taxable profit will allow the deferred tax asset to be utilised. In addition, management assesses the carrying amount of deferred tax assets that are recognised at the end of each reporting period. The Group reduces the carrying amount of a deferred tax asset to the extent that it is no longer probable that sufficient taxable profit will be available for the deferred tax asset to be utilised.

In making the assessment of whether it is probable the Group will realize or utilise the deferred tax assets, management primarily relies on the generation of future taxable income to support the recognition of deferred tax assets. In order to fully utilize the deferred tax assets recognized at 31 December 2016, the Group would need to generate future taxable income of at least RMB 412 million. Based on estimated forecast and historical experience, management believes that it is probable that the Group will generate sufficient taxable income to utilize the deferred tax assets.

F - 33

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

5 Segment information

The Group manages its business by divisions, which are organized by business lines. In view of the fact that the Company and its subsidiaries operate mainly in the PRC, no geographical segment information is presented.

In a manner consistent with the way in which information is reported internally to the Group’s chief operating decision maker, Board of Directors, for the purposes of resource allocation and performance assessment, the Group has identified the following five reportable segments. No operating segments have been aggregated to form the following reportable segments.

Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items mainly comprise investments accounted for using the equity method, deferred income tax assets, cash and cash equivalents, entrusted lending and incomes relating to these assets (such as share of profit of investments accounted for using equity method and interest income) and borrowings and interest expenses.

The Group principally operates in five operating segments: synthetic fibres, resins and plastics, intermediate petrochemicals, petroleum products and trading of petrochemical products. Synthetic fibres, resins and plastics, intermediate petrochemicals and petroleum products are produced through intermediate steps from the principal raw material of crude oil. The specific products of each segment are as follows:

(i) The synthetic fibres segment produces primarily polyester, acrylic fibres and carbon fibres, which are mainly used in the textile and apparel industries.

(ii) The resins and plastics segment produces primarily polyester chips, polyethylene resins, polypropylene resins and PVA granules. The polyester chips are used to produce polyester fibres, coating and containers. Polyethylene resins and plastics are used to produce insulated cable, mulching films and moulded products such as housewares and toys. Polypropylene resins are used for films, sheets and moulded products such as housewares, toys, consumer electronics and automobile parts.

(iii) The intermediate petrochemicals segment primarily produces p-xylene, benzene and ethylene oxide. The intermediate petrochemicals produced by the Group are both served as raw materials in the production of other petrochemicals, resins, plastics and synthetic fibres, and sold to external customers.

(iv) The petroleum products segment is equipped with crude oil refinery facilities used to produce qualified refined gasoline, fuel, diesel oil, heavy oil and liquefied petroleum gas, and provide raw materials for the Group’s downstream petrochemical processing facilities.

(v) The trading of petrochemical products segment is primarily engaged in importing and exporting of petrochemical products. The products are sourced from international and domestic suppliers.

(vi) Other operating segments represent the operating segments which do not meet the quantitative threshold for determining reportable segments. These include investment property leasing, service provision and a variety of other commercial activities.

F - 34

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

5 Segment information (continued)

	2014						2015						2016
	Total segment revenue		Inter- segment revenue		Revenue from external customers		Total segment revenue		Inter- segment revenue		Revenue from external customers		Total segment revenue		Inter- segment revenue		Revenue from external customers
	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000		RMB’000
Synthetic fibers		2,935,540		—		2,935,540		2,397,015		—		2,397,015		1,915,242		—		1,915,242
Resins and plastics		12,895,531		241,131		12,654,400		10,348,002		106,042		10,241,960		10,164,433		91,673		10,072,760
Intermediate petrochemicals		27,988,970		15,408,977		12,579,993		23,305,685		13,697,886		9,607,799		20,360,722		11,248,718		9,112,004
Petroleum products		63,510,346		5,266,442		58,243,904		47,473,490		3,579,131		43,894,359		38,776,209		3,514,487		35,261,722
Trading of petrochemical products		17,612,914		2,820,482		14,792,432		16,940,621		3,220,905		13,719,716		22,148,401		1,551,453		20,596,948
Others		1,974,929		1,054,951		919,978		1,429,317		542,028		887,289		1,369,671		485,441		884,230
		126,918,230		24,791,983		102,126,247		101,894,130		21,145,992		80,748,138		94,734,678		16,891,772		77,842,906

	2014			2015			2016
	RMB’000			RMB’000			RMB’000
Segment result - (Loss)/profit from operations
Petroleum products		(29,289	)		1,862,304			3,812,973
Resins and plastics		(331,540	)		1,218,598			1,637,578
Intermediate petrochemicals		131,830			956,820			1,810,011
Trading of petrochemical products		66,106			15,165			51,168
Synthetic fibres		(581,923	)		(356,399	)		(608,891	)
Others		156,916			212,444			75,017
(Loss)/profit from operations		(587,900	)		3,908,932			6,777,856
Net finance (expenses)/income		(359,698	)		(243,779	)		83,685
Share of profit of investments accounted for using the equity method		57,654			572,035			916,754
(Loss)/profit before taxation		(889,944	)		4,237,188			7,778,295

F - 35

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

5 Segment information (continued)

Other profit and loss disclosures

	2014									2015									2016
	Depreciation and amortisation			Impairment loss			Inventory write down			Depreciation and amortisation			Impairment loss			Inventory write down			Depreciation and amortisation			Impairment loss			Inventory (write-down) /reversal
	RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000			RMB’000
Synthetic fibres		(185,209	)		(28,690	)		(252	)		(159,472	)		—			(4,768	)		(137,153	)		(185,096	)		(38,750	)
Resins and plastics		(233,014	)		(114	)					(122,558	)		—			(339	)		(120,641	)		—			1,575
Intermediate petrochemicals		(621,545	)		(14,843	)		(10,175	)		(552,833	)		(50,001	)		(429	)		(525,698	)		(14,351	)		(642	)
Petroleum products		(1,009,980	)		(138,624	)					(979,911	)		—			(3,168	)		(886,784	)		(53,155	)		—
Trading of petrochemical products		(227	)		(3,630	)					(175	)		—			(13,150	)		(176	)		—			—
Others		(223,500	)		(27,698	)		(13	)		(230,012	)		(756	)		(23,014	)		(211,808	)		(1,570	)		(38,451	)
		(2,273,475	)		(213,599	)		(10,440	)		(2,044,961	)		(50,757	)		(44,868	)		(1,882,260	)		(254,172	)		(76,268	)

	As at 31 December
	2015		2016
	Total assets		Total assets
	RMB’000		RMB’000
Allocated assets
Synthetic fibres		1,624,351		1,405,804
Resins and plastics		1,578,493		1,821,576
Intermediate petrochemicals		4,557,760		4,441,418
Petroleum products		12,164,426		13,426,863
Trading of petrochemical products		924,622		1,186,590
Others		2,299,088		2,323,376
Allocated assets		23,148,740		24,605,627
Unallocated assets
Investments accounted for using the equity method		3,311,139		3,688,794
Cash and cash equivalents		1,077,430		5,440,623
Deferred income tax assets		71,045		103,091
Others		212,237		107,475
Unallocated assets		4,671,851		9,339,983
Total assets		27,820,591		33,945,610

F - 36

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

5 Segment information (continued)

	As at 31 December
	2015		2016
	Total liabilities		Total liabilities
	RMB’000		RMB’000
Allocated liabilities
Synthetic fibres		272,717		344,287
Resins and plastics		646,347		1,118,166
Intermediate petrochemicals		675,470		1,126,031
Petroleum products		3,059,334		4,323,580
Trading of petrochemical products		948,775		1,407,484
Others		53,628		76,395
Allocated liabilities		5,656,271		8,395,943
Unallocated liabilities
Borrowings		2,070,000		546,432
Total liabilities		7,726,271		8,942,375

	2014		2015		2016
	RMB’000		RMB’000		RMB’000
Additions to property, plant and equipment, construction in progress, lease prepayment and other assets
Synthetic fibres		39,408		38,629		106,872
Resins and plastics		58,955		94,935		169,330
Intermediate petrochemicals		668,075		180,806		261,291
Petroleum products		573,834		546,996		740,520
Others		172,011		96,886		36,965
		1,512,283		958,252		1,314,978

Entity-wide information

The Group’s revenue from external customers and the total non-current assets other than financial instruments and deferred income tax assets located are mainly within Mainland China as at 31 December 2016.

Revenue of approximate RMB 31,796,065 thousands (2015: RMB 39,657,297 thousands,2014: RMB 55,173,267 thousands) are derived from a single customer. These revenues are attributable to the Petroleum products and Others segments.

F - 37

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

6 Other operating income

	2014		2015		2016
	RMB’000		RMB’000		RMB’000
Government grants		172,829		150,116		144,631
Rental income from investment property		48,555		48,553		46,164
Income from pipeline transportation services		8,059		6,731		5,215
Others		32,142		29,524		1,296
		261,585		234,924		197,306

7 Other operating expenses

	2014			2015			2016
	RMB’000			RMB’000			RMB’000
Cost related to lease of investment property		(13,306	)		(13,453	)		(13,904	)
Others		(86,920	)		(20,418	)		(10,371	)
		(100,226	)		(33,871	)		(24,275	)

8 Other gains/(loss) - net

	2014		2015			2016
	RMB’000		RMB’000			RMB’000
Forward foreign exchange contracts		—		37,154			—
Loss on disposal of property, plant and equipment-net		—		(9,393	)		(42,031	)
Net foreign exchange gain/(loss)		—		878			(11,851	)
		—		28,639			(53,882	)

9 Finance income and expenses

	2014			2015			2016
	RMB’000			RMB’000			RMB’000
Interest income		64,673			49,302			133,484
Net foreign exchange gain		—			—			3,818
Finance income		64,673			49,302			137,302
Interest on bank and other borrowings		(375,808	)		(215,460	)		(56,080	)
Less: amounts capitalized on qualifying assets		1,208			3,518			2,463
Net interest expense		(374,600	)		(211,942	)		(53,617	)
Net foreign exchange loss		(49,771	)		(81,139	)		—
Finance expenses		(424,371	)		(293,081	)		(53,617	)
Finance (expenses)/income - net		(359,698	)		(243,779	)		83,685

F - 38

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

10 Expense by nature

	2014			2015		2016
	RMB’000			RMB’000		RMB’000
Cost of raw material		71,501,827			41,483,278		31,922,984
Cost of trading products		14,585,761			13,573,180		20,423,854
Employee benefit expenses (Note 11)		2,627,357			2,595,646		2,487,534
Depreciation and amortisation (Note 14, 15,16)		2,273,475			2,044,961		1,882,260
Repairs and maintenance expenses		1,088,314			978,845		1,192,203
Transportation costs		354,735			337,454		323,678
Impairment loss (Note 15, 21)		10,439			50,757		254,172
Inventory write-down (Note 20)		213,600			44,868		76,268
Leasing expenses		20,487			23,477		73,852
Sales commissions (Note 29)		113,162			112,245		100,221
Auditors’ remuneration - audit services		7,800			7,800		7,800
Change of goods in process and finished goods		(546,246	)		855,692		(731,944	)
Other expenses		1,223,512			1,249,762		1,264,879
Total cost of sales, selling and administrative expenses		93,474,223			63,357,965		59,277,761

11 Employee benefit expenses

	2014		2015		2016
	RMB’000		RMB’000		RMB’000
Wages and salaries		1,731,459		1,719,419		1,666,806
Social welfare costs		696,925		694,415		640,710
Share options granted to directors and employees (Note 25)		—		22,702		18,004
Others		198,973		159,110		162,014
Total employee benefit expense		2,627,357		2,595,646		2,487,534

(i) Five highest paid individuals

During the year ended 31 December 2014,2015 and 2016, all 5 individuals with the highest emoluments are directors and supervisors whose emoluments are disclosed in Note 35(i).

F - 39

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

12 Income tax

	2014			2015		2016
	RMB’000			RMB’000		RMB’000
-Current income tax		16,286			82,753		1,828,868
-Deferred taxation		(230,470	)		844,024		(32,046	)
Income tax (income)/expense		(214,184	)		926,777		1,796,822

A reconciliation of the expected income tax calculated at the applicable tax rate and total profit/(loss) with the actual income tax is as follows:

	2014			2015			2016
	RMB’000			RMB’000			RMB’000
(Loss)/Profit before taxation		(889,944	)		4,237,188			7,778,295
Expected PRC income tax at the statutory tax rate of 25%		(222,486	)		1,059,297			1,944,574
Tax effect of share of profit of investments accounted for using the equity method		(11,913	)		(140,509	)		(225,813	)
Tax effect of other non-taxable income		(18,106	)		(19,178	)		(16,610	)
Tax effect of non-deductible loss, expenses and costs		5,408			5,486			23,578
True up for final settlement of enterprise income taxes in respect of previous year		11			1,752			32,457
Profit on disposal of associates and joint ventures		3,496			—			—
Utilization of previously unrecognized tax losses		(536	)		—			(58	)
Temporary differences for which no deferred income tax asset was recognized in current year		12,261			15			13,511
Utilization of previously unrecognised temporary differences		—			(12,359	)		(36	)
Tax losses for which no deferred income tax asset was recognized		17,681			32,273			25,219
Actual income tax		(214,184	)		926,777			1,796,822

The provision for PRC income tax is calculated at the rate of 25% (2015 and 2014: 25%) on the estimated taxable income of the year ended 31 December 2016 determined in accordance with relevant income tax rules and regulations. The Group did not carry out business overseas and therefore does not incur overseas income taxes.

F - 40

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

12 Income tax (continued)

(i) The analysis of deferred tax assets and deferred tax liabilities is as follows:

	2015			2016
	RMB’000			RMB’000
Deferred tax assets:
– Deferred tax asset to be recovered after more than 12 months		47,884			69,382
– Deferred tax asset to be recovered within 12 months		31,862			40,309
		79,746			109,691
Deferred tax liabilities:
– Deferred tax liabilities to be recovered after more than 12 months		(5,812	)		(4,500	)
– Deferred tax liabilities to be recovered within 12 months		(2,889	)		(2,100	)
		(8,701	)		(6,600	)
Deferred tax assets net		71,045			103,091

(ii) Movements in deferred tax assets and liabilities are as follows:

	Balance at 1 January 2015			Recognized in income statement			Balance at 31 December 2015
	RMB’000			RMB’000			RMB’000
Impairment for bad and doubtful debts, provision for inventories and payroll payables		59,580			(39,788	)		19,792
Deferred income		4,109			(4,109	)		—
Provision for impairment losses in fixed assets, construction in progress		126,028			11,880			137,908
Difference in depreciation		(72,310	)		(19,011	)		(91,321	)
Capitalisation of borrowing costs		(11,590	)		2,889			(8,701	)
Tax losses carried forward		803,559			(800,684	)		2,875
Share option		—			5,675			5,675
Others		5,693			(876	)		4,817
Deferred tax assets		915,069			(844,024	)		71,045
	Balance at 1 January 2016			Recognized in income statement			Balance at 31 December 2016
	RMB’000			RMB’000			RMB’000
Impairment for bad and doubtful debts, provision for inventories and payroll payables		19,792			1,081			20,873
Provision for impairment losses in fixed assets, construction in progress		137,908			35,868			173,776
Difference in depreciation		(91,321	)		(7,755	)		(99,076	)
Capitalisation of borrowing costs		(8,701	)		2,101			(6,600	)
Tax losses carried forward		2,875			(2,875	)		—
Share option		5,675			4,501			10,176
Others		4,817			(875	)		3,942
Deferred tax assets		71,045			32,046			103,091

F - 41

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

12 Income tax (continued)

The Group recognizes deferred tax assets only to the extent that it is probable that future taxable income will be available against which the assets can be utilized. Based on the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets will be utilized, management believes that it is probable the Group will realize the benefits of these temporary differences for which deferred tax assets have been recoginized.

(iii) Deferred tax assets not recognized

As at 31 December 2016, a subsidiary of the Company did not recognise the deferred tax assets in respect of the impairment losses on property, plant and equipment amounting to RMB 456,623 thousands and provision for inventories amounting to RMB 46,190 thousands (31 December 2015: RMB 432,579 thousands and RMB 46,190 thousands respectively), because it was not probable that the related tax benefit would be realized.

As at 31 December 2016, certain subsidiaries of the Company did not recognize the deferred tax assets of RMB 432,634 thousands (31 December 2015: RMB 411,284 thousands) in respect of unused tax losses carried forward for PRC income tax purpose because it was not probable that the related tax benefit would be realized.

Tax losses carried forward that are not recognised as deferred tax assets will expire in the following years:

	2015		2016
	RMB’000		RMB’000
2016		79,526		—
2017		68,211		68,211
2018		63,733		63,733
2019		70,723		70,723
2020		129,091		140,591
2021		—		89,376
		411,284		432,634

F - 42

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

13 (Loss)/Earnings per share

(a) Basic

Basic (loss)/earnings per share is calculated by dividing the (loss)/profit attributable to owners of the Company by the weighted average number of ordinary shares in issue during the year.

	2014			2015		2016
	RMB’000			RMB’000		RMB’000
Net (loss)/profit attributable to owners of the Company		(692,222)			3,274,308		5,968,466
Weighted average number of ordinary shares in issue(thousands of shares)		10,800,000			10,800,000		10,800,000
Basic (loss)/earnings per share(RMB per share)		RMB (0.064	)		RMB 0.303		RMB 0.553
Basic (loss)/earnings per ADS(RMB per ADS)		RMB (6.409	)		RMB 30.318		RMB 55.264

(b) Diluted

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares.

The Company has dilutive potential ordinary shares from share options. The number of shares that would have been issued assuming the exercise of the share options less the number of shares that could have been issued at fair value (determined as the average market price per the Company’s A share for year ended 31 December 2016) for the same total proceeds is the number of shares issued for no consideration. The resulting number of shares issued for no consideration is included in the weighted average number of ordinary shares as the denominator for calculating diluted earnings per share.

The calculation of the diluted earnings per share for year ended 31 December 2014,2015 and 2016 was shown as:

	2014			2015		2016
	RMB’000			RMB’000		RMB’000
Earnings
(Loss)/Profit attributable to owners of the Company		(692,222	)		3,274,308		5,968,466
Weighted average number of ordinary shares in issue (thousands of shares)		10,800,000			10,800,000		10,800,000
Adjustments for share options granted (thousands of shares)		—			9,041		8,632
Weighted average number of ordinary shares for diluted earnings per share (thousands of shares)		10,800,000			10,809,041		10,808,632
Diluted (loss)/earnings per share (RMB per share)		RMB (0.064	)		RMB 0.303		RMB 0.552
Diluted (loss)/earnings per ADS (RMB per ADS)(i)		RMB (6.409	)		RMB 30.292		RMB 55.219

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

F - 43

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

14 Lease prepayment and other assets

	Land use rights RMB’000			Other Intangible assets RMB’000			Long-term prepaid expense RMB’000			Total RMB’000
At 1 January 2015
Cost		708,972			81,085			602,451			1,392,508
Accumulated amortisation		(300,087	)		(48,830	)		—			(348,917	)
Net book amount		408,885			32,255			602,451			1,043,591
Year ended 31 December 2015
Opening net book amount		408,885			32,255			602,451			1,043,591
Additions		—			—			148,553			148,553
Charge for the year		(14,690	)		(2,922	)		(305,035	)		(322,647	)
Reclassified to prepayments		—			—			(86,481	)		(86,481	)
Closing net book amount		394,195			29,333			359,488			783,016
At 31 December 2015
Cost		708,972			81,085			359,488			1,149,545
Accumulated amortisation		(314,777	)		(51,752	)		—			(366,529	)
Net book amount		394,195			29,333			359,488			783,016
Year ended 31 December 2016
Opening net book amount		394,195			29,333			359,488			783,016
Additions		—			—			324,523			324,523
Charge for the year		(14,491	)		(2,922	)		(226,744	)		(244,157	)
Reclassified to prepayments		—			—			(157,926	)		(157,926	)
Closing net book amount		379,704			26,411			299,341			705,456
At 31 December 2016
Cost		708,972			81,085			299,341			1,089,398
Accumulated amortisation		(329,268	)		(54,674	)		—			(383,942	)
Net book amount		379,704			26,411			299,341			705,456

Long-term prepaid expenses are mainly catalyst. As at 31 December 2016, the current portion of catalyst amounted to RMB 157,926 thousands (31 December 2015: RMB 86,481 thousands) was reclassified to prepayments, while the net book value of non-current portion was RMB 287,423 thousands (31 December 2015: RMB 345,414 thousands).

During the year ended 31 December 2016, the amortisation of RMB 244,157 thousands (2015: RMB 322,647 thousands, 2014: RMB 347,144 thousands) has been charged in cost of sales.

F - 44

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

15 Property, plant and equipment

	Buildings RMB’000			Plant and machinery RMB’000			Vehicles and other equipment RMB’000			Total RMB’000
At 1 January 2015
Cost		3,757,546			40,353,304			1,931,721			46,042,571
Accumulated depreciation		(2,109,366	)		(25,957,875	)		(1,507,236	)		(29,574,477	)
Impairment loss		(279,099	)		(593,348	)		(54,072	)		(926,519	)
Net book amount		1,369,081			13,802,081			370,413			15,541,575
Year ended 31 December 2015
Opening net book amount		1,369,081			13,802,081			370,413			15,541,575
Additions		—			127,381			23,295			150,676
Disposals		(452	)		(23,337	)		(2,479	)		(26,268	)
Reclassification		48,244			(51,253	)		3,009			—
Transferred from construction in progress (Note 17)		11,283			444,904			23,194			479,381
Transferred to investment property    (Note 16)		(3,277	)		—			—			(3,277	)
Charge for the year		(106,439	)		(1,539,391	)		(62,937	)		(1,708,767	)
Impairment loss		—			(50,001	)		—			(50,001	)
Closing net book amount		1,318,440			12,710,384			354,495			14,383,319
At 31 December 2015
Cost		3,813,839			40,630,644			1,903,931			46,348,414
Accumulated depreciation		(2,216,300	)		(27,279,363	)		(1,495,393	)		(30,991,056	)
Impairment loss		(279,099	)		(640,897	)		(54,043	)		(974,039	)
Net book amount		1,318,440			12,710,384			354,495			14,383,319
Year ended 31 December 2016
Opening net book amount		1,318,440			12,710,384			354,495			14,383,319
Additions		195			149,691			16,826			166,712
Disposals		(1,300	)		(33,660	)		(2,173	)		(37,133	)
Reclassification		(4,192	)		(5,573	)		9,765			—
Transferred from construction in progress(Note 17)		28,652			757,157			42,782			828,591
Transferred from investment property    (Note 16)		11,587			—			—			11,587
Charge for the year		(94,189	)		(1,467,424	)		(62,934	)		(1,624,547	)
Impairment loss		—			(247,058	)		(7,184	)		(254,242	)
Closing net book amount		1,259,193			11,863,517			351,577			13,474,287
At 31 December 2016
Cost		3,841,570			41,025,426			1,924,313			46,791,309
Accumulated depreciation		(2,303,278	)		(28,330,684	)		(1,511,509	)		(32,145,471	)
Impairment loss		(279,099	)		(831,225	)		(61,227	)		(1,171,551	)
Net book amount		1,259,193			11,863,517			351,577			13,474,287

In the year ended 31 December 2016, the amount of depreciation expense charged to cost of sales and selling and administrative expense were RMB 1,616,117 thousands and RMB 8,430 thousands, respectively (2015: RMB 1,706,595 thousands and RMB 2,172 thousands, respectively. 2014: RMB 1,926,256 thousands and RMB 75 thousands.).

F - 45

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

15 Property, plant and equipment (continued)

During the year ended 31 December 2016, the Company and its subsidiaries made impairment provision of RMB 254,242 thousands against these property, plant and equipment which will be redundant and replaced by new facilities (2015: RMB 50,001 thousands).

16 Investment property

	RMB’000
At 1 January 2015
Cost		552,534
Accumulated depreciation		(136,692	)
Net book amount		415,842
Year ended 31 December 2015
Opening net book amount		415,842
Transferred from property, plant and equipment (Note 15)		3,277
Charge for the year		(13,547	)
Closing net book amount		405,572
At 1 January 2016
Cost		556,884
Accumulated depreciation		(151,312	)
Net book amount		405,572
Year ended 31 December 2016
Opening net book amount		405,572
Transferred to property, plant and equipment (Note 15)		(11,587	)
Charge for the year		(13,556	)
Closing net book amount		380,429
At 31 December 2016
Cost		540,493
Accumulated depreciation		(160,064	)
Net book amount		380,429

As at 31 December 2016, the Group had no contractual obligations for future repairs and maintenance (31 December 2015: Nil).

Investment properties represent certain floors of an office building leased to other entities including related parties.

The fair value of the investment properties of the Group as at 31 December 2016 was estimated by the directors to be approximately RMB 1,330,700 thousands by reference to market values of similar properties in the nearby area (31 December 2015: RMB 1,262,135 thousands). This fair value estimation was at level 3 of fair value hierarchy by using market observable inputs. The investment property has not been valued by an external independent appraiser.

Rental income of RMB 46,164 thousands was recognized by the Group during the year ended 31 December 2016 (2015: RMB 48,553 thousands, 2014: RMB 48,555 thousands).

F - 46

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

17 Construction in progress

	2015			2016
	RMB’000			RMB’000
At 1 January		542,878			722,520
Additions		659,023			823,743
Transferred to property plant and Equipment (Note 15)		(479,381	)		(828,591	)
At 31 December		722,520			717,672

During the year ended 31 December 2016, the Group capitalised borrowing costs amounting to RMB 2,463 thousands (2015: RMB 3,518 thousands, 2014: RMB 1,208 thousands) on qualifying assets. Borrowing costs were capitalised at the weighted average rate of its general borrowings of 3.03% (2015: 3.47%,2014:3.89%).

18 Subsidiaries

The following list contains the particulars of major subsidiaries of the Group, all of which are limited companies established and operated in the PRC as at 31 December 2016.

Company	Registered capital ’000		Percentage of equity directly held by the Company %		Percentage of equity held by the Group %		Percentage of equity held by non-controlling interests %		Principal activities
Shanghai Petrochemical Investment Development Company Limited		RMB 1,000,000		100.00		100.00		—	Investment management
China Jinshan Associated Trading Corporation		RMB 25,000		67.33		67.33		32.67	Import and export of petrochemical products and equipment
Shanghai Jinchang Engineering Plastics Company Limited		USD 9,154		—		74.25		25.75	Production of Polypropylene compound products
Shanghai Golden Phillips Petrochemical Company Limited		USD 50,000		—		60.00		40.00	Production of polyethylene products
Zhejiang Jin Yong Acrylic Fibre Company Limited		RMB 250,000		75.00		75.00		25.00	Production of acrylic fibre products
Shanghai Golden Conti Petrochemical Company Limited		RMB 545,776		—		100.00		—	Production of petrochemical products
Shanghai Jinshan Trading Corporation		RMB 100,000		—		67.33		32.67	Import and export of petrochemical products

The total comprehensive income attributable to non-controlling interests for the year ended 31 December 2016 is RMB 13,007 thousands (2015: 36,103 thousands, 2014:16,462 thousands).

F - 47

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

19 Investments accounted for using the equity method

The amounts recognised in the balance sheet are as follows:

	2015		2016
	RMB’000		RMB’000
Associates
-Share of net assets		3,074,156		3,498,097
Joint ventures
-Share of net assets		236,983		190,697
		3,311,139		3,688,794

The amounts recognised in the share of profit/(loss) of investments accounted for using the equity method are as follows:

	2015		2016
	RMB’000		RMB’000
Associates		550,530		929,315
Joint ventures		21,505		(12,561	)
		572,035		916,754

Investment in associates

	2015			2016
	RMB’000			RMB’000
At 1 January		2,720,134			3,074,156
Share of profit		550,530			929,315
Other Comprehensive Income		—			18,213
Cash dividends distribution		(196,508	)		(523,587	)
At 31 December		3,074,156			3,498,097

F - 48

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

19 Investments accounted for using the equity method (continued)

Investment in associates (continued)

Set out below are the material associates of the Group as at 31 December 2016 and 2015. The associates as listed below have share capital consisting solely of ordinary shares, which are held directly by the Group; the country of incorporation or registration is also their principal place of business.

Nature of investment in major associates as at 31 December 2016 and 2015

Name of entity	Place of business/country of incorporation		% of ownership interest		Nature of the relationship		Measurement method
Shanghai Secco Petrochemical Company Limited [“Shanghai Secco”]		PRC		20		Manufacturing and distribution of chemical products		Equity
Shanghai Chemical Industry Park Development Company Limited [“Chemical Industry”]		PRC		38.26		Planning, development and operation of the Chemical Industry Park in Shanghai, PRC		Equity
Shanghai Jinsen Hydrocarbon Resins Company Limited [“Jinsen”]		PRC		40		Production of resins products		Equity
Shanghai Azbil Automation Company Limited[“Azbil”]		PRC		40		Service and maintenance of building automation systems and products		Equity

Shanghai Secco, Chemical Industry, Jinsen and Azbil are private companies and there are no quoted market prices available for their shares.

There are no contingent liabilities relating to the Group’s interest in the associates.

F - 49

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

19 Investments accounted for using the equity method (continued)

Investment in associates (continued)

Summarised financial information for major associates

Set out below are the summarised financial information for the above associates.

Summarised balance sheet for material associates

As at 31 December 2015	Shanghai Secco RMB’000			Chemical Industry RMB’000			Jinsen RMB’000			Azbil RMB’000
Current
-Current Assets		4,879,596			2,486,929			128,354			150,672
-Current Liabilities		(3,532,247	)		(404,115	)		(7,882	)		(41,801	)
Non-current
-Non-current Assets		8,033,469			2,693,119			86,514			3,444
-Non-current liabilities		(487,020	)		(980,583	)		—			—
Net Assets		8,893,798			3,795,350			206,986			112,315

As at 31 December 2016	Shanghai Secco RMB’000			Chemical Industry RMB’000			Jinsen RMB’000			Azbil RMB’000
Current
-Current Assets		5,596,573			4,265,139			110,499			153,980
-Current Liabilities		(1,982,932	)		(1,299,046	)		(10,324	)		(46,532	)
Non-current
-Non-current Assets		6,582,633			3,001,112			83,077			3,145
-Non-current liabilities		—			(1,655,448	)		—			—
Net Assets		10,196,274			4,311,757			183,252			110,593

F - 50

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

19 Investments accounted for using the equity method (continued)

Investment in associates (continued)

Summarised statement of comprehensive income for material associates

2014	Shanghai Secco RMB’000			Chemical Industry RMB’000		Jinsen RMB’000			Azbil RMB’000
Revenue		26,131,711			566		266,556			276,665
Post-tax (loss)/profit from continuing operations		(339,450	)		221,540		12,426			30,153
Other comprehensive income		—			—		—			—
Total comprehensive (loss)/income		(339,450	)		221,540		12,426			30,153
Dividends declared by associate		—			30,000		12,115			30,000
2015	Shanghai Secco RMB’000			Chemical Industry RMB’000		Jinsen RMB’000			Azbil RMB’000
Revenue		23,848,576			1,032		245,060			186,657
Post-tax profit from continuing operations		2,185,268			235,635		8,155			20,507
Other comprehensive income		—			—		—			—
Total comprehensive income		2,185,268			235,635		8,155			20,507
Dividends declared by associate		780,000			42,000		7,315			30,000
2016	Shanghai Secco RMB’000			Chemical Industry RMB’000		Jinsen RMB’000			Azbil RMB’000
Revenue		23,969,408			2,471,027		167,956			180,108
Post-tax profit/(loss) from continuing operations		3,753,476			513,804		(16,394	)		16,278
Other comprehensive income		—			47,603		—			—
Total comprehensive income/(loss)		3,753,476			561,407		(16,394	)		16,278
Dividends declared by associate		2,451,000			45,000		7,340			18,000

F - 51

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

19 Investments accounted for using the equity method (continued)

Investment in associates (continued)

The information above reflects the amounts presented in the financial statements of the associates (and not the Group’s share of those amounts) adjusted for differences in accounting policies between the group and the associates.

Reconciliation of summarised financial information

Reconciliation of the summarised financial information presented to the carrying amount of its interest in material associates

Summarised financial information for material associates

2015	Shanghai Secco RMB’000			Chemical Industry RMB’000			Jinsen RMB’000			Azbil RMB’000
Opening net assets 1 January		7,488,530			3,601,715			206,146			121,808
Profit for the year		2,185,268			235,635			8,155			20,507
Other comprehensive income		—			—			—			—
Capital increment		—			—			—			—
Declared dividends		(780,000	)		(42,000	)		(7,315	)		(30,000	)
Closing net assets		8,893,798			3,795,350			206,986			112,315
% of ownership interest		20.00	%		38.26	%		40.00	%		40.00	%
Interest in associates		1,778,760			1,452,101			82,794			44,926
Unentitled portion (Note a)		—			(331,242	)		—			—
Carrying value		1,778,760			1,120,859			82,794			44,926
2016	Shanghai Secco RMB’000			Chemical Industry RMB’000			Jinsen RMB’000			Azbil RMB’000
Opening net assets 1 January		8,893,798			3,795,350			206,986			112,315
Profit/(loss) for the year		3,753,476			513,804			(16,394	)		16,278
Other comprehensive income		—			47,603			—			—
Capital increment		—			—			—			—
Declared dividends		(2,451,000	)		(45,000	)		(7,340	)		(18,000	)
Closing net assets		10,196,274			4,311,757			183,252			110,593
% of ownership interest		20.00	%		38.26	%		40.00	%		40.00	%
Interest in associates		2,039,256			1,649,677			73,301			44,237
unrealised upstream and downstream transaction		(7,979	)		—			—			—
Unentitled portion (Note a)		—			(348,600	)		—			—
Carrying value		2,031,277			1,301,077			73,301			44,237

Note a: Unentitled portion represented the earnings from sales of the lands injected by Government in Chemical Industry cannot be shared by other shareholders.

F - 52

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

19 Investments accounted for using the equity method (continued)

Investment in associates (continued)

Summarised financial information for other associates

	2015			2016
	RMB’000			RMB’000
Carrying value of investments at 31 December		46,817			48,205
Aggregate amount of the Group’s share of those individually immaterial associates:
Profit for the year		8,347			7,423
Other comprehensive income		—			—
Total comprehensive income		8,347			7,423
Investment in joint ventures
	2015			2016
	RMB’000			RMB’000
At 1 January		216,128			236,983
Share of profit		21,505			(12,561	)
Cash dividends distribution		(650	)		(33,725	)
At 31 December		236,983			190,697

The joint venture listed below has share capital consisting solely of ordinary shares, which is held directly by the Group.

Name of entity	Place of business/country of incorporation		% of ownership interest		Nature of the relationship		Measure-ment method
BOC-SPC Gases Company Limited [“BOC”]		PRC		50		Production and sales of industrial gases		Equity
Shanghai Jinpu Plastic Packing Materials Company Limited [“Jinpu”]		PRC		50		Production of polypropylene film		Equity
Shanghai Petrochemical Yangu Gas Development Company Limited [“Yangu Gas”]		PRC		50		Production and sales of industrial gases		Equity

BOC, Jinpu and Yangu Gas are private companies and there are no quoted market prices available for their shares.

F - 53

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

19 Investments accounted for using the equity method (continued)

Investment in joint venture (continued)

Summarised financial information for joint ventures

Set out below are the summarised financial information for joint ventures which are accounted for using the equity method.

Summarised balance sheet

As at 31 December 2015	BOC RMB’000			Jinpu RMB’000			Yangu Gas RMB’000
Current
Cash and cash equivalents		28,563			1,790			19,224
Other current assets (excluding cash)		55,888			30,886			12,925
Total current assets		84,451			32,676			32,149
Financial liabilities		(57,686	)		(31,462	)		—
Other current liabilities		(13,077	)		(3,236	)		(5,807	)
Total current liabilities		(70,763	)		(34,698	)		(5,807	)
Non-current
Total non-current Assets		313,884			81,985			78,622
Total non-current liabilities		—			—			—
Net assets		327,572			79,963			104,964
At 31 December 2016	BOC RMB’000			Jinpu RMB’000			Yangu Gas RMB’000
Current
Cash and cash equivalents		43,356			2,587			27,174
Other current assets (excluding cash)		37,422			1,740			12,401
Total current assets		80,778			4,327			39,575
Financial liabilities		(29,522	)		(21,610	)		(3,104	)
Other current liabilities		(12,545	)		(3,389	)		(2,115	)
Total current liabilities		(42,067	)		(24,999	)		(5,219	)
Non-current
Total non-current assets		273,096			17,945			66,757
Total non-current liabilities		—			—			—
Net assets		311,807			(2,727	)		101,113

F - 54

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

19 Investments accounted for using the equity method (continued)

Investment in joint venture (continued)

Summarised statement of comprehensive income for joint ventures

2014	BOC RMB’000			Jinpu RMB’000			Yangu Gas RMB’000
Revenue		388,391			226,221			75,342
Depreciation and amortisation		(44,870	)		(9,783	)		(14,193	)
Interest income		383			77			167
Interest expense		(5,533	)		(2,329	)		(965	)
Profit/(loss) from continuing operations		41,345			(26,753	)		1,397
Income tax expense		(14,545	)		—			—
Post-tax profit/(loss) from continuing operations		26,800			(26,753	)		1,397
Other comprehensive income		—			—			—
Total comprehensive income/(loss)		26,800			(26,753	)		1,397
Dividends declared by joint venture		106,242			—			2,000
2015	BOC RMB’000			Jinpu RMB’000			Yangu Gas RMB’000
Revenue		396,176			118,966			68,469
Depreciation and amortisation		(44,727	)		(8,498	)		(10,952	)
Interest income		326			50			169
Interest expense		(4,012	)		(1,072	)		(244	)
Profit/(loss) from continuing operations		72,778			(24,213	)		1,830
Income tax expense		(14,392	)		—			—
Post-tax profit/(loss) from continuing operations		58,386			(24,213	)		1,830
Other comprehensive income		—			—			—
Total comprehensive income/(loss)		58,386			(24,213	)		1,830
Dividends declared by joint venture		—			—			1,300
2016	BOC RMB’000			Jinpu RMB’000			Yangu Gas RMB’000
Revenue		370,171			31,794			59,904
Depreciation and amortisation		(45,317	)		(8,463	)		(11,612	)
Interest income		354			6			246
Interest expense		(927	)		(775	)		—
Profit/(loss) from continuing operations		66,855			(82,690	)		(2,651	)
Income tax expense		16,679			—			—
Post-tax profit/(loss) from continuing operations		50,485			(82,690	)		(2,651	)
Other comprehensive income		—			—			—
Total comprehensive income/(loss)		50,485			(82,690	)		(2,651	)
Dividends declared by joint venture		66,250			—			1,200

The information above reflects the amounts presented in the financial statements of the joint ventures (and not the Group’s share of those amounts) adjusted for differences in accounting policies between the Group and the joint ventures.

F - 55

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

19 Investments accounted for using the equity method (continued)

Investment in joint venture (continued)

Reconciliation of summarised financial information

2015	BOC RMB’000			Jinpu RMB’000			Yangu Gas RMB’000
Opening net assets 1 January		269,186			104,176			104,434
Profit/(loss) for the year		58,386			(24,213	)		1,830
Other comprehensive income		—			—			—
Declared dividends		—			—			(1,300	)
Closing net assets		327,572			79,963			104,964
% of ownership interest		50.00	%		50.00	%		50.00	%
Interest in joint ventures		163,786			39,982			52,482
Unrealized downstream transactions		(19,267	)		—			—
Carrying value		144,519			39,982			52,482
2016	BOC RMB’000			Jinpu RMB’000			Yangu Gas RMB’000
Opening net assets 1 January		327,572			79,963			104,964
Profit/(loss) for the year		50,485			(82,690	)		(2,651	)
Other comprehensive income		—			—			—
Declared dividends		(66,250	)		—			(1,200	)
Closing net assets/(deficit)(a)		311,807			(2,727	)		101,113
% of ownership interest		50.00	%		50.00	%		50.00	%
Interest in joint ventures		155,903			—			50,558
Unrealized downstream transactions		(15,764	)		—			—
Carrying value		140,139			—			50,558

(a) The Group’s share of losses in Jinpu exceeded RMB 2,727 thousands to its interest during the year ended 31 December 2016 (2015 and 2014: nil), cumulatively exceeded RMB 2,727 thousands to its investment as at 31 December 2016 (31 December 2015 and 2014: nil). The Group has no obligations and does not need to make payments on behalf of Jinpu. Meanwhile, the Group has not any other unsecured receivables due from Jinpu. As a result, the Group did not recognize further losses and the carrying amount of the investment in Jinpu was solely decreased to zero.

20 Inventories

	As at 31 December 2015							As at 31 December 2016
	Gross carrying amount RMB’000		Provision for declines in the value of inventories RMB’000			Carrying amount RMB’000		Gross carrying amount RMB’000		Provision for declines in the value of inventories RMB’000			Carrying amount RMB’000
Raw materials		2,517,806		(1,564	)		2,516,242		3,863,647		(309	)		3,863,338
Work in progress		898,694		(28,081	)		870,613		1,004,580		(44,453	)		960,127
Finished goods		554,171		(25,424	)		528,747		1,154,679		(22,583	)		1,132,096
Spare parts and consumables		332,652		(70,066	)		262,586		266,189		(62,277	)		203,912
		4,303,323		(125,135	)		4,178,188		6,289,095		(129,622	)		6,159,473

The cost of inventories recognized in Cost of Sales amounted to RMB 52,400,798 thousands for the year ended 31 December 2016 (2015: RMB 55,056,458 thousands; 2014: RMB 71,425,192 thousands) which included an inventory provision of RMB 76,268 thousands (2015: RMB 44,868 thousands; 2014: RMB 213,600 thousands).

As at 31 December 2016, the provision for inventory write-down was RMB 129,622 thousands (31 December 2015: RMB 125,135 thousands). During the year ended 31 December 2016, the Group sold certain finished goods and utilized certain spare parts and consumables which were previously provided for. The related provision of RMB 71,781 thousands was reversed and included in ‘cost of sales’ in the consolidated income statement.

F - 56

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

21 Trade and other receivables

	As at 31 December
	2015 RMB’000			2016 RMB’000
Trade receivables		488,584			414,962
Less: impairment provision		(24	)		(18	)
		488,560			414,944
Bills receivable		991,273			1,238,620
Amounts due from related parties		1,163,128			1,290,619
		2,642,961			2,944,183
Prepayments		103,746			165,804
Other receivables		141,655			165,798
		2,888,362			3,275,785

During the year ended 31 December 2016, certain associates and joint ventures of the Group declared dividends with total amount of RMB 557,312 thousands to the Group (2015: RMB 197,158 thousands;2014: RMB 97,597 thousands). As at 31 December 2016 and 31 December 2015, all these declared dividends had been received by the Group.

As at 31 December 2016, entrusted lendings of RMB 88,000 thousands included in other receivables was made by the Group at an interest rate of 1.75% per annum, which will be due in 2017 (31 December 2015: RMB 106,000 thousands at interest rates ranging from 1.75% to 3.00% per annum).

The remaining balance of other receivables mainly represented the receivables from export tax refund and consumption tax refund.

As of 31 December 2016, the Group didn’t have any trade receivable which was past due but not impaired (31 December 2015: Nil).

Amounts due from related parties mainly represent trade-related balances, unsecured in nature and bear no interest.

The aging analysis of trade receivables, bills receivable and amounts due from related parties (net of allowance for doubtful debts) is as follows:

	As at 31 December
	2015 RMB’000		2016 RMB’000
Within one year		2,642,921		2,944,162
Above one year		40		21
		2,642,961		2,944,183

Movements of the Group’s impairment provision for trade and other receivables are as follows:

	2015 RMB’000			2016 RMB’000
At 1 January		1,256			1,269
Provision for receivables impairment		834			71
Receivables written off during the year as uncollectible		(743	)		(207	)
Unused amounts reversed		(78	)		(141	)
At 31 December		1,269			992

F - 57

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

21 Trade and other receivables (continued)

Bills receivable represent short-term bank acceptance receivables that entitle the Group to receive the full face amount of the receivables from the banks at maturity, which generally range from one to six months from the date of issuance. Historically, the Group had experienced no credit losses on bills receivable.

As at 31 December 2016 and 31 December 2015, no trade receivable or bills receivable was pledged as collateral.

Sales to third parties are generally on a cash basis. Subject to negotiation, credit is generally only available for major customers with well-established trading records.

22 Cash and cash equivalents

	As at 31 December
	2015		2016
	RMB’000		RMB’000
Cash deposits with a related party		5,394		169,261
Cash at bank and on hand		1,072,036		5,271,362
		1,077,430		5,440,623

23 Share capital

	Ordinary A shares listed in PRC with restriction RMB’000			Ordinary A shares listed in PRC RMB’000		Foreign invested H shared listed overseas RMB’000		Total RMB’000
As at 1 January 2015		4,920,000			2,385,000		3,495,000		10,800,000
Transition to unrestricted shares		(540,000	)		540,000		—		—
As at 31 December 2015		4,380,000			2,925,000		3,495,000		10,800,000
As at 1 January 2016		4,380,000			2,925,000		3,495,000		10,800,000
Transition to unrestricted shares		(4,380,000	)		4,380,000		—		—
As at 31 December 2016		—			7,305,000		3,495,000		10,800,000

F - 58

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

24 Reserves

	Legal surplus RMB’000		Capital surplus RMB’000		Surplus reserve RMB’000		Other reserve RMB’000		Safety production fund RMB’000			Retained earnings RMB’000			Total RMB’000
Balance at 1 January 2015		4,072,476		4,180		101,355		—		1,265			1,520,996			5,700,272
Net profit attributable to shareholders of the Company		—		—		—		—		—			3,274,308			3,274,308
Utilization of safety production fund		—		—		—		—		(312	)		312			—
Share option scheme (Note 25)		—		—		—		22,702		—			—			22,702
Balance at 31 December 2015		4,072,476		4,180		101,355		22,702		953			4,795,616			8,997,282
Net profit attributable to shareholders of the Company		—		—		—		—		—			5,968,466			5,968,466
Dividends proposed and approved		—		—		—		—		—			(1,080,000	)		(1,080,000	)
Utilisation of safety production fund		—		—		—		—		(607	)		607			—
Share option scheme (Note 25)		—		—		—		18,004		—			—			18,004
Share of other comprehensive income of investments accounted for using the equity method		—		—		—		18,213		—			—			18,213
Balance at 31 December 2016		4,072,476		4,180		101,355		58,919		346			9,684,689			13,921,965

F - 59

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

25 Share-based payments

Pursuant to the resolution of the fifth meeting of the eighth session of the Board of Directors of the Company on 6 January 2015, the proposal regarding the list of participants and the number of share options under the share option incentive scheme was approved.

According to the Company’s share option incentive scheme, the grant date of share options was 6 January 2015, and there were a total of 38,760 thousand share options granted to 214 participants (0.359% of the total ordinary share capital issued). Each share option has a right to purchase an ordinary A share listed in PRC on vesting date at the exercise price under vesting conditions. The options were divided by three tranches of 40%, 30% and 30% of the total share options granted, respectively. Each tranche had independent vesting conditions relevant to year 2015, 2016 and 2017, respectively, which were listed as following:

• weighted average rate of return on equity of the Group should be no less than 9% for 2015, 9.5% for 2016 and 10% for 2017 in respect to the three tranche;

• for each year of 2015, 2016 and 2017, the compound annual growth rate in net profit based on the net profit of 2013 should achieve 5%;

• for each year of 2015, 2016 and 2017, proportion of the main business revenue in the total revenue should be no less than 99%;

• for each year of 2015, 2016 and 2017, each of the above three conditions should be no lower than the 75% level of peer companies; and

• achieving the target budget set by the Sinopec Corp. in 2015, 2016 and 2017, respectively.

The participant should serve the Group at the required position from the grant date. Exercisable amount of each tranche depended on the time for which the participant served the Group during each year of 2015, 2016 and 2017. Upon the fulfilment of relevant vesting conditions, the share options of each tranche shall become exercisable at its exercisable date.

The fair value of the employee services received in exchange for the grant of this equity-settled, share-based compensation plan is recognised as an expense on a straight-line basis over the vesting period of each tranche. The total amount to be expensed is determined by reference to the fair value of the options granted excluding the impact of any service and non-market performance vesting conditions. When the options are exercised, the Company issues new shares. The proceeds received net of any directly attributable transaction costs are credited to share capital and share premium. As at 31 December 2016, no share option had been exercised yet.

As at the grand date, the exercise price of each option was RMB 4.2. During the vesting period, the exercise price would be adjusted according to the declaration of dividends or any changes of total shares. As at 31 December 2016, the outstanding share options of each tranche, their exercisable date and exercise price are as follows. These outstanding share options will expire in twelve months after each exercisable date.

Tranche	Vesting date	Exercise price (per share in RMB)		Outstanding shares
1	6 January 2017		4.10		15,404,000
2	6 January 2018		4.10		11,553,000
3	6 January 2019		4.10		11,553,000

The total fair value of share options at the grant date was RMB 65,412 thousands, which has been valued by an external valuation expert using Black-Scholes valuation model with the support from an external valuation expert.

The significant inputs into the model were as follows:

	Granting date
Spot share price	RMB	4.51
Exercise price	RMB	4.20
Expected volatility		41.20	%
Maturity (years)		5.00
Risk-free interest rate		3.39%~3.67	%
Dividend yield		1.00	%

F - 60

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

25 Share-based payments (continued)

Share option expenses of RMB 18,004 thousands have been recognised in the consolidated income statement for the year ended 31 December 2016 (the year ended 31 December 2015: RMB 22,702 thousands; the year ended 31 December 2014: Nil).

26 Borrowings

	As at 31 December
	2015		2016
	RMB’000		RMB’000
Loans due within one year
-Short term bank loans		1,700,000		546,432
-Short term loans from related parties		370,000		—
		2,070,000		546,432

The weighted average interest rate for the Group’s borrowings was 3.03% for the year ended 31 December 2016 (2015: 3.55%).

As at 31 December 2016, no borrowings were secured by property, plant and equipment (31 December 2015: nil).

As at 31 December 2016, the Group had standby credit facilities with several PRC financial institutions which provided the Group to borrow up to RMB 23,664,190 thousands (31 December 2015:28,179,120 thousands), within which the maturity dates of unused facility amounted to RMB 21,959,224 thousands will be after 31 December 2017.

27 Deferred income

	2015			2016
	RMB’000			RMB’000
At 1 January		16,436			—
Recognised in other operating income		(16,436	)		—
At 31 December		—			—

F - 61

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

28 Trade and other payables

	As at 31 December
	2015		2016
	RMB’000		RMB’000
Trade payables		1,562,232		2,123,904
Bills payable		—		5,000
Amounts due to related parties		1,573,967		3,044,304
Subtotal		3,136,199		5,173,208
Staff salaries and welfares payable		39,999		37,634
Taxes payable (exclude income tax payable)		1,308,821		1,538,062
Interest payable		1,642		465
Dividends payable		19,119		20,473
Construction payable		205,714		191,043
Other liabilities		323,459		351,701
Subtotal of other payables		1,898,754		2,139,378
		5,034,953		7,312,586

As at 31 December 2016 and 2015, all trade and other payables of the Group were non- interest bearing, and their fair value approximated their carrying amounts due to their short maturities.

As at 31 December 2016, amounts due to related parties included the advances from the related parties of RMB 13,814 thousands (31 December 2015: RMB 18,165 thousands).

As at 31 December 2016, the ageing analysis of the trade payables (including bills payable and amounts due to related parties with trading nature) based on invoice date was as follows:

	As at 31 December
	2015		2016
	RMB’000		RMB’000
Within one year		3,110,638		5,151,868
Between one and two years		3,240		7,373
Over two years		22,321		13,967
		3,136,199		5,173,208

F - 62

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

29 Related party transactions

The following is a list of the Group’s major related parties:

Names of related parties	Relationship with the Company
China Petrochemical Corporation(“Sinopec Group”)	Ultimate parent company
BOC-SPC Gases Company Limited	Joint venture of the Group
Shanghai Jinpu Plastic Packing Materials Company Limited	Joint venture of the Group
Shanghai Petrochemical Yangu Gas Development Company Limited	Joint venture of the Group
Shanghai Secco Petrochemical Company Limited	Associate of the Group
Shanghai Chemical Industry Park Development Company Limited	Associate of the Group
Shanghai Jinsen Hydrocarbon Resins Company Limited	Associate of the Group
Shanghai Azbil Automation Company Limited	Associate of the Group
Shanghai Nam Kwong Petro-Chemical Company Limited	Associate of the Group
Shanghai Jinhuan Petroleum Naphthalene Development Company Limited	Associate of the Group
Shanghai Chemical Industry Park Logistics Company Limited	Associates of the Group
Sinopec Chemical Commercial Holding Company Limited	Subsidiary of the immediate parent company
Sinopec Sales Company Limited	Subsidiary of the immediate parent company
Sinopec Yizheng Chemical Fibre Company Limited	Subsidiary of the immediate parent company
China International United Petroleum and Chemical Company Limited	Subsidiary of the immediate parent company
China Petrochemical International Company Limited	Subsidiary of the immediate parent company
Sinopec Refinery Product Sales Company Limited	Subsidiary of the immediate parent company
Sinopec Yangzi Petrochemical Company Limited	Subsidiary of the immediate parent company
China Petrochemical International Beijing Company Limited	Subsidiary of the immediate parent company
China Petrochemical International Ningbo Company Limited	Subsidiary of the immediate parent company
China Petrochemical International Tianjin Company Limited	Subsidiary of the immediate parent company
China Petrochemical International Russia Company Limited	Subsidiary of the immediate parent company
Sinopec Europe Company Limited	Subsidiary of the immediate parent company
China and South Korea (Wuhan) petrochemical Company Limited	Subsidiary of the immediate parent company
Sinopec USA Company Limited	Subsidiary of the immediate parent company
Sinopec Chemical Commercial Holding (Hongkong Company Limited	Subsidiary of the immediate parent company
Sinopec Huadong Supplies and Equipment Company Limited	Subsidiary of the immediate parent company
Petro-CyberWorks Information Technology Company Limited	Subsidiary of the immediate parent company
Sinopec Qingdao Refining and Chemical Company Limited	Subsidiary of the immediate parent company
Sinopec Fuel Oil Sales Corporation Limited	Subsidiary of the immediate parent company
BASF-YPC Company Limited	Joint venture of the immediate parent company
Zhejiang Baling Hengyi Caprolactam Limited Company	Joint venture of the immediate parent company
Sinopec Petroleum Storage and Reserve Limited	Subsidiary of the ultimate parent company
Sinopec Assets Management Corporation	Subsidiary of the ultimate parent company
Shanghai Petrochemical Machine Manufacturing Company Limited	Subsidiary of the ultimate parent company

F - 63

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

29 Related party transactions (continued)

Names of related parties	Relationship with the Company
Sinopec Shanghai Engineering Company Limited	Subsidiary of the ultimate parent company
The Fourth Construction Company of Sinopec	Subsidiary of the ultimate parent company
The Fifth Construction Company of Sinopec	Subsidiary of the ultimate parent company
The Tenth Construction Company of Sinopec	Subsidiary of the ultimate parent company
Sinopec Engineering Incorporation	Subsidiary of the ultimate parent company
Sinopec Ningbo Engineering Company Limited	Subsidiary of the ultimate parent company
Sinopec Finance Company Limited(“Sinopec Finance”)	Subsidiary of the ultimate parent company

The following is a summary of significant balances and transactions between the Group and its related parties except for the dividends received as disclosed in the forgoing Note 21.

(a) Most of the transactions undertaken by the Group during the year ended 31 December 2016 have been affected on such terms as determined by Sinopec Corp. and relevant PRC authorities.

Sinopec Corp. negotiates and agrees the terms of crude oil supply with suppliers on a group basis, which is then allocated among its subsidiaries, including the Group, on a discretionary basis. Sinopec Corp. also owns a widespread petroleum products sales network and possesses a fairly high market share in domestic petroleum products market, which is subject to extensive regulation by the PRC government.

The Group has entered into a mutual product supply and sales services framework agreement with Sinopec Corp. Pursuant to the agreement, Sinopec Corp. provides the Group with crude oil, other petrochemical raw materials and agent services. On the other hand, the Group provides Sinopec Corp. with petroleum products, petrochemical products and property leasing services.

The pricing policy for these services and products provided under the agreement is as follows:

• If there are applicable State (central and local government) tariffs, the pricing shall follow the State tariffs;

• If there are no State tariffs, but there are applicable State’s guidance prices, the pricing shall follow the State’s guidance prices; or

• If there are no State tariffs or State’s guidance prices, the pricing shall be determined in accordance with the prevailing market prices (including any bidding prices).

Transactions between the Group and Sinopec Corp., its subsidiaries and joint ventures were as follows:

	2014		2015		2016
	RMB’000		RMB’000		RMB’000
Sales of petroleum products		54,017,562		41,731,401		33,159,665
Sales other than petroleum products		6,817,448		4,010,856		5,738,425
Purchases of crude oil		30,931,551		23,313,185		21,599,355
Purchases other than crude oil		5,228,636		4,683,317		3,748,055
Sales commissions		113,162		112,245		100,221
Rental income		28,871		29,071		28,160

F - 64

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

29 Related party transactions (continued)

(b) Other transactions between the Group and Sinopec Group and its subsidiaries, associates and joint ventures of the Group were as follows:

	2014		2015		2016
	RMB’000		RMB’000		RMB’000
Sales of goods and service fee income
- Sinopec Group and its subsidiaries		298,190		151,417		38,389
- Associates and joint ventures of the Group		2,455,829		1,466,511		2,051,620
		2,754,019		1,617,928		2,090,009
Purchase
- Sinopec Group and its subsidiaries		1,251,143		421,803		1,056,737
- Associates and joint ventures of the Group		3,772,603		3,607,573		3,602,791
		5,023,746		4,029,376		4,659,528
Insurance premiums expenses
- Sinopec Group and its subsidiaries		117,896		117,914		123,621
Lease expenses
- Sinopec Group and its subsidiaries		—		—		53,960
Interest income
- Sinopec Finance		1,057		624		232
Loans borrowed
- Sinopec Finance		7,070,000		5,720,000		—
Loans repayment
- Sinopec Finance		6,070,000		6,420,000		370,000
Interest expense
- Sinopec Finance		59,939		31,328		3,322
Construction and installation cost
- Sinopec Group and its subsidiaries		144,248		158,822		177,792

The directors of the Company are of the opinion that the transactions with Sinopec Corp., its subsidiaries and joint ventures, Sinopec Group and its subsidiaries, associates and joint ventures of the Group as disclosed in Note 29(a) and 29(b) were conducted in the ordinary course of business, on normal commercial terms and in accordance with the agreements governing such transactions.

F - 65

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

29 Related party transactions (continued)

(c) The relevant amounts due from/to Sinopec Corp., its subsidiaries and joint venture, Sinopec Group and its subsidiaries, associates and joint ventures of the Group, arising from purchases, sales and other transactions as disclosed in Note 29(a) and 29(b), are summarised as follows:

	As at 31 December
	2015		2016
	RMB’000		RMB’000
Amounts due from related parties
- Sinopec Corp., its subsidiaries and joint ventures		1,098,872		1,226,972
- Sinopec Group and its subsidiaries		9,263		331
- Associates and joint ventures of the Group		54,993		63,316
		1,163,128		1,290,619
Amounts due to related parties
- Sinopec Corp., its subsidiaries and joint ventures		1,253,940		2,620,546
- Sinopec Group and its subsidiaries		91,342		387,788
- Associates and joint ventures of the Group		228,685		35,970
		1,573,967		3,044,304
Cash deposits, maturing within 3 months
- Sinopec Finance		5,394		169,261
Short-term loans
- Sinopec Finance		370,000		—

(d) At 31 December 2016 and 31 December 2015, cash deposits with Sinopec Finance were at an interest rate of 0.35% per annum.

(e) Key management personnel compensation and post-employment benefit plans

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly, including directors and supervisors of the Group. The key personnel compensations are as follows:

	Year ended 31 December
	2014		2015		2016
	RMB’000		RMB’000		RMB’000
Short-term employee benefits		7,668		4,469		5,218
Post-employment benefits		170		147		148
Share-based payments		—		1,342		1,270
		7,838		5,958		6,636

F - 66

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

29 Related party transactions (continued)

(f) Contributions to defined contribution retirement plans

The Group participates in defined contribution retirement plans organized by municipal governments for its staff. The contributions to defined contribution retirement plans are as follows:

	Year ended 31 December
	2014		2015		2016
	RMB’000		RMB’000		RMB’000
Municipal retirement scheme costs		277,167		273,841		247,710
Supplementary retirement scheme costs		72,998		68,921		69,846

At 31 December 2016 and 31 December 2015, there was no material outstanding contribution to the above defined contribution retirement plans.

(g) Transactions with other state-owned entities in the PRC

The Group is a state-controlled enterprise and operates in an economic regime currently dominated by entities directly or indirectly controlled by the PRC government (collectively referred to as “state-controlled entities”) through its government authorities, agencies, affiliations and other organisations.

Apart from transactions with related parties, the Group has transactions with other state-controlled entities which include, but are not limited to, the following:

• sales and purchases of goods and ancillary materials;

• rendering and receiving services;

• lease of assets, purchase of property, plant and equipment;

• placing deposits and obtaining finance; and

• use of public utilities

These transactions are conducted in the ordinary course of the Group’s business on terms comparable to those with other entities that are not state controlled. The Group has established its procurement policies, pricing strategy and approval process for purchases and sales of products and services which do not depend on whether the counterparties are state-controlled entities or not.

F - 67

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

29 Related party transactions (continued)

(h) Commitments with related parties

(1) Construction and installation cost:

	As at 31 December
	2015		2016
	RMB’000		RMB’000
Sinopec Group and its subsidiaries		35,244		4,310

(2) Operating lease commitments – Group company as lessee

	As at 31 December
	2015		2016
	RMB’000		RMB’000
Sinopec Group and its subsidiaries
No later than 1 year		—		53,960
Later than 1 year and no later than 2 years		—		53,960
		—		107,920

The Group leases oil tanks from Sinopec Petroleum Storage and Reserve Limited with a leasing expense of RMB 53,960 thousands per annum. The lease agreement is non-cancellable and will be ended at 31 December 2018.

(i) Investment commitments with related parties

	As at 31 December
	2015		2016
	RMB’000		RMB’000
Capital contribution to Shanghai Secco		111,263		111,263

Pursuant to the resolution of the 18th meeting of the 7th term of Board of Directors on 5 December 2013, the Company was approved to make capital contribution of USD 30,017 thousands (RMB 182,804 thousands equivalent) to Shanghai Secco, an associate of the Group. The capital to Shanghai Secco will be contributed in RMB by instalments. The capital contribution is mainly to meet the funding needs of the implementation of the “260,000 tons of AN-2 project” (“AN-2 project “), and “90,000 tons of BEU-2 project”(“BEU-2 project”).

On 10 December 2013, the Company contributed the first instalment of RMB 60,000 thousands for AN-2 project. On 5 March 2014, the Company contributed the first instalment of RMB 11,541 thousands for BEU-2 project. According to the approval by Shanghai Municipal Commission of Commerce date 19 October 2015, the rest of the capital contribution to Shanghai Secco should be made within 50 years starting from its registration date.

Except for the above disclosed in Note 29(h) and 29(i), the Group had no other material commitments with related parties as at 31 December 2016, which are contracted, but not included in the financial statements.

F - 68

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

30 Dividend

An annual dividend in respect of the year ended 31 December 2015 of RMB 0.1 per share, amounting to a total dividend of RMB 1,080,000 thousands, was approved by the Board of Directors on 16 March 2016 and paid in 2016.

31 Cash generated from operations

Reconciliation of (losses)/profit before taxation to cash used in operation:

	Year ended 31 December
	2014			2015			2016
	RMB’000			RMB’000			RMB’000
(Losses)/Profit before tax		(889,944	)		4,237,188			7,778,295
Adjustment items:
Interest income		(64,673	)		(49,302	)		(133,484	)
Share of profit of investments accounted for using the equity method		(57,654	)		(572,035	)		(916,754	)
Gain on disposal of associates		(6,491	)		—			—
Gain on forward contract		—			(37,154	)		—
Interest expense		374,600			199,908			27,762
Foreign exchange loss/(gain)		49,771			81,139			(2,307	)
Depreciation of property, plant and equipment		1,926,331			1,708,767			1,624,547
Depreciation of investment property		13,450			13,547			13,556
Amortisation of lease prepayments and other assets		347,144			322,647			244,157
Impairment loss on construction in progress		10,175			—			—
Impairment loss on property, plant and equipment		—			50,001			254,242
loss on disposal of property, plant and equipment-net		33,966			9,393			42,031
Government grant relating to disposal of property, plant and equipment		—			—			(15,000	)
Share-based payment		—			22,702			18,004
Profit on operation before change of working capital		1,736,675			5,986,801			8,935,049
Decrease/(increase) in inventories		3,108,536			1,752,515			(1,981,285	)
Decrease/(increase) in operation receivables		474,898			485,167			(483,169	)
Increase/(decrease) in operation payables		1,255,221			(1,451,695	)		665,616
Trade receivables being offset according to the offsetting master arrangements (Note 3.4)		(493,659	)		(927,225	)		(1,017,666	)
Trade payables being offset according to the offsetting master arrangements (Note 3.4)		493,659			927,225			1,017,666
(Decrease)/increase in balances to related parties-net		(2,525,314	)		(1,596,273	)		1,342,846
Cash generated from operating activities		4,050,016			5,176,515			8,479,057

F - 69

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

31 Cash generated from operations (continued)

In the statement of cash flows, proceeds from sale of property, plant and equipment comprise:

	2014			2015			2016
	RMB’000			RMB’000			RMB’000
Net book amount		58,428			26,268			37,133
Loss on disposal of property, plant and equipment-net		(33,966	)		(9,393	)		(42,031	)
Government grant relating to disposal of property, plant and equipment		—			—			15,000
Increase in other payables		—			—			1,787
		24,462			(9,393	)		(25,244	)
Net proceeds from disposal of property, plant and equipment		24,462			16,875			11,889

32 Capital commitments

(a) Capital commitments

	As at 31 December
	2015		2016
	RMB’000		RMB’000
Property, plant and equipment
Contracted but not provided for		39,814		5,300
Authorised but not contracted for		1,124,660		908,036
		1,164,474		913,336

(b) Operating lease commitments – the Group as lessee

Except the lease agreement disclosed in the forgoing Note 29(h), the Group also entered into other various non-cancellable operating lease agreements. The future aggregate minimum lease payments under non-cancellable operating leases are as follows:

	As at 31 December
	2015		2016
	RMB’000		RMB’000
No later than 1 year		4,576		60,125
Later than 1 year and no later than 2 years		510		54,438
Later than 2 year and no later than 3 years		227		384
Later than 3 years		3,453		3,207
		8,766		118,154

33 Subsequent event

A dividend in respect of the year ended 31 December 2016 of RMB 0.25 per share, amounting to a total dividend of RMB 2,700,000 thousands, was proposed by the Board of Directors on 27 April 2017.

F - 70

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

34 Balance sheet and reserve movement of the Company

	As at 31 December 2016		As at 31 December 2015		As at 1 January 2015
	RMB’000		RMB’000		RMB’000
			(Restatement)		(Restatement)
Assets
Non-current assets
Lease prepayments and other assets		623,455		694,171		947,859
Property, plant and equipment		13,191,911		14,039,077		15,151,067
Investment properties		413,943		402,581		412,647
Construction in progress		717,294		722,520		542,878
Investments in subsidiaries		1,445,620		1,445,620		1,445,620
Investments in associates and jointly controlled entities(b)		3,332,354		2,899,619		2,540,970
Deferred income tax assets		99,057		62,867		905,186
		19,823,634		20,266,455		21,946,227
Current assets
Inventories		5,374,425		3,955,550		5,465,293
Trade receivables		3,562		3,768		11,001
Bills receivable		1,097,011		679,084		991,722
Other receivables		49,841		13,394		14,469
Prepayments		157,771		86,481		85,458
Amounts due from related parties		1,226,943		1,040,889		879,114
Cash and cash equivalents		4,421,143		942,264		186,348
		12,330,696		6,721,430		7,633,405
Total assets		32,154,330		26,987,885		29,579,632
Equity and liabilities
Equity attributable to owners of the Company
Share capital		10,800,000		10,800,000		10,800,000
Reserves (a)(b)		13,778,226		8,737,101		5,491,339
Total equity		24,578,226		19,537,101		16,291,339

F - 71

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

34 Balance sheet and reserve movement of the Company (Continued)

	As at 31 December 2016		As at 31 December 2015		As at 1 January 2015
	RMB’000		RMB’000		RMB’000
			(Restatement)		(Restatement)
Liabilities
Non-current liabilities
Borrowings		—		—		1,611,900
Deferred income		—		—		16,436
		—		—		1,628,336
Current liabilities
Borrowings		632,000		2,499,000		4,507,195
Advance from customers		431,134		891,760		1,908,818
Trade payables		801,804		428,994		490,790
Other payables		1,992,421		1,757,767		1,707,983
Amounts due to related parties		3,105,940		1,823,960		3,045,171
Income tax payable		612,805		49,303		—
		7,576,104		7,450,784		11,659,957
Total liabilities		7,576,104		7,450,784		13,288,293
Total equity and liabilities		32,154,330		26,987,885		29,579,632

The balance sheet of the Company was approved by the Board of Directors on 15 March 2017 and were signed on its behalf.

Wang Zhiqing	Gao Jinping
Chairman and General Manager	Director and Vice General Manager

F - 72

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

34 Balance sheet and reserve movement of the Company (Continued)

(a) Reserve movement of the Company

	Reserves
	RMB’000
	(Restatement)
At 1 January 2015 (b)		5,491,339
Employees share option scheme		22,702
Net profit attributable to shareholders of the Company (b)		3,223,060
At 31 December 2015		8,737,101
At 1 January 2016		8,737,101
Employees share option scheme		18,004
Net profit attributable to shareholders of the Company		6,084,908
Other comprehensive income		18,213
Dividends proposed and approved		(1,080,000	)
At 31 December 2016		13,778,226

(b) Retrospective adjustments

As a result of adoption of the Amendment to IAS 27, the Company made retrospective adjustment on Investments in associates and jointly controlled entities and Reserves in separate financial statements (Note 2.1.1(a)). 

A reconciliation of the Reserve in preceding year’s audited separate financial statements and the retrospective one in the comparative information of current year’s separate financial statements is as follows:

	Before retrospective adjustment		Adoption of the Amendment to IAS 27		After retrospective adjustment
	RMB’000		RMB’000		RMB’000
Balance at 1 January 2015		5,168,398		322,941		5,491,339
Net profit attributable to shareholders of the Company		2,864,411		358,649		3,223,060
Employees share option scheme		22,702		—		22,702
Balance at 31 December 2015		8,055,511		681,590		8,737,101

F - 73

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

35 Benefits and interests of directors

(i) Directors’ and chief executives’ emoluments:

	2014
	Salaries and other benefits		Retirement scheme contributions		Discretionary bonus		Total
	RMB’000		RMB’000		RMB’000		RMB’000
Executive Directors
Wang Zhiqing		195		17		619		831
Gao Jingping		195		17		599		811
Ye Guohua		171		17		543		731
Jin Qiang (As vice president before June 2014, newly appointed as director in June 2014)		171		16		557		744
Guo Xiaojun (As vice president before June 2014, newly appointed as director in June 2014)		171		17		427		615
Li Honggen (Resigned as director and vice president in June 2014)		85		8		470		563
Zhang Jianping (Resigned as director and vice president in June 2014)		85		8		470		563
Independent non- executive directors
Jin Mingda		150		—		—		150
Cai Tingji		150		—		—		150
Jin Mingda		150		—		—		150
Supervisors
Zhang Jianbo		174		12		301		487
Zuo Qiang		111		13		274		398
Li Xiaoxia		115		14		244		373
		1,923		139		4,504		6,566

F - 74

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

35 Benefits and interests of directors (Continued)

(i) Directors’ and chief executives’ emoluments (Continued):

	2015
	Salaries and other benefits		Retirement scheme contributions		Discretionary bonus		Share option		Total
	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000
Executive Directors
Wang Zhiqing		197		18		463		293		971
Gao Jingping		197		18		463		293		971
Ye Guohua		173		18		405		252		848
Jin Qiang		173		17		469		252		911
Guo Xiaojun		173		18		397		252		840
Independent non- executive directors
Cai Tingji		150		—		—		—		150
Zhang Yiming		150		—		—		—		150
Liu Yunhong		150		—		—		—		150
Du Weifeng		150		—		—		—		150
Supervisors
Kuang Yuxiang (newly appointed as supervisor in April 2015)		129		14		146		—		289
Zhang Jianbo (Resigned as supervisor in March 2015		48		3		287		—		338
Zuo Qiang		105		14		281		—		400
Li Xiaoxia		115		14		246		—		375
		1,910		134		3,157		1,342		6,543

F - 75

Sinopec Shanghai Petrochemical Company Limited

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

35 Benefits and interests of directors (Continued)

(i) Directors’ and chief executives’ emoluments (Continued):

	2016
	Salaries and other benefits		Retirement scheme contributions		Discretionary bonus		Share option		Total
	RMB’000		RMB’000		RMB’000		RMB’000		RMB’000
Executive Directors
Wang Zhiqing		199		18		564		250		1,031
Gao Jinping		199		18		563		250		1,030
Ye Guohua(resigned in January 2017)		175		18		490		215		898
Jin Qiang		239		18		490		215		962
Guo Xiaojun		175		18		484		215		892
Independent non- executive directors
Cai Tingji		150		—		—		—		150
Zhang Yiming		150		—		—		—		150
Liu Yunhong		150		—		—		—		150
Du Weifeng		150		—		—		—		150
Supervisors
Kuang Yuxiang (resigned in July 2017)		140		11		320		—		471
Zuo Qiang		120		15		295		—		430
Li Xiaoxia		119		14		259		—		392
		1,966		130		3,465		1,145		6,706

(ii) Directors’ retirement benefits

No specific retirement benefits were paid to directors in respect of services in connection with the management of the affairs of the company or its subsidiary undertaking (2015 and 2014:Nil).

(iii) Directors’ material interests in transactions, arrangements or contracts

No significant transactions, arrangements and contracts in relation to the Group’s business to which the Company was a party and in which a director of the Company had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year.

F - 76

Exhibit Index

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