Reformation Gives Birth to Investment Focus




Financial subsidy turns into performance for enterprises


The abnormal price relationship between crude oil and oil
products caused by the price control policy has led to an overall
loss in the oil refining sector in China during 2005.
   The financial subsidy of RMB10 billion offered to Sinopec
Group at the end of year 2005 as pre-tax profit enabled its
subordinate companies to manage a recovery of their 2005
performance.
   Sinopec Group and its subordinate companies got a financial
subsidy of RMB9.415 billion as pre-tax profit in 2005,
equivalent to an EPS (earning per share) increase of RMB0.075.
The EPS of the company was therefore adjusted to RMB0.475, an
increase of 27.69% over the previous year.
   Based on the proportion of the amount of crude oil processed,
Shanghai Petrochemical Co., Ltd. got a lump-sum compensation of
RMB632.82 million, equivalent to an EPS increase of RMB0.073
after tax payment. Because of the reduction in the crude oil
price in the fourth quarter, the performance in the company made
slight improvement. It is estimated that Shanghai Petrochemical
Company Ltd. can achieve an EPS of RMB0.33 in 2005, a drop of
around 40% from the previous year.
   Yangzi Petrochemical Co., Ltd. got a lump-sum compensation
of RMB517 million, equivalent to an EPS increase of RMB0.162.
It is estimated that the company can achieve an EPS of RMB1.65,
a drop of 17.91% from the previous year.
   Shijiazhuang Refining & Chemical Co., Ltd. despite a loss of
RMB750 million from January to September 2005, even with a
compensation of RMB234 million, the company still suffered a
huge loss in 2005.
   Needless to say, the financial subsidy seems to be able to
help Sinopec Group and its subordinate companies to maintain
profitable. However, it can not solve the fundamental problems
such as the downturn performance of the petrochemical sector and
the loss suffered by the oil refining sector.


Price control shifts to tax control


The Chinese Government has tried to reduce the impacts of high
crude oil price on relevant industries and people's living
standard through price control. Nevertheless, prices of
petrochemical products have close relationship with each other.
Market-geared operation after the WTO accession, in particular,
has enabled the entire petroleum and chemical industry to act
according to economic functioning rules. The arbitrary means to
fix the price of a particular product in the industrial chain
will disturb market economic functioning rules in the entire
petroleum and chemical industry. It did not only create the
abnormal price status, such as oil products are cheaper than
crude oil, but it also triggered a series of energy problems in
China.
    As taxation itself has a function of balancing the interests
between different sectors, problems caused by the high crude oil
price should also be controlled by taxation. The shift of price
control to tax control is therefore the fundamental method for
solving a series of energy problems in China.


Reformation yields
investment opportunities


The large-scale buyback conducted by PetroChina Company Ltd. in
2005 has produced profound demonstrative effect. It provided a
good experience for Sinopec Corp. to do reformation in 2006. On
October 31st, 2005 PetroChina announced that it would purchase
the three listed companies of Jilin Chemical Industrial Co.,
Ltd., Liaohe Jinma Oilfield Co., Ltd., and Jinzhou Petrochemical
Co., Ltd. at the same time. (CCR2005, No. 31) The plan had great
implications. It did not only remove the negative impact from
industrial policy risks and avoid the withdrawal of huge funds
from China, but it also saved the loss suffered by Jinzhou
Petrochemical Co., Ltd. and Jilin Chemical Industrial Co., Ltd.,
in avoiding the risks of bankruptcy and explaining to the
investors.
   Eight subordinate companies of Sinopec listed in the A-share
market still require reformation. They are classified by
industrial chain into oil recovery companies, comprehensive
petrochemical companies, oil refining and marketing companies,
and chemical fiber companies.
   Oil refining, marketing companies and comprehensive
petrochemical companies are greatly influenced by industrial
policies. Comprehensive petrochemical companies, in particular,
have always been known for good performance in listed petroleum
and chemical companies. Due to the abnormal price relationship
between crude oil and oil products caused by the arbitrary means,
comprehensive petrochemical companies have separated from the
overall prosperity of the world's petrochemical industry, which
deeply affected the interests of the investors. The reformation
to comprehensive petrochemical companies is therefore the
biggest task placed before Sinopec today. It is expected that
Qilu Petrochemical Co., Ltd. and Yangzi Petrochemical Co., Ltd.
will be the first targets in the next step of reformation to be
conducted by Sinopec.
    Note: Sinopec Corp. announced on February 15th, 2006 that
it has decided to purchase all circulating shares and
non-circulating shares of its four listed subsidiaries
including Qilu Petrochemical Company Ltd., Yangzi Petrochemical
Company Ltd., Zhongyuan Oil/Gas Co., Ltd. and Shengli Oil Field
Dynamic Group Co., Ltd.