Sinopec Shanghai Petrochemical : ANNUAL RESULTS ANNOUNCEMENT - Form 6-K

2022 ANNUAL RESULTS ANNOUNCEMENT

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In 2022, the net loss attributable to equity shareholders of the parent company amounted to RMB2,872,072 thousand under CAS (net loss of RMB2,846,156 thousand attributable to shareholders of the Company under IFRS). The Board did not recommend the distribution of profit for the year nor capital reserve capitalisation.

Forward-looking statements such as future plans and development strategies contained in this report do not constitute any substantive commitments of the Company to investors. The Company has alerted investors on the relevant investment risks.

No.

No.

Potential risks are elaborated in this report. Please refer to "Management Discussion and Analysis" under Section 5 "Report of the Directors" for details of the potential risks arising from the future development of the Company.

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Located at Jinshanwei in the southwest of Shanghai, the Company and its subsidiaries (the "Group") are a highly integrated petrochemical enterprises which mainly process crude oil into a broad range of petroleum products, intermediate petrochemicals, resins and plastics and synthetic fibres. The Group sells most of its products within the PRC domestic market and derives most of its revenues from customers in Eastern China, one of the fastest growing regions in the PRC.

The Group's high-quality development is supported by the ever-increasing demand in the PRC for petrochemical products. Relying on the competitive advantage of its high degree of integration, the Group is optimizing its product structure, improving the quality and variety of its existing products, upgrading technology and increasing the capacity of its key upstream plants.

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After the first exercise of the Company's Share Option Incentive Scheme in August 2017, the total number of issued shares of the Company increased by 14,176,600 shares.

After the second exercise of the Company's Share Option Incentive Scheme in January 2018, the total number of issued shares of the Company increased by 9,636,900 shares.

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As at 31 December 2022, so far as was known to the Directors or chief executive of the Company, the interests and short positions of the Company's substantial shareholders (being those who are entitled to exercise or control the exercise of 5% or more of the voting power at any general meeting of the Company but excluding the Directors, chief executive and Supervisors) in the shares and underlying shares of the Company who are required to disclose their interests pursuant to Divisions 2 and 3 of Part XV of the Securities and Futures Ordinance (the "SFO") or as recorded in the register of interests required to be kept under section 336 of the SFO were as set out below:

Interests in ordinary shares of the Company

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

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Note:

Save as disclosed above, as at 31 December 2022, the Directors have not been notified by any person (other than the Directors, chief executive and Supervisors) who had interests or short positions in the shares and underlying shares of the Company which would fall to be disclosed to the Company pursuant to Divisions 2 and 3 of Part XV of the SFO or as recorded in the register of interests required to be kept by the Company under section 336 of the SFO.

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(Unless otherwise specified, the financial information included in this "Management Discussion and Analysis" section was extracted from the financial statements prepared under IFRS.)

In 2022, the change in domestic and international situations surpassed expectations, the momentum of global economic growth decayed, geopolitical fluctuations intensified, oil and gas prices fluctuated wildly, and market demand slumped. The severe and complicated situations posed unprecedented huge challenges for the Company's production and operation. Facing the highly volatile energy market, the Group coordinated the production and operation, scientific and technological innovation, reform and management and project construction in a well-coordinated way, basically completing the annual target. The total volume of crude oil processed for the year was 10.4453 million tons, representing a year-on-year decrease of 24.11%; the volume of refined oil produced for the year was 5.9080 million tons, representing a year-on-year decrease of 25.86%; the total volume of goods within the main commodities categories was 9.7062 million tons, representing a year-on-year decrease of 27.82%. The Group's turnover was RMB82,443 million, representing a year-on-year decrease of 7.57%. The Group's product sale rate was 99.83% and the payment return rate was 100%, signaling premium and stable product quality.

In 2022, global economy plunged. As a result, commodity prices fluctuated significantly, international crude oil prices stayed high, and petroleum and petrochemical product prices oscillated at high. As of 31 December 2022, the weighted average prices (excluding tax) of synthetic fibers, resins and plastics, major intermediate petrochemical products and major petroleum products of the Group increased by 36.31%, 3.58%, 13.97% and 31.94% year on year respectively.

International oil prices were basically upward in the first half of 2022 but on the downward trend in the second half with sluggish oil demand.

For the year ended 31 December 2022, the Group processed a total of 10.4453 million tons of crude oil (including 378,300 tons of incoming materials), representing a decrease of 24.11% year on year, mainly due to the weak market demand and the Company's device accidents. In 2022, the annual crude oil processing cost was RMB4,682.50 per ton, representing an increase of RMB1,450.21 per ton or 44.87% over the same period of the previous year. The total crude oil processing cost for the year increased by RMB3,956 million or 9.16%, accounting for 61.81% of the total cost of sales.

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Following the explosion of the Company's 1# glycol devices, the Group, overcoming unfavorable factors such as the extreme high temperature and typhoon, steadily and orderly pushed forward the emergency disposal of the accident, the investigation and elimination of risks and hidden dangers, restorative maintenance, and resumption of work and production. We strengthened organizational leadership and coordination with the focus on key links, and implemented safety upgrading management. At the end of September, the whole industry chain resumed normal operation, among which, the catalytic cracking units (CCUs) achieved zero flare discharging, and ethylene units set the fastest start-up record in the industry. We reinforced the fulfillment of production safety responsibilities, cemented site management, and maintained stable production run.

Adhering to the combination of independent innovation and collaborative innovation, the Company has stepped up efforts to tackle key problems in science and technology, applying for 120 patents and authorizing 59 of them. The Company completed the R&D, mass production and service support tasks of "flying" torches of the Beijing 2022 Winter Olympic Games, and awarded as an "Outstanding Contribution Group for the Beijing Winter Olympic Games and the Winter Paralympic Games". Carbon fiber and its composite materials and other research tasks basically achieved the annual target and the general requirements of the three-year task. We promoted the research of carbon fiber composites in key application fields, and expanded the demonstration applications of carbon fiber composites in rail transportation, construction bridges and new energy. We successfully applied them in the hydrogen-powered trams of Lin-gang T2 public tram and Qingdao Haikou Road Cross-Wind River Bridge. We strengthened information technology efforts, and continuously improved the information level.

Focusing on the three-year action of deepening reform, we aligned our efforts in this respect with the first-class management standard and continued increasing our efforts in this respect. We comprehensively promoted the tenure system and contractual management of management members, and launched the tenure system and contractual reform of the middle management cadres. We optimized the organizational setup and improved the organizational operation efficiency and professional management capability. We formulated a work plan for improving the quality of listed companies, initiated the delisting of the Company's ADR (American Depositary Receipts) from the U.S., and implemented the first H-share buyback. We comprehensively promoted 5S (SEIRI, SEITON, SEISO, SEIKETSU and SHITSUKE) management and carried out the "compliance management enhancement year" activity, to advance a law-based enterprise.

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We promoted the transformation and upgrading to green development through project construction, to build a green enterprise. We passed the review of environment-friendly enterprises. We expedited the construction of key projects. Projects of 24,000 tons/year of raw silk and 12,000 ton/year of 48K large-tow carbon fiber were put into operation. The 250,000 tons/year thermoplastic elastomer project, which is a key project in Shanghai, steadily progressed. We pressed ahead with hidden danger management and environmental protection projects as well as new energy projects such as photovoltaic projects. We delivered the second phase of the hydrogen supply center of hydrogen cells, and completed the construction of the first megawatt-class photovoltaic power plant project. We promoted coupled biomass power generation, and achieved a "double 10,000" in terms of tons of biomass fuel blended and tons of CO2 emissions reduced. We participated in the market-based trading of "green certificates" for the first time and purchased 10,000 "green certificates".

The Group's financial conditions and the results of its operations are susceptible to accounting methods, assumptions and estimates applied in preparing the financial statements. Such assumptions and estimates are based on the historical experience of the management of the Group and on various other assumptions that the management believes to be reasonable, and form the basis for the management to make judgments about matters that cannot be confirmed by other sources. On an on-going basis, the management evaluates its estimates. Actual results may differ from those estimates as the actual circumstances, environment and conditions change.

The selection of accounting policies, judgments and other uncertainties in the course of applying of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing the financial statements. The principal accounting policies are set forth in the financial statements. The Company's management has made the following accounting judgement and estimate in the preparation of the financial statements.

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The classification depends on the Group's business model for managing the financial assets and the contractual terms of the cash flows. The Group determines the business model for managing financial assets at the level of the financial asset portfolio. The factors considered include the way to evaluate and report the performance of financial assets to key management personnel, the risks affecting the performance of financial assets and their management methods, and the way for relevant business management personnel to obtain remuneration, etc.

When evaluating whether the contractual cash flow of financial assets is consistent with the basic lending arrangements, the Group has the following main judgments: whether the time distribution or amount of the principal may change in the duration due to prepayment and other reasons; whether the interest only includes the time value of money, credit risk, other basic lending risks and the consideration of cost and profit. For example, does the amount of prepayment only reflect the outstanding principal and the interest based on the outstanding principal, as well as the reasonable compensation paid for the early termination of the contract.

Inventories are valued at the lower of cost and net realizable value. The net realizable value is determined based on the estimated selling prices in the ordinary course of business less the estimated costs to completion, and other costs necessary to make the sale. These estimates are based on the current market condition and historical experience of selling products of similar nature. It could change significantly as a result of competitor actions in response to changes in market conditions.

Management reassesses these estimations at the end of each reporting period to ensure inventory is measured at the lower of cost and net realizable value.

At the end of each reporting period, the Group estimates the recoverable amount of an asset or a cash-generating unit ("CGU") (a portion of which related to certain production facilities), at the higher of its fair value less costs of disposal and its value in use, to determine the impairment losses. If circumstances indicate that the carrying amount of the asset or CGU may not be recoverable, the asset or CGU may be considered "impaired", and an impairment loss may be recognized.

The recoverable amount of assets or CGUs is the higher of the fair value less costs of disposal and value in use. As the fair value of certain assets or CGUs may not be publicly available, the Group 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 for projections of product sales and operating costs and discount rate. In particular, in determining the value in use of the Group's specific CGUs, significant judgements are required on the accounting estimates which are based on the assumptions relating to product sales growth rates, related costs growth rates and discount rate applied.

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Property, plant and equipment, are depreciated on a straight-line basis over the estimated useful lives of the assets, after taking into account its residual value. Management reviews the estimated useful lives and estimated residual value of the assets annually in order to determine the amount of depreciation expense to be recorded during any reporting period. The estimated 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.

The following table sets forth the Group's sales volumes and net sales (net of sales taxes and surcharges) for the years indicated:

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The following table sets forth a summary of the Group's consolidated statement of profit or loss for the years indicated (prepared under IFRS):

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Comparison between the year ended 31 December 2022 and the year ended 31 December 2021 is as follows:

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5.3.2.A Operating results

In 2022, the net sales of the Group amounted to RMB72,654.6 million, a decrease of 4.26% from the previous year's RMB75,888.8 million. Analysis by product is as follows:

In 2022, the Group's net sales of synthetic fiber products amounted to RMB412.5 million, representing a decrease of 70.00% from the previous year's RMB1,374.8 million. This was mainly due to the price hike of main raw materials and the perennial loss of acrylic fiber, and due to the lower sales during the Reporting Period resulting from the decrease of sales of synthetic fiber products. The sales volume of synthetic fibers decreased by 78.02% year on year, while the weighted average sales price increased by 36.31%. Meanwhile, the sales volume of acrylic fibers, the main product of the synthetic fibers segment, decreased by 71.92% year on year. The net sales of acrylic fibers and other products accounted for 78.47% and 21.53% of the total sales of the synthetic fibers segment respectively.

The net sales of synthetic fibers accounted for 0.60% of the Group's net sales in the current year, representing a decrease of 1.2 percentage points from the previous year.

In 2022, the Group's net sales of resins and plastics products amounted to RMB7,321.2 million, a decrease of 26.51% from the previous year's RMB9,962.7 million. This was mainly due to the decrease in production resulting from the downturn in the domestic market and the shutdown of production during the year. The weighted average sales price of resins and plastics increased by 3.58%, while the sales volume of resins and plastics products decreased by 29.13% year on year. Meanwhile, the weighted average sales price of polyethylene and polypropylene decreased by 0.11% and 5.48%, and that of polyester chips increased by 14.17% year on year. The sales of polyethylene, polypropylene, polyester chips and other products accounted for 45.36%, 41.31%, 9.47% and 3.86% of the total sales of the resins and plastics segment respectively.

The net sales of resins and plastics accounted for 10.08% of the Group's net sales in the current year, representing a decrease of 3 percentage points from the previous year.

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In 2022, the Group's net sales of intermediate petrochemical products amounted to RMB10,537.7 million, a decrease of 2.25% from the previous year's RMB10,780.5 million. This was mainly due to the rise in the unit price of intermediate petrochemical products driven by the sharp rise in international crude oil prices and due to the decrease in the sales volume resulting from the stagnant market. The weighted average sales price of major intermediate petrochemical products increased by 13.97% year on year, and its sales volume decreased by 11.43% year on year. The sales of p-xylene, ethylene oxide, pure benzene, ethylene glycol and other products accounted for 41.16%, 11.93%, 19.44%, 2.44% and

25.03% of the total sales of intermediate petrochemical products respectively.

The net sales of intermediate petrochemical products accounted for 14.50% of the Group's net sales in the current year, an increase of 0.3 percentage points from the previous year.

In 2022, the Group's net sales of petroleum products amounted to RMB41,444.7 million, a decrease of 1.05% from the previous year's RMB41,884.4 million. This was mainly due to the increase in petroleum product prices resulting from the downturn in the domestic market and the hike in international crude oil prices. The weighted average sales price of major petroleum products increased by 31.94% year on year, and its sales volume decreased by 30.06% year on year.

The net sales of petroleum products accounted for 57.04% of the Group's net sales in the current year, an increase of 1.8 percentage points from the previous year.

In 2022, the Group's net sales of trading of petrochemical products amounted to RMB12,007.6 million, an increase of 8.65% from the previous year's RMB11,051.4 million. This was mainly due to the increase in sales of our second-level subsidiary, Shanghai Jinshan Trading Corporation, by RMB1,439 million.

The net sales of trading of petrochemical products accounted for 16.53% of the Group's net sales in the current year, an increase of 1.9 percentage points from the previous year.

In 2022, the Group's net sales of other products amounted to RMB930.9 million, an increase of 11.48% from the previous year's RMB835.0 million.

The net sales of other products accounted for 1.28% of the Group's net sales in the current year, an increase of 0.2 percentage points from the previous year.

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Cost of sales and operating expenses consist of cost of sales, sales and administrative expenses, other operating expenses and other operating income, etc. In 2022, the Group's cost of sales and operating expenses amounted to RMB76,498.0 million, an increase of 2.74% from RMB74,456.6 million in 2021. Cost of sales and expenses of synthetic fibers, resins and plastics, intermediate petrochemical products, petroleum products, trading of petrochemical products and other products amounted to RMB1,427.8 million, RMB8,573.7 million, RMB11,994.3 million, RMB41,443.7 million, RMB11,994.8 million and RMB1,063.7 million respectively, representing a decrease of 35.94%, a decrease of 13.49%, an increase of 5.07%, an increase of 6.49%, an increase of 8.97% and an increase of 8.93% year on year respectively.

Compared with the last year, the cost of sales and operating expenses of intermediate petrochemical products, petroleum products, trading of petrochemical products and others increased this year, which was mainly due to the hike in crude oil prices and thus the increase in corresponding costs.

-Cost of sales

In 2022, the Group's cost of sales amounted to RMB76,265.9 million, an increase of 2.65% from previous year's RMB74,298.0 million, which was mainly due to the increase in cost resulting from the rise in crude oil prices as well as the lower NRV of most inventories than the cost. The cost of sales accounted for 104.97% of the net sales this year.

-Selling and administrative expenses

In 2022, the Group's sales and administrative expenses amounted to RMB288.7 million, a decrease of

21.59% from the previous year's RMB368.2 million. This was mainly due to the overall sales volume drop in the year.

-Other operating income

In 2022, the Group's other operating income amounted to RMB110.6 million, a decrease of 11.73% from previous year's RMB125.3 million, which was mainly due to the drop in rental income.

-Other operating expenses

In 2022, the Group's other operating expenses amounted to RMB25.8 million, a decrease of 42.28% from previous year's RMB44.7 million. This was mainly due to the decrease of RMB23.2 million for the purchases of rights of carbon emission during the year.

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In 2022, the Group's operating loss amounted to RMB3,843.4 million, a decrease of RMB5,275.6 million from the operating profit of RMB1,432.2 million in the previous year. In 2022, the operating profit declined significantly from the previous year due to the rising cost resulting from higher crude oil prices, the increase in the selling price of products not as high as the rising cost, and a sluggish domestic market.

In 2022, the operating loss of synthetic fibers amounted to RMB1,015.3 million, an increase of RMB161.2 million from the operating loss of RMB854.1 million in the previous year. The increase was mainly due to the weak market demand of the textile industry which is the downstream market of the synthetic fibers segment, together with temporary plant shutdown. Due to a part of production facilities being idle or obsolete the provision for impairment of long-term assets of RMB49.2 million was made for the synthetic fiber segment.

In 2022, the operating loss of resins and plastics amounted to RMB1,252.5 million, a decrease of RMB1,304.7 million from the operating profit of RMB52.2 million in the previous year. The decrease in operating "profit" in the year was mainly because the rise in international crude oil prices resulted in the sharp rise in costs while the demand in the downstream market was weak, and thus the increase in sales price was lower than that in cost price.

In 2022, the operating loss of intermediate petrochemical products amounted to RMB1,456.6 million, an increase of RMB821.5 million from the operating loss of RMB635.1 million in the previous year. The "increase in operating loss" in the year was mainly because the rise in international crude oil prices resulted in the sharp rise in costs while the demand in the downstream market was weak, and thus the increase in sales price was lower than that in cost price. In 2022, the provision for impairment of long-term assets of RMB212.4 million was made for some devices as the increasing production and operation cost is not expected to be covered by the estimated sales price of the devices due to deteriorating market conditions.

In 2022, the operating profit of petroleum products amounted to RMB1.0 million, a decrease of RMB2,966.0 million from the operating profit of RMB2,967.0 million in the previous year. The decrease in operating profit in the year was mainly because the rise in international crude oil prices resulted in the sharp rise in costs, and thus the increase in sales price was lower than that in cost price.

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In 2022, the Group's operating profit of trading of petrochemical products amounted to RMB12.8 million, a decrease of RMB30.9 million from the operating profit of RMB43.7 million in the previous year, which was mainly due to the decrease in the gross profit from trading of petrochemical products during the period.

In 2022, the Group's other operating loss amounted to RMB132.8 million, a decrease of RMB8.7 million from the other operating loss of RMB141.5 million in the previous year, which was no significant change compared with the previous year.

In 2022, the Group's net financial income amounted to RMB443.3 million, an increase of RMB28.7 million from the net financial income of RMB414.6 million in the previous year, mainly due to the increase in interest income from time deposits during the Reporting Period, resulting in an increase of our interest income by RMB33 million from RMB508.8 million in 2021 to RMB541.8 million in 2022.

In 2022, the Group's loss before taxation amounted to RMB3,573.7 million, a decrease of RMB6,294.8 million from the profit before taxation of RMB2,721.1 million in the previous year.

The income tax benefit of the Group amounted to RMB731.4 million in 2022 and the income tax expenses amounted to RMB644.5 million in 2021. This is mainly due to the recognition of deferred income tax assets as a result of the Company's loss for the year.

In accordance with The Enterprise Income Tax Law of the PRC (amended in 2018), the income tax rate applicable to the Group in 2022 is 25% (2021: 25%).

In 2022, the Group's loss after tax amounted to RMB2,842.3 million, a decrease of RMB4,918.9 million from the profit after tax of RMB2,076.6 million in the previous year.

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The Group's primary sources of capital are cash inflows from investing activities arising from the maturity of time deposits. The Group's primary uses of capital are costs of sales, other operating expenses and capital expenditure.

In 2022, the Group's net cash outflows generated from operating activities amounted to RMB7,459.4 million, representing a decrease of RMB11,409.4 million from the net cash inflows of RMB3,950.0 million in the previous year. During the Reporting Period, with the operating loss, the Group's cash outflows generated from operating activities in 2022 amounted to RMB6,960.7 million, representing a decrease of RMB11,372.4 million from the cash inflows generated from operating activities of RMB4,411.7 million in the previous year.

By the end of 2022, the Group's total borrowings decreased by RMB9.8 million to RMB2,250 million as compared to the end of last year, mainly due to the decrease of long-term borrowings due within one year by RMB19.8 million as well as the increase of short-term borrowings due within one year by RMB10 million.

The Group managed to maintain its gearing ratio at a safe level by strengthening its management of liabilities (such as borrowings) and enhancing its control over financial risks. The Group generally does not experience any seasonality in borrowings. However, due to the fact that the Group's capital expenditure is, by nature, planned in advance, long-term bank loans can be suitably arranged in advance of expenditures, while short-term borrowings are used to meet operational needs. The terms of the Group's existing borrowings do not restrict its ability to distribute dividends for its shares.

As of 31 December 2022, the Group's gearing ratio was 35.93% (2021: 35.26%). The ratio is calculated using this formula: total liabilities/total assets multiply by 100%.

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5.3.2.C Research and development, patents and licenses

The Group owns various technology development departments, including the Advanced Materials Innovation Research Institute, Petrochemical Research Institute, Plastic Research Institute and Environmental Protection Research Institute, which are responsible for the research and development of new technologies, products, processes, equipment and environmental protection. The Group's research and development expenses for 2020, 2021 and 2022 amounted to RMB110.6 million, RMB94.3 million and RMB130.5 million, respectively. The increase was mainly due to the increase in material cost for research and development of technology in equipment and products.

The Group does not rely on any patents, licenses, industrial, commercial or financial contracts or new production processes in any material respect.

5.3.2.D Off-Balance Sheet Arrangements

Please refer to note 34 to the financial statements prepared under IFRS in the full text of the 2022 Annual Report for details of the Group's capital commitments. The Group did not provide any guarantee to external parties during the Reporting Period.

5.3.2.E Contractual obligations

The following table sets forth the Group's obligations to repay loan principal in future as at 31 December 2022:

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5.3.2.F Analysis of operation and results of major controlling companies and investing companies during the Reporting Period

As at 31 December 2022, the Company had more than 50% equity interest in the following principal subsidiaries:

Note: None of the subsidiaries have issued any debt securities.

The Group's share of interests in associates comprises a 38.26% interest in Shanghai Chemical Industry Park Development Co., Ltd. ("Chemical Industrial Park") established in the PRC in the amount of RMB2,115.1 million, and a 20% interest in Shanghai SECCO Petrochemical Company Limited ("Shanghai SECCO") established in the PRC in the amount of RMB333.9 million. The principal activities of Chemical Industry Park Development Co., Ltd., include the planning, development and operation of a chemical industrial park located in Shanghai of the PRC. The principal activities of Shanghai SECCO are the production and distribution of petrochemical products.

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In 2022, Shanghai SECCO recorded a revenue of RM24,096.8 million, and its loss after tax reached RMB1,947.6 million, among which RMB382.0 million was attributed to the Company.

5.3.2.G Major suppliers and customers

The Group's top five suppliers in 2022 were China International United Petroleum & Chemical Co., Ltd., East China Branch of Sinopec Chemical Commercial Holding Company Limited, Materials and Equipment Department of China Petroleum and Chemical Corporation, Shanghai SECCO and Shanghai Gas Co., Ltd. Total procurement costs involving these five suppliers, which amounted to RMB53,719.8 million, accounted for 74.29% of the total procurement costs of the Group for the year. Among the top five suppliers, the purchase amount of related parties was RMB52,304.9 million, accounting for

72.33% of the total annual purchase amount. The total procurement from the largest supplier amounted to RMB45,666.4 million, representing 63.15% of the total costs of purchases by the Group for the year.

The Group's top five customers in 2022 were East China Branch of Sinopec Sales Co., Ltd., China International United Petroleum & Chemical Co., Ltd., Sinopec Chemical Commercial Holding Company Limited, Shanghai SECCO and Zhejiang Dushan Energy Co., Ltd. Total sales to these five customers amounted to RMB54,719.9 million, representing 66.37% of the Group's total turnover for the year. Among the sales of the top five customers, the sales of related parties was RMB52,363.1 million, accounting for 63.51% of the total annual sales. Sales to the Group's largest customer amounted to RMB40,337.0 million, representing 48.93% of the Group's total turnover for the year.

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To the knowledge of the Board, among the suppliers and customers listed above, Shareholders and Directors of the Company and their close associates have no interest in Shanghai Gas Co., Ltd. and Zhejiang Dushan Energy Co., Ltd.; Shanghai SECCO is an associate of the Company; China International United Petroleum & Chemical Co., Ltd., East China Branch of Sinopec Chemical Commercial Holding Company Limited, Materials and Equipment Department of China Petroleum and Chemical Corporation, East China Branch of Sinopec Sales Co., Ltd. and Sinopec Chemical Commercial Holding Company Limited are subsidiaries of Sinopec Corp., the controlling shareholder of the Company.

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Analysis of major changes in the consolidated income statement

Analysis of major changes in the cash flow statement

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5.4.1B Operating income

The sales volume of the Group's synthetic fibres, resins and plastics, intermediate petrochemical products and petroleum products decreased by 78.02%, 29.13%, 22.37% and 28.35% respectively, bringing a lower revenue in 2022 compared with the previous year.

Please refer to 5.3.2.G for details of major customers of the Group.

In 2022, the Group's operating cost was RMB73,518.0 million, an increase of 2.57% from the previous year's RMB71,675.6 million. This was mainly due to the rise in international crude oil price in the year, resulting in an increase in operating cost.

The following table sets forth the details of the operating cost of the Group during the Reporting Period:

Please refer to 5.3.2.G for details of major suppliers of the Group.

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Please refer to "Analysis of changes in the consolidated income statement and the consolidated cash flow statement" under the "Analysis of the Company's principal activities" set forth in the "Discussion and analysis of the Company's operation" for details of the changes in expenses of the Group.

Please refer to 5.3.2.C for details of R&D, patents and licenses of the Group.

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Please refer to "Analysis of changes in the consolidated income statement and the consolidated cash flow statement" under the "Analysis of the Company's principal activities" set forth in the "Discussion and analysis of the Company's operation" for details of changes in the consolidated cash flow statement.

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Save and except as to be disclosed in the 2022 annual report, there was no material acquisition or sale of the Group's subsidiaries, associates or joint ventures or any other material investments in 2022.

As at 31 December 2022, no fixed assets were pledged by the Group (31 December 2021: Nil).

The Board has not noticed any significant events affecting the Group since the end of the Reporting Period.

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As at 31 December 2022, cash at bank and on hand, trade receivables, other receivables, trade payables and other payables, and other financial asset and liabilities denominated in foreign currencies held by the Group were equivalent to net liabilities of RMB46,683 thousand.

From the macroeconomic situation, the crisis in Ukraine is still ravaging the world. The global monetary tightening cycle persists, and the downward risk of the world economy is mounting. It is the norm that the external environment becomes unstable, uncertain, unpredictable. China's economy is under "triple pressure" exacerbated by "more than expected changes". In such case, it is a daunting task to stabilize growth, employment and prices. Although the market demand rebounds and the economy is expected to pick up, there are still interference factors. From the energy price trend, the geopolitical risk premium stays high, the OPEC restricts production and prices, Russian export restrictions intensify the international oil price fluctuation, gas replenishment in Europe remains uncertain, and prices may surge in the replenishment season and heating season. It is expected that a medium-high price of international oil and gas will be maintained throughout the year. From the industrial competition landscape, the domestic oil refining and processing volume reaches its peak. Refined oil consumption hits a plateau. The overcapacity in tandem with sluggish demand only intensify market competition. The resource agglomeration and competition effect of leading enterprises of main units will be more prominent. The penetration rate of the new energy vehicle market jumps faster, the substitution effect also demonstrates itself faster, and the competitive advantage is significantly enhanced.

A comprehensive analysis of the annual production and operation shows that the Company will encounter the following four challenges: First, the wild fluctuation in oil prices challenge the control over the production rhythm. High oil and gas prices, high discount of freight charges, and the refined oil pricing mechanism lead to the decline in refining margins, which significantly hinder the operation of the industry chain. With the regulation over processing volume arrangements skipping cycles, synergies among different segments become more difficult. Second, market uncertainties challenge the optimal regulation of resources. The recovery of refined oil consumption is slow, the chemical market space narrows, the incremental scale of new business is limited, and the pressure to expand market and sales is more pronounced. Third, the continued transmission of inflation challenges the control over investment cost. The rising rigid cost of investment indicates an even greater impact on the completion of free cash flow, asset-liability ratio, cost margin and other indicators. It also means a much greater test for securing the financial position and debt credit stability. Fourth, external risk pooling challenges the prevention and control of operational risks. Geopolitical turmoil, economic downturn, and oil price fluctuations increase the input of external risks. Oil refining and chemical engineering segments are under the pressure of operating losses. The reduction in inventory profit and the greater risk of price drop add to the challenge in maintaining efficiency and steady growth.

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The Group's development objectives are to evolve itself into a "leading domestically, first-class globally" energy and chemical and new material enterprise. The key components of the Group's development strategy are as follows: to take into account both low cost and differentiation, and to focus on both scale and refinement. The Company focuses on value and market orientation, creativity, talents as the backbone of the Company, the emphasis of environment and low carbon emissions and integrated development, to realize low cost and large scale of the upstream, and high value-added and refinement of the downstream. The Company will give full play to its advantages of sound product chain, diversified products and close monitoring of the market to enhance competitiveness. Under the guidance of the development strategy, according to the requirements of North-South Transformation raised by Shanghai Government, the Company will actively promote the transformation of oil refining to chemical industry, chemical industry to materials, materials to high-end products, and parks to ecology, will carry out comprehensive technological transformation and quality upgrades, and will further optimize refining product structure to better meet the market needs. The Company will strengthen the core industries of mid-to-high-end new materials such as carbon fiber, and take polyester, polyolefin, elastomer, and C-5 downstream fine chemical new materials as breakthrough and extension for the mid-to-high-end new materials which will help the North-South transformation and the construction of Carbon Valley Green Bay and local industrial parks in Jinshan District. The Company will develop wind, light, fire, and biological integrated power generation and green hydrogen production technology, and will realize the energy structure transformation from fossil energy to fossil energy combined with renewable energy to achieve energy saving. Through diversified industrial linkage development and cluster agglomeration, the Company will build an industrial base with green energy, fine chemical, and high-end material on the north bank of Hangzhou Bay with world-scale and first-class competitiveness.

In 2023, the Company will, adhering to the principle of prioritizing stability while pursuing progress, integrate into the new development landscape and coordinate development and safety in a better way, to lay a solid foundation for its high-quality development on all fronts. In 2023, the Company plans to process a total of 13.6 million tons of crude oil, produce a total of 8.001 million tons of refined oil products, 756,000 tons of ethylene, 680,000 tons of xylene, and 698,700 tons of new synthetic resin products and special materials annually. In order to achieve the business objectives for 2023, the Group will focus on the following five areas of work:

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Learning from accidents, we exercise full and strict management over the Company, and strengthen the fulfillment of responsibilities. We strictly control risks and ensure safety and environmental protection. We strengthen the control over contractors, promote the review of contractors' QHSE system, and strengthen the supervision over direct work safety. While enhancing the basic skills training, we optimize the training mode and process. We push forward the effective operation of the HSE management system, improve environmental protection KPI indicators, and meet basic emission standards. In addition, we strictly implement the principles of solid waste reduction, recycling and harmlessness, and advance the construction of waste-free factories.

We implement the target of efficiency improvement and cost reduction throughout production and operation. We put equal emphasis on both process and equipment, to ensure the stable and efficient operation of equipment. We optimize crude oil procurement, transportation and distribution, production operation and maintenance, energy saving and "three new business" (new energy, new materials and new economy), strictly control costs and expenses, and improve cost control. These efforts aim to maximize the overall efficiency of the Company.

We keep optimizing the management system and mechanism, further optimize the organizational setup, and improve management efficiency and level. We strengthen organizational performance management by improving assessment, incentives and constraints, and refining the internal management market-oriented working mechanism.

We accelerate transformation and upgrading. We go all out to create a more resilient and higher-value integrated industrial chain, and build an industrial base featuring green energy, fine chemical and high-end materials. We speed up the breakthroughs in core technologies in key fields and the implementation of key projects. During the year, the first phase of 48K large-tow carbon fiber went into commercial operation. We carried out the second phase of equipment construction, made available 100-ton test devices for high-performance carbon fiber and pilot plants for aeronautical composite materials, and accelerated the construction of 250,000 tons/year thermoplastic elastomer projects. We strengthen the construction of platforms of sci-tech innovation and our innovation capability. We promote the application of new technologies and processes in production units. Furthermore, we strengthen the operation and management of joint laboratories with universities to integrate production, learning, research and application.

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We enhance cadres' ability to perform their duties and continuously promote the construction of cadre management system. We also further better the talent system. Specifically, we provide the basic skills training for skilled operators, and continue with the business competition themed "big drills and big game". We refine the plan for training and introducing talents, and improve the management plus assessment and incentive of cutting-edge and urgently-needed talents. These efforts will enable us to maintain the personal interests, long-term interests and fundamental interests of the employees, and enhance the satisfaction and sense of gain of the grass-roots employees.

A large part of the Group's operating income is derived from the sales of refined oil and petrochemical products. Historically, such products have been cyclical in nature and relatively sensitive to macroeconomic changes. Additionally, changes in regional and global economic conditions, productivity and output, prices and supply of raw materials, consumer demand and prices and supply of substitutes also have an effect. From time to time, these factors have a material impact on the prices of the Group's products in regional and global markets. Given the reduction of tariffs and other import restrictions as well as the relaxation of control by the PRC government over the distribution and pricing of products, a substantial number of the Group's products will increasingly be subject to the cyclical impact in the regional and global markets. In addition, the prices of crude oil and petrochemical products will remain volatile, and uncertain. Higher crude oil prices and lower petrochemical products prices are likely to have an adverse impact on the Group's business, operating results and financial condition.

At present, the Group consumes a significant amount of crude oil for the production of petrochemical products. More than 95% of the crude oil consumption is imported. In recent years, crude oil prices have been subject to significant fluctuations due to a variety of factors, and the Group cannot rule out the possibility of any major unexpected event which may cause a suspension in crude oil supply. The Group has attempted to mitigate the effects of increased costs from rising crude oil prices by passing them on to the customers, but the ability to do so is limited because of market conditions and government control over the pricing of refined oil products. Since there is a time-lag between increases in crude oil prices and increases in petrochemical product prices, higher costs cannot be totally offset by raising the sales prices. In addition, the State also imposes control over the distribution of some petroleum products within China. For instance, some of the Group's petroleum products are required to be sold to designated customers (such as subsidiaries of Sinopec Corp). Hence, when crude oil prices are high, the higher costs cannot be totally offset by raising the sales prices of the Group's petroleum products.

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The petrochemical industry is a capital-intensive industry. The Group's ability to maintain and raise income, net income and cash flows is closely connected with ongoing capital expenditures. The Group's estimated capital expenditures is estimated to amount to approximately RMB3,700.0 million in 2023, which will be met by financing activities and certain of own funds. The Group's effective capital expenditures may vary significantly due to the Group's ability to generate sufficient cash flows from operations, investments and other factors that are beyond control. Furthermore, there is no assurance as to the completion, cost or outcome of the Group's fundraising projects.

The Group's ability to secure external financing in the future is subject to a number of uncertainties which include the Company's operating results, financial conditions and cash flow in the future; China's economic conditions and the market conditions for the Group's products; financing costs and conditions of the financial market, and issuance of government approval documents, as well as other risks associated with the development of infrastructure projects in China and so forth. The Group's failure to secure sufficient financing required for its operations or development plans may have an adverse impact on the Group's business, operating results and financial condition.

The Group is subject to a number of environmental protection laws and regulations in China. Waste products (waste water, waste gas and waste residue) are generated during the Group's production operations. Currently the Group's operations fully comply with all applicable Chinese environmental protection laws and regulations. However, the Chinese government may further enforce stricter environmental standards, and the Group cannot assure that the central or local governments will not issue more regulations or enforce stricter regulations which may cause the Group to incur additional expenses on environmental protection measures.

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The exchange rate of the Renminbi against the US Dollar and other foreign currencies may fluctuate and is subject to alterations due to changes on the Chinese political and economic situations. In July 2005, the PRC government overhauled its policy of pegging the value of the Renminbi to the US dollar by permitting the Renminbi to fluctuate within a certain band against a basket of foreign currencies. Since the adoption of this new policy, the value of the Renminbi against the US dollar fluctuates daily. In addition, the Chinese government has been under international pressure to further ease its exchange rate policy, and may as a result further change its currency policy. A small portion of our cash and cash equivalents are denominated in foreign currencies, including the US dollar. Any increase in the value of Renminbi against other currencies, including the US dollar, may decrease the Renminbi value of our cash and cash equivalents that are denominated in foreign currencies. On the other hand, most of our revenue is denominated in Renminbi, but a major part of our procurement of crude oil, certain equipment and certain debt repayments are denominated in foreign currencies. Any devaluation of Renminbi in the future will increase our costs and jeopardize profitability. Any devaluation of Renminbi may also have an adverse impact on the value of dividends payable in foreign currencies by the Group for H shares and ADR.

The Group will, from time to time, continue to conduct transactions with the Group's controlling shareholder Sinopec Corp. and Sinopec Corp.'s controlling shareholder Sinopec Group as well as their connected parties (subsidiaries or associates). These connected transactions include the provision of the following services by such connected parties to the Group: raw materials purchases, agency sale of petrochemical products, construction, installation and engineering design services, petrochemical products industry insurance services and financial services; and the sale of petroleum and petrochemical products by the Group to Sinopec Corp. and its connected parties. These connected transactions and services conducted by the Group are carried out under normal commercial terms and in accordance with the relevant agreements. However, if Sinopec Corp. and Sinopec Group refuse to conduct such transactions or revise the agreements between the Group and itself in a manner unfavorable to the Group, the Group's business and business efficiency will be adversely impacted. Furthermore, Sinopec Corp. has an interest in certain sectors that are directly or indirectly competing with or which may compete with the Group's business. Since Sinopec Corp. is the controlling shareholder of the Group and its own interests may conflict with those of the Group, it may act for its own benefit regardless of the Group's interests.

Sinopec Corp., the controlling shareholder of the Company, owns approximately 5,459 million shares of the Company, which represents 50.44% of the total number of shares of the Company and gives it an absolute controlling position. Sinopec Corp. may, by using its controlling position, exercise influence over the Group's production operations, fund allocations, appointment or removal of senior staff and so forth, thereby adversely affecting the Group's production operations as well as minority shareholders' interests.

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In 2022, the capital expenditures of the Group amounted to RMB3,452 million, representing a decrease of 2.29% as compared with RMB3,533 million in 2021. Major projects include the following:

The Group's capital expenditures for 2023 are estimated at approximately RMB3,700 million.

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In 2016, the Company made amendments to its cash dividend policy in the Articles of Association. The proposed amendments to the Articles of Association and its appendices were considered and approved at the annual general meeting of 2015 held on 15 June 2016. According to Article 206 of the Articles of Association:

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In 2022, the net loss attributable to equity shareholders of the Company amounted to RMB2,872,072 thousand under CAS (net loss of RMB2,846,156 thousand under IFRS). The Board did not recommend distribution of annual dividends, and will not conduct capitalization of capital reserves.

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For the Company's performance of corporate social responsibility in 2022 and the Company's 2022 ESG Report, please refer to the "2022 Environmental, Social and Governance Report of Sinopec Shanghai Petrochemical Company Limited" ("2022 ESG Report") published by the Company on the websites of the Shanghai Stock Exchange, the Hong Kong Stock Exchange and the Company.

The Company is one of the polluting enterprises under Intensive Monitoring and Control by the State proclaimed by the Ministry of Environmental Protection. According to the Measures for Self-Monitoring and Information Disclosure of the Enterprises subject to Intensive Monitoring and Control by the State (Trial Implementation), the Company has disclosed to the public on the website of the Shanghai Municipal Bureau of Ecology and Environment about the sites of the pollution sources, the types and concentration of pollutants which are subject to intensive monitoring and control by the State.

The Company, as a manufacturing enterprise in the petrochemical industry, consistently places environmental protection as its priority. It has continually received ISO14001 Environmental Management System Certification. In January 2013, it obtained the certifications from the Shanghai Audit Center of Quality, including quality (GB/T19001: 2008), environment (GB/T24001: 2004) and occupational health and safety (GB/T28001: 2011). In December 2022, the Company was awarded the title "Sinopec Green Enterprise for 2022"; and continued to use the title "All-China Environmentally Friendly Enterprise" through the review of China's environmentally friendly enterprises.

In 2022, the Company kept well prepared for the worst scenarios, enhanced its "red line" consciousness, practiced the HSE concept and system thinking, and implemented the HSE system. We kept in mind that "Out of limits equals to accidents and being punished is a disgrace" and strengthened source control. We implemented a "dual prevention mechanism" to prevent and address major security and environmental protection risks and improve the essential security and environmental protection level; in addition, we strove for excellence in HSE performance, and helped in achieving the vision of building a "domestic leading and world-class" energy, chemical and new materials company.

In 2022, the Company formulated the "Implementation Plan of SPC for Deepening the Battle Against Pollution Prevention and Control", planned prevention and control of water pollution, air pollution, solid waste pollution, soil and groundwater pollution, noise pollution and radiation pollution, environmental risk prevention and control, ecological protection, environmental monitoring and other key tasks. The emissions of ammonia nitrogen, sulfur dioxide and nitrogen oxide decreased by 57.64%, 23.90%, 10.56%, respectively, and COD emissions increased by 7.19% year-on-year.

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In 2022, the Company achieved a 100% comprehensive standard rate of effluents, a 99.99% standard rate of controlled exhaust gas discharge, and a 100% rate of proper disposal of hazardous waste.

The Company continued to progress the LDAR related work. In 2022, we tested a total of 2,902,476 sealing points of production units, detected 8,374 leak points and repaired 8,245 points, with a repair rate of 98.50%.

In 2022, we paid environmental tax totaling RMB11,416,500 to Jinshan District Tax Bureau.

In 2022, the Company received no administrative penalties for environmental problems.