Report of the
Board of Directors

Report of the Board of Directors

The Board is pleased to present its report together with the audited consolidated financial statements of the Group for the year ended 31 December 2018.

PRINCIPAL BUSINESS

Our Group is the largest distributor of pharmaceutical and healthcare products, and a leading supply chain services provider in the PRC; it also operates the largest national pharmaceutical distribution network in the PRC according to the information of China Association of Pharmaceutical Commerce. The Group has been able to rapidly increase its market share and profits in a highly fragmented industry by taking advantage of its economies of scale and nationwide distribution network, through which the Group offers a wide range of value-added supply chain services for its customers and suppliers.

The Group has integrated operations in the following business segments, namely:

  • Pharmaceutical distribution segment: Pharmaceutical distribution is the Group’s principal business. The Group provides distribution, logistics and other value-added services for domestic and international pharmaceutical and healthcare products manufacturers and other suppliers. The Group differentiates itself from its competitors in China by its strengths of geographic coverage, the breadth of its product portfolio and the comprehensive supply chain services provided to its customers and suppliers, etc.
  • Retail pharmacy segment: The Group has established a network of retail drug stores in major cities of China via direct operations and franchises.
  • Medical devices segment: The Group is engaged in the distribution of medical devices in China.
  • Other business segment: The Group is also engaged in the production, sale and financial leasing, pharmaceutical products, chemical reagents and laboratory supplies.

Please refer to the section headed “Management Discussion and Analysis” for the reasonable review and analysis utilizing financial key indicators on the Group business, major risks and uncertainties faced by the Group, and the future development of the Group business.

RESULTS

The operating results of the Group during the Reporting Period are set out in the consolidated statement of profit or loss on page 99 of this annual report.

DIVIDENDS

Relevant resolution was passed at a meeting of the Board held on 22 March 2019 to propose to distribute a final dividend of RMB0.59 per share (tax inclusive) for the year ended 31 December 2018 (the “Final Dividend”), totalling approximately RMB1,753,277,000. If the proposal of profit distribution is approved by shareholders at the 2018 annual general meeting to be held on Thursday, 27 June 2019 (the “AGM”), the Final Dividend will be distributed to the shareholders whose names appear on the register of members of the Company on Tuesday, 9 July 2019 no later than 27 August 2019.

According to the Articles of Association of the Company, the Final Dividends will be denominated and declared in Renminbi. Final Dividend on domestic shares of the Company and for investors investing in the H shares of the Company through Shanghai Hong Kong Stock Connect or Shenzhen Hong Kong Stock Connect (the “Southbound Trading”) (the “Southbound Trading Shareholders”) will be paid in Renminbi, and the Final Dividend for other holders of H shares of the Company will be paid in Hong Kong dollars. The amount of the Final Dividend payable in Hong Kong dollars shall be calculated based on the average exchange rate of Renminbi to Hong Kong dollars as announced by the People’s Bank of China for the calendar week prior to 27 June 2019 (being the date of declaration of the Final Dividend).

For the Southbound Trading Shareholders, the Company will enter into the Agreement on Distribution of Cash Dividends of H Shares for Southbound Trading (港股通H shares股票現金紅利派發協議) with China Securities Depository and Clearing Corporation Limited, pursuant to which, the Shanghai Branch and Shenzhen Branch of China Securities Depository and Clearing Corporation Limited, each of which as a nominee of the holders of H shares for Southbound Trading, will receive all the Final Dividend distributed by the Company and distribute the Final Dividend to the relevant Southbound Trading Shareholders through their depositary and clearing systems.

Pursuant to the Enterprise Income Tax Law of the PRC and its implementing regulations (hereinafter collectively referred to as the “EIT Law”), the tax rate of the enterprise income tax applicable to the income of non-resident enterprise deriving from the PRC is 10%. For this purpose, any H shares registered under the name of non-individual enterprise, including the H shares registered under the name of HKSCC Nominees Limited, other nominees or trustees, or other organizations or entities, shall be deemed as shares held by non-resident enterprise shareholders as defined under the CIT Law. The Company will distribute the Final Dividend to non-resident enterprise shareholders subject to a deduction of 10% enterprise income tax withheld and paid by the Company on their behalf.

Any resident enterprise as defined under the CIT Law which has been legally incorporated in the PRC or which has established effective administrative entities in the PRC pursuant to the laws of foreign countries (regions) and whose name appears on the register of the members of H shares of the Company should deliver a legal opinion ascertaining its status as a resident enterprise furnished by a practicing PRC lawyer (with the official chop of the issuing law firm affixed thereon) and relevant documents to Computershare Hong Kong Investor Services Limited in due course, if they do not wish to have the 10% enterprise income tax withheld and paid on their behalf by the Company.

Pursuant to the Notice on the Issues on Levy of Individual Income Tax after the Abolishment of GuoShui Fa [1993] No. 045 Document (the “Notice”) issued by the State Administration of Tax on 28 June 2011, the dividend to be distributed by the PRC non-foreign invested enterprises which has issued shares in Hong Kong to the overseas resident individual shareholders, is subject to the individual income tax with a tax rate of 10% in general. However, the tax rates for respective overseas resident individual shareholders may vary depending on the relevant tax agreements between the countries of their residence and Mainland China. Thus, 10% personal income tax will be withheld by the Company from the Final Dividend payable to the individual H-share shareholders whose names appear on the register of members of the Company on Tuesday, 9 July 2019, unless otherwise stated in the relevant taxation regulations, taxation agreements or Notices

Pursuant to the “Notice on Taxation Policies concerning the Pilot Program of an Interconnection Mechanism for Transactions in the Shanghai and Hong Kong Stock Markets” (Cai Shui [2014] No.81) (《關於滬港股票市場交易互聯互通機制試點有關稅收政策的通知》(財稅[2014]81號)) and the “Notice on Taxation Policies concerning the Pilot Program of an Interconnection Mechanism for Transactions in the Shenzhen and Hong Kong Stock Markets” (Cai Shui [2016] No.127) (《關於深港股票市場交易互聯互通機制試點有關稅收政策的通知》(財稅[2016]127號)) jointly promulgated by the Ministry of Finance, the State Administration of Taxation and the China Securities Regulatory Commission, for dividends derived by Mainland individual investors from investing in H-share listed on the Hong Kong Stock Exchange through Shanghai Hong Kong Stock Connect or Shenzhen Hong Kong Stock Connect, H-share companies shall withhold individual income tax at a tax rate of 20% for the investors. For Mainland securities investment funds investing in shares listed on Hong Kong Stock Exchange through Shanghai Hong Kong Stock Connect or Shenzhen Hong Kong Stock Connect, the above rules also apply and individual income tax shall be levied on dividends derived therefrom. Dividends derived by Mainland enterprise investors from investing in shares listed on Hong Kong Stock Exchange through Shanghai Hong Kong Stock Connect or Shenzhen Hong Kong Stock Connect shall be reported and paid by the enterprise investors themselves. H-share companies will not withhold or pay enterprise income tax on their behalf in the distribution of dividends.

The Company will have no liability in respect of any claims arising from any delay in, or inaccurate determination of the status of the shareholders or any disputes over the mechanism of withholding.

The Board is not aware of any shareholders who have waived or agreed to waive any dividends.

Dividend Policy

The Company has established a dividend policy. Under the PRC Company Law and the Articles of Association, all of our shareholders have equal rights to dividends and distribution. The declaration of dividends is subject to the discretion of the Board and the approval of the shareholders, which we expect will take into account factors such as the following:

  1. our financial results;
  2. our shareholders’ interests;
  3. general business conditions and strategies;
  4. our capital requirements;
  5. contractual restrictions on the payment of dividends by us to our shareholders or by our subsidiaries to us;
  6. taxation considerations;
  7. possible effects on our credit worthiness;
  8. statutory and regulatory restrictions; and
  9. any other factors the Board may deem relevant.

The allocations to the statutory common reserve fund is currently 10% of the Company’s after-tax profit attributable to equity holders of the Company for the fiscal year determined in accordance with PRC accounting rules and regulations. When the accumulated allocations to the statutory common reserve fund reach 50% of the Company’s registered capital, the Company will no Long positioner be required to make allowances for allocation to the statutory common reserve fund.

PURCHASE, SALE AND REDEMPTION OF LISTED SECURITIES

The Company’s restricted share incentive scheme (the “Scheme”) took effect on 18 October 2016. During the Reporting Period, as six incentive recipients resigned from the Group, making them unqualified for the Scheme, the Trustee sold 200,000 H shares of the Company to the secondary market. Save as disclosed above, during the Reporting Period, the Company and its subsidiaries had not purchased, sold or ransomed any of the listed shares of the Company.

First Unlocking of the Restricted Shares under the Initial Grant pursuant to the Restricted Share Incentive Scheme

On 16 November 2018, the Board considered and approved the Resolution on the First Unlocking of the Restricted Shares under the Initial Grant pursuant to the Restricted Share Incentive Scheme of the Company. Pursuant to this resolution, the two-year lock-up period in relation to the Initial Grant has expired, followed by the first unlocking period. Among the incentive recipients who participated in the Initial Grant, except for those who left the Group or changed their positions in the Group, thus causing the termination of the unlocking or those who fell short of performance standards in the individual performance review, thus failing to meet the unlocking conditions, the remaining 144 incentive recipients have all met the unlocking conditions of the Initial Grant for the first unlocking period. The 1.7523 million H shares of the Company held by them were unlocked on 16 November 2018. During the Reporting Period, 58 incentive recipients who met the unlocking conditions sold 451,769 H shares of the Company to the secondary market through the Trustee upon unlocking.

PRINCIPAL SUBSIDIARIES

Details of the names, principal places of business, places of incorporation and issued share capital of the Company’s principal subsidiaries are set out in Note 46 to the Consolidated Financial Statements.

RESERVES

Details of movements in reserves of the Group during the Reporting Period are set out in the consolidated statement of changes in equity on page 103 of this annual report and Note 32 to the Consolidated Financial Statements.

DISTRIBUTABLE RESERVES

In accordance with the Company Law of the PRC, the Company may only distribute dividends out of its distributable annual profits (i.e. the Company’s profit after tax after offsetting: (i) the accumulated losses brought forward from the previous years; and (ii) the allocations to the statutory surplus reserve and, if any, the discretionary common reserve (in such order of priorities)).

According to the Articles of Association, for the purpose of determining profit distribution, the profit distribution of the Company is the lesser of its profit after tax determined in accordance with: (i) the PRC accounting standard and regulations; and (ii) the HKFRS.

In 2018, the distributable reserves of the Company, calculated based on the above principles, amounted to approximately RMB22,018.59 million, which is prepared in accordance with the HKFRSs.

PROPERTY, PLANT, EQUIPMENT AND INVESTMENT PROPERTIES

Details of changes in investment properties and property, plant and equipment of the Group during the Reporting Period are set out in Notes 15 and 16 to the Consolidated Financial Statements.

BORROWINGS

Details of issued bonds of the Group are set out in Note 33 to the Consolidated Financial Statements.

debenture

In order to facilitate the adjustment of the debt structure of the Group and reduce financing costs, the Group issued corporate bonds of RMB3.3 billion and super short-term financing bonds of RMB26 billion during the Reporting Period.

Details of issued bonds of the Group are set out in Note 33 to the Consolidated Financial Statements.

equity-linked agreement

Details of equity-linked agreements entered by the Group in 2018 are set out in the section headed “Non-Exempt Continuing Connected Transactions” in the Report of the Board of Directors.

MAJOR CUSTOMERS AND SUPPLIERS

During the Reporting Period, purchases of goods and services from its 5 largest suppliers were less than 30% of the Group’s total purchases and the goods and services sold to its 5 largest customers were less than 30% of the Group’s total sales.

Permitted Indemnity Provisions

The Company has maintained directors’ liability insurance to protect the Directors of the Company against any potential losses arising from his/her actual or alleged misconduct.

CONNECTED TRANSACTIONS

Pursuant to the requirements of the Listing Rules, the transactions between the Company and the connected person (as defined under the Listing Rules) of the Company constitute connected transactions of the Company. The Company regulates and manages such transactions in compliance with the Listing Rules. The following are the non-exempt connected transactions conducted by the Group during the Reporting Period.

Non-Exempt Continuing Connected Transactions

For the year of 2018, the Group entered into several non-exempt continuing connected transcations. The annual caps for and the actual transaction amounts of the non-exempt continuing connected transactions by the Group are set out below:

Transactions between the Group and the CNPGC Group under  the Procurement Framework and Sales Framework Agreement Annual cap
for the year
2018
(RMB million)
Actual transaction amounts for the
year ended
31 December 2018
(RMB million)
Transactions between the Group and the CNPGC Group under  the Framework Procurement Agreement 6,000 4,448
Transactions between the Group and the CNPGC Group under  the Framework Sales Agreement 1,400 911

Transactions between the Group and Sinopharm Group Finance Co. under the Financial Services Framework Agreement Annual caps
for 2018
(RMB million)
Actual transaction
amounts for the year ended
31 December 2018
(RMB million)
Maximum daily balance of the deposits placed with Sinopharm  Group Finance Co. by the Group 3,500 3,483
Interests/service fees incurred by the Group for the provision of 200 150

Transaction between the Group and the CNPGC Group under the EPC General Contracting Services Framework Agreement Annual caps
for 2018
(RMB million)
Actual transaction
amounts for the year ended
31 December 2018
(RMB million)
Amount payable by the Group to the CNPGC Group under the EPC General Contracting Services Framework Agreement 500 21

Transaction between the Group and the Factoring Company under the Factoring Services Framework Agreement Caps for the nine months ended
31 December 2018
(RMB million)
Actual transaction
amounts for the
nine months ended
31 December 2018
(RMB million)
Interests/service fees payable by the Group to the CNPGC Group under the Factoring Services Framework Agreement 75 20

The continuing connected transactions between the Group and the CNPGC Group under the Framework Procurement Agreement

In order to regulate the continuing connected transactions in respect of the procurement of pharmaceutical products between the Group and CNPGC and its subsidiaries and associates (excluding the Group) (the “CNPGC Group”), the Company and the CNPGC renewed the Framework Procurement Agreement of Pharmaceutical Products, Personal-care Supplies and Medical Equipment (“Framework Procurement Agreement”) on 27 October 2017, and set up the annual caps for the continuing connected transactions contemplated under the Framework Procurement Agreement for the three years ending 31 December 2020 to be RMB6,000 million, RMB8,000 million and RMB10,000 million, respectively.

Pursuant to the Listing Rules, the Framework Procurement Agreement and the annual caps for the continuing connected transactions contemplated thereunder for the three years ending 31 December 2020 have been approved by the independent shareholders of the Company.

Pursuant to the Framework Procurement Agreement, the Group has agreed to purchase pharmaceutical products, personal-care supplies and medical equipment as well as the related services from the CNPGC Group. The related services to be provided by the CNPGC Group under the Framework Procurement Agreement mainly include the transportation services, storage services, equipment maintenance and repair services, as well as other related and ancillary services.

Under the Framework Procurement Agreement, the price shall be determined in accordance with the following pricing principles: (i) The price of pharmaceutical products, personal-care supplies and medical equipment procured by the Group from the CNPGC Group under the renewed Framework Procurement Agreement will be offered by members of the CNPGC Group based on the bidding price of the relevant products, which is won by relevant member of the CNPGC Group through its participation in the public bidding process of such products conducted by the tender office of Chinese government or hospitals, deducting the gross profit of distributors at each level; (ii) where Relevant members of the GNPGC Group will on a regular basis, provide the Company and its subsidiaries with the procurement price list of all types of the above-mentioned products for distributors at each level. The company and/or its subsidiaries, after considering comprehensively a lot of factors relating to the specific product, including but not limited to the price, quality, credit period, delivery method, after-sales service, gross profit and average price in the industry and going through all necessary internal review and approval procedures covering the president and various departments including procurement department, finance department, operation department and quality department of the company and/or its subsidiaries, will determine whether to accept the procurement price of specific product as offered by members of the CNPGC Group. If the company and/or its subsidiaries, after taking into consideration all the above-mentioned factors, consider that the procurement price offered by members of the CNPGC Group is not in the best interest of the Company and its shareholders, or is not fair and reasonable, they will make the decision not to procure such products from the CNPGC Group.

The Framework Procurement Agreement is for a term of three years with effect from 1 January 2018 and ending on 31 December 2020. Upon expiry, the Framework Procurement Agreement will, subject to compliance with the relevant requirements under the Listing Rules and agreement of the parties, be renewed for a further term of three years. For details of the transactions please refer to the announcement published on the websites of Hong Kong Stock Exchange and the Company on 27 October 2017.

CNPGC is the ultimate controlling shareholder of the Company and connected person of the Company under the Listing Rules. The transactions under the Framework Procurement Agreement between the Company and the CNPGC constitute continuing connected transactions of the Company.

During the Reporting Period, the proposed annual caps for and the actual transaction amounts under the Framework Procurement Agreement payable to CNPGC Group by the Group were RMB6,000 million and RMB4,448 million, respectively.

The continuing connected transactions between the Group and the CNPGC Group under the Framework Sales Agreement

In order to regulate the continuing connected transactions in respect of the sales of, among others, pharmaceutical products between the Group and the CNPGC Group, the Company and the CNPGC renewed the Framework Sales Agreement of Pharmaceutical Products, Personal-care Supplies, Medical Equipment, Chemical Reagents and Laboratory Supplies (“Framework Sales Agreement”) on 27 October 2017, and set up the annual caps for the continuing connected transactions contemplated under the renewed Framework Sales Agreement for the three years ending 31 December 2020 to be RMB1,400 million, RMB2,000 million and RMB2,800 million, respectively.

Pursuant to Framework Sales Agreement, the Group has agreed to sell pharmaceutical products, personal-care supplies, medical equipment, chemical reagents and laboratory supplies as well as the related services to the CNPGC Group. The related services to be provided by the Group under the Framework Sales Agreement mainly include the transportation services, storage services, equipment maintenance and repair services, as well as other related and ancillary services.

Under the Framework Sales Agreement, the price shall be determined in accordance with the following pricing principles: (i) The price of pharmaceutical products, personal-care supplies, medical equipment, chemical reagent, chemical reagents or laboratory supplies sold by the Group to the CNPGC Group under the renewed Framework Sales Agreement will be offered by members of the Group based on the bidding price of the relevant products, which is won by relevant member of the Group through it’s participation in the public bidding process of such products conducted by the tender office of Chinese government or hospitals, deducting the gross profit margin of distributors at each level; (ii) The finance department of the Company will be responsible for collecting data of the continuing connected transactions conducted by itself or any of its subsidiaries on a regular basis and examining and comparing specific agreements for such continuing connected transactions with those entered into with independent third parties, so as to ensure that the pricing policies of the relevant products offered by the Company and/or its subsidiaries to the CNPGC Group are comparable to those offered to independent third parties.

The Framework Sales Agreement is for a term of three years with effect from 1 January 2018 and ending on 31 December 2020. Upon expiry, the Framework Sales Agreement will, subject to compliance with the relevant requirements under the Listing Rules and agreement of the parties, be renewed for a further term of three years. For details of the transactions please refer to the announcement published on the websites of Hong Kong Stock Exchange and the Company on 27 October 2017.

CNPGC is the ultimate controlling shareholder of the Company and a connected person of the Company under the Listing Rules. The transactions under the Framework Sales Agreement between the Company and the CNPGC constitute continuing connected transactions of the Company.

During the Reporting Period, the proposed annual caps for and the actual transaction amounts under the Framework Sales Procurement Agreement payable to the Group by the CNPGC Group were RMB1,400 million and RMB911 million, respectively.

The continuing connected transactions between the Group and Sinopharm Group Finance Co. under the Financial Services Framework Agreement

In order to regulate the continuing connected transactions in respect of the utilization of financial services between the Group and Sinopharm Group Finance Co., the Company and Sinopharm Group Finance Co. (a subsidiary of the ultimate controlling shareholder of the Company and a connected person of the Company) renewed the Financial Services Framework Agreement on 27 October 2017, and set up the annual caps for the maximum daily balance of the deposits under the renewed Financial Services Framework Agreement for each of the three years ending 31 December 2020 to be RMB3,500 million, and the annual caps for the interests/service fees paid for the provision of other financial services under the renewed Financial Services Framework Agreement for each of the three years ending 31 December 2020 to be RMB200 million.

Pursuant to the Financial Services Framework Agreement, the Company and/or its subsidiaries will, from time to time, utilize the following financial services available from Sinopharm Group Finance Co. as is deemed necessary: (i) deposit services; (ii) loan and entrustment loan services; (iii) other financial services including bill discounting and acceptance services, finance lease services, settlement services and entrustment loan agency services; and (iv) other services as approved by China Banking Regulatory Commission.

Fees and charges payable by the Company and/or its subsidiaries to Sinopharm Group Finance Co. under the Financial Services Framework Agreement are determined on the following basis: (1) Deposit services: interest rates shall not be lower than each of (i) the interest rates floor promulgated by the People’s Bank of China from time to time for the same category of deposits; (ii) the interest rates offered to other members of the CNPGC Group by Sinopharm Group Finance Co. for the same category of deposits; and (iii) the interest rates offered to the Company and/or its subsidiaries by commercial banks for the same category of deposits. (2) Loan services: interest rates shall not be higher than each of (i) the interest rates cap promulgated by the People’s Bank of China from time to time for the same category of loans; (ii) the interest rates offered to other members of the CNPGC Group by Sinopharm Group Finance Co. for the same category of loans; and (iii) the interest rates offered to the Company and/or its subsidiaries by commercial banks for the same category of loans. (3) Other financial services: the interests or service fees charged for other financial services shall (i) comply with the standard rates as promulgated by the People’s Bank of China or China Banking Regulatory Commission from time to time (if applicable); (ii) be not higher than the interests or service fees charged by commercial banks for comparable services; and (iii) be not higher than the interests or service fees charged by Sinopharm Group Finance Co. for comparable services to other members of the CNPGC Group. Sinopharm Group Finance Co. may provide other services to the Company and/or its subsidiaries as may be approved by China Banking Regulatory Commission in the future. The fees and charges for such services to be provided shall: (i) comply with the standard rates as promulgated by the People’s Bank of China or China Banking Regulatory Commission from time to time (if applicable) for such kind of services; (ii) be not higher than the fees charged by commercial banks for comparable services; and (iii) be not higher than the fees charged by Sinopharm Group Finance Co. for comparable services to other members of the CNPGC Group.

The Financial Services Framework Agreement is effective for a term of three years from 1 January 2018 to 31 December 2020. For details of the transactions please refer to the announcement published on the websites of Hong Kong Stock Exchange and the Company on 27 October 2017.

Sinopharm Group Finance Co. is a subsidiary of the ultimate controlling shareholder of the Company and a connected person of the Company under the Listing Rules. Therefore, the transactions under the Financial Services Framework Agreement between the Company and Sinopharm Group Finance Co. constitute continuing connected transactions of the Company.

During the Reporting Period, under the Financial Services Framework Agreement, the maximum daily balance of the deposits placed with Sinopharm Group Finance Co. by the Group was RMB3,500 million, while the actual amounts was RMB3,483 million; the annual cap for the interests/service fees incurred by the Group for the provision of other financial services by Sinopharm Group Finance Co. was RMB200 million, while the actual amount was RMB150 million.

The continuing connected transactions between the Group and the CNPGC Group under the EPC General Contracting Service Framework Agreement

In order to regulate the continuing connected transactions in respect of the EPC general contracting service between the Group and the CNPGC Group, the Company and the CNPGC renewed the EPC General Contracting Service Framework Agreement (“EPC Service Agreement”) on 27 October 2017, and set up the annual caps for the continuing connected transactions contemplated under the EPC Service Agreement for the three years ending 31 December 2020 to be RMB500 million, respectively.

Pursuant to the Listing Rules, the EPC Service Agreement and the annual caps for the continuing connected transactions contemplated thereunder for the three years ending 31 December 2020 have been approved by the Board of the Company.

Pursuant to the EPC Service Agreement, the CNPGC Group will provide EPC (Engineering, Procurement, and Construction) general contracting services to the Group according to the engineering project general contracting agreements obtained by CNPGC through bidding process.

Under the EPC Service Agreement, the price shall be determined in accordance with the following pricing principles: (i) T Under the EPC General Contracting Service Framework Agreement, the service provider and the price of EPC general contracting services shall be determined through a bidding process in principle and in compliance with applicable laws, regulations and rules. The CNPGC Group shall bid by stringently following the steps and/or measurements as stipulated by The Invitation And Submission of Bids Law of the PRC and the specific requirements in bidding invitation documents made by the Group; (ii) The bid invitation documents made by the Group include all substantial requirements and all key terms for the conclusion of contracts, including: the project’s technical requirements, the criteria for examination of the contractors, the requirements for the bid price and the standard of evaluation of the bid and etc. The Group’s tender committee is responsible for (i) adhering the process is in accordance with The Invitation And Submission of Bids Law of the PRC; (ii) reviewing, evaluating and monitoring documents from outsourcing service providers based on the technical, commercial and pricing criteria and payment terms of relevant service fees, which will ensure the terms obtained by the Group from the CNPGC Group is no less favorable than those available from independent third parties; and (iii) grading the service providers and writing recommendation advice. The Group’s tender committee is responsible for deciding which service provider will be awarded the EPC General Contracting Service Framework Agreement.

The EPC Service Agreement is for a term of three years with effect from 1 January 2018 and ending on 31 December 2020. Upon expiry, the EPC Service Agreement will, subject to compliance with the relevant requirements under the Listing Rules and agreement of the parties, be renewed for a further term of three years. For details of the transactions please refer to the announcement published on the websites of Hong Kong Stock Exchange and the Company on 27 October 2017.

CNPGC is the ultimate controlling shareholder of the Company and a connected person of the Company under the Listing Rules. The transactions under the EPC Service Agreement between the Company and the CNPGC constitute continuing connected transactions of the Company.

During the Reporting Period, the proposed annual caps and the actual amounts under the EPC Service Agreement payable by the Group to the CNPGC Group were RMB500 million and RMB21 million, respectively.

The continuing connected transactions between the Group and the CNPGC Factoring Company under the Factoring Service Framework Agreement

In order to regulate the continuing connected transactions in respect of the utilization of factoring services between the Group and the CNPGC Factoring Company, the Company and the CNPGC Factoring Company ( a subsidiary of the ultimate controlling shareholder of the Company, therefore is a connected person of the Company) entered into the Factoring Services Framework Agreement (“Factoring Services Framework Agreement”) on 23 March 2018, and set up the annual caps of interests/fees paid by the Group for commercial factoring services for the nine months ending on 31 December 2018 and the two years ending 31 December 2020 under the Factoring Services Framework Agreement to be RMB75 million, RMB100 million and RMB100 million, respectively.

Pursuant to the Factoring Services Framework Agreement, the CNPGC Factoring Company will recourse and non-recourse factoring and other commercial factoring services (including sales sub-account management services, accounts receivable collection services and other permitted business of the Factoring Company) to the Group.

Pursuant to the Factoring Services Framework Agreement, the comprehensive pricing (including interest and fees) of the commercial factoring services charged by the Factoring Company shall be fair and reasonable and shall not be higher than the comprehensive pricing of the same commercial factoring services provided by independent third parties to the Group during the same period.

The Factoring Services Framework Agreement shall be effective from 23 March 2018 to 31 December 2020. Upon expiry, the Factoring Service Framework Agreement will, subject to compliance with the relevant requirements under the Listing Rules and agreement of the parties, be renewed for a further term of three years. Details for the transactions were set out in an announcement dated 23 March 2018 published on the websites of Hong Kong Stock Exchange and the Company.

Pursuant to the Hong Kong Listing Rules, the CNPGC Factoring Company is a subsidiary of the Company’s ultimate controlling shareholder, therefore is a connected person of the Company. Accordingly, the transactions contemplated under the Factoring Services Framework Agreement constitute continuing connected transactions of the Company.

During the Reporting Period, the proposed annual caps and the actual amounts under the Factoring Services Framework Agreement for nine months ending 31 December 2018 payable by the Group to the CNPGC Factoring Company were RMB75 million and RMB20 million, respectively.

The Company has conformed that the execution and enforcement of the implementation agreements under the continuing connected transactions set above for the year ended 31 December 2018 has followed the pricing principles of such continuing connected transactions.

The Independent non-executive Directors had reviewed the above continuing connected transactions and confirmed that these transactions had been entered into:

  1. in the ordinary and usual course of business of the Company;
  2. either on normal commercial terms or, on terms no less favourable to the Company; and
  3. in accordance with relevant agreements governing them on terms that are fair and reasonable and in the interests of the shareholders of the Company as a whole.

Pursuant to Rule 14A.56 of the Listing Rules, the Board engaged the auditor of the Company to perform certain agreed upon procedures in respect of the continuing connected translations and the auditor has reported the factual findings on these procedures to the Board committee.

The auditors of the Company had informed the Board and confirmed that the above-mentioned continuing connected transactions:

  1. were approved by the Board;
  2. were in accordance with pricing policy of the Company;
  3. were entered into in accordance with relevant agreements governing the transactions; and
  4. did not exceed the annual caps disclosed in the relevant announcements of the Company.

Non-Exempt Connected Transaction

On 11 July 2018, the Company and CNPGC entered into an agreement, pursuant to which the Company agreed to acquire 60% equity interests in CSIMC held by CNPGC, at a consideration of RMB5,107,890,720, which will be satisfied by issue of 204,561,102 domestic shares by the Company to CNPGC under general mandate at the issue price of RMB24.97 per consideration share. Upon completion of the acquisition (the “Acquisition”), CSIMC became a subsidiary of the Company. For details, please refer to the announcements of the Company dated 11 July 2018 and 30 July 2018. On 16 October 2018, the Acquisition was completed. On 13 December 2018, the Company issued 204,561,102 domestic shares to CNPGC.

Save as disclosed above, for the year ended 31 December 2018, there is no other related party transaction or continuing related party transaction set out in Note XX to the Financial Statements which constitutes discloseable connected transaction or continuing connected transaction under the Listing Rules. In respect of the connected transactions and the continuing connected transactions, the Company has complied with the disclosure requirements of the Listing Rules (as amended from time to time).

DIRECTORS’ AND SUPERVISORS’ SERVICE CONTRACTS

Each of the Directors and Supervisors has entered into a service contract with the Company. None of the Directors and Supervisors has entered into any service contract with the Company which is not determinable by the Company within one year without payment of compensation (other than statutory compensation).

BIOGRAPHIES OF DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT

Biographies of the Directors, Supervisors and senior management are set out from page 38 to 50 of this annual report.

The list of Directors during the Reporting Period and as at the date of this report (unless otherwise stated) is set out below:

Name Position Commencement Date Expiry Date
Executive Directors
Li Zhiming Executive Directors 21 September 2017 20 September 2020
Yu Qingming Executive Directors 28 December 2018 20 September 2020
Liu Yong Executive Directors 18 December 2017 20 September 2020
Non-executive Directors
Chen Qiyu Non-executive Directors 21 September 2017 20 September 2020
She Lulin Non-executive Directors 21 September 2017 28 December 2018
Wang Qunbin Non-executive Directors 21 September 2017 22 March 2019
Ma Ping Non-executive Directors 21 September 2017 20 September 2020
Hu Jianwei Non-executive Directors 28 December 2018 20 September 2020
Deng Jindong Non-executive Directors 21 September 2017 20 September 2020
Li Dongjiu Non-executive Directors 21 September 2017 12 January 2018
Lian Wanyong Non-executive Directors 21 September 2017 12 January 2018
Wen Deyong Non-executive Directors 21 September 2017 20 September 2020
Rong Yan Non-executive Directors 9 March 2018 28 December 2018
Wu Yijian Non-executive Directors 9 March 2018 28 December 2018
Guan Xiaohui Non-executive Directors 8 March 2019 20 September 2020
Independent Non-executive Directors
Li Ling Independent Non-executive Directors 21 September 2017 28 December 2018
Yu Tze Shan Hailson Independent Non-executive Directors 21 September 2017 20 September 2020
Tan Wee Seng Independent Non-executive Directors 21 September 2017 20 September 2020
Liu Zhengdong Independent Non-executive Directors 21 September 2017 20 September 2020
Zhuo Fumin Independent Non-executive Directors 21 September 2017 20 September 2020
Chen Fangruo Independent Non-executive Directors 28 December 2018 20 September 2020

REMUNERATIONS OF DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND FIVE HIGHEST PAID INDIVIDUALS

The remuneration committee determines and makes recommendation to the Board (as appropriate) on the remuneration and other benefits payable to the Directors. The committee regularly oversees the remuneration of all Directors to ensure that their remuneration and compensation are at appropriate level. The Group maintains competitive remuneration packages with reference to the industry standard and according to the business development of the Group, and determines remuneration of the Directors based on their qualifications, experience and contributions, to attract and retain its Directors as well as to control costs.

Details of the remuneration of the Directors and Supervisors in 2018 are set out in Note 49 to the Consolidated Financial Statements.

Details of the five highest paid individuals of the Group in 2018 are set out in Note 10 to the Consolidated Financial Statements on page 161 of this annual report.

Details of the remuneration of the current senior management of the Company by band for the year ended 31 December 2018 are set out as follows:

Range Number of individuals
RMB nil to RMB3,000,000 7
RMB6,000,000 to RMB9,000,000 3
RMB9,000,000 and above 1

INTERESTS OF DIRECTORS AND SUPERVISORS IN transaction, arrangement or CONTRACT

Save as the non-exempt continuing connected transactions disclosed in this annual report, for the year ended 31 December 2018, there was no transaction, arrangement and contract of significance to which the Company, its holding company, its subsidiary or a subsidiary of its holding company was a party and in which a Director, Supervisor or their relevant party has or had at any time during that period, in any way, whether directly or indirectly, a material interest.

INTERESTS OF DIRECTORS IN COMPETING BUSINESS

As at 31 December 2018, three non-exec

DIRECTORS’, SUPERVISORS’ AND CHIEF EXECUTIVE’S INTERESTS AND SHORT POSITIONS IN SHARES, UNDERLYING SHARES AND DEBENTURES OF THE COMPANY AND ITS ASSOCIATED CORPORATIONS

As at 31 December 2018, none of the Directors, Supervisors and the chief executive of the Company had any interests or short positions in the shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) (the “SFO”)) as recorded in the register required to be kept under Section 352 of the SFO or as otherwise notified to the Company and the Hong Kong Stock Exchange pursuant to the requirements of the Model Code.

Name Class of shares Nature of interest Number of
shares held
Approximate
percentage to
the total
number of
shares of the
Company
(%)
Approximate
percentage to
the relevant
class of
shares
(%)
Long position position/
short position/
shares available
for lending
Li Zhiming H shares Beneficial owne 260,000 0.01 0.02 Long position
Yu Qingming H shares Beneficial owne 100,000 0.00 0.01 Long position
Liu Yon H shares Beneficial owne 210,000 0.01 0.02 Long position
Jin Yi H shares Beneficial owne 1,200 0.00 0.00 Long position

Notes:
The information was disclosed based on the data available on the HKExnews website of the Hong Kong Stock Exchange (www.hkex.com.hk), above-mentioned “approximate percentage to the total number of shares of the Company” is calculated based on the 2,971,656,191 total number of shares of the Company issued as at 31 December 2018.

Save as disclosed above, as at 31 December 2018, none of the Directors, Supervisors and the chief executive of the Company had any interests or short positions in the shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) (the “SFO”)) as recorded in the register required to be kept under Section 352 of the SFO or as otherwise notified to the Company and the Hong Kong Stock Exchange pursuant to the requirements of the Model Code.

RIGHTS TO PURCHASE SHARES OR DEBENTURES OF DIRECTORS, SUPERVISORS AND CHIEF EXECUTIVE

No arrangements to which the Company, any of its subsidiaries, its holding company or any subsidiary of its holding company is or was a party enabling the Directors, Supervisors and the chief executive of the Company to acquire benefits by means of acquisitions of shares or debentures of the Company or any other body corporate subsisted during the Reporting Period.

SUBSTANTIAL SHAREHOLDERS’ INTERESTS AND SHORT POSITIONS IN SHARES AND UNDERLYING SHARES OF THE COMPANY

As at 31 December 2018, so far as was known to the Directors, the interests or short positions of the following persons (other than the Directors, Supervisors or the chief executive of the Company) in the shares and underlying shares of the Company as recorded in the register required to be kept under section 336 of the SFO were as follows:

Name Class of shares Nature of interest shares held
shares held
Approximate
percentage to
the total
number of
shares of the
Company
(%)
Approximate
percentage to
the relevant
class of
shares
(%)
Long position position/
short position/
shares available
for lending
CNPGC Domestic share Beneficial owne 207,289,498
(Note 2)
6.98 11.65 -
Domestic share Interest of controlled  corporation 1,571,555,953
(Note 1 and 2)
52.88 88.35 -
Sinopharm Investment Domestic share Beneficial owne 1,571,555,953
(Note 1 and 2)
52.88 88.35 -
Fosun Pharma Domestic share Interest of controlled  corporation 1,571,555,953
(Note 1 and 3)
52.88 88.35 -
Fosun High Technology Domestic share Interest of controlled  corporation 1,571,555,953
(Note 1 and 4)
52.88 88.35 -
Fosun Company Domestic share Interest of controlled  corporation 1,571,555,953
(Note 1 and 5)
52.88 88.35 -
Fosun Holdings Domestic share Interest of controlled  corporation 1,571,555,953
(Note 1 and 6)
52.88 88.35 -
Fosun International  Holdings Domestic share Interest of controlled  corporation 1,571,555,953
(Note 1 and 7)
52.88 88.35 -
Mr. Guo Guangchang Domestic share Interest of controlled  corporation 1,571,555,953
(Note 1 and 8)
52.88 88.35 -
BlackRock, Inc. H shares Interest of controlled  corporation
(Note 10)
84,186,233 2.83 7.06 Long position
Mirae Asset Global Investments (Hong Kong) Limited H shares Investment manager 71,724,400 2.41 6.01 Long position
JPMorgan Chase & Co. H shares Beneficial owner,  Investment manager,  Custodian/approved  lending agent  (Note 9) 250,672,887

8.44

21.01

Long position

3,354,632 0.11 0.28 Short position
230,041,040 7.74 19.28 Shares available for  lending
Oppenheimer Developing Markets Fund H shares Beneficial owne 142,587,200 4.80 11.95 Long position

Notes:

The information was disclosed based on the data available on the HKExnews website of the Hong Kong Stock Exchange (www.hkexnews.hk).

  1. Such 1,571,555,953 domestic shares belong to the same batch of shares.
  2. CNPGC is interested in 207,289,498 domestic shares directly and 1,571,555,953 domestic shares indirectly through Sinopharm Industrial Investment Co., Ltd. (“Sinopharm Investment”). As CNPGC owns 51% equity interest in Sinopharm Investment, it is deemed to be interested in the shares held by Sinopharm Investment for the purposes of the SFO.
  3. Fosun Pharma is the beneficial owner of 49% equity interest in Sinopharm Investment and, therefore, Fosun Pharma is deemed to be interested in the domestic shares owned by Sinopharm Investment for the purposes of the SFO.
  4. Fosun High Technology (Group) Co., Ltd. (“Fosun High Technology”) is the beneficial owner of 37.55% equity interest in Fosun Pharma and, therefore, Fosun High Technology is deemed to be interested in the domestic shares owned by Sinopharm Investment for the purposes of the SFO.
  5. Fosun International Ltd. (“Fosun Company”) is the beneficial owner of 100% equity interest in Fosun High Technology and, therefore, Fosun Company is deemed to be interested in the domestic shares owned by Sinopharm Investment for the purposes of the SFO.
  6. Fosun Holdings Ltd. (“Fosun Holdings”) is the beneficial owner of 70.72% equity interest in Fosun Company and, therefore, Fosun Holdings is deemed to be interested in the domestic shares owned by Sinopharm Investment for the purposes of the SFO.
  7. Fosun International Holdings Ltd. (“Fosun International Holdings”) is the beneficial owner of 100% equity interest in Fosun Holdings and, therefore, Fosun International Holdings is deemed to be interested in the domestic shares owned by Sinopharm Investment for the purposes of the SFO.
  8. Mr. Guo Guangchang is the beneficial owner of 85.29% equity interest in Fosun International Holdings and 0.005% equity interest in Fosun Pharma and, therefore, Mr. Guo Guangchang is deemed to be interested in the domestic shares owned by Sinopharm Investment for the purposes of the SFO.
  9. JPMorgan Chase & Co. is interested, through a series of controlled corporations, in an aggregate of long positions of 250,672,887 H shares (of which 230,041,040 are H shares available for lending) and short positions of 3,354,632 H shares of the Company.
  10. BlackRock, Inc. is interested in long positions of 84,186,233 and short positions of 601,600 H shares of the Company indirectly through a series of controlled corporations.
  11. Above-mentioned “approximate percentage to the total number of shares of the Company” is calculated based on the 2,971,656,191 total number of shares of the Company issued as at 31 December 2018.

Save as disclosed above, to the best knowledge of the Directors, as at 31 December 2018, no person (other than the Directors, Supervisors or the chief executive of the Company) had any interests or short positions in the shares or underlying shares of the Company as recorded in the register required to be kept under section 336 of the SFO.

PRE-EMPTIVE RIGHTS

There are no provisions for pre-emptive rights under the Articles of Association and the laws of the PRC which oblige the Company to offer pre-emptive rights of new shares to existing shareholders on their shareholding proportion.

SUFFICIENCY OF PUBLIC FLOAT

Based on the information that is publicly available to the Company and to the best knowledge of all Directors, there was sufficient public float of more than 25% of the Company’s issued shares as required under the Listing Rules in the financial year of 2018 and prior to the issue of this annual report.

MANAGEMENT CONTRACT

There was no contract concerning the management or administration of the whole or any substantial part of the business of the Company which was entered into or existed during the Reporting Period.

PENSION SCHEME

During the Reporting Period, details of the pension scheme of the Group are set out in Note 10 to the Consolidated Financial Statements.

DONATION

During the Reporting Period, details of the donation are set out in Note 8 to the Consolidated Financial Statements.

Environmental policy and performance

Since its establishment, the Company has established the environmental protection management system according to the Chinese laws, regulations, technical specifications, technical standards and systems relating to the environmental protection. It provides guidance and assistance in the environment protection work assigned in the budget objective and work scheme for all the companies affiliated to the subsidiaries, and then conducts supervision, management and appraisal. Each affiliated company has included the environmental protection, energy conservation and emission reduction into their medium and long-term development planning and annual plan, established and improved the management system and various rules and regulations in relation to the environmental protection, energy conservation and emission reduction, abided by relevant local and national laws, regulations and emission standards, and fulfilled the measures and responsibilities for the environmental protection, energy conservation and emission reduction. The industrial enterprise subordinate to the Company has established and implemented the ISO 14001 Environmental Management System Certification.

The Company has formulated a series of management systems including the Administrative Measures for Environmental Protection, the Administrative Measures for Clean Production, the Administrative Measures for Hazardous Waste, and the Emergency Plan for Environmental Accidents, specifying responsibilities of employees at various levels in terms of the environmental protection, energy conservation and emission reduction, and strengthening the environmental protection consciousness of all the companies. The responsible person of each subsidiary shall be primarily responsible for the environmental protection of all the subsidiaries, and the performance shall be included into the annual appraisal index of the responsible person of such subsidiary, in order to enhance the environmental protection responsibility and consciousness of the leaders of all the subsidiaries. The target-oriented responsibility system shall be adopted in the management with the responsible person of the subsidiary primarily responsible for the environmental protection.

ENTRUSTED DEPOSIT AND MATURED TIME DEPOSIT

As at 31 December 2018, the Company had not held any deposits under trust or any time deposit in any financial institution in the PRC which could not be withdrawn upon maturity.

TAX RELIEF AND EXEMPTION

Save as disclosed in this annual report, the Company is not aware that any holders of securities of the Company are entitled to any tax relief or exemption by reason of their holding of such securities.

CONFIRMATION OF INDEPENDENCY BY INDEPENDENT NON-EXECUTIVE DIRECTORS

The Company had received annual confirmation of independence from each independent non-executive Director. Based on the confirmation, the Company considered that all independent non-executive Directors were independent.

AUDITOR

The financial statements set out in this annual report have been audited by Ernst & Young.

By Order of the Board
Sinopharm Group Co. Ltd.
Li Zhiming
Chairman

Shanghai, PRC
22 March 2019

EN
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