Interim Results

RNS Number:3812A
Sinopec Zhenhai Refining&Chem Co Ld
26 August 2002



 
              SINOPEC ZHENHAI REFINING & CHEMICAL COMPANY LIMITED
 (A joint-stock limited company incorporated in the People's Republic of China)


               INTERIM RESULTS ANNOUNCEMENT FOR THE YEAR OF 2002

The Board of Directors ("the Directors") of Sinopec Zhenhai Refining & Chemical 
Company Limited ("the Company") is pleased to present the interim results of the 
Company and its subsidiaries ("the Group") for the six months ended 30 June 
2002. The interim financial report is unaudited.

Interim financial report prepared in accordance with IAS 34 "Interim Financial 
Reporting"
This interim financial report is unaudited, but has been reviewed in accordance 
with Statement of Auditing Standards 700 "Engagements to review interim 
financial reports", issued by the Hong Kong Society of Accountants, by KPMG, 
whose unmodified review report is included in the interim report to be sent to 
shareholders.


Condensed consolidated income statement (unaudited)

(Amounts in thousands, except per share data)

                                                      Six-month period
                                                      ended 30 June
                                                      2002          2001
               
                                             Note     RMB           RMB                                              
 
 
Turnover                                              9,887,594     10,368,560
Less: Business taxes and surcharges                    (485,738)      (447,768)
Net sales                                             9,401,856      9,920,792
Cost of sales                                        (8,429,005)    (9,136,594)
Gross profit                                            972,851        784,198
Other operating income                                    3,860          1,532
Selling, administrative and other
 operating expenses                                    (349,464)      (391,195)
Profit from operations                                  627,247        394,535
Net financing costs                                     (30,917)       (54,436)
Share of profits less (losses) from
 associates                                               1,134         (3,437)
Others, net                                              (4,079)        (6,219)
Profit from ordinary activities before
 taxation                                     3         593,385        330,443
Income tax expense                            4        (140,972)       (36,575)
Profit attributable to shareholders           2         452,413        293,868

Dividends                                     5          88,332         88,332

Earnings per share                            6        
  - Basic                                              RMB 0.18       RMB 0.12
  - Diluted                                            RMB 0.18       RMB 0.11



Notes to the unaudited interim financial report

1.   Principal activities and basis of preparation
The Group is principally engaged in the production and sale of petroleum
products, intermediate petrochemical products as well as urea and other
petrochemical products. China Petroleum & Chemical Corporation ("Sinopec Corp")
is the immediate parent company of the Group.

The interim financial report has been prepared in accordance with the
requirements of the Rules Governing the Listing of Securities on The Stock
Exchange of Hong Kong Limited, including compliance with International
Accounting Standard ("IAS") 34 "Interim Financial Reporting" adopted by the
International Accounting Standards Board ("IASB").

The financial information relating to the financial year ended 31 December 2001
included in the interim financial report does not constitute the Company's
annual financial statements for that financial year but is derived from those
financial statements. The annual financial statements for the year ended 31
December 2001 are available from the Company's registered office. The Company's
former independent auditors, Arthur Andersen & Co, have expressed an unqualified
opinion on those financial statements in their report dated 29 March 2002.

The accounting policies have been consistently applied by the Group and are
consistent with those adopted in the 2001 annual financial statements, except
for as described in note 8, land use rights are carried at historical cost
effective 1 January 2002. The effect of this change resulted in a decrease in 
the shareholders' equity as of 1 January 2002.

The 2001 annual financial statements have been prepared in accordance with
International Financial Reporting Standards ("IFRS") promulgated by the IASB.
IFRS include IAS and interpretations.


2.  Segment reporting
The Group conducts the majority of its business activities in two areas,
refining and chemicals. The refining segment is principally engaged in the
production and sale of petroleum, intermediate petrochemical and other
petrochemical products. Gasoline, diesel and jet fuel are three major products
of the segment. The chemical segment is principally engaged in the production
and sale of urea. An analysis by business segment is as follows:


                                Six-month period ended 30 June 2002 

                             Refining    Chemicals    Elimination         Total 
                              RMB'000     RMB'000       RMB'000         RMB'000

Net sales                   9,262,768      303,453       (164,365)    9,401,856
Cost of sales              (8,352,718)    (240,652)       164,365    (8,429,005)
Gross profit                  910,050       62,801              -       972,851
Other operating income                                                    3,860
Selling, administrative and
 other operating expenses                                              (349,464)
Profit from operations                                                  627,247
Net financing costs                                                     (30,917)
Share of profits less 
 (losses) from associates                                                 1,134
Others, net                                                              (4,079)
Income tax expense                                                     (140,972)
Profit attributable to 
 shareholders                                                           452,413




                                Six-month period ended 30 June 2001     
                             Refining    Chemicals    Elimination         Total 
                              RMB'000      RMB'000        RMB'000       RMB'000

Net sales                   9,848,898      244,979       (173,085)    9,920,792
Cost of sales              (9,066,641)    (243,038)       173,085    (9,136,594)
Gross profit                  782,257        1,941              -       784,198
Other operating income                                                    1,532
Selling, administrative 
 and other operating 
 expenses                                                              (391,195)
Profit from operations                                                  394,535
Net financing costs                                                     (54,436)
Share of profits less 
 (losses) from associates                                                (3,437)
Others, net                                                              (6,219)
Income tax expense                                                      (36,575)
Profit attributable to 
 shareholders                                                           293,868

 
In view of the fact that the Group operates mainly in the PRC, no geographical 
segmental information is presented.


3.   Profit from ordinary activities before taxation
Profit from ordinary activities before taxation is arrived at after charging/
(crediting):

                                                 Six-month period ended 30 June
 
                                                           2002           2001
                                                        RMB'000        RMB'000

Interest and other borrowing costs                       40,054         78,020
Less: Amount capitalised as construction in progress    (10,425)          (231)
Interest expense, net                                    29,629         77,789
Cost of inventories                                   8,431,097      9,140,497
Depreciation and amortisation                           338,386        416,512
Net loss on disposals of property, plant and 
 equipment                                                9,955         27,504
Provision for diminution in value of long-term 
 investments -                                                -         10,000
Staff reduction expenses -                                    -         39,109
Net gain on disposals of long-term investments -              -           (929)
Investment income                                        (2,721)        (2,889)
Interest income                                          (2,825)       (27,150)



4.  Income tax expense

                                                 Six-month period ended 30 June
 
                                                           2002           2001
                                                        RMB'000        RMB'000
 
Provision for PRC enterprise income tax ("EIT")
  - the Group                                           132,360         69,017
  - associates                                            3,169            458 
Deferred taxation                                         5,443        (32,900)
                                                        140,972         36,575


Individual companies within the Group are generally subject to EIT at 33% on
taxable income determined according to the PRC tax laws. Pursuant to the
relevant tax regulations, the Company is eligible to certain EIT preferential
treatments because of its recycling of certain wasted materials. The amount of
the reduced EIT was RMB 43,077,000 (2001: RMB 69,697,000).

Deferred taxation is provided under the balance sheet liability method in
respect of significant temporary differences arising from differences between
the carrying amount of assets and liabilities for financial reporting purposes
and the amount used for income tax purposes. A deferred tax asset is recognised
to the extent that it is probable that future taxable profits will be available
against which the deferred tax asset can be utilised.

The Group was not subject to Hong Kong Profits tax as the Group did not earn any 
profit assessable to Hong Kong Profits tax.


5.  Dividends
Dividends attributable to the period:

                                                 Six-month period ended 30 June
 
                                                           2002           2001
                                                        RMB'000        RMB'000

Interim dividend proposed after the balance 
 sheet date of RMB 0.04 per share 
 (2001: RMB 0.025 per share)                            100,950         63,093


The interim dividend proposed after the balance sheet date has not been 
recognised as a liability at the balance sheet date.

Dividends attributable to the previous financial year, and approved during the 
period:

                                                 Six-month period ended 30 June
 
                                                           2002           2001
                                                        RMB'000        RMB'000

Final dividend in respect of the previous 
 financial year, approved during the period, 
 of RMB 0.035 per share 
 (2001: RMB 0.035 per share)                             88,332         88,332


6.   Earnings per share 
(i)  Basic

The calculation of basic earnings per share was based on the profit attributable 
to shareholders of approximately RMB 452,413,000 for the six-month period ended 
30 June 2002 (2001: RMB 293,868,000) and on the 2,523,754,468 shares 
(2001: 2,523,754,468 shares) in issue during the period.

(ii) Diluted
The calculation of diluted earnings per share was based on the adjusted profit 
attributable to shareholders of approximately RMB 452,462,000 for the six-month 
period ended 30 June 2002 (2001: RMB 327,819,000) on the assumption that all 
convertible bonds were converted on 1 January 2002 and on the weighted average 
number of approximately 2,525,357,000 shares (2001: 2,952,500,000 shares) deemed 
to have been in issue during the period.


7.  Change in accounting estimates

The Company took a comprehensive review of the expected useful lives of certain
plant, machinery and equipment at the beginning of 2002 which has taken into
consideration the depreciation method currently adopted by the domestic
petrochemical industry. The Company has determined to revise the depreciation
period of these fixed assets. In this connection, the depreciation period of the
main manufacturing facilities has been revised from between 8 and 10 years to
between 12 and 14 years with effect from 1 January 2002.

The change had the effect of a reduction in depreciation expense by
approximately RMB 77 million and an increase of profit attributable to
shareholders by approximately RMB 52 million for the six-month period ended 30
June 2002. The change is expected to decrease the depreciation expense by
approximately RMB 154 million and increase the profit attributable to
shareholders by approximately RMB 103 million for each of the subsequent years
until the assets are fully depreciated or disposed of.


8.  Reserves

Effective from 1 January 2002, land use rights which are included in lease
prepayments are carried at historical cost. Accordingly, the surplus on the
revaluation of land use rights net of deferred tax asset was reversed to
shareholders' equity at 1 January 2002. The effect of this change did not have a
material impact on the Group's financial condition and results of operations in
the periods prior to the change. As such, certain comparative figures have been
reclassified to conform with the current period's presentation.

No transfers were made to the statutory surplus reserve, the statutory public
welfare fund or the discretionary surplus reserve from profit attributable to
shareholders for the six-month period ended 30 June 2002 (2001: Nil).


9.  Comparative figures

Certain comparative figures as at 31 December 2001 and for the six-month period
ended 30 June 2001 have been reclassified to conform with the current period's
presentation.


DIVIDENDS

The Directors have declared an interim dividend of RMB 0.04 per share, or a
total of RMB 100.95 million for the year ending 31 December 2002. The dividend
will be paid on 28 October 2002 to shareholders whose names appear on the
Company's register of members on 18 September 2002. Dividends payable to Sinopec
Corp, the Company's immediate parent company, will be paid in RMB, while
dividends payable to holders of H shares will be paid in Hong Kong dollars at an
exchange rate of RMB 1.0611 for HK$1, being the average of the basic rates of
RMB for Hong Kong dollars published by the People's Bank of China in the
calendar week immediately before the date of the declaration of dividend (23
August 2002). Accordingly, each H share of the Company is entitled to an interim
dividend of HK$0.037.

The register of members of the Company will be closed from 14 September 2002 to
18 September 2002 (both days inclusive), during which period no transfer of
shares will be effected. In order to qualify for the 2002 interim dividend,
holders of H shares must lodge their transfers together with all relevant share
certificates to the Company's H share registrar, Hong Kong Registrars Limited at
17/F, Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong, not later than
4 p.m. on 13 September 2002.


REVIEW OF OPERATIONS FOR THE FIRST HALF OF 2002

During the first half of 2002, the Company seized the market opportunities
arising from the gradual recovery of the global economy and the steady growth of
the PRC economy, and continued to capitalise on the advantage of its operation
scale and advanced technology to process a total of 5.91 million tonnes of
feedstock oil (including general trade crude oil of 5.69 million tonnes),
representing an increase of 13 per cent from that of the same period last year.
Profit attributable to shareholders of the Company rose by 53.95 per cent to 
RMB 452.4 million. The growth rate in earnings was higher than that of the
throughput volume of feedstock oil. The Company continued to be a leading player
in the domestic refining companies in terms of earnings. Earnings per share were
RMB 0.18, which were approximately at the same level of that of the full year of
2001 and were the highest in record for the interim period since the Company's
listing.

The Company maximised its overall efficiency and fine-tuned the scheme of
purchasing and processing of the crude oil. In the first half of 2002, the
throughput volume of low-cost sour and inferior crude oil was 3,366,900 tonnes,
which was 32.27 per cent more than that of the same period of the previous year
and accounted for 56.97 per cent of the total throughput volume of the first
half of 2002. The Company's average price of processed feedstock oil for the
first half of 2002 was RMB 1,364.21 per tonne equivalent to US$22.23 per barrel
("$/b") excluding import expenses, which was 16.79 per cent lower than 
RMB 1,639.38 per tonne of the same period last year, and was below the average
FOB price of 23.33 $/b for Brent crude oil in the Singapore market during the 
same period.

The Company fully utilised its crude oil processing capacity through optimising
its facilities. In the first half of 2002, the composite commercial yield
increased by 0.52 percentage point year on year to 93.80 per cent, equivalent to
an increase of 30,000 tonnes of products. Light oil yield also increased by 1.32
percentage points to 72.85 per cent for the period under review. As a result,
the added value of products was further enhanced. The diesel to gasoline ratio
was 2.82 times, representing an increase of 0.51 times from that of the same
period last year, and product mix was adjusted in order to better satisfy
domestic demand. At the same time, the chemical fertiliser plant returned to
black in the first half of 2002, due to the recovery of domestic demand for
fertiliser and the implementation of management and technical measures to reduce
raw material cost.

In the first half of 2002, the Company's product sales volume increased by 14.74
per cent to 5,317,800 tonnes compared with that of the same period of 2001. The
sales volume of petroleum products with relatively high added value, including
diesel, chemical light oil, jet fuel and liquefied petroleum gas ("LPG"),
increased by 668,500 tonnes, while that of fuel oil decreased by 157,000 tonnes.
Since March 2002, the operating environment of domestic refineries has gradually
improved. The Company seized the opportunity and made timely adjustment to
increase its throughput volume and sales volume, resulting in an increase of 15
per cent in throughput volume for the second quarter when compared with that of
the first quarter. The operating results during the second quarter therefore
rose substantially from those of the first quarter.

The Company reduced its selling, administrative and financial expenses for the
interim period by 1.83 per cent year on year through tightening its cost
control. In addition, due to a lower average fixed cost resulting from an
increased throughput volume, the unit refining cash operating cost and the unit
complete expenses decreased by 0.38 per cent and 11.06 per cent to RMB 84.72 per
tonne and to RMB 143.62 per tonne respectively, and continued to maintain
advanced levels in the country.

By the end of June 2002, the Company's 1.8 million tonnes per annum ("tpa")
paraffin hydrodesulfurisation unit, the 3 million tpa diesel hydro refining unit
and the 70,000 tpa sulphur recovery unit have completed construction. The
Company's processing capacity of sour crude oil increased by 2 million tpa to 10
million tpa, with the hydro treating capacity accounting for 73 per cent of the
primary processing capacity. The Company further enhanced its technology edge,
and established favourable conditions for the optimal integration of the
production processes and resources for oil refining and petrochemical processing
in the future.

After a year of preparation, in June 2002, the Company changed its three-tier
management system of "corporate-production plant-workshop" to a two-tier system
of "corporate-operating department", and thereby flattened the management
structures. The reduction in management hierarchy and innovation in management
mechanism will help increase operational efficiency and lower management cost.


PROSPECTS FOR THE SECOND HALF OF 2002

Although there are uncertainties in the domestic and overseas markets in the
second half of 2002, the operating environment of oil refining companies will be
better than that of the same period last year. Signs of promising outlook for
the industry could be traced from the fact that the global economy is close to
recovery and China's economy continues to grow. In addition, the new petroleum
product pricing mechanism, which pegs domestic product oil prices against those
in the markets of Singapore, Rotterdam and New York, will drive refining profits
back to their normal level. Taking account of these factors, the Company is
confident in achieving the performance growth target for the full year.

On the basis of safety, stability and long production cycle, the Company plans
to process 5.6 million tonnes of general trade crude oil in the second half of
2002. The Company believes that it will achieve the target feedstock throughput
volume for the year. Also, the Company will attempt to enhance its facility
utilisation rate through expansion of its third-party processing business. The
Company strives to achieve 11.8 million tonnes in feedstock throughput volume
for the year. In addition, the Company will go all out to achieve cost-
effectiveness and to turn its chemical fertiliser operation which reported loss
for the previous year, to profit-making for the full year.

The Company will capitalise on the new production arrangement after the
commencement of operation of new facilities and the advantage of the integration
of oil refining and petrochemical production. It will enhance the throughput
volume of sour and inferior crude oil, and adopt new techniques to provide
cheaper feedstock for its catalytic unit and chemical fertiliser plant, in order
to further reduce production costs and improve its processing capability. The
Company will further optimise its product mix by increasing diesel output,
enhancing the diesel to gasoline ratio, and raising the output of high value
added products, including LPG, BTX, propylene and solvent oil, to enhance
profitability.

The Company will strictly implement the business strategies that focus on
satisfying domestic demand. While securing volume order for staple products such
as gasoline, diesel and jet fuel, the Company will intensify the marketing
capabilities of products sold through its own distribution channels and market
expansion, in order to increase output and revenue. At the same time, the
Company will exercise stringent control over production cost and expenses to
maintain its unit complete expenses and unit refining cash operating cost at a
leading level within the domestic oil refining industry.

The Company believes the future of the PRC's refining and chemical industry is
full of bright prospects. In the second half of 2002, the Company plans to
invest over RMB 1 billion in fixed assets. Much of these investments will be
applied to the second phase of the 8 million tpa refining capacity expansion
project, paraxylene project, polypropylene project and the chemical fertiliser
conversion project - "replacing oil by coal as source of energy". The fixed
asset investments for the entire year are projected to be RMB 1.6 billion.

In response to the PRC's accession to WTO, the Company will step up and fine-
tune the reorganisation of its management structure and operation process, in
order to optimise the effect of enhanced efficiency and streamlined structure of
a flattened management hierarchy, and to actively, but in a prudent manner,
continue with the adjustments of employment structure and diversion of staff to
outside of the Company's standard payroll.  Simultaneously, during the year the
Company will strive to implement the Enterprise Resource Planning system, and to
start preparing for the establishment of the Health, Safety and Environment
management system.  All this is aimed at enhancing the management quality and
further strengthening the Company's competitiveness in the international 
markets.
    


EXTERNAL COLLABORATION PROJECT

The Company intends to establish a joint-venture company with BP Global
Investment Ltd for the sale of LPG. Upon the establishment of the joint-venture
company, the Company plans to sell all of the LPG produced by the Company to the
joint-venture company. The initial investment of the joint-venture company is
US$25 million, with a registered capital of US$10 million. The Company and BP
Global Investment Ltd will each hold 50 per cent interests of the joint-venture
company. At present, the establishment of the joint-venture company is awaiting
the approval by the relevant department of the State.


STAFF HOUSING SUBSIDY PLAN

According to the relevant regulations of the PRC, the allocation of welfare
staff quarters has been terminated. The Company is formulating a plan to allow
the qualified employees to be compensated in the form of monetary housing
subsidies. The financial impact of such plan will be reflected in the financial
statements of the relevant year when such plan is finalised.


LOANS TO THIRD PARTY AND OVERDUE TIME DEPOSIT

The Company did not have any loans to third party or any overdue time deposit as
at 30 June 2002,


PURCHASE, SALE AND REDEMPTION OF THE COMPANY'S LISTED SECURITIES

During the period ended 30 June 2002, neither the Company nor its subsidiaries
had purchased, sold or redeemed any of the Company's listed securities.


Appointment of AUDITOR

Pursuant to the approval of the annual general meeting held on 7 June 2002, KPMG
was appointed as the Company's auditors for the financial year ending 31
December 2002. The term is one year to the conclusion of the next annual general
meeting.


CODE OF BEST PRACTICE

During the six months ended 30 June 2002, the Company has not formed an
independent Audit Committee. However, the Company's organisational structure has
a Supervisory Committee, which carries out functions similar to those of an
independent Audit Committee.

Save for the aforesaid, the Directors are not aware of any information which
reasonably indicates that the Company has not complied with the Code of Best
Practice as set out in Appendix 14 to the Rules Governing the Listing of
Securities on The Stock Exchange of Hong Kong Limited ("HKSE Listing Rules")
during the first half of 2002.


OTHER DISCLOSURE ITEMS

There has been no material change from the information disclosed in accordance
with the requirements under paragraphs 46 and 32 of Appendix 16 to HKSE Listing
Rules to the information contained in the 2001 Annual Report. A detailed interim
result announcement of the Company containing all the information required by
paragraphs 46(1) to 46(6) inclusive of Appendix 16 to the HKSE Listing Rules
will be published on the website of The Stock Exchange of Hong Kong Limited at
an appropriate time.


By Order of the Board
Sun Weijun
Chairman
23 August 2002, Ningbo, China

           



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